2018 (3) TMI 118 - SC - Indian Laws

Court allows retroactive SARFAESI Act application for merged entities, upholding security interest enforcement in loan agreements.

The Supreme Court held that arbitration clauses in loan agreements do not bar proceedings under the SARFAESI Act. It ruled that the appellant, as a ... Recovery of Loan amounts - validity of actions taken by the appellant against the contesting respondents under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - arbitration clauses - doctrine of election - rejection of applicability of the doctrine of election by holding that simply because remedy under the provisions of the DRT Act was availed would not mean that the financial institution was precluded from taking steps under SARFAESI Act. Whether the arbitration proceedings initiated by the respondent can be carried on along with the SARFAESI proceedings simultaneously? - Held that: - merely because remedy under the Arbitration Act was invoked was no ground to debar the respondent from taking recourse to the SARFAESI Act. Whether resort can be had to Section 13 of the SARFAESI Act in respect of debts which have arisen out of a loan agreement/mortgage created prior to the application of the SARFAESI Act to the respondent? - whether the lender can invoke the SARFAESI Act provision where its notification as financial institution under Section 2(1) (m) has been issued after the account became an NPA under Section 2(1)(o) of the said Act? - Held that: - the SARFAESI Act was retroactive in nature and, therefore, once this Act came into force, the respondent in the said case had right to invoke the provisions of the Act even if loan agreement was entered into and mortgage created prior to the coming into force the SARFAESI Act. The loan was given by IBFSL which was not a financial institution covered by the SARFAESI Act when the loan was given. However, this entity has got merged with the appellant and appellant is a SARFAESI company. In this backdrop, the entire thrust of the argument of the respondent is that as a successor company, the appellant cannot take advantage. In order to deal with this aspect, we will have to first taken into consideration, the effect of such a merger scheme as approved by the High Court. It is to be kept in mind that the loan/debts/financial assets stood vested in the appellant pursuant to the amalgamation scheme filed by the two companies under Sections 391 and 394 of the Companies Act, 1956 whereunder the predecessor company, IBFSL got amalgamated with the appellant - on sanction of the scheme of amalgamation, all loans, recoveries, security, interest, financial documents, etc. in favour of IBFSL got transferred to and stood vested in the appellant including the loans given by IBFSL to respondent borrowers, debts recoverable by IBFSL from respondent borrowers in favour of IBFSL, security documents executed by respondent borrowers in favour of IBFSL, etc. On the sanctioning of the scheme, the respondent borrowers became the borrower of the appellant as if the financial assistance was granted by the appellant to the respondent borrowers. Respondent No.1 would be treated as ‘borrower’ within the meaning of Section 2(1)(f) of the SARFAESI Act; the arrangement would be classified as ‘security arrangement’ under Section 2(1) (zb); the agreements created ‘security interest’ under Section 2(1) (zf); and the appellant became ‘secured creditor’ within the meaning of Section 2(1)(zd) of SARFAESI Act. Appeal allowed - decided in favor of appellant. Issues Involved:1. Whether arbitration clauses in loan agreements bar proceedings under the SARFAESI Act.2. Whether the appellant, as a successor-in-interest of IBFSL, can invoke the SARFAESI Act.3. The legal effect of the merger of IBFSL with the appellant on the rights and obligations under the SARFAESI Act.4. The applicability of the SARFAESI Act to loans given prior to the lender being notified as a financial institution under the Act.Detailed Analysis:Issue 1: Arbitration Clauses and SARFAESI Act ProceedingsThe High Court held that the arbitration clauses in the loan agreements, once invoked, barred any other proceedings under the SARFAESI Act. The Supreme Court disagreed, stating that the SARFAESI Act is a special enactment providing a speedy remedy without recourse to the court of law, whereas the Arbitration and Conciliation Act is a general statute. The Court cited *Transcore v. Union of India* to assert that remedies under the SARFAESI Act are complementary to those under the Arbitration Act and can be pursued simultaneously.Issue 2: Successor-in-Interest and SARFAESI Act InvocationThe High Court ruled that the appellant, as a successor-in-interest to IBFSL (which was not a financial institution under the SARFAESI Act at the time of the loan), could not invoke the SARFAESI Act. The Supreme Court overturned this, referencing *M.D. Frozen Foods Exports Pvt. Ltd. v. Hero Fincorp Ltd.*, which held that the SARFAESI Act applies retroactively to existing agreements once the lender is notified as a financial institution under the Act. The merger of IBFSL with the appellant meant that the appellant inherited the rights and obligations, allowing it to invoke the SARFAESI Act.Issue 3: Legal Effect of MergerThe Supreme Court emphasized that upon the merger, all loans, recoveries, securities, and financial documents of IBFSL vested in the appellant. This transfer was sanctioned under Sections 391 and 394 of the Companies Act, 1956, making the appellant the successor-in-interest. The Court cited *Saraswati Industrial Syndicate Ltd. v. Commissioner of Income Tax* to explain that the amalgamated company inherits all rights and obligations of the amalgamating company, including the right to invoke the SARFAESI Act.Issue 4: Applicability of SARFAESI Act to Pre-Notification LoansThe Supreme Court held that the SARFAESI Act is retroactive, applying to all existing agreements irrespective of whether the lender was a notified financial institution at the time of the loan. The Court referenced *M.D. Frozen Foods* and *Sarthak Builders Pvt. Ltd. v. Orissa Rural Development Corporation Limited* to support this view, stating that the Act provides a procedural remedy for enforcing security interests without affecting substantive rights.Conclusion:The Supreme Court concluded that the High Court erred in its judgment. It held that:- The arbitration proceedings do not bar the invocation of the SARFAESI Act.- The appellant, as the successor-in-interest to IBFSL, can invoke the SARFAESI Act.- The merger legally transferred all rights and obligations to the appellant, allowing it to enforce the security interests under the SARFAESI Act.- The SARFAESI Act applies retroactively to existing debts and security interests.The judgment of the High Court was set aside, and the appeal was allowed.