TaxTMI 
TaxTMI 
2018 (3) TMI 118
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.... 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 meaning of Section 2(d) and (m) of the SARFAESI Act and, therefore, i....
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....ellant 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 under Section 9 of the Arbitration Act, being O.P. No. 377 and 378 of 2013, befo....
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....espondents 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 was not open to the appellant to take recourse to the provisions of SARFAESI Act. Thi....
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....cord 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 banks and financial institutions without recourse to the court of law. On the other hand, the Arbitrat....
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....imply 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 there are two or more co-existent remedies available to the litigants at the time of election which are repugnant and inconsistent. In any even....
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....sions 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 notification was issued on August 05, 2016 specifying certain Non-Financial Banking Companies (NFBCs) covered under clause (f) of Section 45-I of the RBI Act, with as....
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....iction 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, it will have to be held that in the event of any of the provisions of the RDDB Act not being inconsistent with the provisions of the SARFAESI Act, the application of both the Acts, namely, the SARFAESI Act and the RDDB Act, woul....
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....rce 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 arbitration is an adjudicatory process. In the event that the secured assets are insufficient to satisfy the debts, the secured creditor can proceed against other assets in execution against the debtor, after determination of the pending outstanding amount by a competent forum. 34. We a....
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....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. Therefore, an existing borrower, who had been granted financial assistance was covered under Section 2(f) of the said Act as a 'borrower'. Not only this expression, the definition clauses dealing with 'debt securities', 'financial assistance', 'financial assets', etc., clearly convey the legislative intent that the SARFAESI A....
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....ssions 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 argued that the definition of the term borrower is clear and un-ambiguous itself and the rule of literal interpretation deserves to be deployed. The respondents relied upon the dictum in P.K. Unni vs. Nirmala Industries & Others (1990) 2 SCC 378 wherein it is held that the Court must proceed on an assumption that the legislature did not make a mistake and that it int....
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....n 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 rights, liabilities and obligations which were not statutorily envisaged. It was argued that the provisions of SARFAESI Act, cannot be held to be purely procedural, they create substantial right in favour of the secured creditor for recovery of its dues by way of enforcement of security interest without invocation of the court. Section 13(1) creates substantive rights and by no stretch of imagination,....
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....he 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, infructuous inasmuch as any unscrupulous litigant, after suffering an order of winding up, may approach the Board merely be filing a petition and consequently get the proceedings in the Company case stayed. Such a grievance may be justified and the submission having substance but in view of the language of Sections 15 and 16 of the Act particularly explanation to Section 16 inserted by Act No. 12 of 1994, this Court has no op....
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....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 never be the legislative intent. 15. Two principles of construction - one relating to casus omissus and the other in regard to reading the statute as a whole - appear to be well settled. Under the first principle a casus omissus cannot be supplied by the court except in the case of clear necessity and when reason for it is found in the four corners of the statute itself but at the same time a casus omissus should not be readily inferred and for that purp....
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....r 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, 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 ....
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....al 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 the statutory provisions of the Companies Act. Once this is kept in mind, there would not be any difference as far as consequences in law are concerned from the case of M.D. Frozen Foods and this case. Therefore, M.D. Frozen Foods case would apply to the facts of this case in all force. 37) Further, it is too farfetched to argue that just to realise the dues from the respondents, IBFSL and the appellant devised the plan of merger so as to attract the provisions of SARFAESI Act and we are not incl....
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....erved 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 rights under all leases whether executed before or after the date of that Act. (Discussed in Trimbak Damodhar Raipurkar v. Assaram Hiraman Patil). 40. In a similar vein, are the observations made in the case of In re Athlumney. Ex parte Wilson, where the question posed before the Queen's Division Bench was whether Section 23 of the Bankruptcy Act, 1890 was retrospective in its operation. In the aforementioned context, Wright, J., speaking for the Bench, illuminatingly opined: "Perhaps no rule of construction is more f....
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....ope 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 of Satyawati Tondon: "1...With a view to give impetus to the industrial development of the country, the Central and State Governments encouraged the banks and other financial institutions to formulate liberal policies for grant of loans and other financial facilities to those who wanted to set up new industrial units or expand the existing units. Many hundred thousand took advantage of easy financing by the banks and other financial institutions but a large number of them did not repay the amount of loan, etc. Not only this, they instituted frivolous cases ....
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....ed 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: 1. Rafiquennessa v. Lal Bahadur Chetri, AIR 1964 SC 1511 "9..... Mr. Chatterjee has relied upon the wellknown observations made by Wright, J. in (Re Athlumney ex parte or Wilson (1898) 2 QBD 547) when the learned Judge said that it is a general rule that when the legislature alters the rights of parties by taking away or conferring any right of action, its enactments, unless in express terms they apply to pending actions, do not affect them. He added that there was one exception to that rule, namely that where enactments merely affect procedure and do not extend to rights of action, they have been h....