LEGAL ISSUE: Whether an assignee of debt can be substituted as a secured creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) if it is not a bank, financial institution, or securitization/reconstruction company.

CASE TYPE: Insolvency Law

Case Name: Suzuki Parasrampuria Suitings Pvt. Ltd. vs. The Official Liquidator of Mahendra Petrochemicals Ltd. (In Liquidation) and Others

Judgment Date: October 08, 2018

Introduction

Date of the Judgment: October 08, 2018

Citation: 2018 INSC 912

Judges: Ranjan Gogoi, CJI, Navin Sinha, J., K.M. Joseph, J.

Can a company that buys a debt from a financial institution automatically step into the shoes of that institution as a secured creditor, especially under laws like the SARFAESI Act? The Supreme Court of India, in this case, examined whether an assignee of debt, who is not a bank or financial institution, can be substituted as a secured creditor under the SARFAESI Act. The court’s decision clarifies the scope of who can claim the rights of a secured creditor under this law. The judgment was delivered by a three-judge bench comprising Chief Justice Ranjan Gogoi, Justice Navin Sinha, and Justice K.M. Joseph, with the majority opinion authored by Justice Navin Sinha.

Case Background

A winding-up petition was filed against Mahendra Petrochemicals Ltd. (M/s. MPL) in 1996. M/s. MPL was also referred to the Board for Industrial and Financial Reconstruction (BIFR) in 2000 for rehabilitation. During the pendency of the BIFR reference, M/s. MPL entered into an unregistered Memorandum of Understanding (MOU) with Suzuki Parasrampuria Suitings Pvt. Ltd. (the appellant’s sister concern) to lease out its properties for 20 years to repay its debts. This MOU was not disclosed to the company court. The company was ordered to be wound up on 19.04.2010. The Industrial Finance Corporation of India Ltd. (IFCI), Bank of Baroda, and Punjab National Bank were secured creditors of M/s. MPL, with IFCI holding the first charge for dues of Rs. 160 crores. On 28.07.2010, after the winding-up order, IFCI assigned its dues to the appellant for Rs. 85 lakhs.

Timeline:

Date Event
1996 Company Petition No. 150 of 1996 filed for winding up of M/s. MPL.
2000 M/s. MPL referred to the Board for Industrial and Financial Reconstruction (BIFR).
During BIFR pendency M/s. MPL entered into an unregistered MOU with M/s. Suzuki Parasrampuria Suitings Pvt. Ltd. for leasing its properties.
19.04.2010 Winding-up order passed against M/s. MPL.
28.07.2010 IFCI assigned its dues to the appellant for Rs. 85 lakhs.
21.11.2011 IFCI filed a pursis before the Debt Recovery Tribunal, Ahmedabad, reaffirming the assignment in favor of the appellant.
2014 Appellant filed Company Application No. 248 of 2014 seeking substitution as a secured creditor.
31.07.2015 Company Judge rejected the application for substitution.
07.09.2015 Company Judge rejected the recall/review application.
02.09.2016 Appellate court declined to interfere with the orders of the Company Judge.
08.10.2018 Supreme Court dismissed the appeal.

Course of Proceedings

The appellant filed Company Application No. 248 of 2014 seeking to be substituted in place of IFCI as a secured creditor of M/s. MPL. The Company Judge rejected this application on 31.07.2015, stating that the appellant was not a bank, banking company, financial institution, or securitization/reconstruction company and therefore could not be substituted as a secured creditor under the SARFAESI Act. The Company Judge also held that the appellant could not benefit from Section 130 of the Transfer of Property Act, 1882 for the purpose of substitution as a secured creditor. The appellant then filed OJMCA No. 170 of 2015, seeking a recall/review of the order dated 31.07.2015, arguing that they were only seeking substitution as a transferee of an actionable claim under Section 130 of the Transfer of Property Act, 1882 and not as a secured creditor. This application was also rejected. The appeal against these orders was rejected by the appellate court on 02.09.2016.

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Legal Framework

The case primarily revolves around the interpretation of Section 130 of the Transfer of Property Act, 1882 and the provisions of the SARFAESI Act. Section 130 of the Transfer of Property Act, 1882 deals with the transfer of actionable claims. It states:

“130. Transfer of actionable claim.—(1) The transfer of an actionable claim whether with or without consideration shall be effected only by the execution of an instrument in writing signed by the transferor or his duly authorized agent, shall be complete and effectual upon the execution of such instrument, and thereupon all the rights and remedies of the transferor, whether by way of damages or otherwise, shall vest in the transferee, whether such transferor was with or without notice of such transfer.”

The SARFAESI Act provides a mechanism for secured creditors to recover their dues. The Company Judge held that the appellant did not fall under the definition of a secured creditor as defined in the SARFAESI Act. The court noted that the appellant was not a bank, financial institution, or securitization/reconstruction company, and therefore, could not avail the benefits of the SARFAESI Act.

Arguments

Appellant’s Arguments:

  • The appellant argued that it never sought substitution as a secured creditor in place of IFCI.
  • The appellant claimed it only desired to be recognized as a transferee of an actionable claim under Section 130 of the Transfer of Property Act, 1882.
  • The appellant contended that the deed of assignment dated 28.07.2010 was valid and unchallenged.
  • The appellant argued that its status under the SARFAESI Act was irrelevant to its claim as a transferee under Section 130 of the Transfer of Property Act, 1882.
  • The appellant argued that the Company Court wrongly declined to exercise its inherent powers under Rule 9 of the Companies (Court) Rules, 1959.

Respondents’ Arguments:

  • The respondents argued that the appellant was making a volte face by shifting its stand after the rejection of its initial claim.
  • The respondents contended that the appellant initially sought substitution as a secured creditor and could not now change its position.
Main Submission Sub-Submissions
Appellant never sought the status of a secured creditor under SARFAESI Act
  • Appellant only desired to be adjudged a transferee of an actionable claim under Section 130 of the Transfer of Property Act, 1882.
  • The rights and claims of the appellant under Section 130 of the Transfer of Property Act, 1882 have not been considered.
Deed of assignment dated 28.07.2010 was subsisting and was unchallenged
  • The lack of status under the SARFAESI Act was irrelevant to the transfer of an actionable claim under Section 130 of the Transfer of Property Act, 1882.
Company Court wrongly declined to exercise its inherent power under Rule 9 of the Companies (Court) Rules, 1959
  • The inherent power of the Company Court was wrongly declined to be exercised in the facts of the case.
Respondents: Appellant cannot make a volte face after rejection of its initial claim
  • Appellant is taking shifting stands at different times according to its convenience in the same proceedings.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue before the court was:

  • Whether the appellant, as an assignee of debt, could be substituted as a secured creditor under the SARFAESI Act, or whether its claim was limited to that of a transferee of an actionable claim under Section 130 of the Transfer of Property Act, 1882.

Treatment of the Issue by the Court

Issue Court’s Decision and Reasoning
Whether the appellant could be substituted as a secured creditor under the SARFAESI Act The Court upheld the Company Judge’s decision that the appellant could not be substituted as a secured creditor under the SARFAESI Act because it is not a bank, financial institution, or securitization/reconstruction company. The Court noted that the appellant initially sought substitution as a secured creditor and later changed its stance.
Whether the appellant’s claim was limited to that of a transferee of an actionable claim under Section 130 of the Transfer of Property Act, 1882. The Court found that the appellant’s initial claim was for substitution as a secured creditor under the SARFAESI Act, and the reference to Section 130 of the Transfer of Property Act, 1882 was only to support that claim. The Court did not address the issue of whether the appellant could claim rights as a transferee of an actionable claim separately.
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Authorities

The Supreme Court considered the following:

Legal Provisions:

  • Section 130 of the Transfer of Property Act, 1882: The court considered this section but held it was not applicable in the present case as the appellant was seeking substitution as a secured creditor under SARFAESI Act.
  • The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act): The court examined the provisions of the SARFAESI Act to determine if the appellant could be considered a secured creditor under this Act.
  • Rule 9 of the Companies (Court) Rules, 1959: The court considered whether the inherent powers under this rule could be invoked for recall/review of the order.

Case Laws:

  • Amar Singh vs. Union of India, (2011) 7 SCC 69: The Supreme Court cited this case to emphasize that a litigant cannot take inconsistent positions in the same case. The court observed that “an action at law is not a game of chess” and that a litigant must come to court with clean hands.
  • Joint Action Committee of Air Line Pilots’ Assn. of India vs. DG of Civil Aviation, (2011) 5 SCC 435: The Supreme Court referred to this case to reiterate that a party cannot approbate and reprobate on the same facts and take inconsistent shifting stands. The court stated, “Taking inconsistent pleas by a party makes its conduct far from satisfactory. Further, the parties should not blow hot and cold by taking inconsistent stands and prolong proceedings unnecessarily.”
Authority How it was Considered
Section 130, Transfer of Property Act, 1882 The Court held that this section was not applicable in the present case as the appellant was not seeking rights as a transferee of an actionable claim, but rather as a secured creditor under SARFAESI Act.
SARFAESI Act, 2002 The Court examined the provisions of the SARFAESI Act and held that the appellant did not fall under the definition of a secured creditor under the Act.
Rule 9, Companies (Court) Rules, 1959 The Court held that the inherent powers under this rule could not be invoked to review the order as the appellant was seeking to make an entirely new case.
Amar Singh vs. Union of India, (2011) 7 SCC 69, Supreme Court of India The Court relied on this case to emphasize that a litigant cannot take inconsistent positions in the same case.
Joint Action Committee of Air Line Pilots’ Assn. of India vs. DG of Civil Aviation, (2011) 5 SCC 435, Supreme Court of India The Court cited this case to reiterate that a party cannot approbate and reprobate on the same facts and take inconsistent shifting stands.

Judgment

Submission by Parties How it was treated by the Court
Appellant’s submission that it never sought substitution as a secured creditor under the SARFAESI Act. The Court rejected this submission, stating that the appellant’s initial pleadings and actions indicated that it sought substitution as a secured creditor under the SARFAESI Act. The court held that the appellant was trying to make a volte face and take shifting stands.
Appellant’s submission that it only desired to be recognized as a transferee of an actionable claim under Section 130 of the Transfer of Property Act, 1882. The Court held that the appellant’s reliance on Section 130 of the Transfer of Property Act, 1882 was only to support its claim as a secured creditor under the SARFAESI Act and not a separate claim.
Respondents’ submission that the appellant cannot make a volte face and take shifting stands. The Court upheld this submission, stating that a litigant cannot take contradictory stands in the same case. The Court found that the appellant was trying to approbate and reprobate on the same facts.

How each authority was viewed by the Court:

  • Section 130 of the Transfer of Property Act, 1882: The Court held that this provision was not applicable as the appellant’s primary claim was for substitution as a secured creditor under SARFAESI Act, and not merely as a transferee of an actionable claim.
  • SARFAESI Act, 2002: The Court held that the appellant did not fall under the definition of a secured creditor under this Act.
  • Rule 9 of the Companies (Court) Rules, 1959: The Court held that the inherent powers under this rule could not be invoked to review the order as the appellant was seeking to make an entirely new case.
  • Amar Singh vs. Union of India, (2011) 7 SCC 69: The Court used this case to support its finding that a litigant cannot take inconsistent positions in the same case.
  • Joint Action Committee of Air Line Pilots’ Assn. of India vs. DG of Civil Aviation, (2011) 5 SCC 435: The Court used this case to support its finding that a party cannot approbate and reprobate on the same facts and take inconsistent shifting stands.
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What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the appellant’s inconsistent stands in the same proceedings. The court emphasized that a litigant cannot approbate and reprobate, meaning they cannot take contradictory positions to suit their convenience. The court also focused on the fact that the appellant initially sought substitution as a secured creditor under the SARFAESI Act, and later attempted to change its stance when its claim was found unsustainable. The court’s reasoning was also influenced by the fact that the appellant was not a bank, financial institution, or securitization/reconstruction company, and therefore, could not be substituted as a secured creditor under the SARFAESI Act.

Sentiment Percentage
Inconsistent Stands of the Appellant 40%
Appellant’s initial claim for substitution as a secured creditor 30%
Appellant’s ineligibility as a secured creditor under SARFAESI Act 30%
Ratio Percentage
Fact 60%
Law 40%

Logical Reasoning:

Appellant seeks substitution as secured creditor under SARFAESI Act
↓
Company Judge rejects substitution as appellant is not a bank or financial institution
↓
Appellant claims to be transferee of actionable claim under Section 130 of the Transfer of Property Act, 1882
↓
Supreme Court holds appellant cannot change its stand and is not eligible as a secured creditor under SARFAESI Act

The court rejected the appellant’s claim that it was only seeking to be recognized as a transferee of an actionable claim under Section 130 of the Transfer of Property Act, 1882, stating that the appellant’s initial claim was for substitution as a secured creditor under the SARFAESI Act and the reference to Section 130 was only to support that claim. The court emphasized that the appellant could not approbate and reprobate, and that a litigant cannot take contradictory stands in the same case. The court also noted that the appellant was not eligible to be a secured creditor under the SARFAESI Act.

Key Takeaways

  • An assignee of debt who is not a bank, financial institution, or securitization/reconstruction company cannot be substituted as a secured creditor under the SARFAESI Act.
  • Litigants cannot take inconsistent stands in the same case. They cannot approbate and reprobate on the same facts.
  • The court’s decision emphasizes the importance of consistency in legal arguments and adherence to the specific requirements of the SARFAESI Act.

Directions

No specific directions were given by the Supreme Court in this case.

Specific Amendments Analysis

There were no specific amendments discussed in the judgment.

Development of Law

The ratio decidendi of this case is that an assignee of debt who is not a bank, financial institution, or securitization/reconstruction company cannot be substituted as a secured creditor under the SARFAESI Act. This judgment clarifies that the benefits of the SARFAESI Act are limited to specific entities as defined by the Act. This decision reinforces the principle that litigants must maintain consistent legal positions throughout proceedings and cannot change their stance to suit their convenience. There is no change in the previous position of law.

Conclusion

The Supreme Court dismissed the appeal, upholding the lower court’s decision that the appellant could not be substituted as a secured creditor under the SARFAESI Act. The court emphasized that the appellant was not eligible under the SARFAESI Act and had taken inconsistent stands in the proceedings. This judgment highlights the importance of consistency in legal arguments and adherence to the specific requirements of the SARFAESI Act.

Source: Suzuki Parasrampuria Suitings Pvt. Ltd. vs. The Official Liquidator