2024 (7) TMI 452 - HC - Indian Laws

SICA reference proceedings abate automatically when secured creditors holding three-fourths debt initiate SARFAESI recovery measures

M/s. Swadeshi Cement Limited, Mr. U.S. Sitani Versus M/s. Asset Care Enterprise Ltd. (ACE), Appellate Authority For Industrial & Finance Reconstruction, Board for Industrial and Financial Reconstruction, The Chairman & Managing Director Grasim Industries Ltd. (Cement Business), The Secretary, Department of Industries, Government of Rajasthan, Jaipur, The Chairman & M.D., Rajasthan State Industrial Development & Investment Corporation Ltd., Assistant Commissioner, Central Excise and Customs, CE Division, Jaipur, M/s. Man Soon Trading Company

Rajasthan HC held that reference proceedings under SICA abate by operation of law when secured creditors holding not less than three-fourths of ... Abatement of reference proceedings - recovery of debt under the SARFAESI Act - HELD THAT:- A close analysis and interpretation of third proviso to subsection (1) of Section 15 of the SICA would reveal that where secured creditors take any measure to recover their secured debt under the provisions of the SARFAESI Act, as provided therein, the reference shall abate by operation of law. The abatement would follow as necessary consequence under the law where the secured creditors represent not less than three-fourth of the amount outstanding. Therefore, it is vividly clear that such a provision has been made for the benefit of a secured creditor. The expression, “such secured creditors” clearly manifests legislative intention that the outstanding amount must be of such secured creditors who have taken any measure to recover their secured debt under subsection (4) of Section 13 of the SARFAESI Act. To put it differently, if there are number of secured creditors who have taken any measure to recover their secured debt under subsection (4) of Section 13 of the SARFAESI Act and the secured debt, which is outstanding, is not less than three-fourth of the outstanding amount which was disbursed to the borrower by those secured creditors, third proviso to sub-section (1) of Section 15 of the SICA would be attracted to result in abatement of the proceedings by operation of law. Thus, it is already held that even before repeal of the SICA vide the SIC Repeal Act of 2003, the reference proceedings abated in view of the provisions contained in third proviso to sub-section (1) of Section 15 of the SICA, the third proviso to clause (b) of Section 4 of the SIC Repeal Act of 2003 is not attracted. Appeal dismissed. Issues Involved:1. Legality of the AAIFR's order declaring abatement of reference proceedings.2. Impact of interim orders and revival of writ petitions on BIFR and AAIFR proceedings.3. Interpretation of the third proviso to Section 15(1) of the SICA.4. Definition and role of secured creditors under the SARFAESI Act.5. Effect of the repeal of the SICA on ongoing proceedings.Detailed Analysis:1. Legality of the AAIFR's Order Declaring Abatement of Reference Proceedings:The appellant challenged the AAIFR's order dated 12.01.2009, which declared that the reference proceedings before the BIFR had abated. The AAIFR's decision was based on the third proviso to Section 15(1) of the SICA, which states that reference proceedings shall abate if secured creditors representing not less than three-fourths in value of the amount outstanding have taken measures under Section 13(4) of the SARFAESI Act. The court upheld the AAIFR's order, stating that the AAIFR had the jurisdiction to decide on the abatement of the reference proceedings as it was a continuation of the original proceedings before the BIFR.2. Impact of Interim Orders and Revival of Writ Petitions on BIFR and AAIFR Proceedings:The appellant argued that the interim order dated 25.02.1994 in Writ Petition No. 1071/1994, which restrained the BIFR from proceeding with the winding-up, should have prevented further actions by the BIFR and AAIFR. However, the court noted that the said writ petition was dismissed, and the interim order was no longer in effect. Furthermore, the BIFR had issued a fresh notice on 01.03.2007, which was not challenged in the writ petition. Therefore, the proceedings before the BIFR and AAIFR were valid and not affected by the revival of the writ petition.3. Interpretation of the Third Proviso to Section 15(1) of the SICA:The appellant contended that the third proviso to Section 15(1) of the SICA should only apply when a rehabilitation scheme has been framed and not when the proceedings have moved beyond the reference stage. The court rejected this argument, citing the Supreme Court's decision in Madras Petrochem Limited & Another Vs. Board for Industrial and Financial Reconstruction & Others, which held that the proviso applies to all stages of BIFR proceedings, including the inquiry and scheme preparation stages. The court emphasized that the legislative intent was to give secured creditors the right to recover their debts without being thwarted by BIFR proceedings.4. Definition and Role of Secured Creditors under the SARFAESI Act:The court analyzed the definition of 'secured creditor' under Section 2(zd) of the SARFAESI Act, which includes banks, financial institutions, asset reconstruction companies, and debenture trustees. The court found that M/s. Asset Care Enterprise Limited (ACE) was a secured creditor as it had acquired the debt liabilities of IFCI and ICICI. The court also clarified that the term 'amount outstanding' refers to the principal, interest, and other dues payable by the borrower as per the books of account of the secured creditor. Therefore, ACE represented not less than three-fourths in value of the amount outstanding, fulfilling the condition for abatement under the third proviso to Section 15(1) of the SICA.5. Effect of the Repeal of the SICA on Ongoing Proceedings:The respondents argued that the repeal of the SICA by the SIC Repeal Act of 2003 would result in the abatement of all ongoing reference proceedings. The court noted that the SIC Repeal Act of 2003, which came into force on 25.11.2016, provided that any reference or inquiry pending before the BIFR or AAIFR would stand abated. However, the court held that the reference proceedings had already abated under the third proviso to Section 15(1) of the SICA due to the actions taken by the secured creditors under the SARFAESI Act. Therefore, the repeal of the SICA did not affect the outcome of the case.Conclusion:The court dismissed the appeal, upholding the AAIFR's order declaring the abatement of the reference proceedings. The court affirmed that the secured creditors had taken valid measures under the SARFAESI Act, leading to the abatement of the BIFR proceedings by operation of law. The court also clarified the interpretation of the third proviso to Section 15(1) of the SICA and the definition of secured creditors under the SARFAESI Act.