2014 (2) TMI 1333 - HC - Indian Laws

Precedent overturned: SARFAESI Act applies to existing debts for recovery of outstanding debt.

Sarthak Builders Pvt. Ltd. and Another Versus Orissa Rural Development Corporation Limited and 5 Others

The court held that the SARFAESI Act applies to existing debts, allowing for the recovery of outstanding and legally recoverable debt even for loans ... Whether provisions of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 can be invoked with reference to the loan transaction entered into prior to coming into force of the said Act? Held that: - the statute intends to remedy a situation where recovery of loans of specified financial institutions were held up and are intended to be speedily recovered, without reference to procedure of the Court, by way of Securitization, by a substituted procedure and forum. Such statute applies to pre existing rights and may not be held to be retrospective so as to be hit by presumption of prospectivity. Moreover, presumption in respect of a procedural statute is that such statute is retrospective and can apply to existing cause of action even if it has reference to past transactions. A Division Bench of this Court in Subash Chandra Panda v. State of Orissa and others [2008 (2) TMI 930 - ORISSA HIGH COURT], held in the negative - it was held prior to the notification dated 10.11.2003, the opposite party No. 6 was not a financial institution within the meaning of Section 2(m)(iv) of the Act. Since it was not a financial institution, it was not a secured creditor and it cannot invoke the provisions of the said Act in respect of a loan transaction of a prior date. The provisions of the SARFAESI Act apply to existing debts even if loan was advanced earlier similarly, as soon as by a notification of Central Government, a financial institution is notified for purposes of Section 2(m), the machinery of the Act becomes available to recover any outstanding and legally recoverable debt even if such loan was advanced earlier - appeal allowed. Issues Involved:1. Applicability of SARFAESI Act to loan transactions entered into prior to its enactment.2. Interpretation of the term 'Secured Creditor' under SARFAESI Act.3. Retrospective vs. Retroactive application of laws.4. Procedural vs. Substantive law in the context of SARFAESI Act.Issue-wise Detailed Analysis:1. Applicability of SARFAESI Act to Loan Transactions Entered into Prior to Its Enactment:The primary issue was whether the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) could be invoked for loan transactions that occurred before the Act came into force. The court examined conflicting judgments from different High Courts: the Orissa High Court in Subash Chandra Panda v. State of Orissa held that the Act could not be applied retrospectively, while the Uttaranchal High Court and Allahabad High Court in Unique Engineering Works v. Union of India and others and Pradeep Kumar Gupta and another v. State of U.P. and others respectively, held that the Act could be applied retroactively.2. Interpretation of the Term 'Secured Creditor' Under SARFAESI Act:The term 'Secured Creditor' is defined under Section 2(zd) of the SARFAESI Act to include banks, financial institutions, and other entities specified by the Central Government. The Orissa Rural Housing Development Corporation Limited (ORHDC) was notified as a financial institution under Section 2(m) of the Act on 10.11.2003. The court analyzed whether ORHDC could invoke the provisions of the SARFAESI Act for loans advanced before this notification.3. Retrospective vs. Retroactive Application of Laws:The court distinguished between retrospective and retroactive application of laws. Retrospective laws affect past transactions, while retroactive laws apply to existing conditions to rectify them. The court noted that the SARFAESI Act was intended to address the issue of non-performing assets (NPAs) and was procedural in nature, thus allowing for retroactive application.4. Procedural vs. Substantive Law in the Context of SARFAESI Act:The court emphasized that while substantive laws are presumed to be prospective, procedural laws are generally retrospective. The SARFAESI Act, being procedural, was intended to provide a mechanism for the enforcement of existing security interests without the intervention of the court. The court cited several precedents to support this view, including Mardia Chemicals Ltd. v. Union of India and United Bank of India v. Satyawati Tandon.Conclusion:The court concluded that the SARFAESI Act applies to existing debts, even if the loans were advanced before the Act came into force. It held that once a financial institution is notified under Section 2(m), the machinery of the Act becomes available to recover any outstanding and legally recoverable debt, regardless of when the loan was advanced. The judgment in Subash Chandra Panda was overruled, and the views in Unique Engineering Works and Pradeep Kumar Gupta were upheld. The matter was directed to be listed before the Division Bench for further proceedings on the merits.