REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 18 OF 2018

INDIABULLS HOUSING FINANCE  LIMITED .....APPELLANT(S)

VERSUS

M/S. DECCAN CHRONICLE HOLDINGS LIMITED AND OTHERS .....RESPONDENT(S)

W I T H

CONTEMPT PETITION (CIVIL) NO. 756 OF 2017

A N D

CONTEMPT PETITION (CIVIL) NO. 1693 OF 2017

J U D G M E N T

A.K. SIKRI, J.

This  appeal  preferred  by  Indiabulls  Housing  Finance

Limited,  in  which the main contesting parties are M/s.  Deccan

Chronicle Holdings Limited and its Directors (other respondents

are the proforma parties), questions the correctness and legality

of the judgment and order dated February 04, 2014 passed by

the High Court of Judicature of Andhra Pradesh at Hyderabad.

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The impugned judgment is passed by the High Court in the writ

petition  which  was  filed  by  the  contesting  respondents

questioning the validity of actions taken by the appellant against

the  contesting  respondents  under  the  provisions  of  the

Securitisation  and  Reconstruction  of  Financial  Assets  and

Enforcement of Security Interest Act, 2002 (hereinafter referred to

as the ‘SARFAESI Act’) for recovery of the loan amounts, along

with interest, which are payable by the contesting respondents to

the appellant.

2) The High Court has accepted the challenge laid by the contesting

respondents holding that:

(a) loan agreements contained arbitration clauses which were

invoked  by  the  appellant  with  the  filing  of  cases  under

Section 9 of the Arbitration and Conciliation Act, 1996.  In

view thereof, initiation of any other proceedings under the

SARFAESI Act are impermissible in law; and

(b) the  loan  was  initially  given  by  M/s.  Indiabulls  Financial

Services Limited (for short, ‘IBFSL’) on December 08, 2011

and January 05,  2012 in  the sum of  Rs.50 crores each.

IBFSL was not a banking company or financial institution

within  the  meaning  of  Section  2(d)  and  (m)  of  the

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SARFAESI Act and, therefore, it had no jurisdiction to take

any steps by invoking the provisions of this Act.  However,

IBFSL got merged with the appellant company.  No doubt,

the appellant is a financial institution under the SARFAESI

Act. However, since IBFSL had no right to initiate any action

under the said Act, as a successor-in-interest, the appellant

steps into the shoes of IBFSL and, therefore, it also cannot

initiate  any  action  under  the  SARFAESI  Act.   If  that  is

allowed,  held  the  High  Court,  substantive  rights  of  the

contesting  respondents  which  accrued  to  them  under

Sections 69 and 69A of the Transfer of Property Act, 1882

would  be  adversely  affected,  which  cannot  be

countenanced.

3) Having given the glimpse of the transaction which was entered

into  between  the  parties  and  also  that  of  the  basis  of  the

impugned judgment of the High Court, we proceed to discuss the

details on which the 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

Section 45-I(a) of the Reserve Bank of India Act, 1934 to operate

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as  a  Non-Banking  Financial  Company  and,  thus,  act  as  a

financial  institution  under  the  said  Act.   The  appellant  was

incorporated on May 10, 2005.  The appellant and IBFSL were

sister  concerns.   The  appellant  was  granted  a  registration

certificate dated December 28, 2005 to commence the business

of  housing  finance  institution.   The  Central  Government,  vide

Notification dated September 19, 2007, issued under Section 2(1)

(m)  of  SARFAESI  Act,  specified  the  petitioner  as  a  ‘financial

institution’ for the purposes of the said Act.  IBFSL disbursed a

loan amount of Rs.50 crores to the respondent borrowers vide

Loan Agreement dated December 08, 2011.  The loan facility was

secured  by  the  respondent  borrowers  by  creating  equitable

mortgage over various properties.  IBFSL also disbursed a further

amount of Rs.50 crores to the respondent borrowers vide Loan

Agreement  dated  January  05,  2012.   The  loan  facility  was

security by the respondent borrowers again by creating equitable

mortgage over various properties.

5) Sometime in  the  year  2012,  it  was  proposed  that  IBFSL gets

merged with  the appellant.   After  completing the formalities  of

informing the National Housing Bank as well as the Reserve Bank

of India about the aforesaid proposal and furnishing them copies

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of  the  scheme  of  merger,  the  appellant  filed  a  petition  under

sections 391-394 of the Indian Companies Act, 1956 in the High

Court of Delhi for merger of IBFSL with the appellant.  The High

Court,  after  taking  various  steps  under  the  provisions  of  the

Companies Act, ultimately sanctioned the scheme of arrangement

between IBFSL and the appellant vide orders dated December

12, 2012.  With the sanction of the aforesaid merger, the assets

and liabilities of IBFSL stood vested in the appellant, with IBFSL

being dissolved without winding up on its amalgamation with the

appellant.  Pursuant to the said merger, the borrowers of IBFSL,

including the respondent borrowers, became the borrowers of the

appellant.

6) Insofar  as  respondent  borrowers  are  concerned,  they  had

committed  default  in  repaying  the  loans  advanced to  them by

IBFSL and, therefore, even before the merger, IBFSL had issued

loan recall notice dated September 18, 2012 to the respondent

borrowers.   On  March  04,  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 the Arbitration Act, being

O.P. No. 377 and 378 of 2013, before III Addl. Chief Judge, City

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Civil Court, Hyderabad for securing the amount payable by the

respondent  borrowers.   An ad-interim injunction restraining the

respondent  borrowers  and  other  co-borrowers  therein  from

alienating the scheduled properties to third parties in any manner

was passed.  The scheme of arrangement as approved by the

order  dated  April  12,  2013  was  filed  with  the  Registrar  of

Companies on March 08, 2013 making the same effective.  The

appellant, having stepped into the shoes of IBFSL in respect of

the debts owed to IBFSL, issued notice dated March 08, 2013

under  Section  13(2)  of  SARFAESI  Act  to  the  respondent

borrowers and other co-borrowers.  This was followed by notice

dated May 29, 2013 issued under Section 13(4) of SARFAESI Act

in respect of taking over symbolic possession of the mortgaged

properties.

7) The respondents herein, on July 17, 2013, filed SA No. 182 of

2013  before  the  Debts  Recovery  Tribunal,  Chandigarh  under

Section  17  of  SARFAESI  Act  challenging  the  action  of  the

appellant  invoking  the  measures  under  Section  13(4)  of

SARFAESI Act.  Within few days thereafter, i.e. on July 30, 2013,

respondent  No.1  also  field  Writ  Petition  No.  22688  of  2013

challenging, inter alia, the declaration of the account as NPA and

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passing  of  orders  by  the  Chief  Metropolitan  Magistrate  under

Section 14 of the SARFAESI Act.  Similar writ petitions, being Writ

Petition Nos. 22689 and 22934 of 2013 were filed by respondent

No.1’s  employee union and respondent  No.4 respectively.   On

September  04,  2013,  the  respondents  herein  unconditionally

withdrew SA No. 182 of  2013 filed before the Debts Recovery

Tribunal,  Chandigarh.   The  appellant  issued an  auction  notice

dated November 21,  2013 informing the respondent  borrowers

that  auction  of  the  Banjara  Hill  properties  of  the  respondent

borrowers would be conducted on December 24, 2013.  At this

juncture, on December 19, 2013, respondent Nos.1 to 5 filed Writ

Petition No. 37381 of 2012 before the High Court.

8) In the aforesaid writ petition, the High Court passed interim orders

dated December 20, 2013, directing the parties to maintain status

quo.   Another  interim  order  dated  December  23,  2013  was

passed directing the appellant not to finalise the auction though it

was permitted to receive bids.  However, the said auction could

not  fructify  as,  according  to  the  appellant,  some  miscreants

belonging to the contesting respondents came on the spot and

threatened the intending purchasers and even tried to beat the

representatives  of  the  respondents  and,  therefore,  the  auction

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had to  be  cancelled.   The  appellant  thereafter  issued another

auction notice dated December 28, 2013 fixing the auction dates

as 3rd and 4th February 2014 in respect of Banjara Hills and Raj

Bhavan  Road  properties  respectively.   Auction  in  respect  of

Banjara Hills properties took place on February 03, 2014 as per

the date fixed.  However, the sale was not finalised on account f

the interim orders passed by the High Court.  On February 04,

2014, when the next property was to be auctioned, the High Court

gave the judgment in Writ Petition No. 37381 of 2013 filed by the

contesting respondents allowing the said writ petition and setting

aside the entire invocation of the SARFAESI Act by the appellant.

9) As already pointed out above, the High Court is swayed by the

fact that after IBFSL had invoked the provisions of Section 9 of

the Arbitration Act and filed petitions in this behalf, having regard

to the arbitration agreement between the parties, it was not open

to the appellant to take recourse to the provisions of SARFAESI

Act.  This aspect is concluded in the following manner:

“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

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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.”

10) The High Court noted that  the contesting respondents had not

borrowed any amount from the appellant.   The loan was taken

from IBFSL, which was not under the purview of SARFAESI Act.

Therefore,  at  the  time  of  taking  the  loan,  the  respondent

borrowers knew that  IBFSL would not  be in a position to take

recourse to the SARFAESI Act.  With the merger of IBFSL with

the appellant,  ruled the High Court,  the loan transaction which

was  outside  the  purview  of  the  SARFAESI  Act,  could  not  be

brought under its purview without the consent of  the borrower.

According to the High Court,  SARFAESI Act  prescribes a new

legal regime and if the loan is allowed to be brought within the

SARFAESI  Act  only  because  of  merger  and  the  appellant  is

allowed to take recourse under the SARFAESI Act, it would affect

substantive rights of the contesting borrowers under Sections 69

and 69A of the Transfer of Property Act.  In the process, the High

Court has noted that the views of the Uttarakhand High Court and

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the  Allahabad  High  Court  are  contrary  to  the  aforesaid  view.

However, it chose to agree with the view taken by the Division

Bench of  the  Orissa  High  Court  in  deciding  that  provisions of

SARFAESI Act will not be applicable.  Pertinently, Full Bench of

the  Orissa  High  Court  itself  has  overruled  its  Division  Bench

judgment.

11) We may record at this stage that the main ground on which notice

issued  under  SARFAESI  Act  had  been  quashed  is  the

impermissibility  of  invoking  the  provisions  of  the  Act  by  the

appellant herein who took over the assets and liabilities of IBFSL

on  merger.   Insofar  as  the  other  issue,  namely,  provisions  of

SARFAESI  Act  could  not  be  invoked  as  IBFSL  had  already

invoked the machinery under the Arbitration Act by filing petitions

under  Section  9  thereof  is  concerned,  this  is  decided  as  the

subsidiary  issue.   Insofar  as  this  subsidiary  question  is

concerned, learned counsel for the respondent did not press this

ground  seriously  and  it  was  virtually  conceded  that  merely

because  IBFSL had  filed  applications  under  Section  9  of  the

Arbitration Act, would not create a bar for proceeding under the

SARFAESI Act.  Even otherwise, we find that the High Court was

in  error  in  deciding  this  issue.   It  is  not  correct  to  say  that

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proceedings under the SARFAESI Act cannot be placed on high

pedestal.   We find that  SARFAESI  Act  is  a special  enactment

which was enacted by the Parliament to provide speedy remedy

to  the  banks  and  financial  institutions  without  recourse  to  the

court of law.  On the other hand, the Arbitration and Conciliation

Act, in contrast, is a statute of general nature.  Merely because

steps  are  taken  under  this  general  law  would  not  mean  that

remedy under the special  statute is  foreclosed.  If  at  all,  legal

position is just the reverse.  Matter is no more res integra and is

covered by a judgment of this Court in  Transcore  v.  Union of

India & Anr.1  In that case, after analysing the provisions of the

Recovery of Debts Due to Banks and Financial Institutions Act,

1993, the Court summed up the position as under:

“18.  On analysing  the  above provisions  of  the  DRT Act, we find that the said Act is a complete code by itself  as  far  as  recovery  of  debt  is  concerned.  It provides for various modes of recovery. It incorporates even  the  provisions  of  the  Second  and  Third Schedules to the Income Tax Act, 1961. Therefore, the debt  due  under  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 adjudication of disputes as far as the debt due is concerned. It covers secured as well as unsecured debts. However, it does not  rule out  applicability  of  the provisions of  the TP Act,  in  particular  Sections  69  and  69-A of  that  Act. Further, in cases where the debt is secured by pledge of shares or immovable properties, with the passage of time and delay in the DRT proceedings, the value of the pledged assets or mortgaged properties invariably

1  (2008) 1 SCC 125

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falls. On account of inflation, value of the assets in the hands of the bank/FI invariably depletes which, in turn, leads to asset-liability mismatch. These contingencies are not taken care of by the DRT Act and, therefore, Parliament had to enact the NPA Act, 2002.”

12) Thereafter, the Court analysed the provisions of SARFAESI Act

and then noted, in paragraph 37 of the judgment, three points of

determination which arose for consideration.  We are concerned

with point No.1 formulated therein, which reads as under:

“(i)  Whether the banks or financial institutions having elected to seek their remedy in terms of the DRT Act, 1993 can still  invoke the NPA Act, 2002 for realising the secured assets without withdrawing or abandoning the OA filed before DRT under the DRT Act.”

13) After detailed discussion on this question, the Court rejected the

applicability  of  the  doctrine  of  election  by  holding  that  simply

because remedy under the provisions of the DRT Act was availed

would not mean that the financial institution was precluded from

taking steps under SARFAESI Act.  Thus, answering the question

in the affirmative, essence of the discussion can be captured in

the following paragraphs:

“64.  In  the  light  of  the  above  discussion,  we  now examine  the  doctrine  of  election.  There  are  three elements of election, namely, existence of two or more remedies;  inconsistencies  between  such  remedies and a choice of one of them. If any one of the three elements  is  not  there,  the  doctrine  will  not  apply. According to American Jurisprudence, 2d, Vol. 25, p. 652,  if  in  truth  there  is  only  one  remedy,  then  the doctrine  of  election  does  not  apply.  In  the  present case, as stated above, the NPA Act is an additional

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remedy to the DRT Act. Together they constitute one remedy and, therefore,  the doctrine of election does not  apply.  Even  according  to Snell's  Principles  of Equity (31st Edn., p. 119), the doctrine of election of remedies  is  applicable  only  when  there  are  two  or more co-existent remedies available to the litigants at the  time  of  election  which  are  repugnant  and inconsistent. In any event, there is no repugnancy nor inconsistency  between  the  two  remedies,  therefore, the doctrine of election has no application.

65.  In  our  view,  the  judgments  of  the  High  Courts which have taken the view that the doctrine of election is applicable are erroneous 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 financial  assets which belongs to the bank/FI by virtue of the contract between the parties or by operation of common law principles or by law. The very object of Section 13 of the NPA Act is recovery by non-adjudicatory process. A secured asset under the NPA Act is an asset in which interest is created by the borrower in favour of  the bank/FI  and on that  basis alone  the  NPA  Act  seeks  to  enforce  the  security interest  by non-adjudicatory process. Essentially, the NPA Act deals with the rights of the secured creditor. The NPA Act proceeds on the basis that the debtor has failed not only to repay the debt, but he has also failed to maintain the level of margin and to maintain value of the security at a level is the other obligation of the  debtor.  It  is  this  other  obligation  which  invites applicability of the NPA Act. It is for this reason, that Sections 13(1) and 13(2) of the NPA Act proceed on the basis that security interest in the bank/FI needs to be enforced expeditiously without the intervention of the  court/tribunal;  that  liability  of  the  borrower  has accrued and on account of default in repayment, the account of the borrower in the books of the bank has become non-performing. For the above reasons, the NPA Act states that the enforcement could take place by  non-adjudicatory  process  and  that  the  said  Act removes all fetters under the above circumstances on the rights of the secured creditor.”

14) With this,  we now address the central  issue on which detailed

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arguments were advanced by both the parties.  We may note that

our discussion is not on a virgin field as the terrain has already

been covered by this Court in M.D. Frozen Foods Exports Pvt.

Ltd. & Ors.  v.  Hero Fincorp Ltd.2  The learned senior counsel

appearing for the appellant had submitted that this case, which is

directly on point,  not  only lays down the proposition that  even

successor-in-interest  (like  the  appellant  herein)  would  be

authorised to invoke the provisions of SARFAESI Act even if the

original lender was not a financial institution covered by the Act, it

has specifically  overruled the judgment  of  the Andhra Pradesh

High 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 in the matter.

15) Learned counsel for the appellant is factually correct in pointing

out  that  the  impugned  judgment  of  the  Andhra  Pradesh  High

Court is specifically 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 monies for

their  business  from  the  respondents  against  security  of

2  (2017) SCC Online SC 1211

Civil Appeal No. 18 of 2018 Page 14 of 42

immovable properties by creating an equitable mortgage.  Loan

agreement contained an arbitration clause.  Since the appellant

defaulted in making the payment and the account became NPA,

the respondent invoked the arbitration clause on November 16,

2016.   However,  three  months  before  this  invocation,  a

notification  was  issued  on  August  05,  2016  specifying  certain

Non-Financial  Banking  Companies  (NFBCs)  covered  under

clause (f) of Section 45-I of the RBI Act, with assets of more than

Rs. 500 crores and above, as financial institutions and directing

that the provisions of SARFAESI Act shall apply to such financial

institutions with the exceptions of provisions of Sections 13 to 19

of that Act.  Sections 13 to 19 were made applicable, as per the

notification,  only to such security interest  which is obtained for

securing repayment of secured debt with principal amount of Rs.1

crore and above.  The respondent was specifically covered by the

said notification which was issued in exercise of 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  view of  the

aforesaid  notification,  the  respondent  issued  a  notice  under

Section 13(2) of SARFAESI Act on November 24, 2016 for one of

the seven properties mortgaged to it against the aforesaid loan

which was advanced to the appellants.

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17) Having regard to the aforesaid facts in  M.D. Frozen Foods, the

Court formulated following three questions which had arisen for

consideration:

“A. Whether the arbitration proceedings initiated by the respondent  can  be  carried  on  along  with  the SARFAESI proceedings simultaneously?

B.  Whether  resort  can be had to  Section 13 of  the SARFAESI Act in respect of debts which have arisen out of a loan agreement/mortgage created prior to the application of the SARFAESI Act to the respondent?

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

These questions amply demonstrate that the instant case is

virtually on the same footing.

18) Insofar as question ‘A’ is concerned, the Court categorically held

that  merely  because  remedy  under  the  Arbitration  Act  was

invoked  was  no  ground  to  debar  the  respondent  from  taking

recourse  to  the  SARFAESI  Act.   The  discussion  from  that

judgment is reproduced below:

“26. A claim by a bank or a financial institution, before the  specified  laws came into  force,  would  ordinarily have been filed in the Civil Court having the pecuniary jurisdiction.  The  setting  up  of  the  Debt  Recovery Tribunal  under  the  RDDB  Act  resulted  in  this specialised  Tribunal  entertaining  such claims by the banks and financial institutions. In fact, suits from the civil jurisdiction were transferred to the Debt Recovery

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Tribunal.  The Tribunal was, thus, an alternative to a Civil Court recovery proceedings.

27. On  the  SARFAESI  Act  being  brought  into  force seeking to recover debts against  security  interest,  a question  was  raised  whether  parallel  proceedings could go on under the RDDB Act and the SARFAESI Act. This issue was clearly answered in favour of such simultaneous  proceedings  in Transcore v. Union  of India.  A  later  judgment  in Mathew  Varghese v. M. Amritha  Kumar also  discussed  this  issue  in  the following terms:

“45. A close reading of Section 37 shows that the provisions  of  the  SARFAESI  Act  or  the  Rules framed  thereunder  will  be  in  addition  to  the provisions  of  the  RDDB  Act.  Section  35  of  the SARFAESI  Act  states  that  the  provisions  of  the SARFAESI  Act  will  have  overriding  effect notwithstanding anything inconsistent contained in any  other  law  for  the  time  being  in  force. Therefore, reading Sections 35 and 37 together, it will have to be held that in the event of any of the provisions of the RDDB Act not being inconsistent with  the  provisions  of  the  SARFAESI  Act,  the application  of  both  the  Acts,  namely,  the SARFAESI  Act  and  the  RDDB  Act,  would  be complementary  to  each  other.  In  this  context, reliance  can  be  placed  upon  the  decision in Transcore v. Union of India [(2008) 1 SCC 125 : (2008) 1 SCC (Civ) 116]. In para 64 it is stated as under  after  referring  to  Section  37  of  the SARFAESI Act: (SCC p. 162)

“64. … According to American Jurisprudence, 2d, Vol. 25, p. 652, if in truth there is only one remedy, then the doctrine of election does not apply. In  the  present  case,  as  stated  above, the  NPA Act  is  an  additional  remedy  to  the DRT Act. Together they constitute one remedy and,  therefore,  the  doctrine  of  election  does not apply. Even according to Snell's Principles of  Equity (31st Edn.,  p.  119),  the  doctrine  of election of  remedies is  applicable only  when there  are  two  or  more  co-existent  remedies available to the litigants at the time of election which are repugnant and inconsistent. In any

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event,  there  is  no  repugnancy  nor inconsistency  between  the  two  remedies, therefore,  the  doctrine  of  election  has  no application.”

(emphasis added)

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

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

“35.  The provisions of  this  Act  to  override other  laws.  - The  provisions  of  this  Act  shall have  effect,  notwithstanding  anything inconsistent  therewith  contained  in  any  other law for the time being in force or any instrument having effect by virtue of any such law.”

… .… .… .….

“37.  Application  of  other  laws  not  barred. - The provisions of  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  of  1992),  the

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Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) or any other law for the time being in force.”

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

xx                xx                xx

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

34. We are,  thus, unequivocally of  the view that  the judgments of the Full Bench of the Orissa High Court in Sarthak  Builders  Pvt.  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  the Allahabad  High  Court  in Pradeep  Kumar Gupta v. State of U.P. lay down the correct proposition of law and the view expressed by the Andhra Pradesh High  Court  in Deccan  Chronicles  Holdings Limited v. Union  of  India following  the  overruled decision 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, can go hand in hand.”

19) Insofar as questions ‘B’ and ‘C’ are concerned, the Court again

referred  to  the  conflicting opinion  of  different  High Courts  and

after discussion held that the SARFAESI Act was retroactive in

nature  and,  therefore,  once  this  Act  came  into  force,  the

respondent in the said case had right to invoke the provisions of

the Act even if loan agreement was entered into and mortgage

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created  prior  to  the  coming  into  force  the  SARFAESI  Act.

Paragraphs 36 to 38 of the judgment need to be reproduced in

this behalf, which are to the following effect:

“36.  The  SARFAESI  Act  was  brought  into  force  to solve the problem of recovery of large debts in NPAs. Thus, the very rationale for the said Act to be brought into  force  was  to  provide  an  expeditious  procedure where there was a security interest. It certainly did not apply retrospectively from the date when it came into force.  The  question  is  whether,  the  Act  being applicable to the respondent at a subsequent date and thereby allowing the respondent to utilize its provisions with regards to a past debt, would make any difference to this principle. We are of the view that the answer to the same is in the negative.

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

38. The  Full  Bench  of  the  Orissa  High  Court in Sarthak  Builders  Pvt.  Ltd. v. Orissa  Rural Development Corporation Limited (supra) has, in fact, succinctly  sets  out  this  aspect.  No  doubt,  till  the respondent was not a ‘financial  institution’ within the meaning of Section 2(1)(m)(iv) of the SARFAESI Act, it was not a ‘secured creditor’ as defined under Section 2(1)(zd)  of  the  SARFAESI  Act  and,  thus,  could  not invoke the provisions of the SARFAESI Act. However, the right to proceed under the SARFAESI Act accrued once  the  Notification  was  issued.  The  Full  Bench referred  to  a  Division  Bench  judgment  of  the Uttarakhand  High  Court  in Unique  Engineering Works v. Union of India which dealt  with the issue of retrospectivity and retroactivity. In case of retroactivity, the Parliament  takes  note of  the  existing conditions and  promulgates  the  remedial  measures  to  rectify those  conditions.  In  fact  the  SARFAESI  Act,  in  our view,  was to remedy such a position and provide a measure against secured interests. The scheme of the SARFAESI  Act,  is  really  to  provide  a  procedural

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remedy  against  security  interest  already  created. Therefore,  an  existing  borrower,  who  had  been granted  financial  assistance  was  covered  under Section 2(f) of the said Act as a ‘borrower’. Not only this  expression,  the  definition  clauses  dealing  with ‘debt  securities’,  ‘financial  assistance’,  ‘financial assets’, etc., clearly convey the legislative intent that the SARFAESI Act applies to all existing agreements irrespective  of  the  fact  whether  the  lender  was  a notified  ‘financial  institution’  on  the  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  of  the  property  for  non- payment of dues, without intervention of the court. The mere fact that a more expeditious remedy is provided under  the  SARFAESI  Act  does  not  mean  that  it  is substantive in character or has created an altogether new right.  To accept the argument of  the appellants would imply that they have an inherent right to delay the enforcement against the security interest!”

20) The  Court  also  referred  to  certain  judgments  laying  down

distinction between retroactive and retrospective operation of a

particular statute3.

21) The fact situation was, thus, almost the same in the instant case.

The only difference is that here the loan was initially sanctioned

by  IBFSL  which  stands  merged  with  the  appellant  and  the

appellant  is  the  successor-in-interest  which  is  covered  by  the

SARFAESI Act.  In the aforesaid case, though the entity which

disbursed  the  loan  remained  the  same,  however,  at  the  time

3 West v. Gwynne, 1911 2 Ch 1 at pp. 11, 12 Trimbak Damodhar Raipurkar v. Assaram Hiraman Patil, 1962 Supp (1) SCR 700 In re Athlumney. Ex parte Wilson, (1898) 2 Q.B. 547

Civil Appeal No. 18 of 2018 Page 21 of 42

when the loan was given by the respondent to the appellant it

was not a financial institution covered under the SARFAESI Act,

which  status  was  attained  by  the  respondent  in  view  of

notification dated August 05, 2016 issued much after the loan was

disbursed  to  the  appellant  therein.   This  does  not  make  any

difference in the outcome, as discussed in detailed hereinafter.

22) Learned  counsel  for  respondents  could  not  dispute  that  the

aforesaid judgment covers the present case in its entirety.  This

position had to be accepted by them having regard to the fact that

the  judgment  of  the  High  Court  which  is  impugned  in  these

proceedings has been specifically overruled by this Court in M.D.

Frozen Foods case.  Faced with this stark reality staring at the

face of the respondents, a valiant effort was made to convince

this  Bench to  take a  contrary  view and in  the process  it  was

submitted  that  in  M.D.  Frozen  Foods  some  important  legal

aspects have not been considered.

23) To  put  it  pithily,  the  submissions  of  the  learned  counsel  for

respondents revolved around the following aspects:

(i) The appellant had neither advanced nor granted any loan or

financial assistance to respondent no. 1 and, therefore, it

could not have invoked the provisions of the SARFAESI Act.

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(ii) Respondent  no.  1  could  not  be  treated  as  ‘borrower’ as

defined  under  Section  2(1)(f)  of  the  SARFAESI  Act  read

with Sections 2(1)(c)  and 2(1)(m) of  that  Act.  Submission

was that the respondent no. 1 is not a person who has been

granted  financial  assistance  by  any  Bank  or  Financial

Institution nor can respondent no. 1 be brought under the

ambit of the definition of being a person who has given a

guarantee or create any mortgage or pledge as security for

the financial assistance granted by any Bank or Financial

Institution,  i.e.,  the  appellant.   It  was  argued  that  the

definition of the term borrower is clear and un-ambiguous

itself  and  the  rule  of  literal  interpretation  deserves  to  be

deployed.  The respondents relied upon the dictum in P.K.

Unni vs. Nirmala Industries & Others4   wherein it is held

that  the  Court  must  proceed  on  an  assumption  that  the

legislature did not make a mistake and that it intended to

say what it said it was further held that even assuming that

there was a defect or omission in the words used by the

legislature, the Court would not go to its said to correct or

make up the deficiency.  The Court cannot add words to a

statute or read words into it which are not there, especially

4   (1990) 2 SCC 378

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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 of

Union of India  v. Elphin Stone Spinning and Weaving

Company Limited & Others5  was also taken in this behalf.

The learned counsel also referred to yet another case, viz.,

Delhi Financial Corporation and another v. Rajiv Anand

and others6  wherein this aforesaid principle is reiterated.

(iii) The  loan  agreements  dated  December  08,  2011  and

January  05,  2012  which  were  entered  into  between

respondent  No.  1  and  IBFSL  cannot  be  classified  as

‘security arrangement’ within the meaning of  Section 2(1)

(zb) of the SARFAESI Act.

(iv) These agreements did not  create ‘security interest’ within

the meaning of Section 2(1)(zb) of the SARFAESI Act.   It

was argued that the term security assets as defined under

Section 2(1)(zc) of the Act means the property on which the

security interest is created. The terms ‘security interest’  is

defined under Section 2(1)(zf) to mean right, title, interest of

any kind whatsoever upon property created in favour of a

secured  creditor  (as  defined  under  Section  2(1)(zb)  and

5   (2001) 4 SCC 139 6   (2004) 11 SCC 625

Civil Appeal No. 18 of 2018 Page 24 of 42

includes a mortgage, charge, hypothecation or assignment

other  than  specified  in  Section  31).   Similarly  security

agreement is defined under Section 2(1)(zb).  

The  submission  was  that  the  agreements  dated

December 08, 2011 and January 05, 2012 do not fall within

the purview of Section 2(a)(zb) since at the time when the

said agreements were entered into, the entity in favour of

which they were executed, i.e., Indiabulls Financial Services

Limited, was not a secured creditor within the meaning of

Section  2(1)(zd)  of  the  SARFAESI  Act.   Under  the

circumstances  are  the  necessary  ingredients  of  Section

13(1) and 13(2) being absent, no action could have been

taken under Section 13(2) or Section 13(4) of the Act.  It is

this say of the respondents that the clauses contained in the

scheme  of  amalgamation,  firstly  do  not  manifest  any

intention  to  create  any  new  right  in  favour  of  the

amalgamated company.   Secondly,  clauses in  scheme of

amalgamation, albeit sanctioned by Court, cannot be raised

to  the pedestal  of  statutory  provisions creating a  right  in

favour  of  subsequent  acquirer  of  rights  not  statutorily

provided, nor can such clauses be held to create a deeming

fiction not statutorily provided.

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(v) Amalgamation  of  an  entity  not  lying  within  the  ambit  of

SARFAESI Act  then entity which falls  within realm of  the

said Act would not entitle amalgamated entity to invoke the

provisions  of  SARFAESI  Act,  in  respect  of  a

transaction/agreement  entered  into  much  prior  to  the

amalgamation.   The  submission  was  that  the  imprimatur

created by virtue of sanctioning of a scheme by High Court

under Sections 391 to 394 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, cannot be held to be purely procedural,

they create substantial right in favour of the secured creditor

for recovery of its dues by way of enforcement of security

interest  without  invocation  of  the  court.   Section  13(1)

creates substantive rights and by no stretch of imagination,

and  cannot  be  said  to  a  provision,  procedural  in  nature.

The procedure for enforcement of that substantial  right is

provided under  Sub-Section (2)  on  the  happening of  the

eventuality as mentioned therein.  That a further procedure

of prescribing the details in a notice is to be given by virtue

of Section 13(3) and provide for  making a representation

under Section 13(3)(A) and further provides for a procedure

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for  release  and  recovery  of  secured  debt  under  Section

13(4).  In absence of a substantial right being created by

Section  13(1),  procedural  provisions  contained  in  sub-

Sections (2) to (4) are meaningless as it would not provide

a remedy for the enforcement of substantial  right created

under Section 13(4).  It would not, therefore, be correct to

treat SARFAESI Act as a merely procedural statute.

24) It  was submitted that  this  was a  reverse merger  inasmuch as

IBFSL was a holding company and the appellant company was

only a subsidiary company and holding company was sought to

be amalgamated and merged with the subsidiary company.

25) It  was  also  submitted  that  the  entire  exercise  of  merger  was

undertaken to transfer loan from financial company to a financial

company in order to take advantage of provisions of SARFAESI

Act, which according to the respondents is not permissible in law.

On  the  aforesaid  basis,  the  first  submission  of  the  learned

counsel  for  respondents  was  that  there  was  no  transfer  and

vesting of loan in the appellant company provisions as per the

scheme.   It  was  argued  that  the  scheme  envisaged,  under

paragraph 4, that with effect from the appointed date, i.e., April

01,  2012,  the  amalgamating  company  comprising  the

Civil Appeal No. 18 of 2018 Page 27 of 42

amalgamating undertaking shall, pursuant to the sanction of the

scheme by the High Court and compliance of statutory provisions,

be  and  stand  transferred  to  and  vested  in  the  amalgamated

company as a going concern without any further act, instrument,

deed, matter or thing so as to become, as and from the appointed

date  April  01,  2012,  the  undertakings  of  the  amalgamated

company by virtue of and in the manner provided in the scheme.

26) Various other clauses of the scheme were referred to, to buttress

the aforesaid submission.  In this hue, it was argued that since as

per  Clause  8  of  the  Scheme,  all  suits,  actions  and  other

proceedings including legal and taxation proceedings etc. are to

be  continued  or  enforced  by  or  against  the  amalgamating

company.  The proceedings instituted by IBFSL under Section 9

of the Arbitration Act against the respondents would be deemed

to be an act of the appellant.  In other words, the amalgamating

company can have no better and further right that one possesses

by IBFSL.        

27) The learned counsel for the respondents attempted to strengthen

the aforesaid architecture with the help of some legal precedents.

In the first instance, reference was made to the judgment in the

case  of  Rishabh  Agro  Industries  Limited  v. P.N.B.  Service

Civil Appeal No. 18 of 2018 Page 28 of 42

Limited7 wherein this Court held as under:

“6. Learned counsel appearing for the respondent has submitted that such an interpretation would defeat the ends  of  justice  and  make  the  petitions  under  the Companies  Act,  infructuous  inasmuch  as  any unscrupulous  litigant,  after  suffering  an  order  of winding up, may approach the Board merely be filing a petition and consequently get the proceedings in the Company  case  stayed.   Such  a  grievance  may  be justified and the submission having substance but in view of the language of Sections 15 and 16 of the Act particularly explanation to Section 16 inserted by Act No. 12 of 1994, this Court has no option but to adhere to its earlier decision taken in Real Value Appliances (Supra).  While interpreting, this Court only interprets the law and cannot legislate it.  If a provision of law is misused and subjected to the abuse of process of law, it is for the Legislature to amend modify or repeal it by having recourse to appropriate procedure, if deemed necessary.”     

It  was  argued  that  the  above  observations  of  this  Court

clearly negate the submission of the appellant that because the

SARFAESI Act has 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 judgment in

the case of Padma Sundara Rao v. State of Tamil Nadu8 where

this Court has held as under:

“12.  The rival pleas regarding rewriting of statute and casus omissus need careful consideration. It is well- settled  principle  in  law  that  the  court  cannot  read anything into a statutory provision which is plain and

7   (2000) 5 SCC 515 8   (2002) 3 SCC 533

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unambiguous. A statute is an edict of the legislature. The  language  employed  in  a  statute  is  the determinative factor of legislative intent. The first and primary rule of construction is that the intention of the legislation must  be found in  the words used by the legislature  itself.  The  question  is  not  what  may  be supposed and has been intended but what has been said. “Statutes should be construed, not as theorems of Euclid”, Judge Learned Hand said, “but words must be construed with some imagination of the purposes which  lie  behind  them”.  (See Lenigh  Valley  Coal Co. v. Yensavage [218  FR  547].)  The  view  was reiterated in Union of India v. Filip Tiago De Gama of Vedem  Vasco  De  Gama [(1990)  1  SCC  277  :  AIR 1990 SC 981].

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

14. While  interpreting  a  provision  the  court  only interprets the law and cannot legislate it. If a provision of  law  is  misused  and  subjected  to  the  abuse  of process  of  law,  it  is  for  the  legislature  to  amend, modify  or  repeal  it,  if  deemed  necessary. (See Rishabh  Agro  Industries  Ltd. v. P.N.B.  Capital Services  Ltd. [(2000)  5  SCC  515])  The  legislative casus  omissus  cannot  be  supplied  by  judicial 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] . In Nanjudaiah case [(1996) 10 SCC 619] the period was further stretched to have the time period run from date of service of the High Court's order. Such a view cannot be reconciled with the language of Section 6(1). If the view is accepted it would mean that 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-prescribed period. Same can never be the legislative intent.

15. Two principles  of  construction — one relating to

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casus omissus and the other in regard to reading the statute as a whole — appear to be well settled. Under the first principle a casus omissus cannot be supplied by the court except in the case of clear necessity and when reason for it is found in the four corners of the statute itself  but  at  the same time a casus omissus should not be readily inferred and for that purpose all the parts  of  a  statute or  section must  be construed together  and  every  clause  of  a  section  should  be construed  with  reference  to  the  context  and  other clauses thereof so that the construction to be put on a particular provision makes a consistent enactment of the  whole  statute.  This  would  be  more  so  if  literal construction of a particular clause leads to manifestly absurd  or  anomalous  results  which  could  not  have been  intended  by  the  legislature.  “An  intention  to produce  an  unreasonable  result”,  said  Danckwerts, L.J.,  in  Artemiou v.  Procopiou   [(1966) 1 QB 878 : (1965) 3 All ER 539 : (1965) 3 WLR 1011 (CA)] (at All ER p. 544-I), “is not to be imputed to a statute if there is some other construction available”. Where to apply words literally would “defeat the obvious intention of the  legislation  and  produce  a  wholly  unreasonable result”, we must “do some violence to the words” and so  achieve  that  obvious  intention  and  produce  a rational  construction.  [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 he also observed: (All ER p. 664-I) “This is not a new problem, though our standard of  drafting is such that it  rarely emerges.”]”

29) It  was  contended  that  in  light  of  the  above-stated  principles

enunciated  in  the  Constitution  Bench  decision,  since  the

language  of  Section  2(1)(f)  and  2(a)(zf)  is  unambiguous,  the

casus  omissus  cannot  be  applied  by  a  judicial  interpretation

process.   It  was  submitted  that  there  is  no  scope  of  reading

something into, which it does not exist.

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30) Counsel for the respondents also placed strong reliance upon the

judgment  in  the  ICICI  Bank Limited  v.  Official  Liquidator  of

APS  Star  Industries  and  others9 which  centres  around  the

Banking Regulation Act, 1949 and guidelines of RBI issued on the

subject of inter se transfer of non-performing assets by Bank. It

was held that the Banking Regulation Act, 1949 does not come in

the  way  of  such  transfers.   Banks/Banking  Companies  are

covered under SARFAESI Act in any event.  As such, transfers

inter se bank would not give rise to the question of change in the

nature of the lender leading to change in the status of applicability

of SARFAESI Act.  On that basis, it was submitted that such a

transfer would not change the status of a borrower who, if earlier

created a security interest, continues to be a borrower of another

secured creditor.  However, in the present case, there is sought to

be a complete change in the status of the borrower and that too

without his consent.

31) The learned counsel, at the end, made a passionate plea about

the far reaching consequences which may ensue if the appellant

is permitted to take recourse to the provisions of SARFAESI Act

as debts would be transferred to SARFAESI companies to take

advantage of that enactment.

9   (2010) 10 SCC 1

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32) After considering the aforesaid submission, we are of the opinion

that  entire  edifice  is  built  on  the  pleas  which  are  squarely

answered in M.D. Frozen Foods and there is no reason to take a

different view therefrom for the reasons that follow hereinafter.

33) In the instant case, loan was given by IBFSL which was not a

financial institution covered by the SARFAESI Act when the loan

was  given.   However,  this  entity  has  got  merged  with  the

appellant  and  appellant  is  a  SARFAESI  company.   In  this

backdrop, the entire thrust of the argument of the respondent is

that  as  a  successor  company,  the  appellant  cannot  take

advantage.  In order to deal with this aspect, we will have to first

taken into consideration, the effect of such a merger scheme as

approved by the High Court.   It  is to be kept in mind that the

loan/debts/financial assets stood vested in the appellant pursuant

to the amalgamation scheme filed by the two companies under

Sections 391 and 394 of the Companies Act, 1956 whereunder

the  predecessor  company,  IBFSL  got  amalgamated  with  the

appellant, the effect of such a merger is explained by this Court in

Saraswati  Industrial  Syndicate  Ltd.  v. Commissioner  of

Income Tax10  in the following manner:

10   1990(Supp) SCC 675

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“5. Generally, where only one company is involved in change  and  the  rights  of  the  shareholders  and creditors  are  varied,  it  amounts  to  reconstruction  or reorganisation  of  scheme  of  arrangement.  In amalgamation two or more companies are fused into one  by  merger  or  by  taking  over  by  another. Reconstruction or ‘amalgamation’ has no precise legal meaning. The amalgamation is a blending of  two or more existing undertakings into one undertaking, the shareholders  of  each  blending  company  become substantially the shareholders in the company which is to carry on the blended undertakings. There may be amalgamation either  by  the transfer  of  two or  more undertakings to a new company, or by the transfer of one  or  more  undertakings  to  an  existing  company. Strictly  ‘amalgamation’  does  not  cover  the  mere acquisition by a company of the share capital of other company which remains in existence and continues its undertaking but the context in which the term is used may  show  that  it  is  intended  to  include  such  an acquisition.  See: Halsbury's  Laws  of  England (4th edition volume 7 para 1539). Two companies may join to form a new company, but there may be absorption or  blending  of  one  by  the  other,  both  amount  to amalgamation. When two companies are merged and are so joined, as to form a third company or one is absorbed  into  one  or  blended  with  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  IBFSL got  transferred  to  and  stood  vested  in  the  appellant

including  the  loans  given  by  IBFSL to  respondent  borrowers,

debts recoverable by IBFSL from respondent borrowers in favour

of IBFSL, security documents executed by respondent borrowers

in favour of IBFSL, etc.  On the sanctioning of the scheme, the

respondent borrowers became the borrower of the appellant as if

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the  financial  assistance  was  granted  by  the  appellant  to  the

respondent borrowers.

35) There is a force in the contention by the appellant that the debt

with underlying securities is the asset of IBFSL and that IBFSL

had  right  to  transfer/assign  its  assets  to  any  person  without

seeking consent  of  the borrower.   Such transfer/assignment  is

recognized and that this Court in the case of Official Liquidator

of  APS  Star  Industries has  recognised  and  upheld  such  an

assignment.

36) In the aforesaid backdrop, the factor which assumes importance

and has to be kept in mind is that the appellant is an assignee of

a  debt  through  the  amalgamation  of  original  lender  with  the

appellant which was effected invoking the statutory provisions of

the Companies Act.  Once this is kept in mind, there would not be

any difference as far as consequences in law are concerned from

the case of  M.D. Frozen Foods  and this case. Therefore, M.D.

Frozen Foods  case would apply to the facts of this case in all

force.

37) Further, it is too farfetched to argue that just to realise the dues

from the respondents, IBFSL and the appellant devised the plan

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of merger so as to attract the provisions of SARFAESI Act and we

are not inclined to accept such a submission.  Various judgments

which are relied upon by the respondents also would not apply as

we neither find it to be a case of the Court creating any legislation

or supplying any casus omissus.

38) Apart from the factual parity, even legally the arguments of the

respondents do not carry any weight.  The view taken in  M.D.

Frozen Foods is that the SARFAESI Act is retroactive in nature.

In the process, the Court approved the Full Bench decision of the

Orissa  High  Court  in  Sarthak  Builders  Pvt.  Ltd.,  Chinta,

Arunodaya  Market,  Cuttack  &  Another  v.  Orissa  Rural

Development  Corporation  Limited,  Station  Square,

Bhubaneswar & 5 Ors.11 and made the following observations:

“38…In case of retroactivity, the Parliament takes note of  the  existing  conditions  and  promulgates  the remedial measures to rectify those conditions. In fact the SARFAESI Act, in our view, was to remedy such a position  and  provide  a  measure  against  secured interests. The scheme of the SARFAESI Act, is really to  provide  a  procedural  remedy  against  security interest  already  created.  Therefore,  an  existing borrower, who had been granted financial assistance was covered under Section 2(f) of the said Act as a ‘borrower’.  Not  only  this  expression,  the  definition clauses  dealing  with  ‘debt  securities’,  ‘financial assistance’, ‘financial assets’, etc., clearly convey the legislative intent that the SARFAESI Act applies to all existing agreements  irrespective of  the fact  whether the lender was a notified ‘financial institution’ on the date  of  the  execution  of  the  agreement  with  the

11  (2014) SCC Online Ori 75

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borrower  or  not.  The scheme of  the SARFAESI 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 fact that a more expeditious remedy is provided under the SARFAESI Act does not mean that it  is  substantive  in  character  or  has  created  an altogether new right.  To accept  the argument  of  the appellants would imply that they have an inherent right to delay the enforcement against the security interest!

39. The catena of  judgments  referred  to  by  learned senior counsel for the appellants on substantive law not being retrospective in operation, unless expressly stated so in the Act would, thus, have no application to the matter in issue, in view of what we have observed aforesaid. On the other hand, as observed by Buckley, L.J. in West v. Gwynne, retrospective operation is one matter and interference with existing rights is another. In that context, it was ruled that the provisions of the Conveyancing  of  Law and Property  Act,  1892 were held  applicable  to  leases  containing  a  covenant, condition  or  agreement  against  assigning,  under- letting or parting with possession or disposing of land or  property  leased without  license or  consent  to  all leases  whether  executed  before  or  after  the commencement of the Act. Such a construction was held not to make the Act retrospective in operation but merely  effected  the  future  existing  rights  under  all leases whether executed before or after  the date of that  Act.  (Discussed  in Trimbak  Damodhar Raipurkar v. Assaram Hiraman Patil).

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

“Perhaps  no  rule  of  construction  is  more  firmly established  than  this  —  that  a  retrospective operation is not to be given to a statute so as to impair  an  existing  right  or  obligation, otherwise than as regards matter of procedure, unless that effect cannot be avoided without doing violence to

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the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only… it is a general rule that when the  Legislature  alters  the  rights  of  parties  by taking away or conferring any right of action, its enactments, unless in express terms they apply to pending actions, do not affect them…It is said that there is one exception to that rule, namely, that, where enactments merely affect procedure and do not extend to rights of action, they have been  held  to  apply  to  existing  rights,  and  it  is suggested here that the alteration made by this section is within that exception…”

(Emphasis supplied)

41. Similarly, the date on which a debt is declared as an NPA would again have no impact. We are, thus, of the  view  that  the  provisions  of  the  SARFAESI  Act would become applicable quaall debts owing and live when the Act became applicable to the respondent in terms of the parameters contended by learned senior counsel for the respondent and enlisted at serial Nos. i to iv in para 18.”

It,  thus, follows that  there is only a procedural  change in

respect of forum for recovery of debt and no substantive rights

are affected.

39) In view of the aforesaid judgment, argument of the respondents

herein  predicated  on  Sections  69  and  69A of  the  Transfer  of

Property Act, which weighed with the High Court, is without any

substance.

40) The aforesaid view also gets support from the judgment of this

Court  in  Mardia Chemicals Ltd.  & Ors.  v.  Union of  India &

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Ors.12 wherein  the  background  and  salient  feature  of  the

SARFAESI Act  have been extensively discussed and analysed

and the Court has also highlighted the objective behind enacting

such a legislation.  

41) These sentiments are echoed in the subsequent judgment in the

case  of  United  Bank  of  India  v.  Satyawati  Tondon  and

Others13 wherein  it  was  held  that  the  Act  is  intended  to  give

impetus  to  industrial  development  in  the  country  by  providing

speedy  procedure  of  recovery.   On  account  of  lack  of

infrastructure  and  manpower,  regular  courts  were  not  able  to

cope with the speed in adjudication of recovery cases.  In the light

of  recommendations of  the Tiwari  Committee,  special  tribunals

came to be set up under the provisions of the Recovery of Debts

Due to Banks and Financial Institutions Act, 1993 for recovery of

huge  accumulated  NPAs  of  the  bank  loans.   On  the

recommendations  of  the  Narasimham  Committee  and

Andhyarujina  Committee,  SARFAESI  Act  was  enacted  to

empower banks and financial institutions to take possession of

the  securities  and  to  sell  them without  the  intervention  of  the

Court.   In this regard, reference may be made to the following

observations of this Court in the case of Satyawati Tondon: 12  (2004) 4 SCC 311 13  (2010) 8 SCC 110

Civil Appeal No. 18 of 2018 Page 39 of 42

“1…With  a  view  to  give  impetus  to  the  industrial development  of  the  country,  the  Central  and  State Governments  encouraged  the  banks  and  other financial  institutions  to  formulate  liberal  policies  for grant  of  loans  and  other  financial  facilities  to  those who wanted to set up new industrial units or expand the  existing  units.  Many  hundred  thousand  took advantage of easy financing by the banks and other financial  institutions but  a large number of  them did not repay the amount of loan, etc. Not only this, they instituted  frivolous  cases  and  succeeded  in persuading the civil courts to pass orders of injunction against  the  steps  taken  by  banks  and  financial institutions  to  recover  their  dues.  Due  to  lack  of adequate  infrastructure  and  non-availability  of manpower,  the  regular  courts  could  not  accomplish the  task  of  expeditiously  adjudicating  the  cases instituted by banks and other financial institutions for recovery of  their  dues.  As a result,  several  hundred crores  of  public  money  got  blocked in  unproductive ventures.

2. In order to redeem the situation, the Government of India constituted a committee under the Chairmanship of  Shri  T.  Tiwari  to  examine  the  legal  and  other difficulties faced by banks and financial institutions in the  recovery  of  their  dues  and  suggest  remedial measures.  The  Tiwari  Committee  noted  that  the existing procedure for recovery was very cumbersome and  suggested  that  special  tribunals  be  set  up  for recovery of the dues of banks and financial institutions by  following  a  summary  procedure.  The  Tiwari Committee  also  prepared  a  draft  of  the  proposed legislation which contained a provision for disposal of cases in three months and conferment of power upon the  Recovery  Officer  for  expeditious  execution  of orders made by adjudicating bodies.

xx                xx                xx

16. Thus, the Act intends to provide remedy in respect of pre - existing loans. The interpretation that the Act will apply only to future debt transactions defeats the very  purpose of  law of  reducing the non-performing assets.  This  object  is  clearly  mentioned  in  the Statement of  Objects and Reasons. As noted in the case of Satyaivati Tondon amount of rupees one lakh

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twenty thousand crores was due to the banks in the year 2001 which had adversely affected the economy of  the  country.  Obviously,  the  Act  is  intended  to recover the said pre-existing loans by the machinery provided under  the SARFAESI Act.  The pre-existing loans are not excluded from the purview of the Act. Similarly, the object of notifying the financial institution in  question is  to enable such institution to  avail  the provisions  of  SARFAESI  Act  in  respect  of  existing loans. This salient object of the Act does not appear to have been noticed in Subash Chandra Panda.”

42) We  may  also  reproduce  the  following  discussion  from  that

judgment  which  completely  answers  most  of  the  arguments

raised by the learned counsel for the respondents:

“17. Further, the settled principle of interpretation that while  the  statute  affecting  the  substantive  rights  is presumed to be prospective,  a statute changing the forum of  remedy and the procedure is  retrospective has also not been kept in mind. These principles are the basis of the view taken in the Unique Engineering Works and Pradeep  Kumar  Gupta. The  said considerations are valid and legitimate, supported by ample  authority  of  binding  precedents  of  the  Apex Court, to which reference may be made and relevant observations extracted:

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

“9…..  Mr.  Chatterjee  has  relied  upon  the  well- known  observations  made  by  Wright,  J.  in (Re Athlumney ex  parte  or  Wilson (1898)  2  QBD 547)  when  the  learned  Judge  said  that  it  is  a general  rule  that  when  the  legislature  alters  the rights of parties by taking away or conferring any right  of  action,  its  enactments,  unless in  express terms they apply to pending actions, do not affect them. He added that there was one exception to that rule, namely that where enactments merely affect procedure and do not extend to rights of action, they have been held to apply to existing rights. In order to make the statement of the law relating  to  the  relevant  rule  of  construction

Civil Appeal No. 18 of 2018 Page 41 of 42

which  has  to  be  adopted  in  dealing  with  the effect  of  statutory  provisions  in  this connection, we ought to add that retrospective operation  of  a  statutory  provision  can  be inferred even in cases where such retroactive operation appears to be clearly implicit  in the provision  construed  in  the  context  where  it occurs. In other words, a statutory provision is held  to  be  retroactive  either  when  it  is  so declared by express terms, or the intention to make  it  retroactive  clearly  follows  from  the relevant words and the context  in  which they occur.”  

(emphasis added)”

43) The  aforesaid  discussion,  thus,  leads  us  to  conclude  that

respondent  No.1  would  be  treated  as  ‘borrower’  within  the

meaning of Section 2(1)(f) of the SARFAESI Act; the arrangement

would be classified as ‘security arrangement’ under Section 2(1)

(zb); the agreements created ‘security interest’ under Section 2(1)

(zf);  and  the  appellant  became  ‘secured  creditor’  within  the

meaning of Section 2(1)(zd) of SARFAESI Act.

44) As a result, we hold that judgment of the High Court is erroneous

and set aside the same.  This appeal is allowed.  No orders need

to be passed in the contempt petitions, which stand disposed of.

.............................................J. (A.K. SIKRI)

.............................................J. (ASHOK BHUSHAN)

NEW DELHI; FEBRUARY 23, 2018.

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