Supreme Court Upholds SARFAESI Act: Phoenix ARC Wins Against Vishwa Bharati Vidya Mandir (12 January 2022)

Introduction

Date of the Judgment: 12 January 2022
Citation: (2022) INSC 32
Judges: M.R. Shah, J. and B.V. Nagarathna, J.

Can a borrower bypass the statutory remedies available under the SARFAESI Act and directly approach the High Court through a writ petition against a private Asset Reconstruction Company (ARC)? The Supreme Court of India recently addressed this crucial question in a case involving Phoenix ARC Private Limited and Vishwa Bharati Vidya Mandir, clarifying the boundaries of judicial intervention in debt recovery matters. The court emphasized the importance of adhering to the statutory framework provided under the SARFAESI Act and the limitations on the High Court’s power under Article 226 of the Constitution of India. The judgment was delivered by a two-judge bench comprising Justices M.R. Shah and B.V. Nagarathna, with Justice M.R. Shah authoring the opinion.

Case Background

Vishwa Bharati Vidya Mandir, an educational society registered under the Karnataka Societies Registration Act, 1960, along with St. Ann’s Education Society, had availed substantial credit facilities from Saraswat Co-operative Bank Limited. Vishwa Bharati Vidya Mandir had taken a loan of Rs. 105,60,84,000, and St. Ann’s Education Society had borrowed Rs. 20,05,00,000. To secure these loans, the societies executed various loan and security documents, including personal guarantees and equitable mortgages by depositing title deeds of their properties.

Due to defaults in repayment, the bank classified the accounts of both societies as Non-Performing Assets (NPA) in April 2013. Consequently, the bank issued a notice under Section 13(2) of the SARFAESI Act on June 1, 2013. In March 2014, the bank assigned the NPA accounts to Phoenix ARC Private Limited. Following this assignment, the borrowers requested a restructuring of their debt, leading to a Letter of Acceptance on February 27, 2015, where they acknowledged their liability. However, they failed to adhere to the repayment schedule outlined in the Letter of Acceptance.

Phoenix ARC issued a letter on August 13, 2015, notifying the borrowers that they would take possession of the mortgaged properties if payments were not made within 15 days. The borrowers then filed writ petitions in the High Court, arguing that the letter was essentially a possession notice under Section 13(4) of the SARFAESI Act and violated the Security Interest (Enforcement) Rules, 2002.

Timeline:

Course of Proceedings

The borrowers filed writ petitions before the High Court challenging the communication dated August 13, 2015, arguing it was a possession notice under Section 13(4) of the SARFAESI Act and violated Rule 8(1) of the Security Interest (Enforcement) Rules, 2002. The High Court initially granted an ex-parte ad-interim order on August 26, 2015, directing a status quo on the possession of the mortgaged properties, subject to a payment of Rs. 1 crore by the borrowers.

Phoenix ARC filed objections, arguing that the letter was not a measure under Section 13(4) and that the writ petitions were not maintainable. Despite this, the High Court extended the interim order on February 28, 2017, and again on March 27, 2018, each time requiring the borrowers to deposit an additional Rs. 1 crore. Simultaneously, Phoenix ARC also filed applications before the Debt Recovery Tribunal, Bangalore, for recovery of the outstanding dues. The High Court did not decide on the application for vacating the interim order.

Legal Framework

The core of this case revolves around the interpretation and application of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), particularly Section 13, and the Security Interest (Enforcement) Rules, 2002, specifically Rule 8.

Section 13 of the SARFAESI Act deals with the enforcement of security interest. Section 13(2) allows the secured creditor to issue a notice to the borrower if the borrower’s account is classified as NPA. If the borrower fails to repay the dues after the notice under Section 13(2), Section 13(4) allows the secured creditor to take possession of the secured assets.

Rule 8(1) of the Security Interest (Enforcement) Rules, 2002, specifies the procedure for taking possession of immovable property. It states that the authorized officer of the secured creditor must take possession by delivering a possession notice to the borrower and affixing it to the property. Rule 8(2) further mandates that this possession notice must be published in two leading newspapers within seven days of taking possession.

Arguments

Appellant (Phoenix ARC Private Limited) Arguments:

• The communication dated August 13, 2015, was not a notice under Section 13(4) of the SARFAESI Act but rather a proposed action. The borrowers were informed that if payment was not made, further steps under the SARFAESI Act would be taken.

• Even if the communication was considered a notice under Section 13(4), the borrowers’ only recourse was to file an appeal under Section 17 of the SARFAESI Act. A writ petition under Article 226 of the Constitution of India is not maintainable against a private ARC.

• The High Court should not have interfered with the SARFAESI proceedings, especially when a substantial amount of Rs. 117 crores was due. The interim orders were detrimental to the financial health of the ARC.

• The appellant relied on several judgments 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 under the SARFAESI Act.

Respondent (Vishwa Bharati Vidya Mandir & Ors.) Arguments:

• The writ petition was filed because the ARC failed to comply with Rule 8 of the Security Interest (Enforcement) Rules, 2002. This rule imposes a statutory duty on the ARC to act fairly, securing the interest of the borrower and the public.

• Even against a private body performing public functions, a writ petition is maintainable. They cited 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 to support this claim.

• The borrowers argued that the remedy under Section 17 of the SARFAESI Act was not available because the ARC had not taken any measures under Section 13(4). They also contended that there was no compliance with Rule 8(1) and 8(2) of the Rules, 2002.

• They relied on J. Rajiv Subramaniyan and Anr. Vs. Pandiyas and Ors., (2014) 5 SCC 651, where the court entertained a writ petition against an ARC for violation of statutory duty. They also cited Mathew Varghese Vs. M. Amritha Kumar and Ors., (2014) 5 SCC 610, which held that a sale without complying with Rules 8 and 9 is unconstitutional.

• The writ petition was maintainable, and the High Court was correct in entertaining it.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

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 justified in passing the ex-parte ad-interim order directing to maintain the status quo with respect to the possession of the secured properties?
3. Whether a writ petition under Article 226 of the Constitution of India is maintainable against a private Asset Reconstruction Company (ARC) regarding actions under the SARFAESI Act?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following cases and legal provisions:

Cases:

• United Bank of India Vs. Satyawati Tondon & Ors., (2010) 8 SCC 110 – The Supreme Court of India held that the remedies available under Section 17 of the SARFAESI Act are expeditious and effective. It also emphasized that High Courts should not entertain writ petitions under Article 226 if an effective alternative remedy is available.
• City and Industrial Development Corpn. Vs. Dosu Aardeshir Bhiwandiwala, (2009) 1 SCC 168 – The Supreme Court of India observed that a court exercising jurisdiction under Article 226 must consider whether an alternative remedy is available to the petitioner.
• Kanaiyalal Lalchand Sachdev & Ors. Vs. State of Maharashtra & Ors., (2011) 2 SCC 782 – The Supreme Court of India reiterated that relief under Article 226/227 of the Constitution is not available if an effective alternative remedy exists.
• General Manager, Sri Siddeshwara Cooperative Bank Limited & Anr. Vs. Ikbal & Ors., (2013) 10 SCC 83 – The Supreme Court of India upheld the principle that a writ petition should not be entertained if an alternative remedy is available.
• Agarwal Tracom Private Limited Vs. Punjab National Bank & Ors., (2018) 1 SCC 626 – The Supreme Court of India reiterated that writ petitions are not maintainable when an alternative remedy is available.
• Authorized Officer, State Bank of Travancore & Anr. Vs. Mathew K.C., (2018) 3 SCC 85 – The Supreme Court of India emphasized that writ petitions should not be entertained if alternate statutory remedies are available, except in specific cases.
• Radha Krishnan Industries Vs. State of Himachal Pradesh & Ors., (2021) 6 SCC 771 – The Supreme Court of India held that writ petitions should not be entertained if an effective alternative remedy is available.
• J. Rajiv Subramaniyan and Anr. Vs. Pandiyas and Ors., (2014) 5 SCC 651 – The Supreme Court of India considered a writ petition against an ARC, but the issue of maintainability was not pressed by the Bank.
• Praga Tools Corporation Vs. Shri C.A. Imanual and Ors., (1969) 1 SCC 585 – The Supreme Court of India held that a writ petition is maintainable against a private body performing public functions.
• Ramesh Ahluwalia Vs. State of Punjab and Ors., (2012) 12 SCC 331 – The Supreme Court of India held that a writ petition is maintainable against a private body performing public functions.
• Mathew Varghese Vs. M. Amritha Kumar and Ors., (2014) 5 SCC 610 – The Supreme Court of India held that any sale effected without complying with Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002, would be unconstitutional and void.

Legal Provisions:

• Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) – This section deals with the enforcement of security interest.
• Rule 8 of the Security Interest (Enforcement) Rules, 2002 – This rule specifies the procedure for taking possession of immovable property.
• Article 226 of the Constitution of India – This article confers the power on High Courts to issue writs.
• Section 17 of the SARFAESI Act – This section provides for an appeal against any measure taken under Section 13(4) of the Act.

Authorities Considered by the Court

Judgment

The Supreme Court allowed the appeals, set aside the High Court’s interim orders, and dismissed the writ petitions filed by the borrowers. The court held that the High Court erred in entertaining the writ petitions against the communication dated August 13, 2015, and in granting the interim orders.

The Supreme Court emphasized that the communication dated August 13, 2015, was not a notice under Section 13(4) of the SARFAESI Act but a proposed action. Even if it were a notice under Section 13(4), the borrowers had an alternative remedy under Section 17 of the SARFAESI Act.

The Court also held that a writ petition under Article 226 of the Constitution of India is not maintainable against a private ARC for actions under the SARFAESI Act.

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

How each authority was viewed by the Court?

The Court relied heavily on the principle that writ petitions should not be entertained when an effective alternative remedy is available, as established in cases like United Bank of India vs. Satyawati Tondon. The Court distinguished cases like J. Rajiv Subramaniyan, noting that the issue of maintainability was not pressed in that case. The Court also distinguished cases like Praga Tools Corporation and Ramesh Ahluwalia, stating that a private ARC does not perform public functions normally expected of State authorities.

The Court used the precedents to underscore its position that the High Court should not have entertained the writ petition, given the availability of a statutory remedy under Section 17 of the SARFAESI Act. The court also used the precedents to highlight the importance of exhausting alternative remedies before approaching the High Court under Article 226 of the Constitution of India.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that High Courts should not entertain writ petitions when an effective alternative remedy is available. The Court emphasized the importance of adhering to the statutory framework provided under the SARFAESI Act and the limitations on the High Court’s power under Article 226 of the Constitution of India. The Court also took a strong view against the High Court’s interim orders, which effectively stalled the SARFAESI proceedings, causing prejudice to the secured creditor.

The Court highlighted the following points:

• The communication dated August 13, 2015, was not a notice under Section 13(4) of the SARFAESI Act.
• Even if it were a notice under Section 13(4), the borrowers had an alternative remedy under Section 17 of the SARFAESI Act.
• A writ petition under Article 226 of the Constitution of India is not maintainable against a private ARC for actions under the SARFAESI Act.
• The High Court’s interim orders were unjustifiable and caused prejudice to the secured creditor.

Sentiment Analysis of Reasons

Fact:Law Ratio

Logical Reasoning

Issue 1: Whether the High Court was justified in entertaining the writ petitions against the communication dated 13.08.2015?

Issue 2: Whether the High Court was justified in passing the ex-parte ad-interim order directing to maintain the status quo with respect to the possession of the secured properties?

Issue 3: Whether a writ petition under Article 226 of the Constitution of India is maintainable against a private Asset Reconstruction Company (ARC) regarding actions under the SARFAESI Act?

Conclusion

The Supreme Court’s ruling in Phoenix ARC Private Limited vs. Vishwa Bharati Vidya Mandir & Ors. is significant in clarifying the scope of judicial intervention in debt recovery matters under the SARFAESI Act. The Court’s decision reinforces the principle that High Courts should not entertain writ petitions when an effective alternative remedy is available under the SARFAESI Act. This judgment emphasizes the importance of adhering to the statutory framework provided under the SARFAESI Act and the limitations on the High Court’s power under Article 226 of the Constitution of India.

The ruling also clarifies that private Asset Reconstruction Companies (ARCs) do not perform public functions normally expected of State authorities, and therefore, writ petitions under Article 226 are generally not maintainable against them for actions under the SARFAESI Act. This judgment provides clarity to ARCs and borrowers, ensuring that the statutory framework for debt recovery is respected and followed.