Saturday, January 16, 2016

Supreme Court Resolves Conflict Between SARFAESI Act and Companies Act

In Pegasus Asset Reconstruction P. Ltd. v. Haryana Concast Ltd., the Supreme Court was concerned with a conflict between the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for brevity ‘the SARFAESI Act’) on the one hand and the Companies Act, 1956 on the other. The specific conflict was identified as follows:

Whether a Company Court, directly or through an Official Liquidator, can wield any control in respect of sale of a secured asset by a secured creditor in exercise of powers available to such creditor under the [SARFAESI Act].

To clarify further, the issue becomes relevant in the case of a company under liquidation, where the Company Court and the liquidator are seized of the matter.

The issue had acquired greater significance in viewing differing views adopted by High Courts. The Punjab and Haryana High Court, in the Pegasus case which was on appeal before the Supreme Court, held that the Company Court was entitled to place fetters upon the exercise of powers by a secured creditor in effecting a sale of the secured assets. The Delhi High Court had taken a diametrically opposite view in another case involving Megnostar Telecommunications Private Limited, (which was also on appeal in the same batch of matters before the Supreme Court, by holding that the Companies Act cannot be used to impose fetters against the sale of secured assets by the secured creditors and that the liquidator did not have any say whatsoever in such sale.  The Supreme Court was effectively left with having to choose between the two views, and decided to accept the Delhi High Court position giving primacy to the SARFAESI Act and thereby curbing the powers of the Company Court and the liquidator in a sale of assets by a secured creditor.

In coming to its conclusion, the Supreme Court analysed various provisions of the SARFAESI Act, which contained non obstante clauses that indicated that it operated as a complete code, a position that was accepted by previous judicial decisions. The principal concern in opposition to this conclusion was the position of preferential creditors (such as workmen) who possess priorities under section 529A of the Companies Act, 1956. Here, the Court concluded that several protections were already present in the legislative scheme, and that the neither the Company Court nor the liquidator can exercise greater interference in the sale process.

While the issue involves a somewhat technical interpretation of the SARFAESI Act and the Companies Act, the Supreme Court’s decision certainty strengthens the hands of secured creditors in a liquidation scenario, perhaps in essence giving effect to the legislative intention of the SARFAESI Act. The entire gamut of insolvency laws, including the Companies Act, the SARFAESI Act and the Recovery of Debts due to Banks and Financial Institutions Act, 1993 have experienced similar conflicts and turf wars in the past that have required judicial intervention to resolve them, thereby resulting in loss of precious time and cost. The proposed reforms to bankruptcy and insolvency laws would hopefully minimise such issues.


vswami said...

"Let us hope that the bankruptcy code is not the beginning of a new trend."
To know the prospects of such a hope being translated to reality,even remotely, read:
Making a money bill of it

The bankruptcy code, not a money bill, was introduced in Lok Sabha as one. Is this the first of a new trend?

As anxiously shared on Facebook:

This goes to underline the utmost importance of, or inevitable compulsion, in today's changed circumstances, demanding active, rather proactive participation, of eminent lawyers, such as the author of this write-up, to rise to the occasion and help the government , that too desirably on a timely basis, and see to it that their cited hope is not belied. As always believed, rightly so, ther...
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RNR said...

A Resolution of Another Conflict would be great to have your opinion.