TaxTMI 
TaxTMI 
2018 (3) TMI 118
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....cature of Andhra Pradesh at Hyderabad. The impugned judgment is passed by the High Court in the writ petition which was filed by the contesting respondents questioning the 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 (hereinafter referred to as the 'SARFAESI Act') for recovery of the loan amounts, along with interest, which are payable by the contesting respondents to the appellant. 2) The High Court has accepted the challenge laid by the contesting respondents holding that: (a) loan agreements contained arbitration clauses which were invoked by the appellant with the filing of cases under Section 9 of the Arbitration and Conciliation Act, 1996. In view thereof, initiation of any other proceedings under the SARFAESI Act are impermissible in law; and (b) the loan was initially given by M/s. Indiabulls Financial Services Limited (for short, 'IBFSL') on December 08, 2011 and January 05, 2012 in the sum of Rs. 50 crores each. IBFSL was not a banking company or financial institution within the m....
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....oresaid proposal and furnishing them copies of the scheme of merger, the appellant filed a petition under sections 391-394 of the Indian Companies Act, 1956 in the High Court of Delhi for merger of IBFSL with the appellant. The High Court, after taking various steps under the provisions of the Companies Act, ultimately sanctioned the scheme of arrangement between IBFSL and the appellant vide orders dated December 12, 2012. With the sanction of the aforesaid merger, the assets and liabilities of IBFSL stood vested in the appellant, with IBFSL being dissolved without winding up on its amalgamation with the appellant. Pursuant to the said merger, the borrowers of IBFSL, including the respondent borrowers, became the borrowers of the appellant. 6) Insofar as respondent borrowers are concerned, they had committed default in repaying the loans advanced to them by IBFSL and, therefore, even before the merger, IBFSL had issued loan recall notice dated September 18, 2012 to the respondent borrowers. On March 04, 2013, the loan accounts of the contesting respondents and other co-borrowers were classified as Non Performing Assets (NPA) by IBFSL. On March 06, 2013, IBFSL filed a petition un....
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....tify as, according to the appellant, some miscreants belonging to the contesting respondents came on the spot and threatened the intending purchasers and even tried to beat the representatives of the respondents and, therefore, the auction had to be cancelled. The appellant thereafter issued another auction notice dated December 28, 2013 fixing the auction dates as 3rd and 4th February 2014 in respect of Banjara Hills and Raj Bhavan Road properties respectively. Auction in respect of Banjara Hills properties took place on February 03, 2014 as per the date fixed. However, the sale was not finalised on account f the interim orders passed by the High Court. On February 04, 2014, when the next property was to be auctioned, the High Court gave the judgment in Writ Petition No. 37381 of 2013 filed by the contesting respondents allowing the said writ petition and setting aside the entire invocation of the SARFAESI Act by the appellant. 9) As already pointed out above, the High Court is swayed by the fact that after IBFSL had invoked the provisions of Section 9 of the Arbitration Act and filed petitions in this behalf, having regard to the arbitration agreement between the parties, it w....
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....ull Bench of the Orissa High Court itself has overruled its Division Bench judgment. 11) We may record at this stage that the main ground on which notice issued under SARFAESI Act had been quashed is the impermissibility of invoking the provisions of the Act by the appellant herein who took over the assets and liabilities of IBFSL on merger. Insofar as the other issue, namely, provisions of SARFAESI Act could not be invoked as IBFSL had already invoked the machinery under the Arbitration Act by filing petitions under Section 9 thereof is concerned, this is decided as the subsidiary issue. Insofar as this subsidiary question is concerned, learned counsel for the respondent did not press this ground seriously and it was virtually conceded that merely because IBFSL had filed applications under Section 9 of the Arbitration Act, would not create a bar for proceeding under the SARFAESI Act. Even otherwise, we find that the High Court was in error in deciding this issue. It is not correct to say that proceedings under the SARFAESI Act cannot be placed on high pedestal. We find that SARFAESI Act is a special enactment which was enacted by the Parliament to provide speedy remedy to the b....
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....After detailed discussion on this question, the Court rejected the 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. Thus, answering the question in the affirmative, essence of the discussion can be captured in the following paragraphs: "64. In the light of the above discussion, we now examine the doctrine of election. There are three elements of election, namely, existence of two or more remedies; inconsistencies between such remedies and a choice of one of them. If any one of the three elements is not there, the doctrine will not apply. According to American Jurisprudence, 2d, Vol. 25, p. 652, if in truth there is only one remedy, then the doctrine of election does not apply. In the present case, as stated above, the NPA Act is an additional remedy to the DRT Act. Together they constitute one remedy and, therefore, the doctrine of election does not apply. Even according to Snell's Principles of Equity (31st Edn., p. 119), the doctrine of election of remedies is applicable only when the....
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.... which is directly on point, not only lays down the proposition that even successor-in-interest (like the appellant herein) would be authorised to invoke the provisions of SARFAESI Act even if the original lender was not a financial institution covered by the Act, it has specifically overruled the judgment of the Andhra Pradesh High Court, which is the subject matter of appeal at hand. On that basis, it was submitted that it was not even necessary to have further probe in the matter. 15) Learned counsel for the appellant is factually correct in pointing out that the impugned judgment of the Andhra Pradesh High Court is specifically noted and overruled by this Court in M.D. Frozen Foods. Therefore, it would be apt to discuss the said judgment in the first instance. 16) In M.D. Frozen Foods the appellants had borrowed monies for their business from the respondents against security of immovable properties by creating an equitable mortgage. Loan agreement contained an arbitration clause. Since the appellant defaulted in making the payment and the account became NPA, the respondent invoked the arbitration clause on November 16, 2016. However, three months before this invocation, a....
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..... The setting up of the Debt Recovery Tribunal under the RDDB Act resulted in this specialised Tribunal entertaining such claims by the banks and financial institutions. In fact, suits from the civil jurisdiction were transferred to the Debt Recovery Tribunal. The Tribunal was, thus, an alternative to a Civil Court recovery proceedings. 27. On the SARFAESI Act being brought into force seeking to recover debts against security interest, a question was raised whether parallel proceedings could go on under the RDDB Act and the SARFAESI Act. This issue was clearly answered in favour of such simultaneous proceedings in Transcore v. Union of India. A later judgment in Mathew Varghese v. M. Amritha Kumar also discussed this issue in the following terms: "45. A close reading of Section 37 shows that the provisions of the SARFAESI Act or the Rules framed thereunder will be in addition to the provisions of the RDDB Act. Section 35 of the SARFAESI Act states that the provisions of the SARFAESI Act will have overriding effect notwithstanding anything inconsistent contained in any other law for the time being in force. Therefore, reading Sections 35 and 37 together, i....
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....37 of the SARFAESI Act, which read as under: "35. The provisions of this Act to override other laws. - The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law." ... .... .... ..... "37. Application of other laws not barred. - The provisions of this Act or the rules made thereunder shall be in addition to, and not in derogation of, the Companies Act, 1956 (1 of 1956), the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) or any other law for the time being in force." 29. The aforesaid two Acts are, thus, complimentary to each other and it is not a case of election of remedy. xx xx xx 33. SARFAESI proceedings are in the nature of enforcement proceedings, while arbitra....
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....le similarly from the date when it was so made applicable to them. 38. The Full Bench of the Orissa High Court in Sarthak Builders Pvt. Ltd. v. Orissa Rural Development Corporation Limited (supra) has, in fact, succinctly sets out this aspect. No doubt, till the respondent was not a 'financial institution' within the meaning of Section 2(1)(m)(iv) of the SARFAESI Act, it was not a 'secured creditor' as defined under Section 2(1)(zd) of the SARFAESI Act and, thus, could not invoke the provisions of the SARFAESI Act. However, the right to proceed under the SARFAESI Act accrued once the Notification was issued. The Full Bench referred to a Division Bench judgment of the Uttarakhand High Court in Unique Engineering Works v. Union of India which dealt with the issue of retrospectivity and retroactivity. In case of retroactivity, the Parliament takes note of the existing conditions and promulgates the remedial measures to rectify those conditions. In fact the SARFAESI Act, in our view, was to remedy such a position and provide a measure against secured interests. The scheme of the SARFAESI Act, is really to provide a procedural remedy against security interest already created. ....
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....cally overruled by this Court in M.D. Frozen Foods case. Faced with this stark reality staring at the face of the respondents, a valiant effort was made to convince this Bench to take a contrary view and in the process it was submitted that in M.D. Frozen Foods some important legal aspects have not been considered. 23) To put it pithily, the submissions of the learned counsel for respondents revolved around the following aspects: (i) The appellant had neither advanced nor granted any loan or financial assistance to respondent no. 1 and, therefore, it could not have invoked the provisions of the SARFAESI Act. (ii) Respondent no. 1 could not be treated as 'borrower' as defined under Section 2(1)(f) of the SARFAESI Act read with Sections 2(1)(c) and 2(1)(m) of that Act. Submission was that the respondent no. 1 is not a person who has been granted financial assistance by any Bank or Financial Institution nor can respondent no. 1 be brought under the ambit of the definition of being a person who has given a guarantee or create any mortgage or pledge as security for the financial assistance granted by any Bank or Financial Institution, i.e., the appellant. It was arg....
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....or within the meaning of Section 2(1)(zd) of the SARFAESI Act. Under the circumstances are the necessary ingredients of Section 13(1) and 13(2) being absent, no action could have been taken under Section 13(2) or Section 13(4) of the Act. It is this say of the respondents that the clauses contained in the scheme of amalgamation, firstly do not manifest any intention to create any new right in favour of the amalgamated company. Secondly, clauses in scheme of amalgamation, albeit sanctioned by Court, cannot be raised to the pedestal of statutory provisions creating a right in favour of subsequent acquirer of rights not statutorily provided, nor can such clauses be held to create a deeming fiction not statutorily provided. (v) Amalgamation of an entity not lying within the ambit of SARFAESI Act then entity which falls within realm of the said Act would not entitle amalgamated entity to invoke the provisions of SARFAESI Act, in respect of a transaction/agreement entered into much prior to the amalgamation. The submission was that the imprimatur created by virtue of sanctioning of a scheme by High Court under Sections 391 to 394 of the Companies Act cannot be held to create rig....
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....pril 01, 2012, the undertakings of the amalgamated company by virtue of and in the manner provided in the scheme. 26) Various other clauses of the scheme were referred to, to buttress the aforesaid submission. In this hue, it was argued that since as per Clause 8 of the Scheme, all suits, actions and other proceedings including legal and taxation proceedings etc. are to be continued or enforced by or against the amalgamating company. The proceedings instituted by IBFSL under Section 9 of the Arbitration Act against the respondents would be deemed to be an act of the appellant. In other words, the amalgamating company can have no better and further right that one possesses by IBFSL. 27) The learned counsel for the respondents attempted to strengthen the aforesaid architecture with the help of some legal precedents. In the first instance, reference was made to the judgment in the case of Rishabh Agro Industries Limited v. P.N.B. Service Limited (2000) 5 SCC 515 wherein this Court held as under: "6. Learned counsel appearing for the respondent has submitted that such an interpretation would defeat the ends of justice and make the petitions under the Companies Act, in....
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.... preconceived notions of ideological structure or scheme into which the provision to be interpreted is somewhat fitted. They are not entitled to usurp legislative function under the disguise of interpretation. 14. While interpreting a provision the court only interprets the law and cannot legislate it. If a provision of law is misused and subjected to the abuse of process of law, it is for the legislature to amend, modify or repeal it, if deemed necessary. (See Rishabh Agro Industries Ltd. v. P.N.B. Capital Services Ltd. [(2000) 5 SCC 515]) The legislative casus omissus cannot be supplied by judicial interpretative process. Language of Section 6(1) is plain and unambiguous. There is no scope for reading something into it, as was done in Narasimhaiah case [(1996) 3 SCC 88] . In Nanjudaiah case [(1996) 10 SCC 619] the period was further stretched to have the time period run from date of service of the High Court's order. Such a view cannot be reconciled with the language of Section 6(1). If the view is accepted it would mean that a case can be covered by not only clause (i) and/or clause (ii) of the proviso to Section 6(1), but also by a non-prescribed period. Same can n....
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....t, 1949 does not come in the way of such transfers. Banks/Banking Companies are covered under SARFAESI Act in any event. As such, transfers inter se bank would not give rise to the question of change in the nature of the lender leading to change in the status of applicability of SARFAESI Act. On that basis, it was submitted that such a transfer would not change the status of a borrower who, if earlier created a security interest, continues to be a borrower of another secured creditor. However, in the present case, there is sought to be a complete change in the status of the borrower and that too without his consent. 31) The learned counsel, at the end, made a passionate plea about the far reaching consequences which may ensue if the appellant is permitted to take recourse to the provisions of SARFAESI Act as debts would be transferred to SARFAESI companies to take advantage of that enactment. 32) After considering the aforesaid submission, we are of the opinion that entire edifice is built on the pleas which are squarely answered in M.D. Frozen Foods and there is no reason to take a different view therefrom for the reasons that follow hereinafter. 33) In the instant case, ....
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....ion 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. 35) There is a force in the contention by the appellant that the debt with underlying securities is the asset of IBFSL and that IBFSL had right to transfer/assign its assets to any person without seeking consent of the borrower. Such transfer/assignment is recognized and that this Court in the case of Official Liquidator of APS Star Industries has recognised and upheld such an assignment. 36) In the aforesaid backdrop, the factor which assumes importance and has to be kept in mind is that the appellant is an assignee of a debt through the amalgamation of original lender with the appellant which was effected invoking....
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.... the SARFAESI Act does not mean that it is substantive in character or has created an altogether new right. To accept the argument of the appellants would imply that they have an inherent right to delay the enforcement against the security interest! 39. The catena of judgments referred to by learned senior counsel for the appellants on substantive law not being retrospective in operation, unless expressly stated so in the Act would, thus, have no application to the matter in issue, in view of what we have observed aforesaid. On the other hand, as observed by Buckley, L.J. in West v. Gwynne, retrospective operation is one matter and interference with existing rights is another. In that context, it was ruled that the provisions of the Conveyancing of Law and Property Act, 1892 were held applicable to leases containing a covenant, condition or agreement against assigning, underletting or parting with possession or disposing of land or property leased without license or consent to all leases whether executed before or after the commencement of the Act. Such a construction was held not to make the Act retrospective in operation but merely effected the future existing r....
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....erein the background and salient feature of the SARFAESI Act have been extensively discussed and analysed and the Court has also highlighted the objective behind enacting such a legislation. 41) These sentiments are echoed in the subsequent judgment in the case of United Bank of India v. Satyawati Tondon and Others (2010) 8 SCC 110 wherein it was held that the Act is intended to give impetus to industrial development in the country by providing speedy procedure of recovery. On account of lack of infrastructure and manpower, regular courts were not able to cope with the speed in adjudication of recovery cases. In the light of recommendations of the Tiwari Committee, special tribunals came to be set up under the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 for recovery of huge accumulated NPAs of the bank loans. On the recommendations of the Narasimham Committee and Andhyarujina Committee, SARFAESI Act was enacted to empower banks and financial institutions to take possession of the securities and to sell them without the intervention of the Court. In this regard, reference may be made to the following observations of this Court in the case....
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....country. Obviously, the Act is intended to recover the said pre-existing loans by the machinery provided under the SARFAESI Act. The pre-existing loans are not excluded from the purview of the Act. Similarly, the object of notifying the financial institution in question is to enable such institution to avail the provisions of SARFAESI Act in respect of existing loans. This salient object of the Act does not appear to have been noticed in Subash Chandra Panda." 42) We may also reproduce the following discussion from that judgment which completely answers most of the arguments raised by the learned counsel for the respondents: "17. Further, the settled principle of interpretation that while the statute affecting the substantive rights is presumed to be prospective, a statute changing the forum of remedy and the procedure is retrospective has also not been kept in mind. These principles are the basis of the view taken in the Unique Engineering Works and Pradeep Kumar Gupta. The said considerations are valid and legitimate, supported by ample authority of binding precedents of the Apex Court, to which reference may be made and relevant observations extracted: ....