2014 (12) TMI 486 - HC - Companies Law

Court affirms secured creditors' rights under SARFAESI Act, dismisses jurisdiction challenge

Kingfisher Airlines Limited Versus State Bank of India

The court held that it lacked jurisdiction to interfere with SARFAESI Act proceedings and affirmed secured creditors' rights to enforce security interests ... Physical possession of petitioner's property 'Kingfisher House' under SARFAESI Act - Property mortgaged by appellant - Jurisdiction of Court in terms of Sections 34 and 35 of the SARFAESI Act - Held that:- A plain reading of Section 34 of the SARFAESI Act, would indicate that the jurisdiction of all civil courts to entertain any suit or proceeding, in respect of any matter, which a DRT or an Appellate Tribunal is empowered to determine under the Act, is barred. And no injunction can be granted by any Court or other authority in respect of any action taken or to be taken pursuant to the aforesaid Act. The bar would apparently apply to this court as well. Section 35 of the SARFAESI Act would declare that the provisions of the Act would prevail over other laws notwithstanding anything inconsistent contained therein. Having regard to the objects of the SARFAESI Act, as indicated in the Statement of Objects and Reasons to the Act, it was found that unlike international banks, the banks and financial institutions in India did not have the power to take possession of securities and sell them, resulting in delayed recovery of loans. It was in that direction that the Central Government had constituted certain Committees to examine the reforms necessary in the banking sector and it is on the basis of reports of those Committees, inter alia, suggesting the legislation for Securitization and empowerment of banks and financial institutions to take possession of the securities and sell them without the intervention of the court, that the SARFAESI Act had come into being. Hence, any intervention by any court or authority in respect of proceedings under the said Act would defeat the object of that Act. Hence it is clear that this court would not have jurisdiction to interfere in the present circumstances of the case with the impugned action. The secured creditor who seeks to prove the whole of his debt in the course of the proceedings of winding up must before he can prove his debt relinquish his security for the benefit of the general body of the creditors. If he surrenders his security for the benefit of the general body of creditors, he may prove the whole of his debt. If the secured creditor has realized his security, he may prove for the balance due to him after deducting the net amount that has been realized. The stage for relinquishing security arises when a secured creditor seeks to prove the whole of his debt in the course of winding up. If, he elects to prove in the course of winding up the whole of the debt due and owing to him, he has to necessarily surrender his security for the benefit of the general body creditors. Therefore, in my view, it would be wholly inappropriate and inapposite to require the secured creditor at the stage when he files Company Petition for winding up to exercise the option of relinquishing his security since that stage does not arise until the debt is to be proved. Consequently, the application filed by the respondent is held to be not maintainable. The interim order granted earlier stands vacated and the application is dismissed. - Decided against applicant. Issues Involved:1. Jurisdiction of the Company Court under Sections 34 and 35 of the SARFAESI Act.2. Rights of secured creditors to enforce security interests while also seeking winding up of the respondent company.3. Jurisdiction of the Company Court over the property in the context of SARFAESI Act proceedings.4. Validity and irregularity of proceedings under the SARFAESI Act as a ground for intervention by the Company Court.Issue-wise Detailed Analysis:1. Jurisdiction of the Company Court under Sections 34 and 35 of the SARFAESI Act:The court examined whether it had jurisdiction to grant relief under the SARFAESI Act. Section 34 of the SARFAESI Act bars the jurisdiction of civil courts to entertain suits or proceedings related to matters that a Debt Recovery Tribunal (DRT) or an Appellate Tribunal is empowered to determine. Additionally, Section 35 of the SARFAESI Act states that the provisions of the Act will prevail over other laws. The court noted that while Section 446(2) of the Companies Act, 1956 grants absolute jurisdiction to the Company Court post a winding-up order, the non-obstante clause in the SARFAESI Act would prevail. The court cited the Supreme Court's decision in Allahabad Bank v. Canara Bank, which emphasized that the SARFAESI Act's provisions override those of the Companies Act. Hence, the court concluded that it did not have jurisdiction to interfere with the SARFAESI Act proceedings.2. Rights of secured creditors to enforce security interests while also seeking winding up of the respondent company:The court considered whether secured creditors could enforce their security interests under the SARFAESI Act while also filing a winding-up petition under the Companies Act. It referred to the Supreme Court's decision in M.K. Ranganathan v. Government of Madras, which established that secured creditors could realize their security without the leave of the winding-up court. Additionally, the court cited the case of International Coach Builders v. Karnataka State Financial Corporation, which held that secured creditors could realize their security even if the debtor company was in liquidation. The court also referred to the case of Hegde & Golay Ltd. v. State Bank of India, which clarified that a secured creditor could file a winding-up petition without relinquishing their security. Therefore, the court concluded that secured creditors could enforce their security interests while also seeking the winding up of the respondent company.3. Jurisdiction of the Company Court over the property in the context of SARFAESI Act proceedings:The court examined whether it could exercise jurisdiction over the respondent's property in light of the SARFAESI Act proceedings. It referred to the Supreme Court's decision in Allahabad Bank v. Canara Bank, which distinguished between secured creditors who choose to stand outside the winding-up process and those who relinquish their security and prove their debt in the winding-up process. The court noted that secured creditors who stand outside the winding-up process could enforce their security interests without the intervention of the Company Court. Therefore, the court concluded that it did not have jurisdiction over the property in the context of the SARFAESI Act proceedings.4. Validity and irregularity of proceedings under the SARFAESI Act as a ground for intervention by the Company Court:The court considered whether it could intervene in the SARFAESI Act proceedings based on alleged irregularities. It reiterated that any intervention by the Company Court would defeat the object of the SARFAESI Act, which aims to empower banks and financial institutions to take possession of securities and sell them without court intervention. The court emphasized that any grievances regarding the SARFAESI Act proceedings should be addressed through an appeal under the Act. Therefore, the court concluded that it could not intervene in the SARFAESI Act proceedings based on alleged irregularities.Conclusion:The court held that it did not have jurisdiction to interfere with the SARFAESI Act proceedings and that secured creditors could enforce their security interests while also seeking the winding up of the respondent company. The application filed by the respondent was dismissed, and the interim order was vacated. The court also directed the respondents to afford the applicant a reasonable opportunity to withdraw from the property and rejected the oral application seeking a stay of the order to enable the applicant to prefer an appeal.