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

Date of the Judgment: 12 January 2022
Citation: [Not Available in Source]
Judges: M.R. Shah, J. and B.V. Nagarathna, J. (authored by M.R. Shah, J.)

Can a High Court entertain a writ petition against a private Asset Reconstruction Company (ARC) regarding actions taken under the SARFAESI Act? The Supreme Court of India addressed this question, clarifying the scope of Article 226 of the Constitution in relation to private entities and statutory remedies. The Court held that writ petitions against private ARCs for actions under SARFAESI are generally not maintainable, emphasizing the availability of alternative remedies under the Act. This judgment was delivered by a two-judge bench comprising Justices M.R. Shah and B.V. Nagarathna, with the opinion authored by Justice M.R. Shah.

Case Background

Vishwa Bharati Vidya Mandir, an educational society, and St. Ann’s Education Society had taken loans from Saraswat Co-operative Bank Limited. Vishwa Bharati Vidya Mandir had borrowed ₹105,60,84,000, and St. Ann’s Education Society had borrowed ₹20,05,00,000. These loans were secured by various documents, including personal guarantees and equitable mortgages on 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 debt, 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 letter.

Phoenix ARC then issued a letter on 13 August 2015, stating their intention to take possession of the mortgaged properties after 15 days due to continued defaults. The borrowers challenged this letter in the High Court, arguing it was a possession notice under Section 13(4) of the SARFAESI Act, violating the Security Interest (Enforcement) Rules, 2002. The High Court initially granted an ex-parte interim order for status quo on 26 August 2015, subject to a payment of ₹1 crore by the borrowers. This interim order was extended multiple times, with additional payments required from the borrowers.

Timeline

Course of Proceedings

The borrowers filed writ petitions in the High Court of Karnataka, challenging the letter dated 13 August 2015, claiming 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 granted an ex-parte ad-interim order on 26 August 2015, directing a status quo on the possession of the mortgaged properties, contingent upon the borrowers paying ₹1 crore to Phoenix ARC. Phoenix ARC filed objections, stating that the letter was not a measure under Section 13(4) but a proposed action. The High Court extended the interim order on 28 February 2017, requiring an additional deposit of ₹1 crore. Subsequently, on 27 March 2018, the High Court again extended the interim order, requiring another ₹1 crore deposit. Meanwhile, Phoenix ARC also initiated recovery proceedings before the Debt Recovery Tribunal, Bangalore.

Legal Framework

The judgment primarily concerns 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. Key provisions include:

• Section 13(2) of the SARFAESI Act: This section allows the secured creditor to issue a notice to the borrower if their account is classified as a Non-Performing Asset (NPA), demanding payment of the outstanding dues.
• 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 after the notice under Section 13(2), including taking possession of the secured assets.
• Section 17 of the SARFAESI Act: This section provides a remedy to the borrower to appeal against any measures taken under Section 13(4) by filing an application to the Debt Recovery Tribunal.
• Rule 8(1) of the Security Interest (Enforcement) Rules, 2002: “Where the secured asset is an immovable property, the authorised officer shall take or cause to be taken possession, by delivering a possession notice prepared as nearly as possible in Appendix IV to these rules, to the borrower and by affixing the possession notice on the outer door or at such conspicuous place of the property.” This rule specifies the procedure for taking possession of immovable property, including the delivery and affixation of a possession notice.
• Rule 8(2) of the Security Interest (Enforcement) Rules, 2002: “The possession notice as referred to in sub-rule (1) shall also be published, as soon as possible but in any case not later than seven days from the date of taking possession, in two leading newspapers, one in vernacular language having sufficient circulation in that locality, by the authorised officer.” This rule mandates the publication of the possession notice in two leading newspapers within seven days of taking possession.

Arguments

Arguments by the Appellant (Phoenix ARC):

• The communication dated 13 August 2015 was not a notice under Section 13(4) of the SARFAESI Act but a proposed action. The borrowers were informed that if they failed to pay within 15 days, further action would be taken under the SARFAESI Act. Therefore, the writ petition against this proposed action was not maintainable.

• Even if the communication dated 13 August 2015 was considered a notice under Section 13(4), the borrowers had an alternative remedy under Section 17 of the SARFAESI Act, which allows for an appeal to the Debt Recovery Tribunal. Therefore, the High Court should not have entertained the writ petition.

• Writ petitions under Article 226 of the Constitution are not maintainable against a private party like Phoenix ARC, especially when an alternative remedy is available under the SARFAESI Act.

• The High Court should not have granted an ex-parte interim order, which effectively stalled the proceedings under the SARFAESI Act, especially given the large outstanding amount of ₹117 crores.

• The High Court failed to appreciate that there was no occasion to interfere in the exercise of powers under Article 226 of the Constitution of India against a private party and a non-State actor like the appellant – Phoenix ARC.

Arguments by the Respondents (Borrowers):

• The writ petition was filed against the ARC for not following the statutory duty under Rule 8 of the Security Interest (Enforcement) Rules, 2002. It is argued that this rule imposes a duty on the secured creditor (ARC) to act fairly, which was not followed in this case.

• Even against a private body performing public functions, a writ is maintainable. The ARC was performing a public function by dealing with secured assets, which affects the public interest.

• The writ petition is maintainable despite the availability of an alternative remedy under Section 17 of the SARFAESI Act. The borrowers argued that the letter dated 13 August 2015 did not comply with Rule 8(1) and 8(2) of the Rules, 2002, and therefore, an appeal under Section 17 was not available.

• The borrowers contended that the remedy under Section 17 of the SARFAESI Act, which would be against any measure referred to in sub-section (4) of Section 13 of the SARFAESI Act to file an application to the Debts Recovery Tribunal is not available to the borrowers in the instant case.

• The High Court was correct to entertain the writ petition because the ARC did not take any measures in terms of Section 13(4) of the SARFAESI Act and there was no compliance with Rule 8(1) and 8(2) of the Rules, 2002.

• The present appeals are against an interim order, and the main writ petitions are still pending before the High Court. Therefore, the Supreme Court should not interfere.

Submissions Table:

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 justified in passing the ex-parte ad-interim order, which had the effect of stalling the proceedings under the SARFAESI Act.
3. Whether a writ petition under Article 226 of the Constitution of India is maintainable against a private Asset Reconstruction Company (ARC) for actions under 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

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

How each authority was viewed by the Court?

• The Supreme Court followed United Bank of India vs. Satyawati Tondon & Ors. [(2010) 8 SCC 110], City and Industrial Development Corpn. vs. Dosu Aardeshir Bhiwandiwala [(2009) 1 SCC 168], Kanaiyalal Lalchand Sachdev & Ors. vs. State of Maharashtra & Ors. [(2011) 2 SCC 782], General Manager, Sri Siddeshwara Cooperative Bank Limited & Anr. vs. Ikbal & Ors. [(2013) 10 SCC 83], Agarwal Tracom Private Limited vs. Punjab National Bank & Ors. [(2018) 1 SCC 626], Authorized Officer, State Bank of Travancore & Anr. vs. Mathew K.C. [(2018) 3 SCC 85], and Radha Krishnan Industries vs. State of Himachal Pradesh & Ors. [(2021) 6 SCC 771] to emphasize that writ petitions should not be entertained when alternative statutory remedies are available.
• The Supreme Court distinguished J. Rajiv Subramaniyan and Anr. vs. Pandiyas and Ors. [(2014) 5 SCC 651], 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], stating that these cases were not applicable to the present situation.
• The Supreme Court mentioned Mathew Varghese vs. M. Amritha Kumar and Ors. [(2014) 5 SCC 610] and United Commercial Bank vs. Bank of India and Ors. [(1981) 2 SCC 766] in the context of specific arguments, but these were not central to the decision.

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 under Article 226 of the Constitution when an effective alternative remedy is available under a statute. The Court emphasized that the SARFAESI Act provides a comprehensive mechanism for addressing grievances related to actions taken by secured creditors, including ARCs. The Court also highlighted the importance of maintaining the financial health of secured creditors and the need to avoid unnecessary delays in the recovery of public dues. The Court noted that the High Court’s interim orders had effectively stalled the proceedings under the SARFAESI Act, which was detrimental to the interests of the secured creditor.

Fact:Law Ratio

Logical Reasoning:

The Court reasoned that the High Court should not have entertained the writ petitions against a private ARC, especially when an alternative remedy was available under Section 17 of the SARFAESI Act. The Court also noted that the High Court’s interim orders had effectively stalled the proceedings under the SARFAESI Act, which was detrimental to the interests of the secured creditor. The Court emphasized that the SARFAESI Act provides a comprehensive mechanism for addressing grievances related to actions taken by secured creditors, including ARCs.

The Court also considered the argument that the communication dated 13 August 2015 was not a notice under Section 13(4) of the SARFAESI Act. However, even if it were considered a notice under Section 13(4), the Court held that the borrowers had an alternative remedy under Section 17 of the SARFAESI Act. Therefore, the High Court should not have entertained the writ petitions.

The Court rejected the borrowers’ argument that the ARC was performing a public function, stating that the activities of the ARC were part of a commercial transaction and not a public function normally expected of State authorities.

The Court quoted from the judgment:

“Therefore, in all such cases, the High Court must insist that before availing remedy under Article 226 of the Constitution, a person must exhaust the remedies available under the relevant statute.”

“It must be remembered that stay of an action initiated by the State and/or its agencies/instrumentalities for recovery of taxes, cess, fees, etc. seriously impedes execution of projects of public importance and disables them from discharging their constitutional and legal obligations towards the citizens.”

“The discretionary jurisdiction under Article 226 is not absolute but has to be exercised judiciously in the given facts of a case and in accordance with law.”

Key Takeaways

• 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.
• Borrowers aggrieved by actions under the SARFAESI Act must utilize the statutory remedies provided under the Act, particularly Section 17, which allows for an appeal to the Debt Recovery Tribunal.
• High Courts should be circumspect in exercising their discretion to grant interim relief that stalls proceedings under the SARFAESI Act, especially when a large amount of public money is involved.
• The SARFAESI Act is a comprehensive code for recovery of dues by secured creditors, and its provisions should be adhered to.
• Private ARCs are not considered to be performing public functions that would warrant the exercise of writ jurisdiction under Article 226.

Directions

The Supreme Court directed the dismissal of the writ petitions filed before the High Court and vacated the ex-parte ad-interim orders. The Court also imposed costs of ₹1 lakh on the original writ petitioners (borrowers) in both cases, to be paid directly to the appellant within four weeks.

Development of Law

The ratio decidendi of this case is that 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. This judgment reinforces the principle that alternative statutory remedies should be exhausted before invoking writ jurisdiction. It clarifies that private ARCs are not considered to be performing public functions that would warrant the exercise of writ jurisdiction under Article 226. This ruling strengthens the position of secured creditors in recovering their dues and discourages borrowers from circumventing the statutory mechanism provided by the SARFAESI Act.

Conclusion

The Supreme Court’s judgment in Phoenix ARC Private Limited vs. Vishwa Bharati Vidya Mandir & Ors. clarifies that writ petitions against private ARCs for actions under the SARFAESI Act are generally not maintainable. The Court emphasized the availability of alternative statutory remedies under the SARFAESI Act and cautioned High Courts against interfering with the recovery process by granting interim orders. This decision reinforces the importance of adhering to the statutory framework for debt recovery and upholds the rights of secured creditors. The Court allowed the appeals, dismissed the writ petitions, and vacated the interim orders, imposing costs on the borrowers.