Supreme Court Upholds SARFAESI Act: Phoenix ARC Prevails Over Borrowers in Loan Recovery Dispute (12 January 2022)

Introduction

Date of the Judgment: 12 January 2022

Citation: 2022 INSC 44

Judges: M.R. Shah, J. and B.V. Nagarathna, J.

Can a borrower bypass the statutory remedies available under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) by filing a writ petition against a private Asset Reconstruction Company (ARC)? The Supreme Court of India recently addressed this critical question, clarifying the scope of judicial intervention in matters of loan recovery. This case revolves around a dispute between Phoenix ARC Private Limited and borrowers who challenged the ARC’s actions under the SARFAESI Act through writ petitions. The Supreme Court, in this judgment, has set aside the interim orders passed by the High Court and dismissed the writ petitions filed by the borrowers.

Case Background

Vishwa Bharati Vidya Mandir, an educational society, and St. Ann’s Education Society had taken loans from Saraswat Co-operative Bank Limited amounting to ₹105,60,84,000 and ₹20,05,00,000 respectively. To secure these loans, the borrowers executed various loan and security documents, including personal guarantees and equitable mortgages of their immovable properties. Due to defaults in repayment, the bank classified these accounts as Non-Performing Assets (NPA) in April 2013.

The bank issued a notice under Section 13(2) of the SARFAESI Act on 1 June 2013. In March 2014, the bank assigned the NPA accounts to Phoenix ARC Private Limited. Following the assignment, the borrowers requested a restructuring of the repayment, which led to a Letter of Acceptance on 27 February 2015, acknowledging their liability. However, the borrowers failed to adhere to the terms of this agreement as well.

Consequently, Phoenix ARC issued a letter on 13 August 2015, informing the borrowers that they would take possession of the mortgaged properties after 15 days due to continued defaults. The borrowers then filed writ petitions in the High Court, contending that the letter was a possession notice under Section 13(4) of the SARFAESI Act, which was not in compliance with the Security Interest (Enforcement) Rules, 2002.

Timeline

Course of Proceedings

The borrowers filed writ petitions in the High Court of Karnataka at Bengaluru, challenging the letter dated 13 August 2015, arguing it was a possession notice under Section 13(4) of the SARFAESI Act and violated the Security Interest (Enforcement) Rules, 2002. The High Court initially granted an ex-parte ad-interim order on 26 August 2015, directing a status quo on the possession of the mortgaged properties, contingent on the borrowers paying ₹1 crore to Phoenix ARC.

Phoenix ARC opposed the writ petitions, arguing that the letter was not a notice under Section 13(4) but merely a proposed action. They also contended that the writ petitions were not maintainable against a private entity. Despite this, the High Court extended the interim order on 28 February 2017, requiring the borrowers to deposit an additional ₹1 crore, and again on 27 March 2018, with a further deposit of ₹1 crore. Phoenix ARC then filed appeals before the Supreme Court against these interim orders and the High Court’s decision to entertain the writ petitions.

Legal Framework

The core of this case involves the interpretation and application of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the Security Interest (Enforcement) Rules, 2002.

✓ Section 13(2) of the SARFAESI Act: This section allows a secured creditor to issue a notice to the borrower if their account is classified as a Non-Performing Asset (NPA), demanding repayment of the dues within 60 days.

✓ Section 13(4) of the SARFAESI Act: This section outlines the measures a secured creditor can take if the borrower fails to repay the dues as per the notice under Section 13(2). These measures include taking possession of the secured assets.

✓ Section 17 of the SARFAESI Act: This section provides a remedy to the borrower to file an appeal with the Debts Recovery Tribunal (DRT) against any action taken by the secured creditor under Section 13(4).

✓ Rule 8(1) of the Security Interest (Enforcement) Rules, 2002: This rule specifies the procedure for taking possession of immovable property, requiring the authorized officer to deliver a possession notice to the borrower and affix it to the property.

✓ Rule 8(2) of the Security Interest (Enforcement) Rules, 2002: This rule mandates that the possession notice be published in two leading newspapers within seven days of taking possession.

Arguments

Appellant (Phoenix ARC) Arguments:

• Maintainability of Writ Petitions: The appellant argued that the writ petitions filed by the borrowers against a private entity like Phoenix ARC were not maintainable under Article 226 of the Constitution of India. They contended that the High Court should not have entertained these petitions, especially since an effective alternative remedy was available under Section 17 of the SARFAESI Act.
• Nature of the Communication: The appellant contended that the letter dated 13 August 2015, was not a notice under Section 13(4) of the SARFAESI Act but a mere intimation of a proposed action.
• Alternative Remedy: The appellant highlighted that even if the letter was considered a notice under Section 13(4), the borrowers should have filed an appeal under Section 17 of the SARFAESI Act instead of resorting to a writ petition.
• Financial Implications: The appellant emphasized that the interim orders passed by the High Court, which directed status quo on possession of the secured assets upon payment of a small amount, were detrimental to the financial health of the ARC and the recovery of dues of approximately ₹117 crores.
• Reliance on Precedents: The appellant cited several cases, including United Bank of India Vs. Satyawati Tondon & Ors., (2010) 8 SCC 110, Kanaiyalal Lalchand Sachdev & Ors. Vs. State of Maharashtra & Ors., (2011) 2 SCC 782, and Radha Krishnan Industries Vs. State of Himachal Pradesh & Ors., (2021) 6 SCC 771, to support their argument that writ petitions are not maintainable when an alternative remedy is available.

Respondents (Borrowers) Arguments:

• Statutory Duty: The borrowers argued that the ARC had a statutory duty under Rule 8 of the Security Interest (Enforcement) Rules, 2002, to act fairly while dealing with the security, and that the writ petition was maintainable due to a contravention of this duty. They relied on the decision in J. Rajiv Subramaniyan and Anr. Vs. Pandiyas and Ors., (2014) 5 SCC 651.
• Public Function: The borrowers submitted that even a private body performing public functions could be subject to writ jurisdiction, citing Praga Tools Corporation Vs. Shri C.A. Imanual and Ors., (1969) 1 SCC 585 and Ramesh Ahluwalia Vs. State of Punjab and Ors., (2012) 12 SCC 331.
• Alternative Remedy: The borrowers argued that the existence of an alternative remedy under Section 17 of the SARFAESI Act was not an absolute bar to the maintainability of a writ petition.
• Non-Compliance with Rules: The borrowers contended that the appellant had not complied with Rule 8(1) and 8(2) of the Security Interest (Enforcement) Rules, 2002, and that the notice was not valid. They relied on Mathew Varghese Vs. M. Amritha Kumar and Ors., (2014) 5 SCC 610, which held that sales without compliance with these rules are unconstitutional.
• Interim Order: The borrowers argued that the Supreme Court should not interfere with the interim orders passed by the High Court, especially since the main writ petitions were still pending. They cited United Commercial Bank Vs. Bank of India and Ors., (1981) 2 SCC 766.
• Protection of Interest: The borrowers argued that the appellant’s interest was fully protected as they had taken recourse under Section 19 of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 and the Debts Recovery Tribunal had passed interim orders to protect the appellant’s interest.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the High Court was justified in entertaining the writ petitions against the communication dated 13.08.2015.
2. Whether the High Court was right in passing the ex-parte ad-interim order, virtually stalling the proceedings under the SARFAESI Act.
3. Whether a writ petition against a private financial institution – ARC – under Article 226 of the Constitution of India against the proposed action/actions under Section 13(4) of the SARFAESI Act is maintainable.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on several key cases and legal provisions to reach its decision.

Cases:

• United Bank of India Vs. Satyawati Tondon & Ors., (2010) 8 SCC 110: The Supreme Court held that High Courts should not entertain writ petitions if an effective alternative remedy is available, especially in matters involving recovery of public money or dues of banks.
• City and Industrial Development Corpn. Vs. Dosu Aardeshir Bhiwandiwala, (2009) 1 SCC 168: The Court emphasized that under Article 226, it is essential to consider if an alternative remedy exists for the dispute resolution.
• Kanaiyalal Lalchand Sachdev & Ors. Vs. State of Maharashtra & Ors., (2011) 2 SCC 782: This case reiterated that relief under Articles 226/227 is generally not available if an efficacious alternative remedy exists.
• General Manager, Sri Siddeshwara Cooperative Bank Limited & Anr. Vs. Ikbal & Ors., (2013) 10 SCC 83: The Court upheld the principle that writ petitions should not be entertained when an alternative remedy is available.
• Agarwal Tracom Private Limited Vs. Punjab National Bank & Ors., (2018) 1 SCC 626: This case reinforced the view that High Courts should not interfere in matters where statutory remedies are available.
• Authorized Officer, State Bank of Travancore & Anr. Vs. Mathew K.C., (2018) 3 SCC 85: The Court held that writ petitions should not be entertained if alternative statutory remedies are available, except in specific exceptions.
• Radha Krishnan Industries Vs. State of Himachal Pradesh & Ors., (2021) 6 SCC 771: This case further supported the principle that writ petitions should not be entertained when an effective alternative remedy is available.
• Mathew K.C., (2018) 3 SCC 85: This case highlighted that discretionary jurisdiction under Article 226 is not absolute and should be exercised judiciously.
• Sadhana Lodh Vs. National insurance Co. Ltd. and Anr., (2003) 3 SCC 524: This case was referred to in Kanaiyalal Lalchand Sachdev & Ors. Vs. State of Maharashtra & Ors., (2011) 2 SCC 782, which upheld the order passed by the High Court dismissing the writ petition on the ground that an efficacious remedy is available under Section 17 of the SARFAESI Act.
• Surya Dev Rai Vs. Ram Chander Rai and Ors., (2003) 6 SCC 675: This case was referred to in Kanaiyalal Lalchand Sachdev & Ors. Vs. State of Maharashtra & Ors., (2011) 2 SCC 782, which upheld the order passed by the High Court dismissing the writ petition on the ground that an efficacious remedy is available under Section 17 of the SARFAESI Act.
• State Bank of India Vs. Allied Chemical Laboratories and Anr., (2006) 9 SCC 252: This case was referred to in Kanaiyalal Lalchand Sachdev & Ors. Vs. State of Maharashtra & Ors., (2011) 2 SCC 782, which upheld the order passed by the High Court dismissing the writ petition on the ground that an efficacious remedy is available under Section 17 of the SARFAESI Act.
• J. Rajiv Subramaniyan and Anr. Vs. Pandiyas and Ors., (2014) 5 SCC 651: While this case was cited by the respondents, the Supreme Court noted that the issue of maintainability of writ petitions was not pressed by the bank’s counsel in that case.
• Praga Tools Corporation Vs. Shri C.A. Imanual and Ors., (1969) 1 SCC 585: This case was cited by the respondents to argue that a writ is maintainable against a private body performing public functions.
• Ramesh Ahluwalia Vs. State of Punjab and Ors., (2012) 12 SCC 331: This case was also cited by the respondents to argue that a writ is maintainable against a private body performing public functions.
• Mathew Varghese Vs. M. Amritha Kumar and Ors., (2014) 5 SCC 610: This case was cited by the respondents to argue that sales without compliance with Rules 8 and 9 are unconstitutional.
• United Commercial Bank Vs. Bank of India and Ors., (1981) 2 SCC 766: This case was cited by the respondents to argue that the Supreme Court should not interfere with the interim orders passed by the High Court.
• CIT v. Chhabil Dass Agarwal, (2014) 1 SCC 603: This case was referred to in Mathew K.C., (2018) 3 SCC 85, which highlighted the exceptions to the rule of alternative remedy.

Legal Provisions:

• Section 13(2) of the SARFAESI Act: This provision allows secured creditors to issue a notice to the borrower to repay dues.
• Section 13(4) of the SARFAESI Act: This provision outlines the measures a secured creditor can take if the borrower fails to repay the dues.
• Section 17 of the SARFAESI Act: This provision provides a remedy for borrowers to file an appeal with the Debts Recovery Tribunal (DRT).
• Rule 8(1) of the Security Interest (Enforcement) Rules, 2002: This rule specifies the procedure for taking possession of immovable property.
• Rule 8(2) of the Security Interest (Enforcement) Rules, 2002: This rule mandates the publication of possession notices in newspapers.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

✓ United Bank of India Vs. Satyawati Tondon & Ors., (2010) 8 SCC 110*: Followed to emphasize that High Courts should not entertain writ petitions if an effective alternative remedy is available.

✓ City and Industrial Development Corpn. Vs. Dosu Aardeshir Bhiwandiwala, (2009) 1 SCC 168*: Followed to highlight the importance of considering alternative remedies under Article 226.

✓ Kanaiyalal Lalchand Sachdev & Ors. Vs. State of Maharashtra & Ors., (2011) 2 SCC 782*: Followed to reiterate that relief under Articles 226/227 is generally not available if an efficacious alternative remedy exists.

✓ General Manager, Sri Siddeshwara Cooperative Bank Limited & Anr. Vs. Ikbal & Ors., (2013) 10 SCC 83*: Followed to uphold the principle that writ petitions should not be entertained when an alternative remedy is available.

✓ Agarwal Tracom Private Limited Vs. Punjab National Bank & Ors., (2018) 1 SCC 626*: Followed to reinforce the view that High Courts should not interfere in matters where statutory remedies are available.

✓ Authorized Officer, State Bank of Travancore & Anr. Vs. Mathew K.C., (2018) 3 SCC 85*: Followed to highlight that writ petitions should not be entertained if alternative statutory remedies are available, except in specific exceptions.

✓ Radha Krishnan Industries Vs. State of Himachal Pradesh & Ors., (2021) 6 SCC 771*: Followed to further support the principle that writ petitions should not be entertained when an effective alternative remedy is available.

✓ J. Rajiv Subramaniyan and Anr. Vs. Pandiyas and Ors., (2014) 5 SCC 651*: Not followed because the issue of maintainability of writ petitions was not pressed by the bank’s counsel in that case.

✓ Praga Tools Corporation Vs. Shri C.A. Imanual and Ors., (1969) 1 SCC 585*: Not followed as the ARC was not considered to be performing public functions.

✓ Ramesh Ahluwalia Vs. State of Punjab and Ors., (2012) 12 SCC 331*: Not followed as the ARC was not considered to be performing public functions.

✓ Mathew Varghese Vs. M. Amritha Kumar and Ors., (2014) 5 SCC 610*: Not followed as the court held that the communication was not a notice under Section 13(4) of the SARFAESI Act.

✓ Mathew K.C., (2018) 3 SCC 85*: Followed to highlight that discretionary jurisdiction under Article 226 is not absolute and should be exercised judiciously.

Analysis of the Court’s Reasoning

The Supreme Court’s reasoning in this case underscores the importance of adhering to statutory remedies and limiting judicial intervention in matters where specific legal mechanisms are in place. The court’s decision is rooted in the principle that writ jurisdiction under Article 226 of the Constitution should not be invoked when an effective alternative remedy is available, as provided under Section 17 of the SARFAESI Act. The court emphasized that the SARFAESI Act is a complete code in itself, designed to facilitate the recovery of dues by secured creditors, and that borrowers should utilize the mechanisms provided within the Act to address their grievances. The court’s decision also clarifies that private Asset Reconstruction Companies (ARCs) are not generally subject to writ jurisdiction, as they do not perform public functions in the same manner as government entities or public sector undertakings.

The court’s analysis also highlights the detrimental impact of interim orders that effectively stall the proceedings under the SARFAESI Act. The court noted that such orders can undermine the financial health of secured creditors and impede the recovery of public funds. By setting aside the interim orders passed by the High Court, the Supreme Court has reaffirmed the need for a balanced approach that respects both the rights of borrowers and the interests of secured creditors in the loan recovery process. The court’s reasoning is very strong and direct, indicating a clear stance against the misuse of writ jurisdiction to bypass statutory remedies.

Sentiment Analysis

A sentiment analysis of the language used in the judgment reveals a strong emphasis on the following:

• Statutory Compliance: The court consistently emphasizes the need for strict adherence to the provisions of the SARFAESI Act and the Security Interest (Enforcement) Rules, 2002.
• Alternative Remedies: The court strongly advocates for the utilization of alternative remedies provided under the Act, particularly Section 17, before resorting to writ petitions.
• Financial Stability: The court expresses concern about the financial implications of interim orders that hinder the loan recovery process, highlighting the need for a robust and efficient system for debt recovery.
• Judicial Restraint: The court advocates for judicial restraint in matters where specific statutory remedies are available, emphasizing that writ jurisdiction should not be used to circumvent these remedies.
• Clarity and Directness: The language used by the court is clear and direct, leaving little room for ambiguity about its stance on the issues at hand.

Flowchart of Events

Key Takeaways

• Writ Petitions against Private ARCs: Writ petitions under Article 226 of the Constitution of India are generally not maintainable against private Asset Reconstruction Companies (ARCs) for actions taken under the SARFAESI Act.
• Alternative Remedy: Borrowers must utilize the alternative remedy available under Section 17 of the SARFAESI Act by filing an appeal with the Debts Recovery Tribunal (DRT) instead of resorting to writ petitions.
• Nature of Communication: A letter proposing possession of mortgaged properties is not necessarily a notice under Section 13(4) of the SARFAESI Act, and non-compliance with Rule 8(1) and 8(2) of the Security Interest (Enforcement) Rules, 2002, is not a ground for a writ petition.
• Interim Orders: High Courts should be cautious in passing interim orders that stall proceedings under the SARFAESI Act, as such orders can undermine the financial health of secured creditors and impede the recovery of public funds.
• Statutory Compliance: Secured creditors must adhere to the provisions of the SARFAESI Act and the Security Interest (Enforcement) Rules, 2002, but minor deviations do not necessarily warrant intervention by High Courts under writ jurisdiction.
• Judicial Restraint: High Courts should exercise judicial restraint and avoid interfering in matters where specific statutory remedies are available, unless there is a clear violation of fundamental rights or principles of natural justice.
• SARFAESI Act as a Complete Code: The SARFAESI Act is a complete code in itself, designed to facilitate the recovery of dues by secured creditors, and borrowers should utilize the mechanisms provided within the Act to address their grievances.

Conclusion

The Supreme Court’s judgment in Phoenix ARC Private Limited vs. Vishwa Bharati Vidya Mandir & Ors. is a significant ruling that clarifies the scope of judicial intervention in matters related to the SARFAESI Act. The judgment reinforces the importance of utilizing statutory remedies and limits the scope of writ petitions against private Asset Reconstruction Companies (ARCs). This decision is expected to streamline the loan recovery process and provide greater clarity to secured creditors and borrowers alike. By setting aside the interim orders passed by the High Court and dismissing the writ petitions, the Supreme Court has reaffirmed the need for a balanced approach that respects both the rights of borrowers and the interests of secured creditors in the loan recovery process, thereby upholding the integrity and efficacy of the SARFAESI Act.

Disclaimer

This analysis is intended for informational purposes only and should not be considered legal advice. Please consult with a qualified legal professional for advice tailored to your specific situation.