INDIABULLS HOUSING FINANCE LIMITED versus M/S. DECCAN CHRONICLE HOLDINGS LIMITED AND OTHERS on 23 February 2018

[2018] 1 S.C.R. 1096SUPREME COURT REPORTS

AINDIABULLS HOUSING FINANCE LIMITED

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M/S. DECCAN CHRONICLE HOLDINGS LIMITEDAND OTHERS

(Civil Appeal No. 18 of 2018)

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FEBRUARY 23, 2018

[A. K. SIKRI AND ASHOK BHUSHAN, JJ.]

Securitisation and Reconstruction of Financial Assests andEnforcement of Security Interest Act, 2002:

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ss.2(1)(f), 2(1)(zb), 2(1)(zf) and 2(1)(zd), and 13(1) and (4)– Loan granted to respondent (borrower) – By a non-financialcompany (not covered under 2002 Act) – The company subsequentlymerged with appellant-company (a financial company covered by2002 Act) – For recovery of loan initiation of proceedings underD2002 Act – Held by High Court that the provisions of 2002 couldnot be invoked because the company which had granted the loanwas not covered by 2002 Act at the time of granting loan – Onappeal, held: On sanction of the scheme of merger/amalgamation,all loans, recoveries, security, interest, financial documents etc. inEfavour of the predecessor company got transferred to and stoodvested in the appellant-company – Thus, the borrowers became theborrowers of the appellant-company – The debt with underlyingsecurities was the asset of the predecessor company got it had rightto transfer/assign its assets to any person without seeking consentof the borrower – Therefore, respondent would be treated asF‘borrower’; arrangement would be classified as ‘securityarrangement’; the agreements created ‘security interest’ andappellant became ‘secured creditor’ under 2002 Act.

s.13(1) and (4) – Proceedings under – Whether barred if casefiled u/s. 9 of Arbitration Act, invoking arbitration clause – Held:G2002 Act being a special enactment and Arbitration Act being astatute of general nature, 2002 Act will be placed on higher pedestal– Merely because steps are taken under general law, remedy underspecial stature cannot be foreclosed – Arbitration and ConciliationAct, 1996 – s.9.

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INDIABULLS HOUSING FINANCE LIMITED v. M/S. DECCANCHRONICLE HOLDINGS LIMITED

Allowing the appeal, the Court

HELD: 1. Proceedings under the Securities andReconstruction of Financial Assests and Enforcement of SecurityInterest Act, 2002 (SARFAESI Act) are to be placed on highpedestal. SARFAESI Act is a special enactment which was enactedby the Parliament to provide speedy remedy to the banks andfinancial institutions without recourse to the court of law. On theother hand, the Arbitration and Conciliation Act, in contrast, is astatute of general nature. Merely because steps are taken underthis general law would not mean that remedy under the specialstatute is foreclosed. [Para 11] [1105-A-C]

Transcore v. Union of India & Anr. [2006] 9 Suppl.SCR 785 : (2008) 1 SCC 125 – relied on.

2.1 The loan/debts/financial assets stood vested in theappellant pursuant to the amalgamation scheme filed by the twocompanies under Sections 391 and 394 of the Companies Act,1956 whereunder the predecessor company got amalgamated withthe appellant. On sanction of the scheme of amalgamation, allloans, recoveries, security, interest, financial documents, etc. infavour of the predecessor company got transferred to and stoodvested in the appellant including the loans given by thepredecessor company to respondent borrowers, debtsrecoverable by the predecessor company from respondentborrowers, security documents executed by respondentborrowers in favour of the predecessor company, etc. On thesanctioning of the scheme, the respondent borrowers becamethe borrowers of the appellant as if the financial assistance wasgranted by the appellant to the respondent borrowers. [Paras 33and 34] [1121-E-F; 1120-G-H]

Saraswati Industrial Syndicate Ltd. v. Commissioner ofIncome Tax [1990] Suppl. SCR 332 : (1990) Suppl.SCC 675 – relied on.

2.2 The debt with underlying securities is the asset of thepredecessor company and that the predecessor company had rightto transfer/assign its assets to any person without seeking consentof the borrower. Such transfer/assignment is recognized. [Para35] [1121-G]

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[2018] 1 S.C.R.

AICICI Bank Limited v. Official Liquidator of APS StarIndustries and others [2010] 12 SCR 644 : (2010) 10SCC 1 – relied on.

2.3 It is too farfetched to say that just to realise the duesfrom the respondents, the predecessor company and the appellantBdevised the plan of merger so as to attract the provisions ofSARFAESI Act. [Para 37] [1122-C]

2.4 It will also not be correct to say that if the loan is allowedto be brought within the SARFAESI Act only because of mergerand the appellant is allowed to take recourse under the SARFAESICAct, it would affect substantive rights of the contesting borrowersunder Sections 69 and 69A of the Transfer of Property Act. [Paras10 and 39] [1104-E-F]

Mardia Chemicals Ltd. & Ors. v. Union of India & Ors.[2004] 3 SCR 982 : (2004) 4 SCC 311 ; United BankDof India v. Satyawati Tondon and Others [2010] 9 SCR1 : (2010) 8 SCC 110 – relied on.

2.5 Therefore, respondent No.1 would be treated as‘borrower’ within the meaning of Section 2(1)(f) of the SARFAESIAct; the arrangement would be classified as ‘security arrangement’Eunder Section 2(1)(zb); the agreements created ‘security interest’under Section 2(1)(zf); and the appellant became ‘securedcreditor’ within the meaning of Section 2(1)(zd) of SARFAESIAct. [Para 43] [1127-C-D]

M.D. Frozen Foods Exports Pvt. Ltd. & Ors. v. HeroFFincorp Ltd. (2017) SCC Online SC 1211 – relied on.

P.K. Unni v. Nirmala Industries & Others [1990] 1 SCR483 : (1990) 2 SCC 378 ; Union of India v. ElphinStone Spinning and Weaving Company Limited & Others[2001] 1 SCR 221 : (2001) 4 SCC 139 ; Delhi FinancialCorporation and another v. Rajiv Anand and othersG(2004) 11 SCC 625 ; Rishabh Agro Industries Limitedv. P.N.B. Service Limited [2000] 1 Suppl. SCR 38 :(2000) 5 SCC 515 ; Padma Sundara Rao v. State ofTamil Nadu (2002) 3 SCC 533 – held inapplicable.

Sarthak Builders Pvt. Ltd., Chinta, Arunodaya Market,Cuttack & Another v. Orissa Rural DevelopmentCorporation Limited, Station Square, Bhubaneswar &5 Ors. (2014) SCC Online Ori 75 ; Trimbak DamodharRaipurkar v. Assaram Hiraman Patil, [1962] 1 Suppl.SCR 700 – referred to.

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West v. Gwynne, 1911 2 Ch 1 at pp. 11, 12 ; In reAthlumney. Ex parte Wilson, (1898) 2 Q.B. 547 –referred to.

Case Law Reference

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CIVIL APPELLATE JURISDICTION : Civil Appeal No. 18 of2018.

From the Judgment and Order dated 04.02.2014 of the High CourtGof Judicature of Andhra Pradesh at Hyderabad in Writ Petition No. 37381of 2013

WITH

Contempt Petition (Civil) Nos. 756 and 1693 of 2017.

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1100SUPREME COURT REPORTS

ADr. A.M. Singhvi, Shyam Divan, Sr. Advs, Rishi Agrawala, AnkurSaigal, Rishabh Parikh, Nishant Rao, E. C. Agrawala, Advs for theAppellant.

M/S. Ap & J Chambers, Kuldeep S. Parihar, H. S. Parihar,C. Mukund, M. B. Elakkumanan, Bijoy Kumar Jain, Ms. Pooja Dhar,BRahul Pratap, Jay Kumar Bhardwaj, Damyanti Juneja, Sudhansu P., Advsfor the Respondents.

The Judgment of the Court was delivered by

A. K. SIKRI, J. 1. This appeal preferred by Indiabulls HousingFinance Limited, in which the main contesting parties are M/s. DeccanCChronicle Holdings Limited and its Directors (other respondents are theproforma parties), questions the correctness and legality of the judgmentand order dated February 04, 2014 passed by the High Court of Judicatureof Andhra Pradesh at Hyderabad. The impugned judgment is passed bythe High Court in the writ petition which was filed by the contestingDrespondents questioning the validity of actions taken by the appellantagainst the contesting respondents under the provisions of theSecuritisation and Reconstruction of Financial Assets and Enforcementof Security Interest Act, 2002 (hereinafter referred to as the ‘SARFAESIAct’) for recovery of the loan amounts, along with interest, which arepayable by the contesting respondents to the appellant.E2. The High Court has accepted the challenge laid by thecontesting respondents holding that:

(a) loan agreements contained arbitration clauses which wereinvoked by the appellant with the filing of cases under Section9 of the Arbitration and Conciliation Act, 1996. In viewFthereof, initiation of any other proceedings under theSARFAESI Act are impermissible in law; and (b) the loan was initially given by M/s. Indiabulls Financial ServicesLimited (for short, ‘IBFSL’) on December 08, 2011 andJanuary 05, 2012 in the sum of Rs.50 crores each. IBFSLGwas not a banking company or financial institution within themeaning of Section 2(d) and (m) of the SARFAESI Act and,therefore, it had no jurisdiction to take any steps by invokingthe provisions of this Act. However, IBFSL got merged withthe appellant company. No doubt, the appellant is a financial H

INDIABULLS HOUSING FINANCE LIMITED v. M/S. DECCANCHRONICLE HOLDINGS LIMITED [A. K. SIKRI, J.]

institution under the SARFAESI Act. However, since IBFSLhad no right to initiate any action under the said Act, as asuccessor-in-interest, the appellant steps into the shoes ofIBFSL and, therefore, it also cannot initiate any action underthe SARFAESI Act. If that is allowed, held the High Court,substantive rights of the contesting respondents which accruedto them under Sections 69 and 69A of the Transfer of PropertyAct, 1882 would be adversely affected, which cannot becountenanced.

3. Having given the glimpse of the transaction which was enteredinto between the parties and also that of the basis of the impugnedjudgment of the High Court, we proceed to discuss the details on whichthe lis is founded.

4. We may start with the narration of brief facts of the case,which are as follows:

On April 18, 2005, IBFSL was granted a certificate under Section45-I(a) of the Reserve Bank of India Act, 1934 to operate as a Non-Banking Financial Company and, thus, act as a financial institution underthe said Act. The appellant was incorporated on May 10, 2005. Theappellant and IBFSL were sister concerns. The appellant was granteda registration certificate dated December 28, 2005 to commence thebusiness of housing finance institution. The Central Government, videNotification dated September 19, 2007, issued under Section 2(1)(m) ofSARFAESI Act, specified the petitioner as a ‘financial institution’ forthe purposes of the said Act. IBFSL disbursed a loan amount of Rs.50crores to the respondent borrowers vide Loan Agreement datedDecember 08, 2011. The loan facility was secured by the respondentborrowers by creating equitable mortgage over various properties. IBFSLalso disbursed a further amount of Rs.50 crores to the respondentborrowers vide Loan Agreement dated January 05, 2012. The loanfacility was security by the respondent borrowers again by creatingequitable mortgage over various properties.

5. Sometime in the year 2012, it was proposed that IBFSL getsmerged with the appellant. After completing the formalities of informingthe National Housing Bank as well as the Reserve Bank of India aboutthe aforesaid proposal and furnishing them copies of the scheme ofmerger, the appellant filed a petition under sections 391-394 of the Indian A

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ACompanies Act, 1956 in the High Court of Delhi for merger of IBFSLwith the appellant. The High Court, after taking various steps under theprovisions of the Companies Act, ultimately sanctioned the scheme ofarrangement between IBFSL and the appellant vide orders datedDecember 12, 2012. With the sanction of the aforesaid merger, the assetsand liabilities of IBFSL stood vested in the appellant, with IBFSL beingBdissolved without winding up on its amalgamation with the appellant.Pursuant to the said merger, the borrowers of IBFSL, including therespondent borrowers, became the borrowers of the appellant.

6. Insofar as respondent borrowers are concerned, they hadcommitted default in repaying the loans advanced to them by IBFSLCand, therefore, even before the merger, IBFSL had issued loan recallnotice dated September 18, 2012 to the respondent borrowers. On March04, 2013, the loan accounts of the contesting respondents and other co-borrowers were classified as Non Performing Assets (NPA) by IBFSL.On March 06, 2013, IBFSL filed a petition under Section 9 of theDArbitration Act, being O.P. No. 377 and 378 of 2013, before III Addl.Chief Judge, City Civil Court, Hyderabad for securing the amount payableby the respondent borrowers. An ad-interim injunction restraining therespondent borrowers and other co-borrowers therein from alienatingthe scheduled properties to third parties in any manner was passed. Thescheme of arrangement as approved by the order dated April 12, 2013Ewas filed with the Registrar of Companies on March 08, 2013 makingthe same effective. The appellant, having stepped into the shoes ofIBFSL in respect of the debts owed to IBFSL, issued notice dated March08, 2013 under Section 13(2) of SARFAESI Act to the respondentborrowers and other co-borrowers. This was followed by notice datedFMay 29, 2013 issued under Section 13(4) of SARFAESI Act in respectof taking over symbolic possession of the mortgaged properties.

7. The respondents herein, on July 17, 2013, filed SA No. 182 of2013 before the Debts Recovery Tribunal, Chandigarh under Section 17of SARFAESI Act challenging the action of the appellant invoking theGmeasures under Section 13(4) of SARFAESI Act. Within few daysthereafter, i.e. on July 30, 2013, respondent No.1 also field Writ PetitionNo. 22688 of 2013 challenging, inter alia, the declaration of the accountas NPA and passing of orders by the Chief Metropolitan Magistrateunder Section 14 of the SARFAESI Act. Similar writ petitions, being H

Writ Petition Nos. 22689 and 22934 of 2013 were filed by respondentNo.1’s employee union and respondent No.4 respectively. On September04, 2013, the respondents herein unconditionally withdrew SA No. 182of 2013 filed before the Debts Recovery Tribunal, Chandigarh. Theappellant issued an auction notice dated November 21, 2013 informingthe respondent borrowers that auction of the Banjara Hill properties ofthe respondent borrowers would be conducted on December 24, 2013.At this juncture, on December 19, 2013, respondent Nos.1 to 5 filed WritPetition No. 37381 of 2012 before the High Court.

8. In the aforesaid writ petition, the High Court passed interimorders dated December 20, 2013, directing the parties to maintain statusquo. Another interim order dated December 23, 2013 was passeddirecting the appellant not to finalise the auction though it was permittedto receive bids. However, the said auction could not fructify as, accordingto the appellant, some miscreants belonging to the contesting respondentscame on the spot and threatened the intending purchasers and eventried to beat the representatives of the respondents and, therefore, theauction had to be cancelled. The appellant thereafter issued anotherauction notice dated December 28, 2013 fixing the auction dates as 3[rd]and 4[th] February 2014 in respect of Banjara Hills and Raj Bhavan Roadproperties respectively. Auction in respect of Banjara Hills propertiestook place on February 03, 2014 as per the date fixed. However, thesale was not finalised on account f the interim orders passed by the HighCourt. On February 04, 2014, when the next property was to be auctioned,the High Court gave the judgment in Writ Petition No. 37381 of 2013filed by the contesting respondents allowing the said writ petition andsetting aside the entire invocation of the SARFAESI Act by the appellant.

9. As already pointed out above, the High Court is swayed by thefact that after IBFSL had invoked the provisions of Section 9 of theArbitration Act and filed petitions in this behalf, having regard to thearbitration agreement between the parties, it was not open to the appellantto take recourse to the provisions of SARFAESI Act. This aspect isconcluded in the following manner:

“The two O.Ps. i.e. 377 and 378 of 2013 have already been filedin the name of IBFSL, under Section 9 of the Arbitration Act.The arbitration clause that existed in the agreements has beenextracted in the preceding paragraphs. Section 8 of the Arbitration AB

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AAct makes it amply clear that if the agreement between the partiescontains an arbitration clause, institution of other proceedings isprohibited. When a suit cannot be instituted by a party to anagreement, which contains an arbitration clause, the initiation ofproceedings before other fora becomes equally untenable. Theproceedings under the SARFAESI Act cannot be placed on aBhigher pedestal. The borrower of a secured financial institution,as defined under Section 2(f) of the SARFAESI Act cannot betreated as a super Court, to be kept on a higher pedestal in thecontext of Section 8 of the Arbitration Act. When arbitrationproceedings have already been initiated, the 4[th] respondent cannotCbe permitted, ignore them and proceed against the security.”

10. The High Court noted that the contesting respondents had notborrowed any amount from the appellant. The loan was taken fromIBFSL, which was not under the purview of SARFAESI Act. Therefore,at the time of taking the loan, the respondent borrowers knew that IBFSLDwould not be in a position to take recourse to the SARFAESI Act. Withthe merger of IBFSL with the appellant, ruled the High Court, the loantransaction which was outside the purview of the SARFAESI Act, couldnot be brought under its purview without the consent of the borrower.According to the High Court, SARFAESI Act prescribes a new legalregime and if the loan is allowed to be brought within the SARFAESIEAct only because of merger and the appellant is allowed to take recourseunder the SARFAESI Act, it would affect substantive rights of thecontesting borrowers under Sections 69 and 69A of the Transfer ofProperty Act. In the process, the High Court has noted that the viewsof the Uttarakhand High Court and the Allahabad High Court are contrary Fto the aforesaid view. However, it chose to agree with the view takenby the Division Bench of the Orissa High Court in deciding that provisionsof SARFAESI Act will not be applicable. Pertinently, Full Bench of theOrissa High Court itself has overruled its Division Bench judgment.

11. We may record at this stage that the main ground on whichGnotice issued under SARFAESI Act had been quashed is theimpermissibility of invoking the provisions of the Act by the appellantherein who took over the assets and liabilities of IBFSL on merger.Insofar as the other issue, namely, provisions of SARFAESI Act couldnot be invoked as IBFSL had already invoked the machinery under theArbitration Act by filing petitions under Section 9 thereof is concerned,H

this is decided as the subsidiary issue. Insofar as this subsidiary questionis concerned, learned counsel for the respondent did not press this groundseriously and it was virtually conceded that merely because IBFSL hadfiled applications under Section 9 of the Arbitration Act, would not createa bar for proceeding under the SARFAESI Act. Even otherwise, wefind that the High Court was in error in deciding this issue. It is notcorrect to say that proceedings under the SARFAESI Act cannot beplaced on high pedestal. We find that SARFAESI Act is a specialenactment which was enacted by the Parliament to provide speedyremedy to the banks and financial institutions without recourse to thecourt of law. On the other hand, the Arbitration and Conciliation Act, incontrast, is a statute of general nature. Merely because steps are takenunder this general law would not mean that remedy under the specialstatute is foreclosed. If at all, legal position is just the reverse. Matter isno more res integra and is covered by a judgment of this Court inTranscore v. Union of India & Anr.[1]In that case, after analysing theprovisions of the Recovery of Debts Due to Banks and FinancialInstitutions Act, 1993, the Court summed up the position as under:

“18. On analysing the above provisions of the DRT Act, we findthat the said Act is a complete code by itself as far as recovery ofdebt is concerned. It provides for various modes of recovery. Itincorporates even the provisions of the Second and ThirdSchedules to the Income Tax Act, 1961. Therefore, the debt dueunder the recovery certificate can be recovered in various ways.The remedies mentioned therein are complementary to each other.The DRT Act provides for adjudication. It provides for adjudicationof disputes as far as the debt due is concerned. It covers securedas well as unsecured debts. However, it does not rule outapplicability of the provisions of the TP Act, in particular Sections69 and 69-A of that Act. Further, in cases where the debt is securedby pledge of shares or immovable properties, with the passage oftime and delay in the DRT proceedings, the value of the pledgedassets or mortgaged properties invariably falls. On account ofinflation, value of the assets in the hands of the bank/FI invariablydepletes which, in turn, leads to asset-liability mismatch. Thesecontingencies are not taken care of by the DRT Act and, therefore,Parliament had to enact the NPA Act, 2002.”

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A12. Thereafter, the Court analysed the provisions of SARFAESIAct and then noted, in paragraph 37 of the judgment, three points ofdetermination which arose for consideration. We are concerned withpoint No.1 formulated therein, which reads as under:

“(i) Whether the banks or financial institutions having elected toBseek their remedy in terms of the DRT Act, 1993 can still invokethe NPA Act, 2002 for realising the secured assets withoutwithdrawing or abandoning the OA filed before DRT under theDRT Act.”

13. After detailed discussion on this question, the Court rejectedCthe applicability of the doctrine of election by holding that simply becauseremedy under the provisions of the DRT Act was availed would notmean that the financial institution was precluded from taking steps underSARFAESI Act. Thus, answering the question in the affirmative, essenceof the discussion can be captured in the following paragraphs:

D“64. In the light of the above discussion, we now examine thedoctrine of election. There are three elements of election, namely,existence of two or more remedies; inconsistencies between suchremedies and a choice of one of them. If any one of the threeelements is not there, the doctrine will not apply. According toAmerican Jurisprudence, 2d, Vol. 25, p. 652, if in truth there isEonly one remedy, then the doctrine of election does not apply. Inthe present case, as stated above, the NPA Act is an additionalremedy to the DRT Act. Together they constitute one remedyand, therefore, the doctrine of election does not apply. Evenaccording to Snell’s Principles of Equity (31st Edn., p. 119), theFdoctrine of election of remedies is applicable only when there aretwo or more co-existent remedies available to the litigants at thetime of election which are repugnant and inconsistent. In any event,there is no repugnancy nor inconsistency between the tworemedies, therefore, the doctrine of election has no application.

G65. In our view, the judgments of the High Courts which havetaken the view that the doctrine of election is applicable areerroneous and liable to be set aside.

66. We have already analysed the scheme of both the Acts.Basically, the NPA Act is enacted to enforce the interest in the H

financial assets which belongs to the bank/FI by virtue of thecontract between the parties or by operation of common lawprinciples or by law. The very object of Section 13 of the NPAAct is recovery by non-adjudicatory process. A secured assetunder the NPA Act is an asset in which interest is created by theborrower in favour of the bank/FI and on that basis alone theNPA Act seeks to enforce the security interest by non-adjudicatoryprocess. Essentially, the NPA Act deals with the rights of thesecured creditor. The NPA Act proceeds on the basis that thedebtor has failed not only to repay the debt, but he has also failedto maintain the level of margin and to maintain value of the securityat a level is the other obligation of the debtor. It is this otherobligation which invites applicability of the NPA Act. It is for thisreason, that Sections 13(1) and 13(2) of the NPA Act proceed onthe basis that security interest in the bank/FI needs to be enforcedexpeditiously without the intervention of the court/tribunal; thatliability of the borrower has accrued and on account of default inrepayment, the account of the borrower in the books of the bankhas become non-performing. For the above reasons, the NPAAct states that the enforcement could take place by non-adjudicatory process and that the said Act removes all fettersunder the above circumstances on the rights of the securedcreditor.”

14. With this, we now address the central issue on which detailedarguments were advanced by both the parties. We may note that ourdiscussion is not on a virgin field as the terrain has already been coveredby this Court in M.D. Frozen Foods Exports Pvt. Ltd. & Ors. v. HeroFincorp Ltd.[2] The learned senior counsel appearing for the appellanthad submitted that this case, which is directly on point, not only laysdown the proposition that even successor-in-interest (like the appellantherein) would be authorised to invoke the provisions of SARFAESI Acteven if the original lender was not a financial institution covered by theAct, it has specifically overruled the judgment of the Andhra PradeshHigh Court, which is the subject matter of appeal at hand. On that basis,it was submitted that it was not even necessary to have further probe inthe matter.

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1108SUPREME COURT REPORTS

A15. Learned counsel for the appellant is factually correct in pointingout that the impugned judgment of the Andhra Pradesh High Court isspecifically noted and overruled by this Court in M.D. Frozen Foods.Therefore, it would be apt to discuss the said judgment in the first instance.

16. In M.D. Frozen Foods the appellants had borrowed moniesBfor their business from the respondents against security of immovableproperties by creating an equitable mortgage. Loan agreement containedan arbitration clause. Since the appellant defaulted in making the paymentand the account became NPA, the respondent invoked the arbitrationclause on November 16, 2016. However, three months before thisinvocation, a notification was issued on August 05, 2016 specifying certainCNon-Financial Banking Companies (NFBCs) covered under clause (f)of Section 45-I of the RBI Act, with assets of more than Rs. 500 croresand above, as financial institutions and directing that the provisions ofSARFAESI Act shall apply to such financial institutions with theexceptions of provisions of Sections 13 to 19 of that Act. Sections 13 toD19 were made applicable, as per the notification, only to such securityinterest which is obtained for securing repayment of secured debt withprincipal amount of Rs.1 crore and above. The respondent wasspecifically covered by the said notification which was issued in exerciseof powers conferred under sub-clause (iv) of clause (m) of sub-section(1) of Section 2 read with Section 31A of the SARFAESI Act. In viewEof the aforesaid notification, the respondent issued a notice under Section13(2) of SARFAESI Act on November 24, 2016 for one of the sevenproperties mortgaged to it against the aforesaid loan which was advancedto the appellants.

17. Having regard to the aforesaid facts in M.D. Frozen Foods,Fthe Court formulated following three questions which had arisen forconsideration:

“A. Whether the arbitration proceedings initiated by the respondentcan be carried on along with the SARFAESI proceedingssimultaneously?GB. Whether resort can be had to Section 13 of the SARFAESIAct in respect of debts which have arisen out of a loan agreement/mortgage created prior to the application of the SARFAESI Actto the respondent?

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C. A linked question to question (ii), whether the lender can invokethe SARFAESI Act provision where its notification as financialinstitution under Section 2(1)(m) has been issued after the accountbecame an NPA under Section 2(1)(o) of the said Act?”

These questions amply demonstrate that the instant case is virtuallyon the same footing.

18. Insofar as question ‘A’ is concerned, the Court categoricallyheld that merely because remedy under the Arbitration Act was invokedwas no ground to debar the respondent from taking recourse to theSARFAESI Act. The discussion from that judgment is reproduced below:

“26. A claim by a bank or a financial institution, before the specifiedlaws came into force, would ordinarily have been filed in the CivilCourt having the pecuniary jurisdiction. The setting up of the DebtRecovery Tribunal under the RDDB Act resulted in this specialisedTribunal entertaining such claims by the banks and financialinstitutions. In fact, suits from the civil jurisdiction were transferredto the Debt Recovery Tribunal. The Tribunal was, thus, analternative to a Civil Court recovery proceedings.

27. On the SARFAESI Act being brought into force seeking torecover debts against security interest, a question was raisedwhether parallel proceedings could go on under the RDDB Actand the SARFAESI Act. This issue was clearly answered in favourof such simultaneous proceedings in Transcore v. Union of India.A later judgment in Mathew Varghese v. M. Amritha Kumaralso discussed this issue in the following terms:

“45. A close reading of Section 37 shows that the provisions ofthe SARFAESI Act or the Rules framed thereunder will be inaddition to the provisions of the RDDB Act. Section 35 of theSARFAESI Act states that the provisions of the SARFAESI Actwill have overriding effect notwithstanding anything inconsistentcontained in any other law for the time being in force. Therefore,reading Sections 35 and 37 together, it will have to be held that inthe event of any of the provisions of the RDDB Act not beinginconsistent with the provisions of the SARFAESI Act, theapplication of both the Acts, namely, the SARFAESI Act and theRDDB Act, would be complementary to each other. In this context, A

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reliance can be placed upon the decision in Transcore v. Unionof India [(2008) 1 SCC 125 : (2008) 1 SCC (Civ) 116]. In para 64it is stated as under after referring to Section 37 of the SARFAESIAct: (SCC p. 162)

“64. … According to American Jurisprudence, 2d, Vol. 25, p. 652,Bif in truth there is only one remedy, then the doctrine of electiondoes not apply. In the present case, as stated above, the NPA Actis an additional remedy to the DRT Act. Together they constituteone remedy and, therefore, the doctrine of election does not apply.Even according to Snell’s Principles of Equity (31[st] Edn., p. 119),the doctrine of election of remedies is applicable only when thereCare two or more co-existent remedies available to the litigants atthe time of election which are repugnant and inconsistent. In anyevent, there is no repugnancy nor inconsistency between the tworemedies, therefore, the doctrine of election has no application.”

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46. A reading of Section 37 discloses that the application of theSARFAESI Act will be in addition to and not in derogation of theprovisions of the RDDB Act. In other words, it will not in anyway nullify or annul or impair the effect of the provisions of theRDDB Act. We are also fortified by our above statement of lawEas the heading of the said section also makes the position clearthat application of other laws are not barred. The effect of Section37 would, therefore, be that in addition to the provisions containedunder the SARFAESI Act, in respect of proceedings initiated underthe said Act, it will be in order for a party to fall back upon theFprovisions of the other Acts mentioned in Section 37, namely, theCompanies Act, 1956, the Securities Contracts (Regulation) Act,1956, the Securities and Exchange Board of India Act, 1992, theRecovery of Debts Due to Banks and Financial Institutions Act,1993, or any other law for the time being in force.”

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28. These observations, thus, leave no manner of doubt and theissue is no more res integra, especially keeping in mind theprovisions of Sections 35 and 37 of the SARFAESI Act, whichread as under:

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“35. The provisions of this Act to override other laws. -The provisions of this Act shall have effect, notwithstanding H

anything inconsistent therewith contained in any other law forthe time being in force or any instrument having effect by virtueof any such law.”

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“37. Application of other laws not barred. - The provisionsof this Act or the rules made thereunder shall be in addition to,and not in derogation of, the Companies Act, 1956 (1 of 1956),the Securities Contracts (Regulation) Act, 1956 (42 of 1956),the Securities and Exchange Board of India Act, 1992 (15 of1992), the Recovery of Debts Due to Banks and FinancialInstitutions Act, 1993 (51 of 1993) or any other law for thetime being in force.”

29. The aforesaid two Acts are, thus, complimentary to each otherand it is not a case of election of remedy.

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33. SARFAESI proceedings are in the nature of enforcementproceedings, while arbitration is an adjudicatory process. In theevent that the secured assets are insufficient to satisfy the debts,the secured creditor can proceed against other assets in executionagainst the debtor, after determination of the pending outstandingamount by a competent forum.

34. We are, thus, unequivocally of the view that the judgments ofthe Full Bench of the Orissa High Court in Sarthak BuildersPvt. Ltd. v. Orissa Rural Development Corporation Limited,the Full Bench of the Delhi High Court in HDFC Bank Limited v.Satpal Singh Bakshi (supra) and the Division Bench of theAllahabad High Court in Pradeep Kumar Gupta v. State of U.P.lay down the correct proposition of law and the view expressedby the Andhra Pradesh High Court in Deccan ChroniclesHoldings Limited v. Union of India following the overruleddecision of the Orissa High Court in Subash Chandra Panda v.State of Orissa does not set forth the correct position in law.SARFAESI proceedings and arbitration proceedings, thus, cango hand in hand.”

19. Insofar as questions ‘B’ and ‘C’ are concerned, the Courtagain referred to the conflicting opinion of different High Courts and A

B

C

D

E

F

G

H

Aafter discussion held that the SARFAESI Act was retroactive in natureand, therefore, once this Act came into force, the respondent in the saidcase had right to invoke the provisions of the Act even if loan agreementwas entered into and mortgage created prior to the coming into forcethe SARFAESI Act. Paragraphs 36 to 38 of the judgment need to bereproduced in this behalf, which are to the following effect:B

“36. The SARFAESI Act was brought into force to solve theproblem of recovery of large debts in NPAs. Thus, the veryrationale for the said Act to be brought into force was to providean expeditious procedure where there was a security interest. Itcertainly did not apply retrospectively from the date when it cameinto force. The question is whether, the Act being applicable tothe respondent at a subsequent date and thereby allowing therespondent to utilize its provisions with regards to a past debt,would make any difference to this principle. We are of the viewthat the answer to the same is in the negative.

C

D

37. The Act applies to all the claims which would be alive at thetime when it was brought into force. Thus, qua the respondent orother NBFCs, it would be applicable similarly from the date whenit was so made applicable to them.

38. The Full Bench of the Orissa High Court in Sarthak BuildersEPvt. Ltd. v. Orissa Rural Development Corporation Limited(supra) has, in fact, succinctly sets out this aspect. No doubt, tillthe respondent was not a ‘financial institution’ within the meaningof Section 2(1)(m)(iv) of the SARFAESI Act, it was not a ‘securedcreditor’ as defined under Section 2(1)(zd) of the SARFAESIFAct and, thus, could not invoke the provisions of the SARFAESIAct. However, the right to proceed under the SARFAESI Actaccrued once the Notification was issued. The Full Bench referredto a Division Bench judgment of the Uttarakhand High Court inUnique Engineering Works v. Union of India which dealt withthe issue of retrospectivity and retroactivity. In case of retroactivity,Gthe Parliament takes note of the existing conditions and promulgatesthe remedial measures to rectify those conditions. In fact theSARFAESI Act, in our view, was to remedy such a position andprovide a measure against secured interests. The scheme of theSARFAESI Act, is really to provide a procedural remedy againstsecurity interest already created. Therefore, an existing borrower, E

G

H

who had been granted financial assistance was covered underSection 2(f) of the said Act as a ‘borrower’. Not only thisexpression, the definition clauses dealing with ‘debt securities’,‘financial assistance’, ‘financial assets’, etc., clearly convey thelegislative intent that the SARFAESI Act applies to all existingagreements irrespective of the fact whether the lender was anotified ‘financial institution’ on the date of the execution of theagreement with the borrower or not. The scheme of theSARFAESI Act sets out an expeditious, procedural methodology,enabling the bank to take possession of the property for non-payment of dues, without intervention of the court. The mere factthat a more expeditious remedy is provided under the SARFAESIAct does not mean that it is substantive in character or has createdan altogether new right. To accept the argument of the appellantswould imply that they have an inherent right to delay theenforcement against the security interest!”

20. The Court also referred to certain judgments laying downdistinction between retroactive and retrospective operation of a particularstatute[3].[.]

21. The fact situation was, thus, almost the same in the instantcase. The only difference is that here the loan was initially sanctionedby IBFSL which stands merged with the appellant and the appellant isthe successor-in-interest which is covered by the SARFAESI Act. Inthe aforesaid case, though the entity which disbursed the loan remainedthe same, however, at the time when the loan was given by the respondentto the appellant it was not a financial institution covered under theSARFAESI Act, which status was attained by the respondent in view ofnotification dated August 05, 2016 issued much after the loan wasdisbursed to the appellant therein. This does not make any difference inthe outcome, as discussed in detailed hereinafter.

22. Learned counsel for respondents could not dispute that theaforesaid judgment covers the present case in its entirety. This positionhad to be accepted by them having regard to the fact that the judgmentof the High Court which is impugned in these proceedings has beenspecifically overruled by this Court in M.D. Frozen Foodscase. Faced 3West v. Gwynne, 1911 2 Ch 1 at pp. 11, 12

Trimbak Damodhar Raipurkar v. Assaram Hiraman Patil, 1962 Supp (1) SCR 700In re Athlumney. Ex parte Wilson, (1898) 2 Q.B. 547

AB

C

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Awith this stark reality staring at the face of the respondents, a valianteffort was made to convince this Bench to take a contrary view and inthe process it was submitted that in M.D. Frozen Foods some importantlegal aspects have not been considered.

23. To put it pithily, the submissions of the learned counsel forBrespondents revolved around the following aspects:

(i) The appellant had neither advanced nor granted any loan orfinancial assistance to respondent no. 1 and, therefore, it couldnot have invoked the provisions of the SARFAESI Act.

(ii) Respondent no. 1 could not be treated as ‘borrower’ as definedCunder Section 2(1)(f) of the SARFAESI Act read with Sections2(1)(c) and 2(1)(m) of that Act. Submission was that therespondent no. 1 is not a person who has been granted financialassistance by any Bank or Financial Institution nor can respondentno. 1 be brought under the ambit of the definition of being aperson who has given a guarantee or create any mortgage orDpledge as security for the financial assistance granted by anyBank or Financial Institution, i.e., the appellant. It was arguedthat the definition of the term borrower is clear and un-ambiguousitself and the rule of literal interpretation deserves to be deployed.The respondents relied upon the dictum in P.K. Unni vs. NirmalaIndustries & Others[4] wherein it is held that the Court mustEproceed on an assumption that the legislature did not make amistake and that it intended to say what it said it was furtherheld that even assuming that there was a defect or omission inthe words used by the legislature, the Court would not go to itssaid to correct or make up the deficiency. The Court cannot addFwords to a statute or read words into it which are not there,especially when the literal reading produces an intelligible result.The courts are not authorised to alter a word so as to produce a“casus omissus”. Support from the judgment in the matter ofUnion of India v. Elphin Stone Spinning and WeavingCompany Limited & Others[5] was also taken in this behalf.GThe learned counsel also referred to yet another case, viz., DelhiFinancial Corporation and another v. Rajiv Anand andothers[6] wherein this aforesaid principle is reiterated.

4 (1990) 2 SCC 3785 (2001) 4 SCC 139H6 (2004) 11 SCC 625

(iii) The loan agreements dated December 08, 2011 and January05, 2012 which were entered into between respondent No. 1and IBFSL cannot be classified as ‘security arrangement’within the meaning of Section 2(1)(zb) of the SARFAESIAct.

(iv) These agreements did not create ‘security interest’ within theeaning of Section 2(1)(zb) of the SARFAESI Act. It wasargued that the term security assets as defined under Section2(1)(zc) of the Act means the property on which the securityinterest is created. The terms ‘security interest’ is definedunder Section 2(1)(zf) to mean right, title, interest of any kindwhatsoever upon property created in favour of a securedcreditor (as defined under Section 2(1)(zb) and includes amortgage, charge, hypothecation or assignment other thanspecified in Section 31). Similarly security agreement isdefined under Section 2(1)(zb).

The submission was that the agreements dated December

The submission was that the agreements dated December 08, 2011 and January 05, 2012 do not fall within the purviewof Section 2(a)(zb) since at the time when the said agreementswere entered into, the entity in favour of which they wereexecuted, i.e., Indiabulls Financial Services Limited, was nota secured creditor within the meaning of Section 2(1)(zd) ofthe SARFAESI Act. Under the circumstances are thenecessary ingredients of Section 13(1) and 13(2) being absent,no action could have been taken under Section 13(2) orSection 13(4) of the Act. It is this say of the respondents thatthe clauses contained in the scheme of amalgamation, firstlydo not manifest any intention to create any new right in favourof the amalgamated company. Secondly, clauses in schemeof amalgamation, albeit sanctioned by Court, cannot be raisedto the pedestal of statutory provisions creating a right in favourof subsequent acquirer of rights not statutorily provided, norcan such clauses be held to create a deeming fiction notstatutorily provided.

(v) Amalgamation of an entity not lying within the ambit ofSARFAESI Act then entity which falls within realm of thesaid Act would not entitle amalgamated entity to invoke theprovisions of SARFAESI Act, in respect of a transaction/

A

BC

D

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A

agreement entered into much prior to the amalgamation. Thesubmission was that the imprimatur created by virtue ofsanctioning of a scheme by High Court under Sections 391 to394 of the Companies Act cannot be held to create rights,liabilities and obligations which were not statutorily envisaged.It was argued that the provisions of SARFAESI Act, cannotbe held to be purely procedural, they create substantial rightin favour of the secured creditor for recovery of its dues byway of enforcement of security interest without invocationof the court. Section 13(1) creates substantive rights and byno stretch of imagination, and cannot be said to a provision,procedural in nature. The procedure for enforcement of thatsubstantial right is provided under Sub-Section (2) on thehappening of the eventuality as mentioned therein. That afurther procedure of prescribing the details in a notice is tobe given by virtue of Section 13(3) and provide for making arepresentation under Section 13(3)(A) and further providesfor a procedure for release and recovery of secured debtunder Section 13(4). In absence of a substantial right beingcreated by Section 13(1), procedural provisions contained insub-Sections (2) to (4) are meaningless as it would not providea remedy for the enforcement of substantial right createdunder Section 13(4). It would not, therefore, be correct totreat SARFAESI Act as a merely procedural statute.

B

C

D

E

24. It was submitted that this was a reverse merger inasmuch asIBFSL was a holding company and the appellant company was only asubsidiary company and holding company was sought to be amalgamatedFand merged with the subsidiary company.

25. It was also submitted that the entire exercise of merger wasundertaken to transfer loan from financial company to a financialcompany in order to take advantage of provisions of SARFAESI Act,which according to the respondents is not permissible in law. On theGaforesaid basis, the first submission of the learned counsel for respondentswas that there was no transfer and vesting of loan in the appellantcompany provisions as per the scheme. It was argued that the schemeenvisaged, under paragraph 4, that with effect from the appointed date,i.e., April 01, 2012, the amalgamating company comprising theamalgamating undertaking shall, pursuant to the sanction of the scheme H

by the High Court and compliance of statutory provisions, be and standtransferred to and vested in the amalgamated company as a going concernwithout any further act, instrument, deed, matter or thing so as to become,as and from the appointed date April 01, 2012, the undertakings of theamalgamated company by virtue of and in the manner provided in thescheme.

26. Various other clauses of the scheme were referred to, tobuttress the aforesaid submission. In this hue, it was argued that sinceas per Clause 8 of the Scheme, all suits, actions and other proceedingsincluding legal and taxation proceedings etc. are to be continued orenforced by or against the amalgamating company. The proceedingsinstituted by IBFSL under Section 9 of the Arbitration Act against therespondents would be deemed to be an act of the appellant. In otherwords, the amalgamating company can have no better and further rightthat one possesses by IBFSL.

27. The learned counsel for the respondents attempted tostrengthen the aforesaid architecture with the help of some legalprecedents. In the first instance, reference was made to the judgment inthe case of Rishabh Agro Industries Limited v. P.N.B. ServiceLimited[7]wherein this Court held as under:

“6. Learned counsel appearing for the respondent has submittedthat such an interpretation would defeat the ends of justice andmake the petitions under the Companies Act, infructuous inasmuchas any unscrupulous litigant, after suffering an order of windingup, may approach the Board merely be filing a petition andconsequently get the proceedings in the Company case stayed.Such a grievance may be justified and the submission havingsubstance but in view of the language of Sections 15 and 16 ofthe Act particularly explanation to Section 16 inserted by Act No.12 of 1994, this Court has no option but to adhere to its earlierdecision taken in Real Value Appliances (Supra). Whileinterpreting, this Court only interprets the law and cannot legislateit. If a provision of law is misused and subjected to the abuse ofprocess of law, it is for the Legislature to amend modify or repealit by having recourse to appropriate procedure, if deemednecessary.”

A

B

C

D

E

F

G

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A

It was argued that the above observations of this Court clearlynegate the submission of the appellant that because the SARFAESI Acthas been enacted to overcome the accumulated NPA in public interest,the term ‘borrower’ has to be widely construed.

28. Reliance was also placed on the Constitution Bench judgmentBin the case of Padma Sundara Rao v. State of Tamil Nadu[8]wherethis Court has held as under:

“12. The rival pleas regarding rewriting of statute and casus omissusneed careful consideration. It is well-settled principle in law thatthe court cannot read anything into a statutory provision which isCplain and unambiguous. A statute is an edict of the legislature.The language employed in a statute is the determinative factor oflegislative intent. The first and primary rule of construction is thatthe intention of the legislation must be found in the words used bythe legislature itself. The question is not what may be supposedand has been intended but what has been said. “Statutes shouldDbe construed, not as theorems of Euclid”, Judge Learned Handsaid, “but words must be construed with some imagination of thepurposes which lie behind them”. (See Lenigh Valley Coal Co.v. Yensavage [218 FR 547].) The view was reiterated in Unionof India v. Filip Tiago De Gama of Vedem Vasco De GamaE[(1990) 1 SCC 277 : AIR 1990 SC 981].

13. In D.R. Venkatchalam v. Dy. Transport Commr. [(1977) 2SCC 273 : AIR 1977 SC 842] it was observed that courts mustavoid the danger of a priori determination of the meaning of aprovision based on their own preconceived notions of ideologicalFstructure or scheme into which the provision to be interpreted issomewhat fitted. They are not entitled to usurp legislative functionunder the disguise of interpretation.

14. While interpreting a provision the court only interprets the lawand cannot legislate it. If a provision of law is misused andsubjected to the abuse of process of law, it is for the legislature toGamend, modify or repeal it, if deemed necessary. (See RishabhAgro Industries Ltd. v. P.N.B. Capital Services Ltd. [(2000) 5SCC 515]) The legislative casus omissus cannot be supplied byjudicial interpretative process. Language of Section 6(1) is plain

and unambiguous. There is no scope for reading something into it,as was done in Narasimhaiah case [(1996) 3 SCC 88] . InNanjudaiah case [(1996) 10 SCC 619] the period was furtherstretched to have the time period run from date of service of theHigh Court’s order. Such a view cannot be reconciled with thelanguage of Section 6(1). If the view is accepted it would meanthat a case can be covered by not only clause (i) and/or clause(ii) of the proviso to Section 6(1), but also by a non-prescribedperiod. Same can never be the legislative intent.

15. Two principles of construction — one relating to casus omissusand the other in regard to reading the statute as a whole — appearto be well settled. Under the first principle a casus omissus cannotbe supplied by the court except in the case of clear necessity andwhen reason for it is found in the four corners of the statute itselfbut at the same time a casus omissus should not be readily inferredand for that purpose all the parts of a statute or section must beconstrued together and every clause of a section should beconstrued with reference to the context and other clauses thereofso that the construction to be put on a particular provision makesa consistent enactment of the whole statute. This would be moreso if literal construction of a particular clause leads to manifestlyabsurd or anomalous results which could not have been intendedby the legislature. “An intention to produce an unreasonable result”,said Danckwerts, L.J., in Artemiou v. Procopiou [(1966) 1 QB878 : (1965) 3 All ER 539 : (1965) 3 WLR 1011 (CA)] (at All ERp. 544-I), “is not to be imputed to a statute if there is some otherconstruction available”. Where to apply words literally would“defeat the obvious intention of the legislation and produce a whollyunreasonable result”, we must “do some violence to the words”and so achieve that obvious intention and produce a rationalconstruction. [Per Lord Reid in Luke v. IRC [1963 AC 557 : (1963)1 All ER 655 : (1963) 2 WLR 559 (HL)] where at AC p. 577 healso observed: (All ER p. 664-I) “This is not a new problem, thoughour standard of drafting is such that it rarely emerges.”]”

29. It was contended that in light of the above-stated principlesenunciated in the Constitution Bench decision, since the language ofSection 2(1)(f) and 2(a)(zf) is unambiguous, the casus omissus cannotbe applied by a judicial interpretation process. It was submitted thatthere is no scope of reading something into, which it does not exist.

AB

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A

A30. Counsel for the respondents also placed strong reliance uponthe judgment in the ICICI Bank Limited v. Official Liquidator ofAPS Star Industries and others[9]which centres around the BankingRegulation Act, 1949 and guidelines of RBI issued on the subject of interse transfer of non-performing assets by Bank. It was held that theBanking Regulation Act, 1949 does not come in the way of such transfers.BBanks/Banking Companies are covered under SARFAESI Act in anyevent. As such, transfers inter se bank would not give rise to the questionof change in the nature of the lender leading to change in the status ofapplicability of SARFAESI Act. On that basis, it was submitted thatsuch a transfer would not change the status of a borrower who, if earlierCcreated a security interest, continues to be a borrower of another securedcreditor. However, in the present case, there is sought to be a completechange in the status of the borrower and that too without his consent.

31. The learned counsel, at the end, made a passionate plea aboutthe far reaching consequences which may ensue if the appellant isDpermitted to take recourse to the provisions of SARFAESI Act as debtswould be transferred to SARFAESI companies to take advantage ofthat enactment.

32. After considering the aforesaid submission, we are of theopinion that entire edifice is built on the pleas which are squarely answeredin M.D. Frozen Foods and there is no reason to take a different viewEtherefrom for the reasons that follow hereinafter.

33. In the instant case, loan was given by IBFSL which was not afinancial institution covered by the SARFAESI Act when the loan wasgiven. However, this entity has got merged with the appellant andappellant is a SARFAESI company. In this backdrop, the entire thrustFof the argument of the respondent is that as a successor company, theappellant cannot take advantage. In order to deal with this aspect, wewill have to first taken into consideration, the effect of such a mergerscheme as approved by the High Court. It is to be kept in mind that theloan/debts/financial assets stood vested in the appellant pursuant to theamalgamation scheme filed by the two companies under Sections 391Gand 394 of the Companies Act, 1956 whereunder the predecessorcompany, IBFSL got amalgamated with the appellant, the effect of sucha merger is explained by this Court in Saraswati Industrial SyndicateLtd. v. Commissioner of Income Tax[10] in the following manner:

9(2010) 10 SCC 1H101990(Supp) SCC 675

“5. Generally, where only one company is involved in change andthe rights of the shareholders and creditors are varied, it amountsto reconstruction or reorganisation of scheme of arrangement. Inamalgamation two or more companies are fused into one by mergeror by taking over by another. Reconstruction or ‘amalgamation’has no precise legal meaning. The amalgamation is a blending oftwo or more existing undertakings into one undertaking, theshareholders of each blending company become substantially theshareholders in the company which is to carry on the blendedundertakings. There may be amalgamation either by the transferof two or more undertakings to a new company, or by the transferof one or more undertakings to an existing company. Strictly‘amalgamation’ does not cover the mere acquisition by a companyof the share capital of other company which remains in existenceand continues its undertaking but the context in which the term isused may show that it is intended to include such an acquisition.See: Halsbury’s Laws of England (4th edition volume 7 para1539). Two companies may join to form a new company, but theremay be absorption or blending of one by the other, both amount toamalgamation. When two companies are merged and are so joined,as to form a third company or one is absorbed into one or blendedwith another, the amalgamating company loses its entity.”

34. Thus, on sanction of the scheme of amalgamation, all loans,recoveries, security, interest, financial documents, etc. in favour of IBFSLgot transferred to and stood vested in the appellant including the loansgiven by IBFSL to respondent borrowers, debts recoverable by IBFSLfrom respondent borrowers in favour of IBFSL, security documentsexecuted by respondent borrowers in favour of IBFSL, etc. On thesanctioning of the scheme, the respondent borrowers became theborrower of the appellant as if the financial assistance was granted bythe appellant to the respondent borrowers.

35. There is a force in the contention by the appellant that thedebt with underlying securities is the asset of IBFSL and that IBFSL hadright to transfer/assign its assets to any person without seeking consentof the borrower. Such transfer/assignment is recognized and that thisCourt in the case of Official Liquidator of APS Star Industries hasrecognised and upheld such an assignment.

ABC

D

E

F

G

H

A

A36. In the aforesaid backdrop, the factor which assumesimportance and has to be kept in mind is that the appellant is an assigneeof a debt through the amalgamation of original lender with the appellantwhich was effected invoking the statutory provisions of the CompaniesAct. Once this is kept in mind, there would not be any difference as faras consequences in law are concerned from the case of M.D. FrozenBFoods and this case. Therefore, M.D. Frozen Foods case would applyto the facts of this case in all force.

37. Further, it is too farfetched to argue that just to realise thedues from the respondents, IBFSL and the appellant devised the plan ofmerger so as to attract the provisions of SARFAESI Act and we are notCinclined to accept such a submission. Various judgments which are reliedupon by the respondents also would not apply as we neither find it to bea case of the Court creating any legislation or supplying any casusomissus.

38. Apart from the factual parity, even legally the arguments ofDthe respondents do not carry any weight. The view taken in M.D. FrozenFoods is that the SARFAESI Act is retroactive in nature. In the process,the Court approved the Full Bench decision of the Orissa High Court inSarthak Builders Pvt. Ltd., Chinta, Arunodaya Market, Cuttack &Another v. Orissa Rural Development Corporation Limited, StationESquare, Bhubaneswar & 5 Ors.[11]and made the following observations:

“38…In case of retroactivity, the Parliament takes note of theexisting conditions and promulgates the remedial measures torectify those conditions. In fact the SARFAESI Act, in our view,was to remedy such a position and provide a measure againstFsecured interests. The scheme of the SARFAESI Act, is really toprovide a procedural remedy against security interest alreadycreated. Therefore, an existing borrower, who had been grantedfinancial assistance was covered under Section 2(f) of the saidAct as a ‘borrower’. Not only this expression, the definition clausesdealing with ‘debt securities’, ‘financial assistance’, ‘financialGassets’, etc., clearly convey the legislative intent that theSARFAESI Act applies to all existing agreements irrespective ofthe fact whether the lender was a notified ‘financial institution’ onthe date of the execution of the agreement with the borrower or

not. The scheme of the SARFAESI Act sets out an expeditious,procedural methodology, enabling the bank to take possession ofthe property for non-payment of dues, without intervention of thecourt. The mere fact that a more expeditious remedy is providedunder the SARFAESI Act does not mean that it is substantive incharacter or has created an altogether new right. To accept theargument of the appellants would imply that they have an inherentright to delay the enforcement against the security interest!

39. The catena of judgments referred to by learned senior counselfor the appellants on substantive law not being retrospective inoperation, unless expressly stated so in the Act would, thus, haveno application to the matter in issue, in view of what we haveobserved aforesaid. On the other hand, as observed by Buckley,L.J. in West v. Gwynne, retrospective operation is one matter andinterference with existing rights is another. In that context, it wasruled that the provisions of the Conveyancing of Law and PropertyAct, 1892 were held applicable to leases containing a covenant,condition or agreement against assigning, under-letting or partingwith possession or disposing of land or property leased withoutlicense or consent to all leases whether executed before or afterthe commencement of the Act. Such a construction was held notto make the Act retrospective in operation but merely effectedthe future existing rights under all leases whether executed beforeor after the date of that Act. (Discussed in Trimbak DamodharRaipurkar v. Assaram Hiraman Patil).

40. In a similar vein, are the observations made in the case of Inre Athlumney. Ex parte Wilson, where the question posed beforethe Queen’s Division Bench was whether Section 23 of theBankruptcy Act, 1890 was retrospective in its operation. In theaforementioned context, Wright, J., speaking for the Bench,illuminatingly opined:

“Perhaps no rule of construction is more firmly establishedthan this — that a retrospective operation is not to be given toa statute so as to impair an existing right or obligation, otherwisethan as regards matter of procedure, unless that effect cannotbe avoided without doing violence to the language of theenactment. If the enactment is expressed in language which isfairly capable of either interpretation, it ought to be construed AB

C

D

E

F

G

H

A

AB

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A

as prospective only… it is a general rule that when theLegislature alters the rights of parties by taking away orconferring any right of action, its enactments, unless in expressterms they apply to pending actions, do not affect them…It issaid that there is one exception to that rule, namely, that,where enactments merely affect procedure and do notextend to rights of action, they have been held to apply toexisting rights, and it is suggested here that the alterationmade by this section is within that exception…”

B

(Emphasis supplied)

C41. Similarly, the date on which a debt is declared as an NPAwould again have no impact. We are, thus, of the view that theprovisions of the SARFAESI Act would become applicable quaalldebts owing and live when the Act became applicable to therespondent in terms of the parameters contended by learned seniorcounsel for the respondent and enlisted at serial Nos. i to iv inDpara 18.”

It, thus, follows that there is only a procedural change in respectof forum for recovery of debt and no substantive rights are affected.

39. In view of the aforesaid judgment, argument of the respondentsEherein predicated on Sections 69 and 69A of the Transfer of PropertyAct, which weighed with the High Court, is without any substance.

40. The aforesaid view also gets support from the judgment ofthis Court in Mardia Chemicals Ltd. & Ors. v. Union of India &Ors.[12]wherein the background and salient feature of the SARFAESIFAct have been extensively discussed and analysed and the Court hasalso highlighted the objective behind enacting such a legislation.

41. These sentiments are echoed in the subsequent judgment inthe case of United Bank of India v. Satyawati Tondon and Others[13]wherein it was held that the Act is intended to give impetus to industrialdevelopment in the country by providing speedy procedure of recovery.GOn account of lack of infrastructure and manpower, regular courts werenot able to cope with the speed in adjudication of recovery cases. In thelight of recommendations of the Tiwari Committee, special tribunals cameto be set up under the provisions of the Recovery of Debts Due to 12 (2004) 4 SCC 311H13(2010) 8 SCC 110

Banks and Financial Institutions Act, 1993 for recovery of hugeaccumulated NPAs of the bank loans. On the recommendations of theNarasimham Committee and Andhyarujina Committee, SARFAESI Actwas enacted to empower banks and financial institutions to takepossession of the securities and to sell them without the intervention ofthe Court. In this regard, reference may be made to the followingobservations of this Court in the case of Satyawati Tondon:

“1…With a view to give impetus to the industrial development ofthe country, the Central and State Governments encouraged thebanks and other financial institutions to formulate liberal policiesfor grant of loans and other financial facilities to those who wantedto set up new industrial units or expand the existing units. Manyhundred thousand took advantage of easy financing by the banksand other financial institutions but a large number of them did notrepay the amount of loan, etc. Not only this, they instituted frivolouscases and succeeded in persuading the civil courts to pass ordersof injunction against the steps taken by banks and financialinstitutions to recover their dues. Due to lack of adequateinfrastructure and non-availability of manpower, the regular courtscould not accomplish the task of expeditiously adjudicating thecases instituted by banks and other financial institutions forrecovery of their dues. As a result, several hundred crores ofpublic money got blocked in unproductive ventures.

2. In order to redeem the situation, the Government of Indiaconstituted a committee under the Chairmanship of Shri T. Tiwarito examine the legal and other difficulties faced by banks andfinancial institutions in the recovery of their dues and suggestremedial measures. The Tiwari Committee noted that the existingprocedure for recovery was very cumbersome and suggested thatspecial tribunals be set up for recovery of the dues of banks andfinancial institutions by following a summary procedure. The TiwariCommittee also prepared a draft of the proposed legislation whichcontained a provision for disposal of cases in three months andconferment of power upon the Recovery Officer for expeditiousexecution of orders made by adjudicating bodies.

xx xx xx

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A16. Thus, the Act intends to provide remedy in respect of pre -existing loans. The interpretation that the Act will apply only tofuture debt transactions defeats the very purpose of law ofreducing the non-performing assets. This object is clearlymentioned in the Statement of Objects and Reasons. As noted inthe case of Satyaivati Tondon amount of rupees one lakh twentyBthousand crores was due to the banks in the year 2001 which hadadversely affected the economy of the country. Obviously, theAct is intended to recover the said pre-existing loans by themachinery provided under the SARFAESI Act. The pre-existingloans are not excluded from the purview of the Act. Similarly, theCobject of notifying the financial institution in question is to enablesuch institution to avail the provisions of SARFAESI Act in respectof existing loans. This salient object of the Act does not appear tohave been noticed in Subash Chandra Panda.”

42. We may also reproduce the following discussion from thatDjudgment which completely answers most of the arguments raised bythe learned counsel for the respondents:

“17. Further, the settled principle of interpretation that while thestatute affecting the substantive rights is presumed to beprospective, a statute changing the forum of remedy and theEprocedure is retrospective has also not been kept in mind. Theseprinciples are the basis of the view taken in the UniqueEngineering Works and Pradeep Kumar Gupta. The saidconsiderations are valid and legitimate, supported by ample authorityof binding precedents of the Apex Court, to which reference maybe made and relevant observations extracted:

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1. Rafiquennessa v. Lal Bahadur Chetri, AIR 1964 SC 1511

“9….. Mr. Chatterjee has relied upon the well-known observationsmade by Wright, J. in (Re Athlumney ex parte or Wilson (1898)2 QBD 547) when the learned Judge said that it is a general ruleGthat when the legislature alters the rights of parties by taking awayor conferring any right of action, its enactments, unless in expressterms they apply to pending actions, do not affect them. He addedthat there was one exception to that rule, namely that whereenactments merely affect procedure and do not extend torights of action, they have been held to apply to existing H

rights. In order to make the statement of the law relatingto the relevant rule of construction which has to be adoptedin dealing with the effect of statutory provisions in thisconnection, we ought to add that retrospective operationof a statutory provision can be inferred even in cases wheresuch retroactive operation appears to be clearly implicit inthe provision construed in the context where it occurs. Inother words, a statutory provision is held to be retroactiveeither when it is so declared by express terms, or theintention to make it retroactive clearly follows from therelevant words and the context in which they occur.”

(emphasis added)”

(emphasis added)”

43. The aforesaid discussion, thus, leads us to conclude thatrespondent No.1 would be treated as ‘borrower’ within the meaning ofSection 2(1)(f) of the SARFAESI Act; the arrangement would beclassified as ‘security arrangement’ under Section 2(1)(zb); theagreements created ‘security interest’ under Section 2(1)(zf); and theappellant became ‘secured creditor’ within the meaning of Section2(1)(zd) of SARFAESI Act.

44. As a result, we hold that judgment of the High Court iserroneous and set aside the same. This appeal is allowed. No ordersneed to be passed in the contempt petitions, which stand disposed of.

Kalpana K. Tripathy

Appeal allowed.

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