Introduction
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“
SARFAESI”) is an Act meant to protect the interests of secured creditors by giving them a mechanism by which they can enforce their secured interests without resorting to any Courts or Debt Recovery Tribunals. Thus,
it is a creditor protection Act. On the other hand, the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) is an Act to protect and revive companies suffering from industrial sickness. Thus,
it is a debtor protection Act.
A very interesting question arises here – should these two special Acts have a head-on collision, which one would prevail? This was the issue which the Supreme Court was faced with in M/s. Madras Petrochem Ltd vs. BIFR, Civil Appeal Nos.614-615/2016, (Order dated 29th January 2016). The Apex Court analysed the interplay between the SARFAE SI and the SICA.
At a time when the Indian banking system is creaking under the weight of bad loans/NPAs and we are witnessing several high-profile loan default cases, this decision has several far reaching ramifications. According to press reports, over Rs. 1.14 lakh crore of bad loans were written off by public sector banks alone in 2012-15!
Overview of the SARFAESI
According to the SARFAE SI, a secured creditor can enforce any security interest created in its favour. This can be done without the intervention of any Court or Tribunal. If the borrower fails to repay the liabilities then the creditor can adopt one or more of the measures enshrined under this Act which includes, taking possession of or taking over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset; appointing a manager to manage the secured assets taken over by the secured creditor; requiring any person who has acquired any of the secured assets from the borrower and who has to pay any money to the borrower, to pay such amount to the secured creditor, etc. Details of the procedures have been laid down for taking over possession of and selling of movable/ immovable assetsby the secured creditor.
Section 37 of this Act states that the provisions of the Act would be in addition to and would not override the Companies Act, the Securities Contracts (Regulation) Act, the Securities and Exchange Board of India Act and the Recovery of Debts Due to Banks and Financial Institutions Act. Further, section 35 of this Act provides that the provisions of the SARFAE SI would have effect over any other inconsistent law.
Overview of the SICA
Under the SICA, any company whose networth has been fully eroded by its losses must make a reference to the Board of Industrial and Financial Reconstruction (BIFR). If the BIFR decides to admit the reference, then an inquiry will be made by the BIFR and efforts will be made to revive the company or if these efforts fail or are not possible, then the BIFR would order winding-up. However, no reference can be made to the BIFR where financial assets, i.e., any loan given to the sick company has been acquired by a securitisation company under the SARFAE SI. Further, if a reference is pending before the BIFR, then it would abate if 3/4th of the secured creditors decide to take recourse to the SARFAE SI to enforce their secured interest.
One of the most relevant provisions of the SICA is section 22 which provides that where any reference is made to the BIFR and it is admitted then no suit/proceedings will lie against the sick company for recovery of money or for the enforcement of any security against the sick company except with the consent of the BIFR. Thus, section 22 provides a shield to sick companies against any recovery proceedings. Accordingly, the issue before the Supreme Court in the current case was whether section 22 would bar any recovery measures by banks / FIs under the SARFAESI Act?
DRT Act
Yet another legislation to assist banks and financial institutions to deal with the menace of bad loans is the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act) which allows banks/FIs to approach specially constituted Debt Recovery Tribunals for expeditious adjudication and recovery of debts. The Supreme Court in Mardia Chemicals Ltd. vs. Union of India (2004) 4 SCC 311 held that the SARFAE SI was enacted because the DRT Act had failed to achieve its desired results.
Contours of the 3 Statutes
The Supreme Court considered the genesis of these three legislations. It held that each of these dealt with different aspects of recovery of debts due to banks and financial institutions. Two of them referred to the creditors’ interests and how best to deal with recovery of outstanding loans and advances made by them, whereas the SICA dealt with certain debtors which were sick industrial companies and whether such debtors having become sick, were to be rehabilitated.
Interplay between SICA and Ot her Acts
The Supreme Court analysed the SICA’s relationship visa- vis other statutes. The decided cases on this issue were as follows:
(a) The SICA prevailed over the State Financial Corporations Act, 1951 since both were special statutes dealing with sickness/recovery of debts and containing non-obstante clauses, but SICA was the later Act– Maharashtra Tubes Ltd vs. State Industrial and Investment (1993) 2 SCC 144.
(b) The SICA prevailed over the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 by virtue of an amendment in 1994 to SICA since the amendment was later than the 1993 Act – Jay Engineering Works vs. Industry Facilitation Council (2006) 8 SCC 677.
(c) The Arbitration and Conciliation Act, 1996 which contained a non-obstante clause was subordinate to SICA because the Arbitration Act’s non-obstante clause had a limited application to the extent of judicial intervention in arbitration proceedings – Morgan Securities and Credit P Ltd vs. Modi Rubber Ltd (2006) 12 SCC 642.
(d) The Companies Act being a general Act would yield to the SICA being a special Act – Tata Motors Ltd vs. Pharmaceutical Products of India Ltd (2008) 7 SCC 619. The same was the verdict in the case of Raheja Universal Ltd vs. NRC Ltd (2012) 4 SCC 148 which held that the Transfer of Property Act, 1882 being a general law was subordinate to the SICA which was a special law.
(e) The DRT Act and the SICA are both special laws – one to provide measures for restoration of sick companies and the other to provide for speedy recovery of debts of banks. However, with specific reference to sick companies, the SICA is a special law while it is a general law when it came to recovery of debts. In this respect, DRT was a special law. The DRT Act was also later in time than the SICA. However, since the DRT Act contained a specific provision in s.34(2) which provided that it would be in addition to and not in derogation of the SICA, it was held that the SICA would prevail over DRT – KSL & Industries Ltd vs. Arihant Threads Ltd (2015) 1 SCC 166.
SC’s Observations
The Supreme Court observed that section 37 of the SARFAE SI expressly provided that it would not be in derogation but in addition to 4 Acts ~ the Companies Act, the Securities Contracts (Regulation) Act, the Securities and Exchange Board of India Act and the Recovery of Debts Due to Banks and Financial Institutions Act. The SICA was not one of these 4 Acts. Hence, the Legislature was conscious of the fact that SARFAE SI would not be in addition to the SICA and could in fact, override it. This proposition was strengthened by the fact that section 41 of the SARFAESI amended the SICA but section 37 excluded the SICA. While the DRT Act was expressly mentioned u/s. 27, the SICA was not. Therefore, the SARFAESI must be given precedence over the SICA.
Further, section37 contained the words “or any other law for the time being in force” and section 35 contained that the provisions of the SARFAE SI would override any other inconsistent law. The Supreme Court applied the harmonious construction rule and held that section 35 was subject to the 4 laws expressly carved out in section 37. Thus, as respects these 4 laws, the SARFAESI would not override them. Moreover, the words “or any other law for the time being in force” contained in section 37, when viewed in connection with the 4 securities’ market laws, would only be restricted to other laws having relation to the securities market. Even on this count, the SICA would not be included u/s. 37 since it is not a special law dealing with the securities market.
It also observed that the Companies Amendment Act, 2002 as well as the Companies Act, 2013 incorporated the provisions of the SICA by providing for a reference to be made to the National Company Law Tribunal instead of the BIFR. Neither of these have been notified but interestingly, none of these Acts contain a provision similar to section 22 of the SICA. Thus, going forward, creditors would be able to initiate recovery proceedings even when reference is pending before the Tribunal. The modified laws lean in favour of creditors being able to realise their debts outside of the court process. It analysed statistics of debt recovery which showed that of the total bad loans recovered in 2011-12, over 70% was under the SARFAESI Act and only 28% was under the DRT Act. This according to the Court, showed the efficacy of the SARFAESI Act. Hence, it concluded that it would be loathe to give an interpretation which would thwart the recovery process under the SARFAE SI, which alone seems to have worked at least to some extent. Accordingly, it held that section 22 of the SICA would have to yield way to the recovery proceedings taken by banks/FIs under the SARFAE SI and the SICA would not offer a shield to the debtor company.
The SARFAESI Act is a complete code in itself and the earlier judgments rendered under the DRT Act cannot apply to it. Further, the incorporation of certain provisions of the Companies Act in the SARFAE SI Act shows that even the Companies Act is harmonised with it – Pegasus Asset Reconstruction P Ltd vs. M/s. Haryana Concast Ltd, Civil Appeal 3646/2011 (SC).
There are many situations in which the bar u/s. 22 of the SICA would not apply, for instance a rent act eviction petition on the ground of non-payment of rent. Such eviction petitions have been held not to be suits for recovery of money – Gujarat Steel Tube Co. Ltd. vs. Virchandbhai B. Shah, (1999) 8 SCC 11. In Kailash Nath Agarwal vs. Pradeshiya Industrial & Investment Corpn. of U.P. Ltd., (2003) 4 SCC 305, the U.P. Act under which recovery proceedings initiated against guarantors at a post-decree stage were held to be outside the purview of section 22.
Recovery Matrix
The Supreme Court laid down the recovery matrix for banks/other creditors in case of a sick company as follows: (a) In all cases where unsecured creditors of a sick company are involved, the SICA would override all the recovery proceedings, including under the DRT Act.
(b) Where secured creditors of a sick company are involved, the SICA would give way to the recovery proceedings, if any, initiated by the banks / FIs under the SARFAE SI. In this event, the recovery proceedings would be as under:
(i) If there is more than one secured creditor, then 60% of the secured creditors must agree to enforce their security under the SARFAE SI. In such a case, the SICA proceedings would abate.
(ii) If 60% consent is not achieved, then the bar on legal provisions u/s.22 of the SICA would apply.
(c) If instead of taking recourse under the SARFAE SI, secured creditors decide to approach the DRT under the DRT Act, then the shelter under the SICA would continue to be available to the sick company since the Supreme Court has held that the SICA is superior to the DRT Act.
Conclusion
This is a path-breaking judgment as far as banks are concerned. There are numerous instances of sick companies taking shelter under the SICA to prevent loan recoveries by banks and FIs. This decision should act as a booster shot to the floundering banking sector. At a time when the RBI is goading the banks to fasten the recovery process, this should encourage banks and asset reconstruction companies to monetise all NPAs under the SARFAE SI. It is interesting to note that in the decision under discussion, the company was referred to the BIFR in December 1989 while the Supreme Court’s decision permitting sale came in January 2016, a time gap of 27 years! Is it not surprising that the Indian banking system is mired with bad loans?
Numerous attempts to repeal the SICA have failed with this Act yet ruling the roost. Recently, the Finance Minister blamed the slow and complex legal system plagued with delays for the bad loan mess. He also mentioned that India desperately needed a comprehensive bankruptcy and insolvency code. Till the time something urgently is done on this front, this judgment would provide some solace to the banks.
