Supreme Court Upholds SARFAESI Act Invocation by Successor-in-Interest in Indiabulls Housing Finance vs. Deccan Chronicle Holdings (2018)

Introduction

Date of the Judgment: 23 February 2018

Citation: (2018) INSC 158 (23 February 2018)

Judges: A.K. Sikri, J., Ashok Bhushan, J.

Can a financial institution invoke the SARFAESI Act to recover loans when the original lender was not covered under the Act at the time of disbursal but later merged with an entity that is? The Supreme Court of India addressed this question in a case concerning Indiabulls Housing Finance Limited and M/s. Deccan Chronicle Holdings Limited. The core issue revolved around whether a successor-in-interest could initiate proceedings under the SARFAESI Act based on loans originally provided by an entity not covered under the Act. The Supreme Court, in this case, held that the successor-in-interest could indeed invoke the SARFAESI Act.

The judgment was delivered by a two-judge bench comprising Justice A.K. Sikri and Justice Ashok Bhushan. The majority opinion was authored by Justice A.K. Sikri.

Case Background

Indiabulls Financial Services Limited (IBFSL), a Non-Banking Financial Company, provided loans of ₹50 crores each to M/s. Deccan Chronicle Holdings Limited on December 8, 2011 and January 5, 2012. These loans were secured by equitable mortgages on various properties. Subsequently, IBFSL merged with Indiabulls Housing Finance Limited (the appellant), a housing finance institution covered under the SARFAESI Act.

Deccan Chronicle defaulted on the loan repayments, leading IBFSL to issue a loan recall notice on September 18, 2012. On March 4, 2013, the loan accounts were classified as Non-Performing Assets (NPA). IBFSL then filed petitions under Section 9 of the Arbitration and Conciliation Act, 1996, seeking to secure the loan amount.

Following the merger, the appellant, as the successor-in-interest, issued notices under Section 13(2) and 13(4) of the SARFAESI Act to take possession of the mortgaged properties. Deccan Chronicle challenged these actions, leading to the present dispute.

Timeline

Course of Proceedings

The High Court of Andhra Pradesh at Hyderabad ruled in favor of Deccan Chronicle, stating that since IBFSL had initiated arbitration proceedings, the appellant could not invoke the SARFAESI Act. The High Court also held that since the loan was initially given by IBFSL, which was not a financial institution under the SARFAESI Act, the appellant, as a successor, could not initiate proceedings under the Act. The High Court also noted that allowing the appellant to take recourse under the SARFAESI Act would affect the substantive rights of the contesting borrowers under Sections 69 and 69A of the Transfer of Property Act.

The High Court acknowledged conflicting views from other High Courts but chose to follow the Division Bench of the Orissa High Court. However, the Supreme Court noted that the Full Bench of the Orissa High Court had itself overruled the Division Bench judgment.

Legal Framework

The case primarily revolves around the interpretation of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). Key provisions include:

• Section 2(1)(f) of the SARFAESI Act: Defines “borrower” as any person who has been granted financial assistance by any bank or financial institution, or who has given a guarantee or created a mortgage or pledge as security for the financial assistance granted by any bank or financial institution.
• Section 2(1)(m) of the SARFAESI Act: Defines “financial institution” and includes any non-banking financial company as defined in clause (f) of Section 45-I of the Reserve Bank of India Act, 1934.
• Section 2(1)(zb) of the SARFAESI Act: Defines “security agreement” as an agreement, instrument or any other document or arrangement under which security interest is created in favour of the secured creditor.
• Section 2(1)(zc) of the SARFAESI Act: Defines “secured asset” as the property on which security interest is created.
• Section 2(1)(zd) of the SARFAESI Act: Defines “secured creditor” as any bank or financial institution, or any other person in whose favour security interest is created.
• Section 2(1)(zf) of the SARFAESI Act: Defines “security interest” as a right, title, interest of any kind whatsoever upon property, created in favour of a secured creditor and includes any mortgage, charge, hypothecation or assignment other than those specified in Section 31.
• Section 13(2) of the SARFAESI Act: Provides for the issuance of notice by the secured creditor to the borrower upon the borrower’s account being classified as a non-performing asset.
• Section 13(4) of the SARFAESI Act: Provides for the measures that a secured creditor can take to recover its dues in case of default by the borrower.
• Section 35 of the SARFAESI Act: States that the provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
• Section 37 of the SARFAESI Act: States that the provisions of this Act or the rules made thereunder shall be in addition to, and not in derogation of, 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.

The SARFAESI Act was enacted to provide a speedy remedy to banks and financial institutions for recovery of loan amounts without recourse to the court of law. It is a special enactment that overrides general laws.

Arguments

The arguments presented by both sides are detailed below:

Appellant’s Arguments

• The appellant, as the successor-in-interest after the merger with IBFSL, is entitled to invoke the provisions of the SARFAESI Act.
• The judgment in M.D. Frozen Foods Exports Pvt. Ltd. & Ors. v. Hero Fincorp Ltd. [(2017) SCC Online SC 1211] directly applies to this case and has overruled the Andhra Pradesh High Court judgment which is the subject matter of appeal at hand.
• The SARFAESI Act is a special enactment designed to provide a speedy remedy, and its provisions should prevail over general laws like the Arbitration and Conciliation Act, 1996.
• The merger of IBFSL with the appellant resulted in the transfer of all assets and liabilities, including the loans and security interests, to the appellant.
• The SARFAESI Act is retroactive in nature and applies to all existing agreements, irrespective of when the lender became a notified financial institution.
• 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.

Respondent’s Arguments

• The appellant did not provide any loan to the respondent and therefore cannot invoke the SARFAESI Act.
• The respondent is not a “borrower” as defined under Section 2(1)(f) of the SARFAESI Act because they did not receive financial assistance from the appellant.
• The loan agreements entered into with IBFSL do not constitute a “security arrangement” under Section 2(1)(zb) of the SARFAESI Act, since IBFSL was not a secured creditor under the Act at the time of execution.
• The loan agreements did not create a “security interest” as defined under Section 2(1)(zf) of the SARFAESI Act.
• Amalgamation of an entity not lying within the ambit of SARFAESI Act with an 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 SARFAESI Act cannot be treated as merely procedural; it creates substantial rights in favor of the secured creditor.
• The merger was undertaken to transfer the loan from a non-SARFAESI entity to a SARFAESI entity to take advantage of the provisions of the Act, which is not permissible.
• The scheme of amalgamation does not create any new rights in favour of the amalgamated company.
• The literal interpretation of Section 2(1)(f) should be followed, and the Court cannot add words to the statute.
• 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.

The respondents relied on the principle of literal interpretation, arguing that the definition of “borrower” in Section 2(1)(f) of the SARFAESI Act is clear and unambiguous. They cited P.K. Unni vs. Nirmala Industries & Others [(1990) 2 SCC 378] and Union of India v. Elphin Stone Spinning and Weaving Company Limited & Others [(2001) 4 SCC 139] to support their argument that the court cannot add words to a statute.

The respondents also argued that the clauses in the scheme of amalgamation, sanctioned by the 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.

The respondents also relied on Rishabh Agro Industries Limited v. P.N.B. Service Limited [(2000) 5 SCC 515] and Padma Sundara Rao v. State of Tamil Nadu [(2002) 3 SCC 533] to support their argument that the court cannot read anything into a statutory provision which is plain and unambiguous.

The respondents also relied on ICICI Bank Limited v. Official Liquidator of APS Star Industries and others [(2010) 10 SCC 1] to support their argument that 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.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section, but the core issues addressed were:

1. Whether the appellant, as a successor-in-interest, could invoke the SARFAESI Act when the original lender, IBFSL, was not a financial institution covered by the Act at the time of the loan disbursement.
2. Whether the respondent could be treated as a “borrower” under Section 2(1)(f) of the SARFAESI Act.
3. Whether the loan agreements with IBFSL created a “security interest” under the SARFAESI Act.
4. Whether the SARFAESI Act is retroactive in nature and applies to all existing agreements.
5. Whether the merger of IBFSL with the appellant was a valid basis for the appellant to invoke the SARFAESI Act.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court allowed the appeal, setting aside the High Court’s judgment. The Court held that the appellant, as the successor-in-interest, could invoke the SARFAESI Act. The Court relied heavily on its earlier judgment in M.D. Frozen Foods Exports Pvt. Ltd. & Ors. v. Hero Fincorp Ltd., which had already addressed similar issues.

The Court also observed that the SARFAESI Act is retroactive in nature, and its provisions apply to all existing agreements, irrespective of when the lender became a notified financial institution.

The Court emphasized that the SARFAESI Act is a special enactment designed to provide a speedy remedy to banks and financial institutions for recovery of loan amounts without recourse to the court of law.

The Court also noted that the merger of IBFSL with the appellant resulted in the transfer of all assets and liabilities, including the loans and security interests, to the appellant.

Ratio Decidendi

The ratio decidendi of this case can be summarized as follows:

• A successor-in-interest, such as a company resulting from a merger, can invoke the SARFAESI Act even if the original lender was not a financial institution covered by the Act at the time of the loan disbursement.
• The SARFAESI Act is retroactive in nature and applies to all existing agreements, irrespective of when the lender became a notified financial institution.
• The merger of a financial entity results in the transfer of all assets and liabilities, including the right to invoke the SARFAESI Act, to the successor-in-interest.
• The definition of “borrower” under Section 2(1)(f) of the SARFAESI Act includes those who received financial assistance, and the merger makes the respondent a borrower of the appellant.
• Equitable mortgages created under loan agreements fall under the definition of “security interest” under the SARFAESI Act.

Obiter Dicta

The Supreme Court made certain observations that, while not essential to the decision, provide additional context and guidance:

• The SARFAESI Act is a special enactment designed to provide a speedy remedy to banks and financial institutions for recovery of loan amounts without recourse to the court of law.
• The Court reiterated the importance of the SARFAESI Act in the context of recovery of debts and emphasized that it is an additional remedy to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act), and both can be pursued simultaneously.
• The Court observed that the SARFAESI Act is a beneficial legislation and should be interpreted in a manner that furthers its objectives.

Flowchart

Ratio Table