Sarfaesi Act - the Arbitration Act-D.R.T. Act - M/s Deccan Chronicles Holdings Limited obtained loan of Rs.100/- crores from M/s India Bulls Financial Services Limited - IBSFL filed two ops invoking arbitration clause for recovery of loan amount - pending it merged in to her sister company M/s India Bulls Housing Finance Limited, which was registered under Sarfaesi Act - IBHFL initiated actions and took possession of properties directly under Sarfaesi Act - Their Lordship of High court held that when the loan was not taken directly from the later company and when the arbitration proceedings are pending, the later company by virtue of it's registration under Sarfaesi Act , can not proceed against the debtor as the merge was not done with the consent of the debtor and allowed the writ petition =
accepted the Orissa high court judgement and differed with the Allahabad High court judgement
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (for short
'the Sarfaesi Act"),
the Arbitration and Conciliation Act, 1996
(for short "the Arbitration Act"), and
the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993 (for short the D.R.T. Act").
It is too well-known that the Sarfaesi Act is a typical and special
enactment, which has brought into existence, a legal regime, substantially
different from the one, that existed before it. Mortgage is one of the modes of
transfer of properties, and it is dealt with in detail, under the provisions of
the Transfer of Property Act (T.P Act). It is a mechanism for securing the
interests of a person or agency, who lent the amount to another. The procedure
for redemption of the mortgage, at the instance of the mortgagor or the
foreclosure thereof, at the instance of the mortgagee, is prescribed in the T.P
Act itself. Even where a decree for foreclosure is passed, it is in the form of
a preliminary step, giving an opportunity to the borrower to clear the debt, and
to be followed by a final decree, on failure.
Citing the reason that the process of recovery of loans, particularly by Banks,
on the strength of mortgages, through suits
in the Civil Courts is time consuming, the Parliament enacted the D.R.T. Act.
The procedure was simplified and the jurisdiction of the Civil Courts was
conferred upon the Tribunals. Gigantic Financial Agencies, which have
sanctioned and paid loans of huge amounts were not satisfied with the mechanism
provided for under the D.R.T. Act also. The Sarfaesi Act is a radical deviation
from the settled principles of adjudication. The Parliament, which has to its
credit,the enactment of Debt Relief laws, to protect the interests of innocent and
gullible borrowers and relieved many from the indebtedness, has virtually taken
a 'U' turn, to protect the superlative corporate lenders. In the process, the
lender was assigned the status of the adjudicator as well as the executing
agency of the decree. Its word is treated as final not only in regulating a
debt but also to straightaway take possession of the mortgaged property. The
curious part of it is that the debt can be recalled and mortgage can be invoked,
even if the time for complete repayment of the debt has not reached. Citing of
default in payment of installments is sufficient to take the drastic step.
The 4th respondent got itself registered under the Sarfaesi Act. Soon
after the merger of IBFSL with it, the 4th respondent initiated proceedings
under the Sarfaesi Act against the petitioners in respect of the loans, that
were borrowed from IBFSL. Possession notice dated 29-05-2013 was also issued.
The physical possession of the properties is said to have been taken on 02-08-
2013. It is also stated that the 4th respondent has sold away 50% of the
shareholding of the 1st petitioner-company and put to sale, an item of property.
The 4th respondent got issued a notice dated 21-11-2013, to the petitioners proposing to sell two items of immovable property at Hyderabad. It is in this context, that the present writ petition is filed.
It is also argued that the loan agreements provided for arbitration and by
invoking the same, O.P.Nos.377 and 378 of 2013 were filed, under Section 9 of
the Arbitration Act, and in that view of the matter, initiation of any other
proceedings either by the original lender i.e. IBFSL or any successor thereof,
are impermissible in law.
By the time, the O.Ps were filed, Company Petition No.457 of 2012 filed by
IBFSL, seeking merger with the 4th respondent, was pending in the Delhi High
Court.On 08-03-2013 the 4th respondent swung into action and issued notice under
Section 13(2) of the Sarfaesi Act, to the petitioners. A corrigendum was issued
proposing certain amendments. This was followed by issuance of possession
notice dated 29-05-2013, and sale notices dated 8th November, 2013.
Conclusion
The validity of the Sarfaesi Act has been dealt with by the Hon'ble
Supreme Court in Mardia Chemicals Ltd. v. Union of India & others1. It was
upheld in all respects, observing that enough safeguards are provided in it. It
was also observed that even if proceedings in relation to a loan transaction are pending before the
Tribunal, the financial agency can invoke its powers under the Sarfaesi Act and
proceed against the security.
One of the contentions advanced by the petitioners is that the provisions
of the Sarfaesi Act do not apply to its transactions since, a) they did not
borrow any amount from the 4th respondent and b) IBFSL, from whom they borrowed
money, was not under the purview of that Act.
whether a loan transaction, which is outside the
purview of the Sarfaesi Act, can be brought under its purview, without the
consent of the borrower, has not been examined by the Hon'ble Supreme Court, so
far, to our knowledge.
The Orissa High Court in Subash Chandra Panda v. State of Orissa2 took
the view that such a step is not permissible. The Allahabad High Court in
Yogendra Kumar Jaiswal and others v. C.M.M and others3 took a different view.
With due respect to the learned Judges, we are of the view that it is no
part of the duty of the Constitutional Courts to administer the finances, and we
totally disagree with the view expressed by them, that the Sarfaesi Act is
retroactive in nature. Whether one employs the term "retroactive" or
"retrospective", it cannot be permitted to govern the transactions, which were
outside its purview, when they were made.
We respectfully agree with the ratio of the judgment of the Orissa High
Court in Subash Chandra Panda v. State of Orissa (2 supra).
There are other subsidiary questions, that arise for consideration.
The two O.Ps, i.e. 377 and 378 of 2013 have already been filed in the name
of IBFSL, under Section 9 of the Arbitration Act. The arbitration clause that
existed in the agreements has been extracted in the preceding paragraphs.
Section 8 of the Arbitration Act makes it amply clear that if the agreement
between the parties contains an arbitration clause, institution of other
proceedings is prohibited. When a suit cannot be instituted by a party to an
agreement, which contains an arbitration clause, the initiation of proceedings
before other fora becomes equally untenable. The proceedings under the Sarfaesi
Act cannot be placed on a higher pedestal. The borrower of a secured financial
institution, as defined under Section 2(f) of the Sarfaesi Act cannot be treated
as a super Court, to be kept on a higher pedestal in the context of Section 8 of the
Arbitration Act. When arbitration proceedings have already been initiated, the
4th respondent cannot be permitted, ignore them and proceed against the
security.
We therefore, allow the writ petition and set aside the proceedings
initiated by the 4th respondent, against the petitioners. It is, however, left
open to it to take other steps in accordance with law, for recovery of its
loans.
2014 (Feb.Part) judis.nic.in/judis_andhra/filename=10876
THE HON'BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON'BLE SRI JUSTICE M.S.K.JAISWAL
W.P.No.37381 of 2013
04-02-2014
M/s Deccan Chronicles Holdings Limited rep. by its Vice Chairman, and
others..Petitioners
The Union of India rep. by its Joint Secretary,Ministry of Finance &
others..Respondents
Counsel for the petitioners: Sri C.V. Mohan Reddy,
Sr. Counsel
Counsel for the Respondents: Sri S. Ravi, Sr.Counsel
Sri S. Niranjan Reddy
<GIST:
>HEAD NOTE:
?Cases referred
1) (2004) 4 SCC 311
2) AIR 2008 Orissa 88
3) AIR 2010 Allahabad 3
4) 2004(1) UC 451
THE HON'BLE SRI JUSTICE L. NARASIMHA REDDY
AND
THE HON'BLE SRI JUSTICE M.S.K. JAISWAL
W.P.No.37381 of 2013
JUDGMENT: (Per the Hon'ble Sri Justice L. Narasimha Reddy)
This writ petition raises several questions of general importance, that
arise in the course of implementation of different enactments, such as
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (for short
'the Sarfaesi Act"), the Arbitration and Conciliation Act, 1996
(for short "the Arbitration Act"), and the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993 (for short the D.R.T. Act").
The 1st petitioner is a public limited company, involved in the activity
of running newspapers and petitioners 2 to 5 are associated with the management
and administration thereof. The petitioners obtained two separate loans: One
loan of Rs.50 crores on 08-12-2011, and another of Rs.50 crores on 05-01-2012 from
M/s India Bulls Financial Services Limited (for short "IBFSL"), after necessary
documentation. On 08-09-2012, IBFSL issued a notice to the petitioners,
requiring them to pay the outstanding amount within seven days from the date of
receipt of the notice.
The petitioners got issued a reply. Thereafter, IBFSL filed O.P.No.377 of 2013
against the petitioners in the Court of II Additional Chief Judge, City Civil
Court, Hyderabad, under Section 9 of the Arbitration Act, for the relief of
injunction, to restrain the petitioners from alienating, encumbering,
transferring or creating third party rights, vis--vis the properties that were
offered as security and for a direction to the petitioners to jointly and
severally furnish security for a sum of Rs.48,60,77,778/-. Similarly O.P.No.378
of 2013 was filed for similar relief in relation to another loan. Clause 25 of
the Loan Agreement, which provides for arbitration was invoked in both the OPs.
According to the petitioners, about 10 crores was paid towards principal
of the borrowed amount by June 2012. IBFSL was merged with its sister concern,
M/s India Bulls Housing Finance Limited, the 4th respondent, on the basis of an
order dated 12-12-2012 in Company Petition No.457 of 2012, passed by the Delhi High Court
under the provisions of the Companies Act, 1956.
The merger is said to have been effective from 08-03-2013.
The 4th respondent got itself registered under the Sarfaesi Act. Soon
after the merger of IBFSL with it, the 4th respondent initiated proceedings
under the Sarfaesi Act against the petitioners in respect of the loans, that
were borrowed from IBFSL. Possession notice dated 29-05-2013 was also issued.
The physical possession of the properties is said to have been taken on 02-08-
2013. It is also stated that the 4th respondent has sold away 50% of the
shareholding of the 1st petitioner-company and put to sale, an item of property.
The 4th respondent got issued a notice dated 21-11-2013, to the petitioners proposing to sell two items of immovable property at Hyderabad. It is in this context, that the present writ petition is filed.
The petitioners contend that IBFSL, from which they obtained loan; was not
registered as a 'Financial Company', under Section 3 of the Sarfaesi Act, and
the mere fact that the said agency has merged with its sister concern, the 4th
respondent; does not bring about any change in the relations between themselves
and the IBFSL They submit that even if the 4th respondent has stepped into the
shoes of the IBFSL, it can, at the most, take only those steps,
that could have been taken by IBFSL, and not any more.
The second contention of the petitioners is that the
4th respondent is a Housing Finance Company, governed by the provisions of the
National Housing Bank Act, 1987 (for short 'the N.H.B Act') and it cannot deviate from the procedure prescribed under that Act. It is also urged that once the proceedings under Section 9 of the
Arbitration Act have been initiated, it is not permissible for the 4th
respondent to initiate proceedings of any other form, that are prohibited under
Section 8 of that Act.
On behalf of the 4th respondent a detailed counter-affidavit is filed. It
is stated that the petitioners have borrowed about 100 crores from IBFSL, but
failed to repay the same. They contend that once IBFSL has merged into the 4th
respondent, the procedure prescribed under the Sarfaesi Act becomes applicable, and the
contention of the petitioners cannot be accepted. They raised the objection as
to the very maintainability of the writ petition. It is also urged that the
merger of the IBFSL with the 4th respondent is complete in all respects, and the
assets and liabilities that accrued on the merger would be governed by the
provisions of law, that are applicable to the 4th respondent.
The allegation as to the realization of funds from other assets is denied. As
regards the initiation of the proceedings under the Arbitration Act, the 4th
respondent contends that the Sarfaesi Act would have overriding effect on all
other enactments and that no exception can be taken to the impugned sale notice.
Sri C.V. Mohan Reddy, learned Senior Counsel for the petitioners submits
that though the petitioners could have borrowed amounts from Nationalised Banks
and other similar agencies, they have chosen IBFSL only, on account of the
reason that the proceedings of the Sarfaesi Act are not applicable to it.
He contends that the merger of IBFSL with the 4th respondent was effected with
the sole objective of initiating proceedings under the Sarfaesi Act against the
petitioners and that the sequence of events discloses the same. He submits that
whatever may have been the reason or justification for merger of the two
companies, it cannot be permitted to bring about any onerous conditions,
vis--vis the petitioners, in respect of the loan transactions, that too,
without notice to them.
Learned Senior Counsel further submits that the very origin of the 4th
respondent is under the provisions of the N.H.B Act and its affairs are
predominantly governed by the provisions of that Act and not of the Sarfaesi
Act. He submits that the N.H.B Act prescribes a typical regime for recovery of
loans, particularly under Section 36(f); and Section 36(y) bars the jurisdiction
of not only the Court, but also authorities under any other enactment whatever,
and that the same has not been saved under the Sarfaesi Act.
It is also urged that the provisions of the Sarfaesi Act cannot be applied
indiscriminately in respect of a transaction, unless it was from an agency,
which is governed by the provisions of that Act.
It is also argued that the loan agreements provided for arbitration and by
invoking the same, O.P.Nos.377 and 378 of 2013 were filed, under Section 9 of
the Arbitration Act, and in that view of the matter, initiation of any other
proceedings either by the original lender i.e. IBFSL or any successor thereof,
are impermissible in law. Reliance is placed upon the judgments of various High
Courts and Supreme Court, in support of his contention. It is pleaded that the
4th respondent has kept the petitioners in complete dark of the various steps,
through which amounts have been realized by selling almost half of the
shareholding of the 1st petitioner-company, or the manner in which, an item of
immovable property at Gurgaon was brought to sale.
Sri S. Ravi, learned Senior Counsel has advanced arguments on behalf of
the 4th respondent, and to certain extent, they have been supplemented by Sri S.
Niranjan Reddy, learned counsel.
They contend that the writ petition is not maintainable in law, and
in case the petitioners feel aggrieved by any steps taken by the
4th respondent, the only course open to them is to approach the Debt Recovery
Tribunal (for short 'the Tribunal') by filing an appeal.
It has been argued that though the petitioners borrowed the amount from
IBFSL, their liability stands transferred to the 4th respondent in view of the merger, and it being a company, registered under Section 3 of the Sarfaesi Act, is entitled to invoke the provisions of that
enactment. Learned Senior Counsel submits that the Sarfaesi Act contains non-
obstante clauses that virtually override the provisions of any other law for the
time being in force, and in that view of the matter, the objection raised by the
petitioners for initiation of proceedings under that Act are untenable. He
further submits that the initiation of proceedings under the Arbitration Act was
at a time when the merger did not take place, and with the merger becoming
complete, a totally different legal regime altogether came into existence and
the
4th respondent became entitled to invoke the provisions of the Sarfaesi Act.
As regards the N.H.B Act, learned Senior Counsel submits that though the
4th respondent is a company governed by the provisions of that Act, it has every
right to choose or elect between the mechanisms under the N.H.B Act, or the
Sarfaesi Act, for recovery of the amounts, due to it. He too placed reliance
upon quite a good number of precedents, in support of his contention.
In view of the complexity, which the writ petition presents,
it becomes necessary to take note of the purport of different enactments in
relation to the rights of the parties. On certain important aspects, an
authoritative pronouncement from the Hon'ble Supreme Court is yet to emerge, and
there is a vertical division of opinions between the various High Courts. That
is the reason why every possible care is taken to ensure that the various
contentions urged by the parties are addressed, duly taking into account, the
view expressed by the Courts, in this behalf.
It is not in dispute that the petitioners obtained two loans of Rs.50
crores each, from IBFSL, on 08-12-2011 and 05-01-2012, respectively. It is also
not in dispute that the repayment of the loans was not as per the schedule, and
the lending agency has already issued notices, proposing to take action. The
steps contemplated under its notices dated 08-09-2012, however, were not
referable to the Sarfaesi Act, obviously because it is not covered by the
provisions of that Act. The relevant portion of the notice issued by it reads
as under:
"...In view of the aforesaid and pursuant to provisions of the Loan
Documents, without prejudice to our other rights and remedies, we hereby call
upon you to forthwith pay us the aforesaid amount of Rs.51,54,05,096/- (Rupees
Fifty One Crores Fifty Four Lacs Five Thousand and Ninety Six only) within 7
(Seven) days from the date of this notice.
In case failure to comply with the aforesaid, without prejudice to our other
rights and without any further notice to any of you,
a) please treat this notice as a notice of/for sale, enforcement, disposing off,
transfer, assignment and/or encumbrance of any/all of the Security/Securities
(including any shares) provided in favour of the Lender under the Loan
Documents; and/or
b) the Lender shall be entitled to, inter alia, exercise all other rights and/or
enforce remedies (at your costs and risk) available under the Loan Documents
and/or law to recover all amounts payable by you under the Loan Documents.
Notwithstanding anything to the contrary, this notice shall prevail over and/or
not be affected by any other correspondence, payments, actions, etc., in present
or future, by or between you and the Lender, unless this notice is specifically
withdrawn/annulled by the Lender in writing.
Capitalized terms used and not defined herein shall have the meaning as ascribed
to such terms in the Loan Documents..."
It is also necessary to note that IBFSL filed Arbitration O.P.Nos.377 and
378 of 2013 under Section 9 of the Arbitration Act against the petitioners in
the Court of II Additional Chief Judge, City Civil Court, Hyderabad. Clause 25
of the Loan Agreement, that was invoked by the IBFSL reads:
"25. Arbitration:
25.1 Notwithstanding anything to the contrary in the Loan Documents and
herein, the Parties agree that if any dispute/disagreement/differences (Dispute)
arises between the parties during the subsistence of the Loan Documents
(including this Agreement) or thereafter, in connection with, inter alia the
validity, interpretation, implementation or alleged breach of any provision of
the Loan Documents (including this Agreement), jurisdiction or existence of the
arbitrator or of any nature whatsoever, then, the Dispute shall be referred to a
sole arbitrator who shall be nominated/appointed by the Lender only. The
parties expressly agree that, in any circumstances, the appointment of the sole
arbitrator by the Lender shall be and shall always deemed to be sole means for
securing the appointment/nomination of the sale arbitrator, without recourse to
any other alternative mode of appointment/nomination.
25.2 The place of the arbitration shall be New Delhi and the arbitration
proceedings shall be governed by the Arbitration & Conciliation Act, 1995 and
shall be in English language.
25.3 The arbitrator award shall be in writing. The arbitrator shall also decide
on the costs of the arbitration proceedings.
25.4 The award shall be binding on the parties subject to the applicable laws in
force and the award shall be enforceable in any competent court of law."
By the time, the O.Ps were filed, Company Petition No.457 of 2012 filed by
IBFSL, seeking merger with the 4th respondent, was pending in the Delhi High
Court. Judgment therein was rendered
on 12-12-2012, paving the way for merger. However the merger was to come into
force only on compliance with certain conditions. That occurred on 08-03-2013.
On the same day, the 4th respondent swung into action and issued notice under
Section 13(2) of the Sarfaesi Act, to the petitioners. A corrigendum was issued
proposing certain amendments. This was followed by issuance of possession
notice dated 29-05-2013, and sale notices dated
8th November, 2013.
It is too well-known that the Sarfaesi Act is a typical and special
enactment, which has brought into existence, a legal regime, substantially
different from the one, that existed before it. Mortgage is one of the modes of
transfer of properties, and it is dealt with in detail, under the provisions of
the Transfer of Property Act (T.P Act). It is a mechanism for securing the
interests of a person or agency, who lent the amount to another. The procedure
for redemption of the mortgage, at the instance of the mortgagor or the
foreclosure thereof, at the instance of the mortgagee, is prescribed in the T.P
Act itself. Even where a decree for foreclosure is passed, it is in the form of
a preliminary step, giving an opportunity to the borrower to clear the debt, and
to be followed by a final decree, on failure.
Citing the reason that the process of recovery of loans, particularly by Banks,
on the strength of mortgages, through suits
in the Civil Courts is time consuming, the Parliament enacted the D.R.T. Act.
The procedure was simplified and the jurisdiction of the Civil Courts was
conferred upon the Tribunals. Gigantic Financial Agencies, which have
sanctioned and paid loans of huge amounts were not satisfied with the mechanism
provided for under the D.R.T. Act also. The Sarfaesi Act is a radical deviation
from the settled principles of adjudication. The Parliament, which has to its
credit,the enactment of Debt Relief laws, to protect the interests of innocent and
gullible borrowers and relieved many from the indebtedness, has virtually taken
a 'U' turn, to protect the superlative corporate lenders. In the process, the
lender was assigned the status of the adjudicator as well as the executing
agency of the decree. Its word is treated as final not only in regulating a
debt but also to straightaway take possession of the mortgaged property. The
curious part of it is that the debt can be recalled and mortgage can be invoked,
even if the time for complete repayment of the debt has not reached. Citing of
default in payment of installments is sufficient to take the drastic step.
The validity of the Sarfaesi Act has been dealt with by the Hon'ble
Supreme Court in Mardia Chemicals Ltd. v. Union of India & others1. It was
upheld in all respects, observing that enough safeguards are provided in it. It
was also observed that even if proceedings in relation to a loan transaction are pending before theTribunal, the financial agency can invoke its powers under the Sarfaesi Act and
proceed against the security. The reason that appears to have weighed with the
Hon'ble Supreme Court is that the amounts advanced as loan by Banks and other
agencies constitute public finance, and it is in the national interest that the
procedure is streamlined for recovery of such amounts. Once the Sarfaesi Act is
upheld, any amount of argument, advanced by the petitioners, vis--vis its
provisions, cannot be countenanced. Ultimately, it is for the Supreme Court to
say anything further,
if it comes to the conclusion that the beneficiaries under that Act are heckling
at the age old legal system.
One of the contentions advanced by the petitioners is that the provisions
of the Sarfaesi Act do not apply to its transactions since, a) they did not
borrow any amount from the 4th respondent and b) IBFSL, from whom they borrowed
money, was not under the purview of that Act. The gist of the arguments advanced
by the learned counsel on these aspects has already been taken note of, in the
preceding paragraphs.
It is trite that an individual or a corporate personality has the freedom
to contract, and while taking a decision in the course of their business,
several factors assume importance. If an individual intends to purchase an
item, he would take into account, several factors, such as the quality of the
item, its price structure, the reliability of the supplier and the like.
Similarly, if a person is in need of money, he has to take several aspects into
account. Even where an agency is willing to lend the amount, the conditions
subject to which, the money is lent, would assume importance. These conditions
may range from the rate of interest to the method of recovery. If the method of
recovery is stringent and the lender reserves to himself, the right to take
steps, detrimental to the interests of the borrower, the latter may think twice.
In a given case, he may even choose not to borrow the amount, than to face
humiliation in the hands of a powerful and dominant lender.
This can be demonstrated from the financial transactions in the public
field itself. Entrepreneurs with expertise at their disposal would choose to
borrow the amount from the financial institutions that are under regulation by
the Reserve Bank of India, though there may be several private money lenders,
prepared to advance the amount. The reason is that a semblance of protection
against indiscriminate levy of interest or undue squeezing of the borrower
at the discretion of the lender is felt, in case the money is borrowed from
regulated financial agencies. Even as between the financial agencies, that are
controlled by Reserve Bank of India, there are specialized financial agencies,
that are meant to serve the industrial sector, housing sectors, etc. Laws are
made to suit the interests of the lending, as well as the borrowing agencies,
keeping in view the purpose for which the money is borrowed. Instances are not
lacking where the establishment of industries is treated as primary, and every
effort is made to sustain them. The extreme steps taken in this regard can be
discerned from the scope and ambit of the Sick Industrial Companies Act, which
provides for framing of schemes, to sustain an industry, than to close it,
on account of its being sick. Various agencies that advanced finances are even
made to re-schedule the loans, or to forego the component of interest.
The 1st petitioner is in existence for the past several decades and it is
running a reputed newspaper. May be, for expansion or other purposes, it wanted
some finances. By the time it has chosen to borrow the amounts, the Sarfaesi
Act has already come into force. It has deliberately chosen to approach a non-
discrepit financial agency, IBFSL, even while several Nationalized Banks were
prepared to lend the amount, by taking the same security. What prompted the
1st petitioner to approach IBFSL appears to be that, it was not under the
purview of the Sarfaesi Act. It is also essential to mention that the 4th
respondent, a sister concern of the IBFSL, was also in existence at that time.
The reason why the choice has fallen upon the IBFSL and not its sister concern,
the 4th respondent, appears to be that the latter is under the purview of the
Sarfaesi Act, whereas the former is not. When this is the state of affairs
pertaining to the borrowing of amount by the 1st petitioner from IBFSL, any
change in the conditions, that too, to its detriment, should not have been
thrust upon it, without its consent. The sequence of events, in the instant
case, discloses that the predominant purpose for which the IBFSL was merged with
the 4th respondent, was to bring the loan transaction of the 1st petitioner-
company, under the purview of the Sarfaesi Act.
An argument is advanced on behalf of the 4th respondent to the effect that
once the merger has taken place, a new legal regime has come into existence, and
by operation of law,
the petitioners have incurred the obligation to be regulated under the Sarfaesi
Act.
It is not uncommon that the relationship between the citizens and the
state, or the citizens inter se undergoes change, whenever a new enactment is
brought into existence. Even in such cases,
the events, that have already taken place, before the new law is made, are
saved. The driving force, which compels a citizen to submit himself to a law,
which is detrimental to him, is the sovereign power of the State. In case the
subject-matter of the law,
so enacted, is a step in the exercise of sovereign powers, the Courts would be
slow, to rescue the citizen. Where, however, the content of the law is not to
strengthen the sovereign power, but to help one of the parties to a transaction,
it would be the bounden duty of the Court to ensure that a citizen is not forced
to come under a regime, which he did not agree for. When this is the approach
even to a law, the subsidiary step, such as merging of an agency, which was not
under the purview of the Sarfaesi Act, with the one, which is under it, cannot
be taken so lightly, or in a routine manner.
The well-settled principle, that what is not permitted to be done directly,
cannot be done indirectly; gets attracted.
The question as to whether a loan transaction, which is outside the
purview of the Sarfaesi Act, can be brought under its purview, without the
consent of the borrower, has not been examined by the Hon'ble Supreme Court, so
far, to our knowledge. The opinion of the High Courts on this aspect is not
uniform. The Orissa High Court in Subash Chandra Panda v. State of Orissa2 took
the view that such a step is not permissible. The Allahabad High Court in
Yogendra Kumar Jaiswal and others v. C.M.M and others3 took a different view.
In Subash Chandra Panda v. State of Orissa (2 supra),
a Division Bench of the Orissa High Court took note of the definition of the
expressions "financial institution" under Section 2(m) of the Sarfaesi Act and
its ramifications and ultimately held that if a borrower was not a financial
institution, as defined under Section 2(m), when the transaction took place, the
lending agency cannot invoke the provisions of that Sarfaesi Act on the basis of
any subsequent arrangement.
In Yogendra Kumar Jaiswal and others v. C.M.M and
others (3 supra), a Division Bench of the Allahabad High Court however took the
view that the Sarfaesi Act is more procedural than substantive in nature and in
the context of enforcement of security; the extant procedure can be followed.
With great respect to the Hon'ble Judges of the said High Courts, we are of the
view that it would be an act of oversimplification to treat the entire gamut of
the Sarfaesi Act, as mere procedure.
In clear and categorical terms, the Sarfaesi Act prescribes a new legal
regime in the context of the foreclosure of mortgages, which is totally
different from the one, under the T.P Act.
Section 13, which is kingpin of the Sarfaesi Act, commences with the non-
obstante clause by making a specific reference to Sections 69 and 69-A of the
T.P. Act. It is too nave to contend that Section 69 or 69-A of the T.P Act is
procedural in nature. They create valuable substantive rights and create
corresponding obligations upon the parties to a mortgage. Whenever a mortgage
comes into existence, the parties thereto agree upon certain terms within the
framework of law. If the law in relation thereto is altered, during the
subsistence of mortgage, the rights of the parties to the transaction remain
unaffected by the amendment. The change in law would only apply to the
transactions, that take place after it has come into force.
Howsoever tempting it may be, to put all objections of this nature under the
carpet, to receive the applause from the gigantic financial institutions, Courts
cannot be party to such an exercise.
It is only the prerogative of the Executive or the Legislature to take extreme
postures, such as wiping off the loans to the tune of thousands of crores
advanced from public funds; on the one hand, and to offer an ordinary borrower
to the alter of neo-rich kabuliwalas, on the other hand. Directly or
indirectly, the Parliament has provided for one procedure for recovery of
amounts advanced to ordinary citizens, and another for affluent and highly
placed financial institutions. Courts are supposed to view the changes in law
from the strict principles of interpretation,
not carried away by the other temptations. The intention of the legislature
becomes relevant on different occasions, and not when the complaint is that the
rights of the parties are trampled.
It is not as if that the petitioners are extended any facility or
favouritism on account of the 4th respondent being required to abide by the
conditions, under which the loan was borrowed.
Unfortunately, an impression is
being created among the citizens, that approaching an ordinary Court of law is a
purposeless exercise, or a punishment to a party. The curious part of it is
that even Courts of higher order are giving this impression, may be
subconsciously, in the course of deliberations outside the Court for promoting alternative
dispute resolution mechanisms, or making observations in some judgments. It is
an indirect way of belittling the existing system and telling the people that,
there is one legal system for elite, and the other, for ordinary and
inconsequential public.
The Allahabad High Court appears to have been convinced by the judgment of
the Uttaranchal High Court in Unique Engineering Works v. Union of India (UOI)
and Ors.4 In that judgment also, Their Lordships were mostly impressed by the
fact that India is a signatory to several international conventions and our
gross fiscal deficit is approximately 10% GDP per annum.
The relevant paragraph
reads,
"Para-24: We do not find any merit in the arguments advanced on behalf of the
petitioner. It was firstly argued before us that the impugned NPA Act, 2002 has
been enacted at the behest of the World Bank and at the behest of International
Financial Institutions. In this connection, reliance is placed on Statement of
Objects and Reasons to the impugned NPA Act, 2002. As stated above India is a
signatory to several International Conventions. Our gross fiscal deficit is
approximately 10% of GDP per annum. This is a very high ratio. One of the
contributory factors is high amount of non-performing assets. As stated above
the non-performing assets are to the tune of Rs.90,000/- crores which is not a
good indication for banks/financial institutions. Therefore, the Act has been
enacted as a remedial measure to reduce non-performing assets. Hence, there is
no merit in the argument that the impugned NPA Act, 2002 is enacted at the
behest of the World Bank, I.M.F. and other Financial Institutions. Hence, there
is no merit in the first ground of attack."
With due respect to the learned Judges, we are of the view that it is no
part of the duty of the Constitutional Courts to administer the finances, and we
totally disagree with the view expressed by them, that the Sarfaesi Act is
retroactive in nature. Whether one employs the term "retroactive" or
"retrospective", it cannot be permitted to govern the transactions, which were
outside its purview, when they were made.
We respectfully agree with the ratio of the judgment of the Orissa High
Court in Subash Chandra Panda v. State of Orissa (2 supra).
There are other subsidiary questions, that arise for consideration.
The two O.Ps, i.e. 377 and 378 of 2013 have already been filed in the name
of IBFSL, under Section 9 of the Arbitration Act. The arbitration clause that
existed in the agreements has been extracted in the preceding paragraphs.
Section 8 of the Arbitration Act makes it amply clear that if the agreement
between the parties contains an arbitration clause, institution of other
proceedings is prohibited. When a suit cannot be instituted by a party to an
agreement, which contains an arbitration clause, the initiation of proceedings
before other fora becomes equally untenable. The proceedings under the Sarfaesi
Act cannot be placed on a higher pedestal. The borrower of a secured financial
institution, as defined under Section 2(f) of the Sarfaesi Act cannot be treated
as a super Court, to be kept on a higher pedestal in the context of Section 8 of the
Arbitration Act. When arbitration proceedings have already been initiated, the
4th respondent cannot be permitted, ignore them and proceed against the
security.
We therefore, allow the writ petition and set aside the proceedings
initiated by the 4th respondent, against the petitioners. It is, however, left
open to it to take other steps in accordance with law, for recovery of its
loans.
After the judgment was pronounced, learned counsel for the 4th respondent
submitted that the possession of the security has been taken in July 2013 and
status quo in respect thereof may be maintained for a reasonable period.
We direct that status quo obtaining as on today shall be maintained for a period
of four weeks.
The miscellaneous petitions filed in the writ petition shall also stand disposed
of. There shall be no order as to costs.
_________________________
L.NARASIMHA REDDY, J.
_________________________
M.S.K. JAISWAL, J.
Dt.04-02-2014
accepted the Orissa high court judgement and differed with the Allahabad High court judgement
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (for short
'the Sarfaesi Act"),
the Arbitration and Conciliation Act, 1996
(for short "the Arbitration Act"), and
the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993 (for short the D.R.T. Act").
It is too well-known that the Sarfaesi Act is a typical and special
enactment, which has brought into existence, a legal regime, substantially
different from the one, that existed before it. Mortgage is one of the modes of
transfer of properties, and it is dealt with in detail, under the provisions of
the Transfer of Property Act (T.P Act). It is a mechanism for securing the
interests of a person or agency, who lent the amount to another. The procedure
for redemption of the mortgage, at the instance of the mortgagor or the
foreclosure thereof, at the instance of the mortgagee, is prescribed in the T.P
Act itself. Even where a decree for foreclosure is passed, it is in the form of
a preliminary step, giving an opportunity to the borrower to clear the debt, and
to be followed by a final decree, on failure.
Citing the reason that the process of recovery of loans, particularly by Banks,
on the strength of mortgages, through suits
in the Civil Courts is time consuming, the Parliament enacted the D.R.T. Act.
The procedure was simplified and the jurisdiction of the Civil Courts was
conferred upon the Tribunals. Gigantic Financial Agencies, which have
sanctioned and paid loans of huge amounts were not satisfied with the mechanism
provided for under the D.R.T. Act also. The Sarfaesi Act is a radical deviation
from the settled principles of adjudication. The Parliament, which has to its
credit,the enactment of Debt Relief laws, to protect the interests of innocent and
gullible borrowers and relieved many from the indebtedness, has virtually taken
a 'U' turn, to protect the superlative corporate lenders. In the process, the
lender was assigned the status of the adjudicator as well as the executing
agency of the decree. Its word is treated as final not only in regulating a
debt but also to straightaway take possession of the mortgaged property. The
curious part of it is that the debt can be recalled and mortgage can be invoked,
even if the time for complete repayment of the debt has not reached. Citing of
default in payment of installments is sufficient to take the drastic step.
The 4th respondent got itself registered under the Sarfaesi Act. Soon
after the merger of IBFSL with it, the 4th respondent initiated proceedings
under the Sarfaesi Act against the petitioners in respect of the loans, that
were borrowed from IBFSL. Possession notice dated 29-05-2013 was also issued.
The physical possession of the properties is said to have been taken on 02-08-
2013. It is also stated that the 4th respondent has sold away 50% of the
shareholding of the 1st petitioner-company and put to sale, an item of property.
The 4th respondent got issued a notice dated 21-11-2013, to the petitioners proposing to sell two items of immovable property at Hyderabad. It is in this context, that the present writ petition is filed.
It is also argued that the loan agreements provided for arbitration and by
invoking the same, O.P.Nos.377 and 378 of 2013 were filed, under Section 9 of
the Arbitration Act, and in that view of the matter, initiation of any other
proceedings either by the original lender i.e. IBFSL or any successor thereof,
are impermissible in law.
By the time, the O.Ps were filed, Company Petition No.457 of 2012 filed by
IBFSL, seeking merger with the 4th respondent, was pending in the Delhi High
Court.On 08-03-2013 the 4th respondent swung into action and issued notice under
Section 13(2) of the Sarfaesi Act, to the petitioners. A corrigendum was issued
proposing certain amendments. This was followed by issuance of possession
notice dated 29-05-2013, and sale notices dated 8th November, 2013.
Conclusion
The validity of the Sarfaesi Act has been dealt with by the Hon'ble
Supreme Court in Mardia Chemicals Ltd. v. Union of India & others1. It was
upheld in all respects, observing that enough safeguards are provided in it. It
was also observed that even if proceedings in relation to a loan transaction are pending before the
Tribunal, the financial agency can invoke its powers under the Sarfaesi Act and
proceed against the security.
One of the contentions advanced by the petitioners is that the provisions
of the Sarfaesi Act do not apply to its transactions since, a) they did not
borrow any amount from the 4th respondent and b) IBFSL, from whom they borrowed
money, was not under the purview of that Act.
whether a loan transaction, which is outside the
purview of the Sarfaesi Act, can be brought under its purview, without the
consent of the borrower, has not been examined by the Hon'ble Supreme Court, so
far, to our knowledge.
The Orissa High Court in Subash Chandra Panda v. State of Orissa2 took
the view that such a step is not permissible. The Allahabad High Court in
Yogendra Kumar Jaiswal and others v. C.M.M and others3 took a different view.
With due respect to the learned Judges, we are of the view that it is no
part of the duty of the Constitutional Courts to administer the finances, and we
totally disagree with the view expressed by them, that the Sarfaesi Act is
retroactive in nature. Whether one employs the term "retroactive" or
"retrospective", it cannot be permitted to govern the transactions, which were
outside its purview, when they were made.
We respectfully agree with the ratio of the judgment of the Orissa High
Court in Subash Chandra Panda v. State of Orissa (2 supra).
There are other subsidiary questions, that arise for consideration.
The two O.Ps, i.e. 377 and 378 of 2013 have already been filed in the name
of IBFSL, under Section 9 of the Arbitration Act. The arbitration clause that
existed in the agreements has been extracted in the preceding paragraphs.
Section 8 of the Arbitration Act makes it amply clear that if the agreement
between the parties contains an arbitration clause, institution of other
proceedings is prohibited. When a suit cannot be instituted by a party to an
agreement, which contains an arbitration clause, the initiation of proceedings
before other fora becomes equally untenable. The proceedings under the Sarfaesi
Act cannot be placed on a higher pedestal. The borrower of a secured financial
institution, as defined under Section 2(f) of the Sarfaesi Act cannot be treated
as a super Court, to be kept on a higher pedestal in the context of Section 8 of the
Arbitration Act. When arbitration proceedings have already been initiated, the
4th respondent cannot be permitted, ignore them and proceed against the
security.
We therefore, allow the writ petition and set aside the proceedings
initiated by the 4th respondent, against the petitioners. It is, however, left
open to it to take other steps in accordance with law, for recovery of its
loans.
2014 (Feb.Part) judis.nic.in/judis_andhra/filename=10876
THE HON'BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON'BLE SRI JUSTICE M.S.K.JAISWAL
W.P.No.37381 of 2013
04-02-2014
M/s Deccan Chronicles Holdings Limited rep. by its Vice Chairman, and
others..Petitioners
The Union of India rep. by its Joint Secretary,Ministry of Finance &
others..Respondents
Counsel for the petitioners: Sri C.V. Mohan Reddy,
Sr. Counsel
Counsel for the Respondents: Sri S. Ravi, Sr.Counsel
Sri S. Niranjan Reddy
<GIST:
>HEAD NOTE:
?Cases referred
1) (2004) 4 SCC 311
2) AIR 2008 Orissa 88
3) AIR 2010 Allahabad 3
4) 2004(1) UC 451
THE HON'BLE SRI JUSTICE L. NARASIMHA REDDY
AND
THE HON'BLE SRI JUSTICE M.S.K. JAISWAL
W.P.No.37381 of 2013
JUDGMENT: (Per the Hon'ble Sri Justice L. Narasimha Reddy)
This writ petition raises several questions of general importance, that
arise in the course of implementation of different enactments, such as
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (for short
'the Sarfaesi Act"), the Arbitration and Conciliation Act, 1996
(for short "the Arbitration Act"), and the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993 (for short the D.R.T. Act").
The 1st petitioner is a public limited company, involved in the activity
of running newspapers and petitioners 2 to 5 are associated with the management
and administration thereof. The petitioners obtained two separate loans: One
loan of Rs.50 crores on 08-12-2011, and another of Rs.50 crores on 05-01-2012 from
M/s India Bulls Financial Services Limited (for short "IBFSL"), after necessary
documentation. On 08-09-2012, IBFSL issued a notice to the petitioners,
requiring them to pay the outstanding amount within seven days from the date of
receipt of the notice.
The petitioners got issued a reply. Thereafter, IBFSL filed O.P.No.377 of 2013
against the petitioners in the Court of II Additional Chief Judge, City Civil
Court, Hyderabad, under Section 9 of the Arbitration Act, for the relief of
injunction, to restrain the petitioners from alienating, encumbering,
transferring or creating third party rights, vis--vis the properties that were
offered as security and for a direction to the petitioners to jointly and
severally furnish security for a sum of Rs.48,60,77,778/-. Similarly O.P.No.378
of 2013 was filed for similar relief in relation to another loan. Clause 25 of
the Loan Agreement, which provides for arbitration was invoked in both the OPs.
According to the petitioners, about 10 crores was paid towards principal
of the borrowed amount by June 2012. IBFSL was merged with its sister concern,
M/s India Bulls Housing Finance Limited, the 4th respondent, on the basis of an
order dated 12-12-2012 in Company Petition No.457 of 2012, passed by the Delhi High Court
under the provisions of the Companies Act, 1956.
The merger is said to have been effective from 08-03-2013.
The 4th respondent got itself registered under the Sarfaesi Act. Soon
after the merger of IBFSL with it, the 4th respondent initiated proceedings
under the Sarfaesi Act against the petitioners in respect of the loans, that
were borrowed from IBFSL. Possession notice dated 29-05-2013 was also issued.
The physical possession of the properties is said to have been taken on 02-08-
2013. It is also stated that the 4th respondent has sold away 50% of the
shareholding of the 1st petitioner-company and put to sale, an item of property.
The 4th respondent got issued a notice dated 21-11-2013, to the petitioners proposing to sell two items of immovable property at Hyderabad. It is in this context, that the present writ petition is filed.
The petitioners contend that IBFSL, from which they obtained loan; was not
registered as a 'Financial Company', under Section 3 of the Sarfaesi Act, and
the mere fact that the said agency has merged with its sister concern, the 4th
respondent; does not bring about any change in the relations between themselves
and the IBFSL They submit that even if the 4th respondent has stepped into the
shoes of the IBFSL, it can, at the most, take only those steps,
that could have been taken by IBFSL, and not any more.
The second contention of the petitioners is that the
4th respondent is a Housing Finance Company, governed by the provisions of the
National Housing Bank Act, 1987 (for short 'the N.H.B Act') and it cannot deviate from the procedure prescribed under that Act. It is also urged that once the proceedings under Section 9 of the
Arbitration Act have been initiated, it is not permissible for the 4th
respondent to initiate proceedings of any other form, that are prohibited under
Section 8 of that Act.
On behalf of the 4th respondent a detailed counter-affidavit is filed. It
is stated that the petitioners have borrowed about 100 crores from IBFSL, but
failed to repay the same. They contend that once IBFSL has merged into the 4th
respondent, the procedure prescribed under the Sarfaesi Act becomes applicable, and the
contention of the petitioners cannot be accepted. They raised the objection as
to the very maintainability of the writ petition. It is also urged that the
merger of the IBFSL with the 4th respondent is complete in all respects, and the
assets and liabilities that accrued on the merger would be governed by the
provisions of law, that are applicable to the 4th respondent.
The allegation as to the realization of funds from other assets is denied. As
regards the initiation of the proceedings under the Arbitration Act, the 4th
respondent contends that the Sarfaesi Act would have overriding effect on all
other enactments and that no exception can be taken to the impugned sale notice.
Sri C.V. Mohan Reddy, learned Senior Counsel for the petitioners submits
that though the petitioners could have borrowed amounts from Nationalised Banks
and other similar agencies, they have chosen IBFSL only, on account of the
reason that the proceedings of the Sarfaesi Act are not applicable to it.
He contends that the merger of IBFSL with the 4th respondent was effected with
the sole objective of initiating proceedings under the Sarfaesi Act against the
petitioners and that the sequence of events discloses the same. He submits that
whatever may have been the reason or justification for merger of the two
companies, it cannot be permitted to bring about any onerous conditions,
vis--vis the petitioners, in respect of the loan transactions, that too,
without notice to them.
Learned Senior Counsel further submits that the very origin of the 4th
respondent is under the provisions of the N.H.B Act and its affairs are
predominantly governed by the provisions of that Act and not of the Sarfaesi
Act. He submits that the N.H.B Act prescribes a typical regime for recovery of
loans, particularly under Section 36(f); and Section 36(y) bars the jurisdiction
of not only the Court, but also authorities under any other enactment whatever,
and that the same has not been saved under the Sarfaesi Act.
It is also urged that the provisions of the Sarfaesi Act cannot be applied
indiscriminately in respect of a transaction, unless it was from an agency,
which is governed by the provisions of that Act.
It is also argued that the loan agreements provided for arbitration and by
invoking the same, O.P.Nos.377 and 378 of 2013 were filed, under Section 9 of
the Arbitration Act, and in that view of the matter, initiation of any other
proceedings either by the original lender i.e. IBFSL or any successor thereof,
are impermissible in law. Reliance is placed upon the judgments of various High
Courts and Supreme Court, in support of his contention. It is pleaded that the
4th respondent has kept the petitioners in complete dark of the various steps,
through which amounts have been realized by selling almost half of the
shareholding of the 1st petitioner-company, or the manner in which, an item of
immovable property at Gurgaon was brought to sale.
Sri S. Ravi, learned Senior Counsel has advanced arguments on behalf of
the 4th respondent, and to certain extent, they have been supplemented by Sri S.
Niranjan Reddy, learned counsel.
They contend that the writ petition is not maintainable in law, and
in case the petitioners feel aggrieved by any steps taken by the
4th respondent, the only course open to them is to approach the Debt Recovery
Tribunal (for short 'the Tribunal') by filing an appeal.
It has been argued that though the petitioners borrowed the amount from
IBFSL, their liability stands transferred to the 4th respondent in view of the merger, and it being a company, registered under Section 3 of the Sarfaesi Act, is entitled to invoke the provisions of that
enactment. Learned Senior Counsel submits that the Sarfaesi Act contains non-
obstante clauses that virtually override the provisions of any other law for the
time being in force, and in that view of the matter, the objection raised by the
petitioners for initiation of proceedings under that Act are untenable. He
further submits that the initiation of proceedings under the Arbitration Act was
at a time when the merger did not take place, and with the merger becoming
complete, a totally different legal regime altogether came into existence and
the
4th respondent became entitled to invoke the provisions of the Sarfaesi Act.
As regards the N.H.B Act, learned Senior Counsel submits that though the
4th respondent is a company governed by the provisions of that Act, it has every
right to choose or elect between the mechanisms under the N.H.B Act, or the
Sarfaesi Act, for recovery of the amounts, due to it. He too placed reliance
upon quite a good number of precedents, in support of his contention.
In view of the complexity, which the writ petition presents,
it becomes necessary to take note of the purport of different enactments in
relation to the rights of the parties. On certain important aspects, an
authoritative pronouncement from the Hon'ble Supreme Court is yet to emerge, and
there is a vertical division of opinions between the various High Courts. That
is the reason why every possible care is taken to ensure that the various
contentions urged by the parties are addressed, duly taking into account, the
view expressed by the Courts, in this behalf.
It is not in dispute that the petitioners obtained two loans of Rs.50
crores each, from IBFSL, on 08-12-2011 and 05-01-2012, respectively. It is also
not in dispute that the repayment of the loans was not as per the schedule, and
the lending agency has already issued notices, proposing to take action. The
steps contemplated under its notices dated 08-09-2012, however, were not
referable to the Sarfaesi Act, obviously because it is not covered by the
provisions of that Act. The relevant portion of the notice issued by it reads
as under:
"...In view of the aforesaid and pursuant to provisions of the Loan
Documents, without prejudice to our other rights and remedies, we hereby call
upon you to forthwith pay us the aforesaid amount of Rs.51,54,05,096/- (Rupees
Fifty One Crores Fifty Four Lacs Five Thousand and Ninety Six only) within 7
(Seven) days from the date of this notice.
In case failure to comply with the aforesaid, without prejudice to our other
rights and without any further notice to any of you,
a) please treat this notice as a notice of/for sale, enforcement, disposing off,
transfer, assignment and/or encumbrance of any/all of the Security/Securities
(including any shares) provided in favour of the Lender under the Loan
Documents; and/or
b) the Lender shall be entitled to, inter alia, exercise all other rights and/or
enforce remedies (at your costs and risk) available under the Loan Documents
and/or law to recover all amounts payable by you under the Loan Documents.
Notwithstanding anything to the contrary, this notice shall prevail over and/or
not be affected by any other correspondence, payments, actions, etc., in present
or future, by or between you and the Lender, unless this notice is specifically
withdrawn/annulled by the Lender in writing.
Capitalized terms used and not defined herein shall have the meaning as ascribed
to such terms in the Loan Documents..."
It is also necessary to note that IBFSL filed Arbitration O.P.Nos.377 and
378 of 2013 under Section 9 of the Arbitration Act against the petitioners in
the Court of II Additional Chief Judge, City Civil Court, Hyderabad. Clause 25
of the Loan Agreement, that was invoked by the IBFSL reads:
"25. Arbitration:
25.1 Notwithstanding anything to the contrary in the Loan Documents and
herein, the Parties agree that if any dispute/disagreement/differences (Dispute)
arises between the parties during the subsistence of the Loan Documents
(including this Agreement) or thereafter, in connection with, inter alia the
validity, interpretation, implementation or alleged breach of any provision of
the Loan Documents (including this Agreement), jurisdiction or existence of the
arbitrator or of any nature whatsoever, then, the Dispute shall be referred to a
sole arbitrator who shall be nominated/appointed by the Lender only. The
parties expressly agree that, in any circumstances, the appointment of the sole
arbitrator by the Lender shall be and shall always deemed to be sole means for
securing the appointment/nomination of the sale arbitrator, without recourse to
any other alternative mode of appointment/nomination.
25.2 The place of the arbitration shall be New Delhi and the arbitration
proceedings shall be governed by the Arbitration & Conciliation Act, 1995 and
shall be in English language.
25.3 The arbitrator award shall be in writing. The arbitrator shall also decide
on the costs of the arbitration proceedings.
25.4 The award shall be binding on the parties subject to the applicable laws in
force and the award shall be enforceable in any competent court of law."
By the time, the O.Ps were filed, Company Petition No.457 of 2012 filed by
IBFSL, seeking merger with the 4th respondent, was pending in the Delhi High
Court. Judgment therein was rendered
on 12-12-2012, paving the way for merger. However the merger was to come into
force only on compliance with certain conditions. That occurred on 08-03-2013.
On the same day, the 4th respondent swung into action and issued notice under
Section 13(2) of the Sarfaesi Act, to the petitioners. A corrigendum was issued
proposing certain amendments. This was followed by issuance of possession
notice dated 29-05-2013, and sale notices dated
8th November, 2013.
It is too well-known that the Sarfaesi Act is a typical and special
enactment, which has brought into existence, a legal regime, substantially
different from the one, that existed before it. Mortgage is one of the modes of
transfer of properties, and it is dealt with in detail, under the provisions of
the Transfer of Property Act (T.P Act). It is a mechanism for securing the
interests of a person or agency, who lent the amount to another. The procedure
for redemption of the mortgage, at the instance of the mortgagor or the
foreclosure thereof, at the instance of the mortgagee, is prescribed in the T.P
Act itself. Even where a decree for foreclosure is passed, it is in the form of
a preliminary step, giving an opportunity to the borrower to clear the debt, and
to be followed by a final decree, on failure.
Citing the reason that the process of recovery of loans, particularly by Banks,
on the strength of mortgages, through suits
in the Civil Courts is time consuming, the Parliament enacted the D.R.T. Act.
The procedure was simplified and the jurisdiction of the Civil Courts was
conferred upon the Tribunals. Gigantic Financial Agencies, which have
sanctioned and paid loans of huge amounts were not satisfied with the mechanism
provided for under the D.R.T. Act also. The Sarfaesi Act is a radical deviation
from the settled principles of adjudication. The Parliament, which has to its
credit,the enactment of Debt Relief laws, to protect the interests of innocent and
gullible borrowers and relieved many from the indebtedness, has virtually taken
a 'U' turn, to protect the superlative corporate lenders. In the process, the
lender was assigned the status of the adjudicator as well as the executing
agency of the decree. Its word is treated as final not only in regulating a
debt but also to straightaway take possession of the mortgaged property. The
curious part of it is that the debt can be recalled and mortgage can be invoked,
even if the time for complete repayment of the debt has not reached. Citing of
default in payment of installments is sufficient to take the drastic step.
The validity of the Sarfaesi Act has been dealt with by the Hon'ble
Supreme Court in Mardia Chemicals Ltd. v. Union of India & others1. It was
upheld in all respects, observing that enough safeguards are provided in it. It
was also observed that even if proceedings in relation to a loan transaction are pending before theTribunal, the financial agency can invoke its powers under the Sarfaesi Act and
proceed against the security. The reason that appears to have weighed with the
Hon'ble Supreme Court is that the amounts advanced as loan by Banks and other
agencies constitute public finance, and it is in the national interest that the
procedure is streamlined for recovery of such amounts. Once the Sarfaesi Act is
upheld, any amount of argument, advanced by the petitioners, vis--vis its
provisions, cannot be countenanced. Ultimately, it is for the Supreme Court to
say anything further,
if it comes to the conclusion that the beneficiaries under that Act are heckling
at the age old legal system.
One of the contentions advanced by the petitioners is that the provisions
of the Sarfaesi Act do not apply to its transactions since, a) they did not
borrow any amount from the 4th respondent and b) IBFSL, from whom they borrowed
money, was not under the purview of that Act. The gist of the arguments advanced
by the learned counsel on these aspects has already been taken note of, in the
preceding paragraphs.
It is trite that an individual or a corporate personality has the freedom
to contract, and while taking a decision in the course of their business,
several factors assume importance. If an individual intends to purchase an
item, he would take into account, several factors, such as the quality of the
item, its price structure, the reliability of the supplier and the like.
Similarly, if a person is in need of money, he has to take several aspects into
account. Even where an agency is willing to lend the amount, the conditions
subject to which, the money is lent, would assume importance. These conditions
may range from the rate of interest to the method of recovery. If the method of
recovery is stringent and the lender reserves to himself, the right to take
steps, detrimental to the interests of the borrower, the latter may think twice.
In a given case, he may even choose not to borrow the amount, than to face
humiliation in the hands of a powerful and dominant lender.
This can be demonstrated from the financial transactions in the public
field itself. Entrepreneurs with expertise at their disposal would choose to
borrow the amount from the financial institutions that are under regulation by
the Reserve Bank of India, though there may be several private money lenders,
prepared to advance the amount. The reason is that a semblance of protection
against indiscriminate levy of interest or undue squeezing of the borrower
at the discretion of the lender is felt, in case the money is borrowed from
regulated financial agencies. Even as between the financial agencies, that are
controlled by Reserve Bank of India, there are specialized financial agencies,
that are meant to serve the industrial sector, housing sectors, etc. Laws are
made to suit the interests of the lending, as well as the borrowing agencies,
keeping in view the purpose for which the money is borrowed. Instances are not
lacking where the establishment of industries is treated as primary, and every
effort is made to sustain them. The extreme steps taken in this regard can be
discerned from the scope and ambit of the Sick Industrial Companies Act, which
provides for framing of schemes, to sustain an industry, than to close it,
on account of its being sick. Various agencies that advanced finances are even
made to re-schedule the loans, or to forego the component of interest.
The 1st petitioner is in existence for the past several decades and it is
running a reputed newspaper. May be, for expansion or other purposes, it wanted
some finances. By the time it has chosen to borrow the amounts, the Sarfaesi
Act has already come into force. It has deliberately chosen to approach a non-
discrepit financial agency, IBFSL, even while several Nationalized Banks were
prepared to lend the amount, by taking the same security. What prompted the
1st petitioner to approach IBFSL appears to be that, it was not under the
purview of the Sarfaesi Act. It is also essential to mention that the 4th
respondent, a sister concern of the IBFSL, was also in existence at that time.
The reason why the choice has fallen upon the IBFSL and not its sister concern,
the 4th respondent, appears to be that the latter is under the purview of the
Sarfaesi Act, whereas the former is not. When this is the state of affairs
pertaining to the borrowing of amount by the 1st petitioner from IBFSL, any
change in the conditions, that too, to its detriment, should not have been
thrust upon it, without its consent. The sequence of events, in the instant
case, discloses that the predominant purpose for which the IBFSL was merged with
the 4th respondent, was to bring the loan transaction of the 1st petitioner-
company, under the purview of the Sarfaesi Act.
An argument is advanced on behalf of the 4th respondent to the effect that
once the merger has taken place, a new legal regime has come into existence, and
by operation of law,
the petitioners have incurred the obligation to be regulated under the Sarfaesi
Act.
It is not uncommon that the relationship between the citizens and the
state, or the citizens inter se undergoes change, whenever a new enactment is
brought into existence. Even in such cases,
the events, that have already taken place, before the new law is made, are
saved. The driving force, which compels a citizen to submit himself to a law,
which is detrimental to him, is the sovereign power of the State. In case the
subject-matter of the law,
so enacted, is a step in the exercise of sovereign powers, the Courts would be
slow, to rescue the citizen. Where, however, the content of the law is not to
strengthen the sovereign power, but to help one of the parties to a transaction,
it would be the bounden duty of the Court to ensure that a citizen is not forced
to come under a regime, which he did not agree for. When this is the approach
even to a law, the subsidiary step, such as merging of an agency, which was not
under the purview of the Sarfaesi Act, with the one, which is under it, cannot
be taken so lightly, or in a routine manner.
The well-settled principle, that what is not permitted to be done directly,
cannot be done indirectly; gets attracted.
The question as to whether a loan transaction, which is outside the
purview of the Sarfaesi Act, can be brought under its purview, without the
consent of the borrower, has not been examined by the Hon'ble Supreme Court, so
far, to our knowledge. The opinion of the High Courts on this aspect is not
uniform. The Orissa High Court in Subash Chandra Panda v. State of Orissa2 took
the view that such a step is not permissible. The Allahabad High Court in
Yogendra Kumar Jaiswal and others v. C.M.M and others3 took a different view.
In Subash Chandra Panda v. State of Orissa (2 supra),
a Division Bench of the Orissa High Court took note of the definition of the
expressions "financial institution" under Section 2(m) of the Sarfaesi Act and
its ramifications and ultimately held that if a borrower was not a financial
institution, as defined under Section 2(m), when the transaction took place, the
lending agency cannot invoke the provisions of that Sarfaesi Act on the basis of
any subsequent arrangement.
In Yogendra Kumar Jaiswal and others v. C.M.M and
others (3 supra), a Division Bench of the Allahabad High Court however took the
view that the Sarfaesi Act is more procedural than substantive in nature and in
the context of enforcement of security; the extant procedure can be followed.
With great respect to the Hon'ble Judges of the said High Courts, we are of the
view that it would be an act of oversimplification to treat the entire gamut of
the Sarfaesi Act, as mere procedure.
In clear and categorical terms, the Sarfaesi Act prescribes a new legal
regime in the context of the foreclosure of mortgages, which is totally
different from the one, under the T.P Act.
Section 13, which is kingpin of the Sarfaesi Act, commences with the non-
obstante clause by making a specific reference to Sections 69 and 69-A of the
T.P. Act. It is too nave to contend that Section 69 or 69-A of the T.P Act is
procedural in nature. They create valuable substantive rights and create
corresponding obligations upon the parties to a mortgage. Whenever a mortgage
comes into existence, the parties thereto agree upon certain terms within the
framework of law. If the law in relation thereto is altered, during the
subsistence of mortgage, the rights of the parties to the transaction remain
unaffected by the amendment. The change in law would only apply to the
transactions, that take place after it has come into force.
Howsoever tempting it may be, to put all objections of this nature under the
carpet, to receive the applause from the gigantic financial institutions, Courts
cannot be party to such an exercise.
It is only the prerogative of the Executive or the Legislature to take extreme
postures, such as wiping off the loans to the tune of thousands of crores
advanced from public funds; on the one hand, and to offer an ordinary borrower
to the alter of neo-rich kabuliwalas, on the other hand. Directly or
indirectly, the Parliament has provided for one procedure for recovery of
amounts advanced to ordinary citizens, and another for affluent and highly
placed financial institutions. Courts are supposed to view the changes in law
from the strict principles of interpretation,
not carried away by the other temptations. The intention of the legislature
becomes relevant on different occasions, and not when the complaint is that the
rights of the parties are trampled.
It is not as if that the petitioners are extended any facility or
favouritism on account of the 4th respondent being required to abide by the
conditions, under which the loan was borrowed.
Unfortunately, an impression is
being created among the citizens, that approaching an ordinary Court of law is a
purposeless exercise, or a punishment to a party. The curious part of it is
that even Courts of higher order are giving this impression, may be
subconsciously, in the course of deliberations outside the Court for promoting alternative
dispute resolution mechanisms, or making observations in some judgments. It is
an indirect way of belittling the existing system and telling the people that,
there is one legal system for elite, and the other, for ordinary and
inconsequential public.
The Allahabad High Court appears to have been convinced by the judgment of
the Uttaranchal High Court in Unique Engineering Works v. Union of India (UOI)
and Ors.4 In that judgment also, Their Lordships were mostly impressed by the
fact that India is a signatory to several international conventions and our
gross fiscal deficit is approximately 10% GDP per annum.
The relevant paragraph
reads,
"Para-24: We do not find any merit in the arguments advanced on behalf of the
petitioner. It was firstly argued before us that the impugned NPA Act, 2002 has
been enacted at the behest of the World Bank and at the behest of International
Financial Institutions. In this connection, reliance is placed on Statement of
Objects and Reasons to the impugned NPA Act, 2002. As stated above India is a
signatory to several International Conventions. Our gross fiscal deficit is
approximately 10% of GDP per annum. This is a very high ratio. One of the
contributory factors is high amount of non-performing assets. As stated above
the non-performing assets are to the tune of Rs.90,000/- crores which is not a
good indication for banks/financial institutions. Therefore, the Act has been
enacted as a remedial measure to reduce non-performing assets. Hence, there is
no merit in the argument that the impugned NPA Act, 2002 is enacted at the
behest of the World Bank, I.M.F. and other Financial Institutions. Hence, there
is no merit in the first ground of attack."
With due respect to the learned Judges, we are of the view that it is no
part of the duty of the Constitutional Courts to administer the finances, and we
totally disagree with the view expressed by them, that the Sarfaesi Act is
retroactive in nature. Whether one employs the term "retroactive" or
"retrospective", it cannot be permitted to govern the transactions, which were
outside its purview, when they were made.
We respectfully agree with the ratio of the judgment of the Orissa High
Court in Subash Chandra Panda v. State of Orissa (2 supra).
There are other subsidiary questions, that arise for consideration.
The two O.Ps, i.e. 377 and 378 of 2013 have already been filed in the name
of IBFSL, under Section 9 of the Arbitration Act. The arbitration clause that
existed in the agreements has been extracted in the preceding paragraphs.
Section 8 of the Arbitration Act makes it amply clear that if the agreement
between the parties contains an arbitration clause, institution of other
proceedings is prohibited. When a suit cannot be instituted by a party to an
agreement, which contains an arbitration clause, the initiation of proceedings
before other fora becomes equally untenable. The proceedings under the Sarfaesi
Act cannot be placed on a higher pedestal. The borrower of a secured financial
institution, as defined under Section 2(f) of the Sarfaesi Act cannot be treated
as a super Court, to be kept on a higher pedestal in the context of Section 8 of the
Arbitration Act. When arbitration proceedings have already been initiated, the
4th respondent cannot be permitted, ignore them and proceed against the
security.
We therefore, allow the writ petition and set aside the proceedings
initiated by the 4th respondent, against the petitioners. It is, however, left
open to it to take other steps in accordance with law, for recovery of its
loans.
After the judgment was pronounced, learned counsel for the 4th respondent
submitted that the possession of the security has been taken in July 2013 and
status quo in respect thereof may be maintained for a reasonable period.
We direct that status quo obtaining as on today shall be maintained for a period
of four weeks.
The miscellaneous petitions filed in the writ petition shall also stand disposed
of. There shall be no order as to costs.
_________________________
L.NARASIMHA REDDY, J.
_________________________
M.S.K. JAISWAL, J.
Dt.04-02-2014
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