2010 (11) TMI 847 - HC - Companies Law

Court upholds SARFAESI Act proceedings, deems writ petitions not maintainable under Article 226.

BPL Ltd. Versus Pegasus Assets Reconstruction (P.) Ltd.

The court upheld the validity of proceedings initiated under Section 13 of the SARFAESI Act, finding the transfers of debts and underlying securities ... whether there is any guidance to be collected from the Act itself, its object and its provisions, in the light of the surrounding circumstances which made the legislation necessary, taken in conjunction with well known facts of which the court might take judicial notice? Held that:- Unless the provisions in the BR Act contains any specific restrictions, the 2nd respondent could not be prevented from engaging in any such activity. Yet another contention is that the provisions contained in the BR Act expressly prohibits from engaging any trading or buying and selling. In view of the findings arrived as above, but not agreeable with the contention that the acquisition of the financial assets through transfer by itself will come within the purview of, trading or buying or selling, as contemplated under section 8 of the BR Act. Therefore the transfer of secured assets of the petitioner company by ARCIL to the 2nd respondent and the subsequent transfer by the 2nd respondent to the 1st respondent are not in any manner prohibited and it is not contrary to any of the provisions contained under the SARFAESI Act or under the RDB Act or under the BR Act. These writ petitions deserve no merit. Challenge raised against the proceedings initiated under the SARFAESI Act on the ground that, assignment of debts and underlying securities of the petitioner company by M/s. ARCIL to the 2nd respondent and the subsequent assignment by the 2nd respondent to the 1st respondent in WP(C).27021/10 [3rd respondent in WP(C).25000/10] is illegal and invalid, is hereby negatived. I hold that those transactions are legal and valid under the provisions of the SARFAESI Act, RDB Act and BR Act, and it is not violative of the guidelines or norms prescribed by the RBI. Accordingly the writ petitions are dismissed. Issues Involved:1. Validity of proceedings initiated under Section 13 of the SARFAESI Act.2. Legality of transfer of debts and underlying securities by ARCIL to the 2nd respondent and subsequently to the 1st respondent.3. Jurisdiction and maintainability of the writ petitions under Article 226 of the Constitution of India.4. Compliance with the Banking Regulation Act and RBI guidelines.5. Locus standi of the trade union and additional respondents.Detailed Analysis:1. Validity of Proceedings under Section 13 of the SARFAESI Act:The petitioner company challenged the proceedings initiated under Section 13 of the SARFAESI Act by the 1st respondent, an asset reconstruction company. The petitioner argued that the acquisition of financial assets by a securitization/reconstruction company from another such company is not permissible under the SARFAESI Act, as clarified by the RBI in its Master Circular dated 1-7-2010. The petitioner contended that Section 5 of the SARFAESI Act does not contemplate a transfer of financial assets already acquired by a securitization company to another such company or a bank. The court, however, found that the SARFAESI Act does not restrict such transfers and deemed the proceedings initiated under Section 13 to be legal and valid.2. Legality of Transfer of Debts and Underlying Securities:The petitioner argued that the transfer of debts and underlying securities by ARCIL to the 2nd respondent and subsequently to the 1st respondent was illegal and invalid. The court examined the provisions of the SARFAESI Act, particularly Section 5, which allows securitization companies to acquire financial assets from banks or financial institutions. The court noted that the term 'financial asset' includes assigned debt and that the SARFAESI Act permits such transfers. The court held that the transfers were legal and valid under the SARFAESI Act, RDB Act, and BR Act, and were not violative of RBI guidelines.3. Jurisdiction and Maintainability of the Writ Petitions:The respondents argued that the writ petitions were not maintainable under Article 226 of the Constitution due to the availability of an efficacious remedy under Section 17 of the SARFAESI Act. The court referred to precedents, including the Supreme Court's decision in United Bank of India v. Satyawati Tondon, which emphasized that High Courts should not entertain writ petitions when an effective alternative remedy is available. The court concluded that the petitioners had not demonstrated any exceptional circumstances warranting the exercise of writ jurisdiction and directed them to pursue remedies under Section 17(1) of the SARFAESI Act.4. Compliance with the Banking Regulation Act and RBI Guidelines:The petitioner contended that the 2nd respondent, being a banking company, was prohibited from engaging in trading or buying and selling debts under the BR Act. The court, however, found that the acquisition of financial assets by banks is permitted under the SARFAESI Act and does not constitute trading or buying and selling as prohibited under the BR Act. The court also noted that the transfer of assets was sanctioned by the RBI, as evidenced by documents produced by the respondents.5. Locus Standi of the Trade Union and Additional Respondents:The writ petition filed by the trade union representing the workers of the petitioner company was also challenged on the grounds of locus standi. The court did not adjudicate on the maintainability of the trade union's petition, leaving the question open for further litigation. Similarly, the court did not address the locus standi of the additional respondent, M/s. ICICI Bank Ltd., a shareholder of the petitioner company, and left the issue open for future consideration.Conclusion:The court dismissed the writ petitions, holding that the transfers of debts and underlying securities by ARCIL to the 2nd respondent and subsequently to the 1st respondent were legal and valid. The court also directed the petitioners to pursue remedies under Section 17(1) of the SARFAESI Act for any other grounds of challenge. The court emphasized the need for High Courts to exercise caution and restraint in entertaining writ petitions when effective alternative remedies are available under statutory provisions.