REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 18 OF 2018
INDIABULLS HOUSING FINANCE
LIMITED .....APPELLANT(S)
VERSUS
M/S. DECCAN CHRONICLE HOLDINGS
LIMITED AND OTHERS .....RESPONDENT(S)
W I T H
CONTEMPT PETITION (CIVIL) NO. 756 OF 2017
A N D
CONTEMPT PETITION (CIVIL) NO. 1693 OF 2017
J U D G M E N T
A.K. SIKRI, J.
This appeal preferred by Indiabulls Housing Finance
Limited, in which the main contesting parties are M/s. Deccan
Chronicle Holdings Limited and its Directors (other respondents
are the proforma parties), questions the correctness and legality
of the judgment and order dated February 04, 2014 passed by
the High Court of Judicature of Andhra Pradesh at Hyderabad.
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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 meaning of Section 2(d) and (m) of the
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SARFAESI Act and, therefore, it had no jurisdiction to take
any steps by invoking the provisions of this Act. However,
IBFSL got merged with the appellant company. No doubt,
the appellant is a financial institution under the SARFAESI
Act. However, since IBFSL had no right to initiate any action
under the said Act, as a successor-in-interest, the appellant
steps into the shoes of IBFSL and, therefore, it also cannot
initiate any action under the SARFAESI Act. If that is
allowed, held the High Court, substantive rights of the
contesting respondents which accrued to them under
Sections 69 and 69A of the Transfer of Property Act, 1882
would be adversely affected, which cannot be
countenanced.
3) Having given the glimpse of the transaction which was entered
into between the parties and also that of the basis of the
impugned judgment of the High Court, we proceed to discuss the
details on which the lis is founded.
4) We may start with the narration of brief facts of the case, which
are as follows:
On April 18, 2005, IBFSL was granted a certificate under
Section 45-I(a) of the Reserve Bank of India Act, 1934 to operate
Civil Appeal No. 18 of 2018 Page 3 of 42
as a Non-Banking Financial Company and, thus, act as a
financial institution under the said Act. The appellant was
incorporated on May 10, 2005. The appellant and IBFSL were
sister concerns. The appellant was granted a registration
certificate dated December 28, 2005 to commence the business
of housing finance institution. The Central Government, vide
Notification dated September 19, 2007, issued under Section 2(1)
(m) of SARFAESI Act, specified the petitioner as a ‘financial
institution’ for the purposes of the said Act. IBFSL disbursed a
loan amount of Rs.50 crores to the respondent borrowers vide
Loan Agreement dated December 08, 2011. The loan facility was
secured by the respondent borrowers by creating equitable
mortgage over various properties. IBFSL also disbursed a further
amount of Rs.50 crores to the respondent borrowers vide Loan
Agreement dated January 05, 2012. The loan facility was
security by the respondent borrowers again by creating equitable
mortgage over various properties.
5) Sometime in the year 2012, it was proposed that IBFSL gets
merged with the appellant. After completing the formalities of
informing the National Housing Bank as well as the Reserve Bank
of India about the aforesaid proposal and furnishing them copies
Civil Appeal No. 18 of 2018 Page 4 of 42
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 under Section 9 of the Arbitration Act, being
O.P. No. 377 and 378 of 2013, before III Addl. Chief Judge, City
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Civil Court, Hyderabad for securing the amount payable by the
respondent borrowers. An ad-interim injunction restraining the
respondent borrowers and other co-borrowers therein from
alienating the scheduled properties to third parties in any manner
was passed. The scheme of arrangement as approved by the
order dated April 12, 2013 was filed with the Registrar of
Companies on March 08, 2013 making the same effective. The
appellant, having stepped into the shoes of IBFSL in respect of
the debts owed to IBFSL, issued notice dated March 08, 2013
under Section 13(2) of SARFAESI Act to the respondent
borrowers and other co-borrowers. This was followed by notice
dated May 29, 2013 issued under Section 13(4) of SARFAESI Act
in respect of taking over symbolic possession of the mortgaged
properties.
7) The respondents herein, on July 17, 2013, filed SA No. 182 of
2013 before the Debts Recovery Tribunal, Chandigarh under
Section 17 of SARFAESI Act challenging the action of the
appellant invoking the measures under Section 13(4) of
SARFAESI Act. Within few days thereafter, i.e. on July 30, 2013,
respondent No.1 also field Writ Petition No. 22688 of 2013
challenging, inter alia, the declaration of the account as NPA and
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passing of orders by the Chief Metropolitan Magistrate under
Section 14 of the SARFAESI Act. Similar writ petitions, being Writ
Petition Nos. 22689 and 22934 of 2013 were filed by respondent
No.1’s employee union and respondent No.4 respectively. On
September 04, 2013, the respondents herein unconditionally
withdrew SA No. 182 of 2013 filed before the Debts Recovery
Tribunal, Chandigarh. The appellant issued an auction notice
dated November 21, 2013 informing the respondent borrowers
that auction of the Banjara Hill properties of the respondent
borrowers would be conducted on December 24, 2013. At this
juncture, on December 19, 2013, respondent Nos.1 to 5 filed Writ
Petition No. 37381 of 2012 before the High Court.
8) In the aforesaid writ petition, the High Court passed interim orders
dated December 20, 2013, directing the parties to maintain status
quo. Another interim order dated December 23, 2013 was
passed directing the appellant not to finalise the auction though it
was permitted to receive bids. However, the said auction could
not fructify 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
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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. This aspect is concluded in the following manner:
“The two O.Ps. i.e. 377 and 378 of 2013 have already
been filed in the name of IBFSL, under Section 9 of
the Arbitration Act. The arbitration clause that existed
in the agreements has been extracted in the preceding
paragraphs. Section 8 of the Arbitration Act makes it
amply clear that if the agreement between the parties
contains an arbitration clause, institution of other
proceedings is prohibited. When a suit cannot be
instituted by a party to an agreement, which contains
Civil Appeal No. 18 of 2018 Page 8 of 42
an arbitration clause, the initiation of proceedings
before other fora becomes equally untenable. The
proceedings under the SARFAESI Act cannot be
placed on a higher pedestal. The borrower of a
secured financial institution, as defined under Section
2(f) of the SARFAESI Act cannot be treated as a super
Court, to be kept on a higher pedestal in the context of
Section 8 of the Arbitration Act. When arbitration
proceedings have already been initiated, the 4th
respondent cannot be permitted, ignore them and
proceed against the security.”
10) The High Court noted that the contesting respondents had not
borrowed any amount from the appellant. The loan was taken
from IBFSL, which was not under the purview of SARFAESI Act.
Therefore, at the time of taking the loan, the respondent
borrowers knew that IBFSL would not be in a position to take
recourse to the SARFAESI Act. With the merger of IBFSL with
the appellant, ruled the High Court, the loan transaction which
was outside the purview of the SARFAESI Act, could not be
brought under its purview without the consent of the borrower.
According to the High Court, SARFAESI Act prescribes a new
legal regime and if the loan is allowed to be brought within the
SARFAESI Act only because of merger and the appellant is
allowed to take recourse under the SARFAESI Act, it would affect
substantive rights of the contesting borrowers under Sections 69
and 69A of the Transfer of Property Act. In the process, the High
Court has noted that the views of the Uttarakhand High Court and
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the Allahabad High Court are contrary to the aforesaid view.
However, it chose to agree with the view taken by the Division
Bench of the Orissa High Court in deciding that provisions of
SARFAESI Act will not be applicable. Pertinently, Full 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
Civil Appeal No. 18 of 2018 Page 10 of 42
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 Arbitration and Conciliation
Act, in contrast, is a statute of general nature. Merely because
steps are taken under this general law would not mean that
remedy under the special statute is foreclosed. If at all, legal
position is just the reverse. Matter is no more res integra and is
covered by a judgment of this Court in Transcore v. Union of
India & Anr.1
In that case, after analysing the provisions of the
Recovery of Debts Due to Banks and Financial Institutions Act,
1993, the Court summed up the position as under:
“18. On analysing the above provisions of the DRT
Act, we find that the said Act is a complete code by
itself as far as recovery of debt is concerned. It
provides for various modes of recovery. It incorporates
even the provisions of the Second and Third
Schedules to the Income Tax Act, 1961. Therefore, the
debt due under the recovery certificate can be
recovered in various ways. The remedies mentioned
therein are complementary to each other. The DRT Act
provides for adjudication. It provides for adjudication of
disputes as far as the debt due is concerned. It covers
secured as well as unsecured debts. However, it does
not rule out applicability of the provisions of the TP
Act, in particular Sections 69 and 69-A of that Act.
Further, in cases where the debt is secured by pledge
of shares or immovable properties, with the passage
of time and delay in the DRT proceedings, the value of
the pledged assets or mortgaged properties invariably
1 (2008) 1 SCC 125
Civil Appeal No. 18 of 2018 Page 11 of 42
falls. On account of inflation, value of the assets in the
hands of the bank/FI invariably depletes which, in turn,
leads to asset-liability mismatch. These contingencies
are not taken care of by the DRT Act and, therefore,
Parliament had to enact the NPA Act, 2002.”
12) Thereafter, the Court analysed the provisions of SARFAESI Act
and then noted, in paragraph 37 of the judgment, three points of
determination which arose for consideration. We are concerned
with point No.1 formulated therein, which reads as under:
“(i) Whether the banks or financial institutions having
elected to seek their remedy in terms of the DRT Act,
1993 can still invoke the NPA Act, 2002 for realising
the secured assets without withdrawing or abandoning
the OA filed before DRT under the DRT Act.”
13) 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
Civil Appeal No. 18 of 2018 Page 12 of 42
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 event, there is no repugnancy nor
inconsistency between the two remedies, therefore,
the doctrine of election has no application.
65. In our view, the judgments of the High Courts
which have taken the view that the doctrine of election
is applicable are erroneous and liable to be set aside.
66. We have already analysed the scheme of both the
Acts. Basically, the NPA Act is enacted to enforce the
interest in the financial assets which belongs to the
bank/FI by virtue of the contract between the parties or
by operation of common law principles or by law. The
very object of Section 13 of the NPA Act is recovery by
non-adjudicatory process. A secured asset under the
NPA Act is an asset in which interest is created by the
borrower in favour of the bank/FI and on that basis
alone the NPA Act seeks to enforce the security
interest by non-adjudicatory process. Essentially, the
NPA Act deals with the rights of the secured creditor.
The NPA Act proceeds on the basis that the debtor
has failed not only to repay the debt, but he has also
failed to maintain the level of margin and to maintain
value of the security at a level is the other obligation of
the debtor. It is this other obligation which invites
applicability of the NPA Act. It is for this reason, that
Sections 13(1) and 13(2) of the NPA Act proceed on
the basis that security interest in the bank/FI needs to
be enforced expeditiously without the intervention of
the court/tribunal; that liability of the borrower has
accrued and on account of default in repayment, the
account of the borrower in the books of the bank has
become non-performing. For the above reasons, the
NPA Act states that the enforcement could take place
by non-adjudicatory process and that the said Act
removes all fetters under the above circumstances on
the rights of the secured creditor.”
14) With this, we now address the central issue on which detailed
Civil Appeal No. 18 of 2018 Page 13 of 42
arguments were advanced by both the parties. We may note that
our discussion is not on a virgin field as the terrain has already
been covered by this Court in M.D. Frozen Foods Exports Pvt.
Ltd. & Ors. v. Hero Fincorp Ltd.2
The learned senior counsel
appearing for the appellant had submitted that this case, 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
2 (2017) SCC Online SC 1211
Civil Appeal No. 18 of 2018 Page 14 of 42
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 assets of more than
Rs. 500 crores and above, as financial institutions and directing
that the provisions of SARFAESI Act shall apply to such financial
institutions with the exceptions of provisions of Sections 13 to 19
of that Act. Sections 13 to 19 were made applicable, as per the
notification, only to such security interest which is obtained for
securing repayment of secured debt with principal amount of Rs.1
crore and above. The respondent was specifically covered by the
said notification which was issued in exercise of powers conferred
under sub-clause (iv) of clause (m) of sub-section (1) of Section 2
read with Section 31A of the SARFAESI Act. In view of the
aforesaid notification, the respondent issued a notice under
Section 13(2) of SARFAESI Act on November 24, 2016 for one of
the seven properties mortgaged to it against the aforesaid loan
which was advanced to the appellants.
Civil Appeal No. 18 of 2018 Page 15 of 42
17) Having regard to the aforesaid facts in M.D. Frozen Foods, the
Court formulated following three questions which had arisen for
consideration:
“A. Whether the arbitration proceedings initiated by the
respondent can be carried on along with the
SARFAESI proceedings simultaneously?
B. 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?
C. A linked question to question (ii), 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?”
These questions amply demonstrate that the instant case is
virtually on the same footing.
18) Insofar as question ‘A’ is concerned, the Court categorically 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. The discussion from that
judgment is reproduced below:
“26. A claim by a bank or a financial institution, before
the specified laws came into force, would ordinarily
have been filed in the Civil Court having the pecuniary
jurisdiction. 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
Civil Appeal No. 18 of 2018 Page 16 of 42
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, would be
complementary to each other. In this context,
reliance can be placed upon the decision
in Transcore v. Union of India [(2008) 1 SCC 125 :
(2008) 1 SCC (Civ) 116]. In para 64 it is stated as
under after referring to Section 37 of the
SARFAESI Act: (SCC p. 162)
“64. … 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
Civil Appeal No. 18 of 2018 Page 17 of 42
event, there is no repugnancy nor
inconsistency between the two remedies,
therefore, the doctrine of election has no
application.”
(emphasis added)
46. A reading of Section 37 discloses that the
application of the SARFAESI Act will be in addition
to and not in derogation of the provisions of the
RDDB Act. In other words, it will not in any way
nullify or annul or impair the effect of the
provisions of the RDDB Act. We are also fortified
by our above statement of law as the heading of
the said section also makes the position clear that
application of other laws are not barred. The effect
of Section 37 would, therefore, be that in addition
to the provisions contained under the SARFAESI
Act, in respect of proceedings initiated under the
said Act, it will be in order for a party to fall back
upon the provisions of the other Acts mentioned in
Section 37, namely, the Companies Act, 1956, the
Securities Contracts (Regulation) Act, 1956, the
Securities and Exchange Board of India Act, 1992,
the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993, or any other law for the time
being in force.”
28. These observations, thus, leave no manner of
doubt and the issue is no more res integra, especially
keeping in mind the provisions of Sections 35 and 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
Civil Appeal No. 18 of 2018 Page 18 of 42
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 are, thus, unequivocally of the view that the
judgments of the Full Bench of the Orissa High Court
in Sarthak Builders Pvt. Ltd. v. Orissa Rural
Development Corporation Limited, the Full Bench of
the Delhi High Court in HDFC Bank Limited v. Satpal
Singh Bakshi (supra) and the Division Bench of the
Allahabad High Court in Pradeep Kumar
Gupta v. State of U.P. lay down the correct proposition
of law and the view expressed by the Andhra Pradesh
High Court in Deccan Chronicles Holdings
Limited v. Union of India following the overruled
decision of the Orissa High Court in Subash Chandra
Panda v. State of Orissa does not set forth the correct
position in law. SARFAESI proceedings and arbitration
proceedings, thus, can go hand in hand.”
19) Insofar as questions ‘B’ and ‘C’ are concerned, the Court again
referred to the conflicting opinion of different High Courts and
after discussion 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
Civil Appeal No. 18 of 2018 Page 19 of 42
created prior to the coming into force the SARFAESI Act.
Paragraphs 36 to 38 of the judgment need to be reproduced in
this behalf, which are to the following effect:
“36. The SARFAESI Act was brought into force to
solve the problem of recovery of large debts in NPAs.
Thus, the very rationale for the said Act to be brought
into force was to provide an expeditious procedure
where there was a security interest. It certainly did not
apply retrospectively from the date when it came into
force. The question is whether, the Act being
applicable to the respondent at a subsequent date and
thereby allowing the respondent to utilize its provisions
with regards to a past debt, would make any difference
to this principle. We are of the view that the answer to
the same is in the negative.
37. The Act applies to all the claims which would be
alive at the time when it was brought into force.
Thus, qua the respondent or other NBFCs, it would be
applicable 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
Civil Appeal No. 18 of 2018 Page 20 of 42
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 Act applies to all existing agreements
irrespective of the fact whether the lender was a
notified ‘financial institution’ on the date of the
execution of the agreement with the borrower or not.
The scheme of the SARFAESI Act sets out an
expeditious, procedural methodology, enabling the
bank to take possession of the property for nonpayment
of dues, without intervention of the court. The
mere fact that a more expeditious remedy is provided
under 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!”
20) The Court also referred to certain judgments laying down
distinction between retroactive and retrospective operation of a
particular statute3
.
21) The fact situation was, thus, almost the same in the instant case.
The only difference is that here the loan was initially sanctioned
by IBFSL which stands merged with the appellant and the
appellant is the successor-in-interest which is covered by the
SARFAESI Act. In the aforesaid case, though the entity which
disbursed the loan remained the same, however, at the time
3 West v. Gwynne, 1911 2 Ch 1 at pp. 11, 12
Trimbak Damodhar Raipurkar v. Assaram Hiraman Patil, 1962 Supp (1) SCR 700
In re Athlumney. Ex parte Wilson, (1898) 2 Q.B. 547
Civil Appeal No. 18 of 2018 Page 21 of 42
when the loan was given by the respondent to the appellant it
was not a financial institution covered under the SARFAESI Act,
which status was attained by the respondent in view of
notification dated August 05, 2016 issued much after the loan was
disbursed to the appellant therein. This does not make any
difference in the outcome, as discussed in detailed hereinafter.
22) Learned counsel for respondents could not dispute that the
aforesaid judgment covers the present case in its entirety. This
position had to be accepted by them having regard to the fact that
the judgment of the High Court which is impugned in these
proceedings has been specifically 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.
Civil Appeal No. 18 of 2018 Page 22 of 42
(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 & Others4
wherein it is held
that the Court must proceed on an assumption that the
legislature did not make a mistake and that it intended to
say what it said it was further held that even assuming that
there was a defect or omission in the words used by the
legislature, the Court would not go to its said to correct or
make up the deficiency. The Court cannot add words to a
statute or read words into it which are not there, especially
4 (1990) 2 SCC 378
Civil Appeal No. 18 of 2018 Page 23 of 42
when the literal reading produces an intelligible result. The
courts are not authorised to alter a word so as to produce a
“casus omissus”. Support from the judgment in the matter of
Union of India v. Elphin Stone Spinning and Weaving
Company Limited & Others5
was also taken in this behalf.
The learned counsel also referred to yet another case, viz.,
Delhi Financial Corporation and another v. Rajiv Anand
and others6
wherein this aforesaid principle is reiterated.
(iii) The loan agreements dated December 08, 2011 and
January 05, 2012 which were entered into between
respondent No. 1 and IBFSL cannot be classified as
‘security arrangement’ within the meaning of Section 2(1)
(zb) of the SARFAESI Act.
(iv) These agreements did not create ‘security interest’ within
the meaning of Section 2(1)(zb) of the SARFAESI Act. It
was argued that the term security assets as defined under
Section 2(1)(zc) of the Act means the property on which the
security interest is created. The terms ‘security interest’ is
defined under Section 2(1)(zf) to mean right, title, interest of
any kind whatsoever upon property created in favour of a
secured creditor (as defined under Section 2(1)(zb) and
5 (2001) 4 SCC 139
6 (2004) 11 SCC 625
Civil Appeal No. 18 of 2018 Page 24 of 42
includes a mortgage, charge, hypothecation or assignment
other than specified in Section 31). Similarly security
agreement is defined under Section 2(1)(zb).
The submission was that the agreements dated
December 08, 2011 and January 05, 2012 do not fall within
the purview of Section 2(a)(zb) since at the time when the
said agreements were entered into, the entity in favour of
which they were executed, i.e., Indiabulls Financial Services
Limited, was not a secured creditor 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.
Civil Appeal No. 18 of 2018 Page 25 of 42
(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,
and cannot be said to a provision, procedural in nature.
The procedure for enforcement of that substantial right is
provided under Sub-Section (2) on the happening of the
eventuality as mentioned therein. That a further procedure
of prescribing the details in a notice is to be given by virtue
of Section 13(3) and provide for making a representation
under Section 13(3)(A) and further provides for a procedure
Civil Appeal No. 18 of 2018 Page 26 of 42
for release and recovery of secured debt under Section
13(4). In absence of a substantial right being created by
Section 13(1), procedural provisions contained in subSections
(2) to (4) are meaningless as it would not provide
a remedy for the enforcement of substantial right created
under Section 13(4). It would not, therefore, be correct to
treat SARFAESI Act as a merely procedural statute.
24) It was submitted that this was a reverse merger inasmuch as
IBFSL was a holding company and the appellant company was
only a subsidiary company and holding company was sought to
be amalgamated and merged with the subsidiary company.
25) It was also submitted that the entire exercise of merger was
undertaken to transfer loan from financial company to a financial
company in order to take advantage of provisions of SARFAESI
Act, which according to the respondents is not permissible in law.
On the aforesaid basis, the first submission of the learned
counsel for respondents was that there was no transfer and
vesting of loan in the appellant company provisions as per the
scheme. It was argued that the scheme envisaged, under
paragraph 4, that with effect from the appointed date, i.e., April
01, 2012, the amalgamating company comprising the
Civil Appeal No. 18 of 2018 Page 27 of 42
amalgamating undertaking shall, pursuant to the sanction of the
scheme by the High Court and compliance of statutory provisions,
be and stand transferred to and vested in the amalgamated
company as a going concern without any further act, instrument,
deed, matter or thing so as to become, as and from the appointed
date April 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
Civil Appeal No. 18 of 2018 Page 28 of 42
Limited7 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 option but to adhere
to its earlier decision taken in Real Value Appliances
(Supra). While interpreting, this 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 by
having recourse to appropriate procedure, if deemed
necessary.”
It was argued that the above observations of this Court
clearly negate the submission of the appellant that because the
SARFAESI Act has been enacted to overcome the accumulated
NPA in public interest, the term ‘borrower’ has to be widely
construed.
28) Reliance was also placed on the Constitution Bench judgment in
the case of Padma Sundara Rao v. State of Tamil Nadu8 where
this Court has held as under:
“12. The rival pleas regarding rewriting of statute and
casus omissus need careful consideration. It is wellsettled
principle in law that the court cannot read
anything into a statutory provision which is plain and
7 (2000) 5 SCC 515
8 (2002) 3 SCC 533
Civil Appeal No. 18 of 2018 Page 29 of 42
unambiguous. A statute is an edict of the legislature.
The language employed in a statute is the
determinative factor of legislative intent. The first and
primary rule of construction is that the intention of the
legislation must be found in the words used by the
legislature itself. The question is not what may be
supposed and has been intended but what has been
said. “Statutes should be construed, not as theorems
of Euclid”, Judge Learned Hand said, “but words must
be construed with some imagination of the purposes
which lie behind them”. (See Lenigh Valley Coal
Co. v. Yensavage [218 FR 547].) The view was
reiterated in Union of India v. Filip Tiago De Gama of
Vedem Vasco De Gama [(1990) 1 SCC 277 : AIR
1990 SC 981].
13. In D.R. Venkatchalam v. Dy. Transport Commr.
[(1977) 2 SCC 273 : AIR 1977 SC 842] it was
observed that courts must avoid the danger of a priori
determination of the meaning of a provision based on
their own 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
never be the legislative intent.
15. Two principles of construction — one relating to
Civil Appeal No. 18 of 2018 Page 30 of 42
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 purpose all
the parts of a statute or section must be construed
together and every clause of a section should be
construed with reference to the context and other
clauses thereof so that the construction to be put on a
particular provision makes a consistent enactment of
the whole statute. This would be more so if literal
construction of a particular clause leads to manifestly
absurd or anomalous results which could not have
been intended by the legislature. “An intention to
produce an unreasonable result”, said Danckwerts,
L.J., in Artemiou v. Procopiou [(1966) 1 QB 878 :
(1965) 3 All ER 539 : (1965) 3 WLR 1011 (CA)] (at All
ER p. 544-I), “is not to be imputed to a statute if there
is some other construction available”. Where to apply
words literally would “defeat the obvious intention of
the legislation and produce a wholly unreasonable
result”, we must “do some violence to the words” and
so achieve that obvious intention and produce a
rational construction. [Per Lord Reid
in Luke v. IRC [1963 AC 557 : (1963) 1 All ER 655 :
(1963) 2 WLR 559 (HL)] where at AC p. 577 he also
observed: (All ER p. 664-I) “This is not a new problem,
though our standard of drafting is such that it rarely
emerges.”]”
29) It was contended that in light of the above-stated principles
enunciated in the Constitution Bench decision, since the
language of Section 2(1)(f) and 2(a)(zf) is unambiguous, the
casus omissus cannot be applied by a judicial interpretation
process. It was submitted that there is no scope of reading
something into, which it does not exist.
Civil Appeal No. 18 of 2018 Page 31 of 42
30) Counsel for the respondents also placed strong reliance upon the
judgment in the ICICI Bank Limited v. Official Liquidator of
APS Star Industries and others9 which centres around the
Banking Regulation Act, 1949 and guidelines of RBI issued on the
subject of inter se transfer of non-performing assets by Bank. It
was held that the Banking Regulation Act, 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.
9 (2010) 100 SCC
Civil Appeal No. 18 of 2018 Page 32 of 42
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 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, the effect of such a merger is explained by this Court in
Saraswati Industrial Syndicate Ltd. v. Commissioner of
Income Tax10 in the following manner:
10 1990(Supp) SCC 675
Civil Appeal No. 18 of 2018 Page 33 of 42
“5. Generally, where only one company is involved in
change and the rights of the shareholders and
creditors are varied, it amounts to reconstruction or
reorganisation of scheme of arrangement. In
amalgamation two or more companies are fused into
one by merger or by taking over by another.
Reconstruction or ‘amalgamation’ has no precise legal
meaning. The amalgamation is a blending of two or
more existing undertakings into one undertaking, the
shareholders of each blending company become
substantially the shareholders in the company which is
to carry on the blended undertakings. There may be
amalgamation either by the transfer of two or more
undertakings to a new company, or by the transfer of
one or more undertakings to an existing company.
Strictly ‘amalgamation’ does not cover the mere
acquisition by a company of the share capital of other
company which remains in existence and continues its
undertaking but the context in which the term is used
may show that it is intended to include such an
acquisition. See: Halsbury's Laws of England (4th
edition volume 7 para 1539). Two companies may join
to form a new company, but there may be absorption
or blending of one by the other, both amount to
amalgamation. When two companies are merged and
are so joined, as to form a third company or one is
absorbed into one or blended with another, the
amalgamating company loses its entity.”
34) Thus, 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
Civil Appeal No. 18 of 2018 Page 34 of 42
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 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
Civil Appeal No. 18 of 2018 Page 35 of 42
of merger so as to attract the provisions of SARFAESI Act and we
are not inclined to accept such a submission. Various judgments
which are relied upon by the respondents also would not apply as
we neither find it to be a case of the Court creating any legislation
or supplying any casus omissus.
38) Apart from the factual parity, even legally the arguments of the
respondents do not carry any weight. The view taken in M.D.
Frozen Foods is that the SARFAESI Act is retroactive in nature.
In the process, the Court approved the Full Bench decision of the
Orissa High Court in Sarthak Builders Pvt. Ltd., Chinta,
Arunodaya Market, Cuttack & Another v. Orissa Rural
Development Corporation Limited, Station Square,
Bhubaneswar & 5 Ors.11 and made the following observations:
“38…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 Act applies to all
existing agreements irrespective of the fact whether
the lender was a notified ‘financial institution’ on the
date of the execution of the agreement with the
11 (2014) SCC Online Ori 75
Civil Appeal No. 18 of 2018 Page 36 of 42
borrower or not. The scheme of the SARFAESI Act
sets out an expeditious, procedural methodology,
enabling the bank to take possession of the property
for non-payment of dues, without intervention of the
court. The mere fact that a more expeditious remedy is
provided under 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 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 firmly
established than this — that a retrospective
operation is not to be given to a statute so as to
impair an existing right or obligation, otherwise
than as regards matter of procedure, unless that
effect cannot be avoided without doing violence to
Civil Appeal No. 18 of 2018 Page 37 of 42
the language of the enactment. If the enactment
is expressed in language which is fairly capable
of either interpretation, it ought to be construed as
prospective only… 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…It is said
that there is one exception to that rule, namely,
that, where enactments merely affect procedure
and do not extend to rights of action, they have
been held to apply to existing rights, and it is
suggested here that the alteration made by this
section is within that exception…”
(Emphasis supplied)
41. Similarly, the date on which a debt is declared as
an NPA would again have no impact. We are, thus, of
the view that the provisions of the SARFAESI Act
would become applicable quaall debts owing and live
when the Act became applicable to the respondent in
terms of the parameters contended by learned senior
counsel for the respondent and enlisted at serial Nos. i
to iv in para 18.”
It, thus, follows that there is only a procedural change in
respect of forum for recovery of debt and no substantive rights
are affected.
39) In view of the aforesaid judgment, argument of the respondents
herein predicated on Sections 69 and 69A of the Transfer of
Property Act, which weighed with the High Court, is without any
substance.
40) The aforesaid view also gets support from the judgment of this
Court in Mardia Chemicals Ltd. & Ors. v. Union of India &
Civil Appeal No. 18 of 2018 Page 38 of 42
Ors.12 wherein 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
Others13 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 of Satyawati Tondon:
12 (2004) 4 SCC 311
13 (2010) 8 SCC 110
Civil Appeal No. 18 of 2018 Page 39 of 42
“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 and succeeded in
persuading the civil courts to pass orders of injunction
against the steps taken by banks and financial
institutions to recover their dues. Due to lack of
adequate infrastructure and non-availability of
manpower, the regular courts could not accomplish
the task of expeditiously adjudicating the cases
instituted by banks and other financial institutions for
recovery of their dues. As a result, several hundred
crores of public money got blocked in unproductive
ventures.
2. In order to redeem the situation, the Government of
India constituted a committee under the Chairmanship
of Shri T. Tiwari to examine the legal and other
difficulties faced by banks and financial institutions in
the recovery of their dues and suggest remedial
measures. The Tiwari Committee noted that the
existing procedure for recovery was very cumbersome
and suggested that special tribunals be set up for
recovery of the dues of banks and financial institutions
by following a summary procedure. The Tiwari
Committee also prepared a draft of the proposed
legislation which contained a provision for disposal of
cases in three months and conferment of power upon
the Recovery Officer for expeditious execution of
orders made by adjudicating bodies.
xx xx xx
16. Thus, the Act intends to provide remedy in respect
of pre - existing loans. The interpretation that the Act
will apply only to future debt transactions defeats the
very purpose of law of reducing the non-performing
assets. This object is clearly mentioned in the
Statement of Objects and Reasons. As noted in the
case of Satyaivati Tondon amount of rupees one lakh
Civil Appeal No. 18 of 2018 Page 40 of 42
twenty thousand crores was due to the banks in the
year 2001 which had adversely affected the economy
of the 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:
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 held to apply to existing
rights. In order to make the statement of the law
relating to the relevant rule of construction
Civil Appeal No. 18 of 2018 Page 41 of 42
which has to be adopted in dealing with the
effect of statutory provisions in this
connection, we ought to add that retrospective
operation of a statutory provision can be
inferred even in cases where such retroactive
operation appears to be clearly implicit in the
provision construed in the context where it
occurs. In other words, a statutory provision is
held to be retroactive either when it is so
declared by express terms, or the intention to
make it retroactive clearly follows from the
relevant words and the context in which they
occur.”
(emphasis added)”
43) The aforesaid discussion, thus, leads us to conclude that
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.
44) As a result, we hold that judgment of the High Court is erroneous
and set aside the same. This appeal is allowed. No orders need
to be passed in the contempt petitions, which stand disposed of.
.............................................J.
(A.K. SIKRI)
.............................................J.
(ASHOK BHUSHAN)
NEW DELHI;
FEBRUARY 23, 2018.
Civil Appeal No. 18 of 2018 Page 42 of 42
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 18 OF 2018
INDIABULLS HOUSING FINANCE
LIMITED .....APPELLANT(S)
VERSUS
M/S. DECCAN CHRONICLE HOLDINGS
LIMITED AND OTHERS .....RESPONDENT(S)
W I T H
CONTEMPT PETITION (CIVIL) NO. 756 OF 2017
A N D
CONTEMPT PETITION (CIVIL) NO. 1693 OF 2017
J U D G M E N T
A.K. SIKRI, J.
This appeal preferred by Indiabulls Housing Finance
Limited, in which the main contesting parties are M/s. Deccan
Chronicle Holdings Limited and its Directors (other respondents
are the proforma parties), questions the correctness and legality
of the judgment and order dated February 04, 2014 passed by
the High Court of Judicature of Andhra Pradesh at Hyderabad.
Civil Appeal No. 18 of 2018 Page 1 of 42
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 meaning of Section 2(d) and (m) of the
Civil Appeal No. 18 of 2018 Page 2 of 42
SARFAESI Act and, therefore, it had no jurisdiction to take
any steps by invoking the provisions of this Act. However,
IBFSL got merged with the appellant company. No doubt,
the appellant is a financial institution under the SARFAESI
Act. However, since IBFSL had no right to initiate any action
under the said Act, as a successor-in-interest, the appellant
steps into the shoes of IBFSL and, therefore, it also cannot
initiate any action under the SARFAESI Act. If that is
allowed, held the High Court, substantive rights of the
contesting respondents which accrued to them under
Sections 69 and 69A of the Transfer of Property Act, 1882
would be adversely affected, which cannot be
countenanced.
3) Having given the glimpse of the transaction which was entered
into between the parties and also that of the basis of the
impugned judgment of the High Court, we proceed to discuss the
details on which the lis is founded.
4) We may start with the narration of brief facts of the case, which
are as follows:
On April 18, 2005, IBFSL was granted a certificate under
Section 45-I(a) of the Reserve Bank of India Act, 1934 to operate
Civil Appeal No. 18 of 2018 Page 3 of 42
as a Non-Banking Financial Company and, thus, act as a
financial institution under the said Act. The appellant was
incorporated on May 10, 2005. The appellant and IBFSL were
sister concerns. The appellant was granted a registration
certificate dated December 28, 2005 to commence the business
of housing finance institution. The Central Government, vide
Notification dated September 19, 2007, issued under Section 2(1)
(m) of SARFAESI Act, specified the petitioner as a ‘financial
institution’ for the purposes of the said Act. IBFSL disbursed a
loan amount of Rs.50 crores to the respondent borrowers vide
Loan Agreement dated December 08, 2011. The loan facility was
secured by the respondent borrowers by creating equitable
mortgage over various properties. IBFSL also disbursed a further
amount of Rs.50 crores to the respondent borrowers vide Loan
Agreement dated January 05, 2012. The loan facility was
security by the respondent borrowers again by creating equitable
mortgage over various properties.
5) Sometime in the year 2012, it was proposed that IBFSL gets
merged with the appellant. After completing the formalities of
informing the National Housing Bank as well as the Reserve Bank
of India about the aforesaid proposal and furnishing them copies
Civil Appeal No. 18 of 2018 Page 4 of 42
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 under Section 9 of the Arbitration Act, being
O.P. No. 377 and 378 of 2013, before III Addl. Chief Judge, City
Civil Appeal No. 18 of 2018 Page 5 of 42
Civil Court, Hyderabad for securing the amount payable by the
respondent borrowers. An ad-interim injunction restraining the
respondent borrowers and other co-borrowers therein from
alienating the scheduled properties to third parties in any manner
was passed. The scheme of arrangement as approved by the
order dated April 12, 2013 was filed with the Registrar of
Companies on March 08, 2013 making the same effective. The
appellant, having stepped into the shoes of IBFSL in respect of
the debts owed to IBFSL, issued notice dated March 08, 2013
under Section 13(2) of SARFAESI Act to the respondent
borrowers and other co-borrowers. This was followed by notice
dated May 29, 2013 issued under Section 13(4) of SARFAESI Act
in respect of taking over symbolic possession of the mortgaged
properties.
7) The respondents herein, on July 17, 2013, filed SA No. 182 of
2013 before the Debts Recovery Tribunal, Chandigarh under
Section 17 of SARFAESI Act challenging the action of the
appellant invoking the measures under Section 13(4) of
SARFAESI Act. Within few days thereafter, i.e. on July 30, 2013,
respondent No.1 also field Writ Petition No. 22688 of 2013
challenging, inter alia, the declaration of the account as NPA and
Civil Appeal No. 18 of 2018 Page 6 of 42
passing of orders by the Chief Metropolitan Magistrate under
Section 14 of the SARFAESI Act. Similar writ petitions, being Writ
Petition Nos. 22689 and 22934 of 2013 were filed by respondent
No.1’s employee union and respondent No.4 respectively. On
September 04, 2013, the respondents herein unconditionally
withdrew SA No. 182 of 2013 filed before the Debts Recovery
Tribunal, Chandigarh. The appellant issued an auction notice
dated November 21, 2013 informing the respondent borrowers
that auction of the Banjara Hill properties of the respondent
borrowers would be conducted on December 24, 2013. At this
juncture, on December 19, 2013, respondent Nos.1 to 5 filed Writ
Petition No. 37381 of 2012 before the High Court.
8) In the aforesaid writ petition, the High Court passed interim orders
dated December 20, 2013, directing the parties to maintain status
quo. Another interim order dated December 23, 2013 was
passed directing the appellant not to finalise the auction though it
was permitted to receive bids. However, the said auction could
not fructify 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
Civil Appeal No. 18 of 2018 Page 7 of 42
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. This aspect is concluded in the following manner:
“The two O.Ps. i.e. 377 and 378 of 2013 have already
been filed in the name of IBFSL, under Section 9 of
the Arbitration Act. The arbitration clause that existed
in the agreements has been extracted in the preceding
paragraphs. Section 8 of the Arbitration Act makes it
amply clear that if the agreement between the parties
contains an arbitration clause, institution of other
proceedings is prohibited. When a suit cannot be
instituted by a party to an agreement, which contains
Civil Appeal No. 18 of 2018 Page 8 of 42
an arbitration clause, the initiation of proceedings
before other fora becomes equally untenable. The
proceedings under the SARFAESI Act cannot be
placed on a higher pedestal. The borrower of a
secured financial institution, as defined under Section
2(f) of the SARFAESI Act cannot be treated as a super
Court, to be kept on a higher pedestal in the context of
Section 8 of the Arbitration Act. When arbitration
proceedings have already been initiated, the 4th
respondent cannot be permitted, ignore them and
proceed against the security.”
10) The High Court noted that the contesting respondents had not
borrowed any amount from the appellant. The loan was taken
from IBFSL, which was not under the purview of SARFAESI Act.
Therefore, at the time of taking the loan, the respondent
borrowers knew that IBFSL would not be in a position to take
recourse to the SARFAESI Act. With the merger of IBFSL with
the appellant, ruled the High Court, the loan transaction which
was outside the purview of the SARFAESI Act, could not be
brought under its purview without the consent of the borrower.
According to the High Court, SARFAESI Act prescribes a new
legal regime and if the loan is allowed to be brought within the
SARFAESI Act only because of merger and the appellant is
allowed to take recourse under the SARFAESI Act, it would affect
substantive rights of the contesting borrowers under Sections 69
and 69A of the Transfer of Property Act. In the process, the High
Court has noted that the views of the Uttarakhand High Court and
Civil Appeal No. 18 of 2018 Page 9 of 42
the Allahabad High Court are contrary to the aforesaid view.
However, it chose to agree with the view taken by the Division
Bench of the Orissa High Court in deciding that provisions of
SARFAESI Act will not be applicable. Pertinently, Full 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
Civil Appeal No. 18 of 2018 Page 10 of 42
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 Arbitration and Conciliation
Act, in contrast, is a statute of general nature. Merely because
steps are taken under this general law would not mean that
remedy under the special statute is foreclosed. If at all, legal
position is just the reverse. Matter is no more res integra and is
covered by a judgment of this Court in Transcore v. Union of
India & Anr.1
In that case, after analysing the provisions of the
Recovery of Debts Due to Banks and Financial Institutions Act,
1993, the Court summed up the position as under:
“18. On analysing the above provisions of the DRT
Act, we find that the said Act is a complete code by
itself as far as recovery of debt is concerned. It
provides for various modes of recovery. It incorporates
even the provisions of the Second and Third
Schedules to the Income Tax Act, 1961. Therefore, the
debt due under the recovery certificate can be
recovered in various ways. The remedies mentioned
therein are complementary to each other. The DRT Act
provides for adjudication. It provides for adjudication of
disputes as far as the debt due is concerned. It covers
secured as well as unsecured debts. However, it does
not rule out applicability of the provisions of the TP
Act, in particular Sections 69 and 69-A of that Act.
Further, in cases where the debt is secured by pledge
of shares or immovable properties, with the passage
of time and delay in the DRT proceedings, the value of
the pledged assets or mortgaged properties invariably
1 (2008) 1 SCC 125
Civil Appeal No. 18 of 2018 Page 11 of 42
falls. On account of inflation, value of the assets in the
hands of the bank/FI invariably depletes which, in turn,
leads to asset-liability mismatch. These contingencies
are not taken care of by the DRT Act and, therefore,
Parliament had to enact the NPA Act, 2002.”
12) Thereafter, the Court analysed the provisions of SARFAESI Act
and then noted, in paragraph 37 of the judgment, three points of
determination which arose for consideration. We are concerned
with point No.1 formulated therein, which reads as under:
“(i) Whether the banks or financial institutions having
elected to seek their remedy in terms of the DRT Act,
1993 can still invoke the NPA Act, 2002 for realising
the secured assets without withdrawing or abandoning
the OA filed before DRT under the DRT Act.”
13) 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
Civil Appeal No. 18 of 2018 Page 12 of 42
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 event, there is no repugnancy nor
inconsistency between the two remedies, therefore,
the doctrine of election has no application.
65. In our view, the judgments of the High Courts
which have taken the view that the doctrine of election
is applicable are erroneous and liable to be set aside.
66. We have already analysed the scheme of both the
Acts. Basically, the NPA Act is enacted to enforce the
interest in the financial assets which belongs to the
bank/FI by virtue of the contract between the parties or
by operation of common law principles or by law. The
very object of Section 13 of the NPA Act is recovery by
non-adjudicatory process. A secured asset under the
NPA Act is an asset in which interest is created by the
borrower in favour of the bank/FI and on that basis
alone the NPA Act seeks to enforce the security
interest by non-adjudicatory process. Essentially, the
NPA Act deals with the rights of the secured creditor.
The NPA Act proceeds on the basis that the debtor
has failed not only to repay the debt, but he has also
failed to maintain the level of margin and to maintain
value of the security at a level is the other obligation of
the debtor. It is this other obligation which invites
applicability of the NPA Act. It is for this reason, that
Sections 13(1) and 13(2) of the NPA Act proceed on
the basis that security interest in the bank/FI needs to
be enforced expeditiously without the intervention of
the court/tribunal; that liability of the borrower has
accrued and on account of default in repayment, the
account of the borrower in the books of the bank has
become non-performing. For the above reasons, the
NPA Act states that the enforcement could take place
by non-adjudicatory process and that the said Act
removes all fetters under the above circumstances on
the rights of the secured creditor.”
14) With this, we now address the central issue on which detailed
Civil Appeal No. 18 of 2018 Page 13 of 42
arguments were advanced by both the parties. We may note that
our discussion is not on a virgin field as the terrain has already
been covered by this Court in M.D. Frozen Foods Exports Pvt.
Ltd. & Ors. v. Hero Fincorp Ltd.2
The learned senior counsel
appearing for the appellant had submitted that this case, 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
2 (2017) SCC Online SC 1211
Civil Appeal No. 18 of 2018 Page 14 of 42
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 assets of more than
Rs. 500 crores and above, as financial institutions and directing
that the provisions of SARFAESI Act shall apply to such financial
institutions with the exceptions of provisions of Sections 13 to 19
of that Act. Sections 13 to 19 were made applicable, as per the
notification, only to such security interest which is obtained for
securing repayment of secured debt with principal amount of Rs.1
crore and above. The respondent was specifically covered by the
said notification which was issued in exercise of powers conferred
under sub-clause (iv) of clause (m) of sub-section (1) of Section 2
read with Section 31A of the SARFAESI Act. In view of the
aforesaid notification, the respondent issued a notice under
Section 13(2) of SARFAESI Act on November 24, 2016 for one of
the seven properties mortgaged to it against the aforesaid loan
which was advanced to the appellants.
Civil Appeal No. 18 of 2018 Page 15 of 42
17) Having regard to the aforesaid facts in M.D. Frozen Foods, the
Court formulated following three questions which had arisen for
consideration:
“A. Whether the arbitration proceedings initiated by the
respondent can be carried on along with the
SARFAESI proceedings simultaneously?
B. 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?
C. A linked question to question (ii), 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?”
These questions amply demonstrate that the instant case is
virtually on the same footing.
18) Insofar as question ‘A’ is concerned, the Court categorically 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. The discussion from that
judgment is reproduced below:
“26. A claim by a bank or a financial institution, before
the specified laws came into force, would ordinarily
have been filed in the Civil Court having the pecuniary
jurisdiction. 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
Civil Appeal No. 18 of 2018 Page 16 of 42
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, would be
complementary to each other. In this context,
reliance can be placed upon the decision
in Transcore v. Union of India [(2008) 1 SCC 125 :
(2008) 1 SCC (Civ) 116]. In para 64 it is stated as
under after referring to Section 37 of the
SARFAESI Act: (SCC p. 162)
“64. … 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
Civil Appeal No. 18 of 2018 Page 17 of 42
event, there is no repugnancy nor
inconsistency between the two remedies,
therefore, the doctrine of election has no
application.”
(emphasis added)
46. A reading of Section 37 discloses that the
application of the SARFAESI Act will be in addition
to and not in derogation of the provisions of the
RDDB Act. In other words, it will not in any way
nullify or annul or impair the effect of the
provisions of the RDDB Act. We are also fortified
by our above statement of law as the heading of
the said section also makes the position clear that
application of other laws are not barred. The effect
of Section 37 would, therefore, be that in addition
to the provisions contained under the SARFAESI
Act, in respect of proceedings initiated under the
said Act, it will be in order for a party to fall back
upon the provisions of the other Acts mentioned in
Section 37, namely, the Companies Act, 1956, the
Securities Contracts (Regulation) Act, 1956, the
Securities and Exchange Board of India Act, 1992,
the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993, or any other law for the time
being in force.”
28. These observations, thus, leave no manner of
doubt and the issue is no more res integra, especially
keeping in mind the provisions of Sections 35 and 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
Civil Appeal No. 18 of 2018 Page 18 of 42
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 are, thus, unequivocally of the view that the
judgments of the Full Bench of the Orissa High Court
in Sarthak Builders Pvt. Ltd. v. Orissa Rural
Development Corporation Limited, the Full Bench of
the Delhi High Court in HDFC Bank Limited v. Satpal
Singh Bakshi (supra) and the Division Bench of the
Allahabad High Court in Pradeep Kumar
Gupta v. State of U.P. lay down the correct proposition
of law and the view expressed by the Andhra Pradesh
High Court in Deccan Chronicles Holdings
Limited v. Union of India following the overruled
decision of the Orissa High Court in Subash Chandra
Panda v. State of Orissa does not set forth the correct
position in law. SARFAESI proceedings and arbitration
proceedings, thus, can go hand in hand.”
19) Insofar as questions ‘B’ and ‘C’ are concerned, the Court again
referred to the conflicting opinion of different High Courts and
after discussion 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
Civil Appeal No. 18 of 2018 Page 19 of 42
created prior to the coming into force the SARFAESI Act.
Paragraphs 36 to 38 of the judgment need to be reproduced in
this behalf, which are to the following effect:
“36. The SARFAESI Act was brought into force to
solve the problem of recovery of large debts in NPAs.
Thus, the very rationale for the said Act to be brought
into force was to provide an expeditious procedure
where there was a security interest. It certainly did not
apply retrospectively from the date when it came into
force. The question is whether, the Act being
applicable to the respondent at a subsequent date and
thereby allowing the respondent to utilize its provisions
with regards to a past debt, would make any difference
to this principle. We are of the view that the answer to
the same is in the negative.
37. The Act applies to all the claims which would be
alive at the time when it was brought into force.
Thus, qua the respondent or other NBFCs, it would be
applicable 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
Civil Appeal No. 18 of 2018 Page 20 of 42
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 Act applies to all existing agreements
irrespective of the fact whether the lender was a
notified ‘financial institution’ on the date of the
execution of the agreement with the borrower or not.
The scheme of the SARFAESI Act sets out an
expeditious, procedural methodology, enabling the
bank to take possession of the property for nonpayment
of dues, without intervention of the court. The
mere fact that a more expeditious remedy is provided
under 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!”
20) The Court also referred to certain judgments laying down
distinction between retroactive and retrospective operation of a
particular statute3
.
21) The fact situation was, thus, almost the same in the instant case.
The only difference is that here the loan was initially sanctioned
by IBFSL which stands merged with the appellant and the
appellant is the successor-in-interest which is covered by the
SARFAESI Act. In the aforesaid case, though the entity which
disbursed the loan remained the same, however, at the time
3 West v. Gwynne, 1911 2 Ch 1 at pp. 11, 12
Trimbak Damodhar Raipurkar v. Assaram Hiraman Patil, 1962 Supp (1) SCR 700
In re Athlumney. Ex parte Wilson, (1898) 2 Q.B. 547
Civil Appeal No. 18 of 2018 Page 21 of 42
when the loan was given by the respondent to the appellant it
was not a financial institution covered under the SARFAESI Act,
which status was attained by the respondent in view of
notification dated August 05, 2016 issued much after the loan was
disbursed to the appellant therein. This does not make any
difference in the outcome, as discussed in detailed hereinafter.
22) Learned counsel for respondents could not dispute that the
aforesaid judgment covers the present case in its entirety. This
position had to be accepted by them having regard to the fact that
the judgment of the High Court which is impugned in these
proceedings has been specifically 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.
Civil Appeal No. 18 of 2018 Page 22 of 42
(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 & Others4
wherein it is held
that the Court must proceed on an assumption that the
legislature did not make a mistake and that it intended to
say what it said it was further held that even assuming that
there was a defect or omission in the words used by the
legislature, the Court would not go to its said to correct or
make up the deficiency. The Court cannot add words to a
statute or read words into it which are not there, especially
4 (1990) 2 SCC 378
Civil Appeal No. 18 of 2018 Page 23 of 42
when the literal reading produces an intelligible result. The
courts are not authorised to alter a word so as to produce a
“casus omissus”. Support from the judgment in the matter of
Union of India v. Elphin Stone Spinning and Weaving
Company Limited & Others5
was also taken in this behalf.
The learned counsel also referred to yet another case, viz.,
Delhi Financial Corporation and another v. Rajiv Anand
and others6
wherein this aforesaid principle is reiterated.
(iii) The loan agreements dated December 08, 2011 and
January 05, 2012 which were entered into between
respondent No. 1 and IBFSL cannot be classified as
‘security arrangement’ within the meaning of Section 2(1)
(zb) of the SARFAESI Act.
(iv) These agreements did not create ‘security interest’ within
the meaning of Section 2(1)(zb) of the SARFAESI Act. It
was argued that the term security assets as defined under
Section 2(1)(zc) of the Act means the property on which the
security interest is created. The terms ‘security interest’ is
defined under Section 2(1)(zf) to mean right, title, interest of
any kind whatsoever upon property created in favour of a
secured creditor (as defined under Section 2(1)(zb) and
5 (2001) 4 SCC 139
6 (2004) 11 SCC 625
Civil Appeal No. 18 of 2018 Page 24 of 42
includes a mortgage, charge, hypothecation or assignment
other than specified in Section 31). Similarly security
agreement is defined under Section 2(1)(zb).
The submission was that the agreements dated
December 08, 2011 and January 05, 2012 do not fall within
the purview of Section 2(a)(zb) since at the time when the
said agreements were entered into, the entity in favour of
which they were executed, i.e., Indiabulls Financial Services
Limited, was not a secured creditor 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.
Civil Appeal No. 18 of 2018 Page 25 of 42
(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,
and cannot be said to a provision, procedural in nature.
The procedure for enforcement of that substantial right is
provided under Sub-Section (2) on the happening of the
eventuality as mentioned therein. That a further procedure
of prescribing the details in a notice is to be given by virtue
of Section 13(3) and provide for making a representation
under Section 13(3)(A) and further provides for a procedure
Civil Appeal No. 18 of 2018 Page 26 of 42
for release and recovery of secured debt under Section
13(4). In absence of a substantial right being created by
Section 13(1), procedural provisions contained in subSections
(2) to (4) are meaningless as it would not provide
a remedy for the enforcement of substantial right created
under Section 13(4). It would not, therefore, be correct to
treat SARFAESI Act as a merely procedural statute.
24) It was submitted that this was a reverse merger inasmuch as
IBFSL was a holding company and the appellant company was
only a subsidiary company and holding company was sought to
be amalgamated and merged with the subsidiary company.
25) It was also submitted that the entire exercise of merger was
undertaken to transfer loan from financial company to a financial
company in order to take advantage of provisions of SARFAESI
Act, which according to the respondents is not permissible in law.
On the aforesaid basis, the first submission of the learned
counsel for respondents was that there was no transfer and
vesting of loan in the appellant company provisions as per the
scheme. It was argued that the scheme envisaged, under
paragraph 4, that with effect from the appointed date, i.e., April
01, 2012, the amalgamating company comprising the
Civil Appeal No. 18 of 2018 Page 27 of 42
amalgamating undertaking shall, pursuant to the sanction of the
scheme by the High Court and compliance of statutory provisions,
be and stand transferred to and vested in the amalgamated
company as a going concern without any further act, instrument,
deed, matter or thing so as to become, as and from the appointed
date April 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
Civil Appeal No. 18 of 2018 Page 28 of 42
Limited7 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 option but to adhere
to its earlier decision taken in Real Value Appliances
(Supra). While interpreting, this 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 by
having recourse to appropriate procedure, if deemed
necessary.”
It was argued that the above observations of this Court
clearly negate the submission of the appellant that because the
SARFAESI Act has been enacted to overcome the accumulated
NPA in public interest, the term ‘borrower’ has to be widely
construed.
28) Reliance was also placed on the Constitution Bench judgment in
the case of Padma Sundara Rao v. State of Tamil Nadu8 where
this Court has held as under:
“12. The rival pleas regarding rewriting of statute and
casus omissus need careful consideration. It is wellsettled
principle in law that the court cannot read
anything into a statutory provision which is plain and
7 (2000) 5 SCC 515
8 (2002) 3 SCC 533
Civil Appeal No. 18 of 2018 Page 29 of 42
unambiguous. A statute is an edict of the legislature.
The language employed in a statute is the
determinative factor of legislative intent. The first and
primary rule of construction is that the intention of the
legislation must be found in the words used by the
legislature itself. The question is not what may be
supposed and has been intended but what has been
said. “Statutes should be construed, not as theorems
of Euclid”, Judge Learned Hand said, “but words must
be construed with some imagination of the purposes
which lie behind them”. (See Lenigh Valley Coal
Co. v. Yensavage [218 FR 547].) The view was
reiterated in Union of India v. Filip Tiago De Gama of
Vedem Vasco De Gama [(1990) 1 SCC 277 : AIR
1990 SC 981].
13. In D.R. Venkatchalam v. Dy. Transport Commr.
[(1977) 2 SCC 273 : AIR 1977 SC 842] it was
observed that courts must avoid the danger of a priori
determination of the meaning of a provision based on
their own 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
never be the legislative intent.
15. Two principles of construction — one relating to
Civil Appeal No. 18 of 2018 Page 30 of 42
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 purpose all
the parts of a statute or section must be construed
together and every clause of a section should be
construed with reference to the context and other
clauses thereof so that the construction to be put on a
particular provision makes a consistent enactment of
the whole statute. This would be more so if literal
construction of a particular clause leads to manifestly
absurd or anomalous results which could not have
been intended by the legislature. “An intention to
produce an unreasonable result”, said Danckwerts,
L.J., in Artemiou v. Procopiou [(1966) 1 QB 878 :
(1965) 3 All ER 539 : (1965) 3 WLR 1011 (CA)] (at All
ER p. 544-I), “is not to be imputed to a statute if there
is some other construction available”. Where to apply
words literally would “defeat the obvious intention of
the legislation and produce a wholly unreasonable
result”, we must “do some violence to the words” and
so achieve that obvious intention and produce a
rational construction. [Per Lord Reid
in Luke v. IRC [1963 AC 557 : (1963) 1 All ER 655 :
(1963) 2 WLR 559 (HL)] where at AC p. 577 he also
observed: (All ER p. 664-I) “This is not a new problem,
though our standard of drafting is such that it rarely
emerges.”]”
29) It was contended that in light of the above-stated principles
enunciated in the Constitution Bench decision, since the
language of Section 2(1)(f) and 2(a)(zf) is unambiguous, the
casus omissus cannot be applied by a judicial interpretation
process. It was submitted that there is no scope of reading
something into, which it does not exist.
Civil Appeal No. 18 of 2018 Page 31 of 42
30) Counsel for the respondents also placed strong reliance upon the
judgment in the ICICI Bank Limited v. Official Liquidator of
APS Star Industries and others9 which centres around the
Banking Regulation Act, 1949 and guidelines of RBI issued on the
subject of inter se transfer of non-performing assets by Bank. It
was held that the Banking Regulation Act, 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.
9 (2010) 100 SCC
Civil Appeal No. 18 of 2018 Page 32 of 42
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 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, the effect of such a merger is explained by this Court in
Saraswati Industrial Syndicate Ltd. v. Commissioner of
Income Tax10 in the following manner:
10 1990(Supp) SCC 675
Civil Appeal No. 18 of 2018 Page 33 of 42
“5. Generally, where only one company is involved in
change and the rights of the shareholders and
creditors are varied, it amounts to reconstruction or
reorganisation of scheme of arrangement. In
amalgamation two or more companies are fused into
one by merger or by taking over by another.
Reconstruction or ‘amalgamation’ has no precise legal
meaning. The amalgamation is a blending of two or
more existing undertakings into one undertaking, the
shareholders of each blending company become
substantially the shareholders in the company which is
to carry on the blended undertakings. There may be
amalgamation either by the transfer of two or more
undertakings to a new company, or by the transfer of
one or more undertakings to an existing company.
Strictly ‘amalgamation’ does not cover the mere
acquisition by a company of the share capital of other
company which remains in existence and continues its
undertaking but the context in which the term is used
may show that it is intended to include such an
acquisition. See: Halsbury's Laws of England (4th
edition volume 7 para 1539). Two companies may join
to form a new company, but there may be absorption
or blending of one by the other, both amount to
amalgamation. When two companies are merged and
are so joined, as to form a third company or one is
absorbed into one or blended with another, the
amalgamating company loses its entity.”
34) Thus, 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
Civil Appeal No. 18 of 2018 Page 34 of 42
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 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
Civil Appeal No. 18 of 2018 Page 35 of 42
of merger so as to attract the provisions of SARFAESI Act and we
are not inclined to accept such a submission. Various judgments
which are relied upon by the respondents also would not apply as
we neither find it to be a case of the Court creating any legislation
or supplying any casus omissus.
38) Apart from the factual parity, even legally the arguments of the
respondents do not carry any weight. The view taken in M.D.
Frozen Foods is that the SARFAESI Act is retroactive in nature.
In the process, the Court approved the Full Bench decision of the
Orissa High Court in Sarthak Builders Pvt. Ltd., Chinta,
Arunodaya Market, Cuttack & Another v. Orissa Rural
Development Corporation Limited, Station Square,
Bhubaneswar & 5 Ors.11 and made the following observations:
“38…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 Act applies to all
existing agreements irrespective of the fact whether
the lender was a notified ‘financial institution’ on the
date of the execution of the agreement with the
11 (2014) SCC Online Ori 75
Civil Appeal No. 18 of 2018 Page 36 of 42
borrower or not. The scheme of the SARFAESI Act
sets out an expeditious, procedural methodology,
enabling the bank to take possession of the property
for non-payment of dues, without intervention of the
court. The mere fact that a more expeditious remedy is
provided under 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 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 firmly
established than this — that a retrospective
operation is not to be given to a statute so as to
impair an existing right or obligation, otherwise
than as regards matter of procedure, unless that
effect cannot be avoided without doing violence to
Civil Appeal No. 18 of 2018 Page 37 of 42
the language of the enactment. If the enactment
is expressed in language which is fairly capable
of either interpretation, it ought to be construed as
prospective only… 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…It is said
that there is one exception to that rule, namely,
that, where enactments merely affect procedure
and do not extend to rights of action, they have
been held to apply to existing rights, and it is
suggested here that the alteration made by this
section is within that exception…”
(Emphasis supplied)
41. Similarly, the date on which a debt is declared as
an NPA would again have no impact. We are, thus, of
the view that the provisions of the SARFAESI Act
would become applicable quaall debts owing and live
when the Act became applicable to the respondent in
terms of the parameters contended by learned senior
counsel for the respondent and enlisted at serial Nos. i
to iv in para 18.”
It, thus, follows that there is only a procedural change in
respect of forum for recovery of debt and no substantive rights
are affected.
39) In view of the aforesaid judgment, argument of the respondents
herein predicated on Sections 69 and 69A of the Transfer of
Property Act, which weighed with the High Court, is without any
substance.
40) The aforesaid view also gets support from the judgment of this
Court in Mardia Chemicals Ltd. & Ors. v. Union of India &
Civil Appeal No. 18 of 2018 Page 38 of 42
Ors.12 wherein 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
Others13 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 of Satyawati Tondon:
12 (2004) 4 SCC 311
13 (2010) 8 SCC 110
Civil Appeal No. 18 of 2018 Page 39 of 42
“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 and succeeded in
persuading the civil courts to pass orders of injunction
against the steps taken by banks and financial
institutions to recover their dues. Due to lack of
adequate infrastructure and non-availability of
manpower, the regular courts could not accomplish
the task of expeditiously adjudicating the cases
instituted by banks and other financial institutions for
recovery of their dues. As a result, several hundred
crores of public money got blocked in unproductive
ventures.
2. In order to redeem the situation, the Government of
India constituted a committee under the Chairmanship
of Shri T. Tiwari to examine the legal and other
difficulties faced by banks and financial institutions in
the recovery of their dues and suggest remedial
measures. The Tiwari Committee noted that the
existing procedure for recovery was very cumbersome
and suggested that special tribunals be set up for
recovery of the dues of banks and financial institutions
by following a summary procedure. The Tiwari
Committee also prepared a draft of the proposed
legislation which contained a provision for disposal of
cases in three months and conferment of power upon
the Recovery Officer for expeditious execution of
orders made by adjudicating bodies.
xx xx xx
16. Thus, the Act intends to provide remedy in respect
of pre - existing loans. The interpretation that the Act
will apply only to future debt transactions defeats the
very purpose of law of reducing the non-performing
assets. This object is clearly mentioned in the
Statement of Objects and Reasons. As noted in the
case of Satyaivati Tondon amount of rupees one lakh
Civil Appeal No. 18 of 2018 Page 40 of 42
twenty thousand crores was due to the banks in the
year 2001 which had adversely affected the economy
of the 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:
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 held to apply to existing
rights. In order to make the statement of the law
relating to the relevant rule of construction
Civil Appeal No. 18 of 2018 Page 41 of 42
which has to be adopted in dealing with the
effect of statutory provisions in this
connection, we ought to add that retrospective
operation of a statutory provision can be
inferred even in cases where such retroactive
operation appears to be clearly implicit in the
provision construed in the context where it
occurs. In other words, a statutory provision is
held to be retroactive either when it is so
declared by express terms, or the intention to
make it retroactive clearly follows from the
relevant words and the context in which they
occur.”
(emphasis added)”
43) The aforesaid discussion, thus, leads us to conclude that
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.
44) As a result, we hold that judgment of the High Court is erroneous
and set aside the same. This appeal is allowed. No orders need
to be passed in the contempt petitions, which stand disposed of.
.............................................J.
(A.K. SIKRI)
.............................................J.
(ASHOK BHUSHAN)
NEW DELHI;
FEBRUARY 23, 2018.
Civil Appeal No. 18 of 2018 Page 42 of 42
