2011 (4) TMI 1203 - SC - Companies Law

Supreme Court affirms financial institution status under Companies Act, SARFAESI Act

The Supreme Court upheld the judgment regarding the status of a financial institution under the Companies Act, 1956 and the SARFAESI Act. The Court ... Special Leave Petitions - Special Leave Petitions, has challenged the judgment and order, passed by High, holding that the Respondent, Industrial Finance Corporation of India Limited is a 'financial institution' under section 4A(2) of the Companies Act, 1956, read with section 2(1)(m) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (‘the SARFAESI Act’) and that, as a consequence, the Respondent IFCI Ltd. would be entitled to take recourse to the provisions of the SARFAESI Act in order to enforce a 'security interest' which had accrued in its favour – counsel submitted that since the Respondent No. 1 Company no longer fulfilled the criteria contained in clause (ii) of the proviso to sub- section (2) of section 4A of the Companies Act, 1956, it had lost the status given to it under clause (ii) of sub-section (1) of section 4A thereof and was not, therefore, entitled to invoke the provisions of the SARFAESI Act, 2002, notwithstanding the provisions of section 5 of the 1993 Act – Held that:- clauses (i) and (ii) are not conjunctive but disjunctive and even though clause (ii) may not have any application to the Respondent No. 1 Company, it was covered by clause (i), since it was constituted under the Companies Act, 1956, which is a Central Act. no reason to interfere with the judgment and orders of the High Court impugned in these Special Leave Petitions, which are, accordingly, dismissed Issues:Challenge to judgment regarding the status of a financial institution under the Companies Act, 1956 and the SARFAESI Act.Analysis:The Supreme Court considered the challenge to a judgment by M/s. Bharat Steel Tubes Ltd. against the Industrial Finance Corporation of India Limited (IFCI) regarding its status as a 'financial institution' under the Companies Act, 1956 and the SARFAESI Act. The Petitioner argued that IFCI lost its status as a public financial institution due to disinvestment by the Central Government, which no longer held 51% or more of the paid-up share capital. The Petitioner contended that IFCI could no longer enjoy the benefits under section 4A of the Companies Act, 1956. The Petitioner also referred to the Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993, highlighting the change in IFCI's nature and character. The Petitioner emphasized that once the Central Government ceased to hold the required share capital, IFCI lost its status as a public financial institution.In response, the Respondent argued that the status of IFCI under section 4A(1)(ii) of the Companies Act, 1956 was preserved by section 5 of the 1993 Act, which transferred all matters, including status, to the new Company. The Respondent pointed out that the Central Government had issued a notification specifying IFCI as a financial institution under the Companies Act, 1956. The Respondent contended that the disinvestment did not affect IFCI's status as a public financial institution, and many pending cases would be affected if IFCI's status was altered.The Supreme Court analyzed the provisions of section 4A of the Companies Act, 1956 and concluded that the financial institutions mentioned in sub-section (1) were recognized as public financial institutions, not subject to the proviso of sub-section (2). The Court held that the conversion of IFCI into a Company did not change its status as a financial institution, as preserved by section 5 of the 1993 Act. The Court rejected the Petitioner's argument that the notification specifying IFCI as a financial institution had to fulfill both conditions of the proviso, stating that clause (i) was applicable to IFCI as it was constituted under the Companies Act, 1956. Ultimately, the Court dismissed the Special Leave Petitions, upholding the judgment and orders of the High Court, with no order as to costs.