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2016 (1) TMI 1 - HC - Indian LawsJurisdiction to invoke provisions of SARFAESI Act - Validity of possession notice - whether the first respondent is not entitled to invoke the provisions of the SARFAESI Act; to declare the action taken by the first respondent under the SARFAESI Act, with respect to the assets of the petitioner-Company, as null and void? - Held that - The words in whose favour security interest is created, in Section 2(zd)(iii), refers to the trustee, and not to the bank/financial institution. As the petitioner has created a charge, on its movable and immovable properties, a security interest is created in favour of the 1st respondent for due repayment of the amount payable, towards the principal and interest, on redemption of the debentures subscribed by LIC, CB. and OBC. As a security interest is created in its favour for the due repayment by the petitioner, of the financial assistance (subscription of debentures) extended by LIC, CB and OBC, and as it holds the security on behalf of banks or financial institutions (CB, OBC and LIC), the 1st respondent fulfils all the conditions stipulated in Section 2(zd)(iii) of the SARFAESI Act to become the secured creditor of the petitioner company. As the debenture trust deed itself stipulates that the security created by the petitioner in favour of the 1st respondent is to be held for the beneficial interest of LIC, CB and OBC, it matters little that the 1st respondent-debenture trustee has not, otherwise, stated that the security is held by it on behalf of banks/financial institutions. The object sought to be achieved by the SARFAESI Act is speedier recovery of NPAs of banks/financial institutions. Debenture holders, which are banks and financial institutions, constitute a class, distinct and apart from other debenture holders, and the speedier remedy, provided by the SARFAESI Act, for recovery of their mounting dues, is to reduce the fiscal burden of these banks/financial institutions created by its huge non- performing assets which is eroding its liquidity. The differentia, between debenture holders which are banks/financial institutions and those which are not, has a rational relation to the object sought to be achieved by the SARFAESI Act which is speedierrecovery of the amounts due to banks and financial institutions consequent on the defaulters account being declared as a non- performing asset. The classification satisfies the requirement of a valid classification under Article 14 of the Constitution and the challenge, to its validity, must fail. While the petitioner has an effective alternate statutory remedy under Section 17 of the SARFAESI Act, against the action taken by the 1st respondent under Section 13(4) of the Act, we see no reason to now relegate the petitioner to the statutory remedy under Section 17 of the Act, as we have dealt with all their contentions and have rejected them as devoid of merits The notice issued by the 1st respondent under Section 13(2), the action taken by them under Section 13(4), and the request made by them to the Chief Metropolitan Magistrate, Hyderabad and Vijayawada under Section 14 of the Act, are strictly in accordance with the provisions of the SARFAESI Act and do not suffer from any illegality. It would be wholly inappropriate, therefore, for us to interdict the action taken by them to recover, from the petitioner-company, the principal and interest due on the redemption of debentures, including by seeking the assistance of the Chief Metropolitan Magistrate, Hyderabad and Vijayawada, under Section 14(1) of the Act, to take possession of the secured assets of the petitioner company. Writ Petition is devoid of merits and is, accordingly, dismissed.
Issues Involved:
1. Whether the first respondent is a secured creditor within the meaning of Section 2(zd) of the SARFAESI Act. 2. Whether the classification of debenture holders between those which are banks/financial institutions and those which are not, violates Article 14 of the Constitution. 3. The scope and applicability of Sections 13(2), 13(4), and 14 of the SARFAESI Act. 4. Availability of an alternative remedy for the petitioner. Issue-wise Detailed Analysis: I. Is the 1st Respondent a Secured Creditor within the Meaning of Section 2(zd) of the SARFAESI Act? The petitioner argued that the first respondent, being a debenture trustee, is not a secured creditor as per Section 2(zd) of the SARFAESI Act, which defines secured creditor to include banks, financial institutions, and trustees holding securities on behalf of these entities. The petitioner contended that the first respondent does not qualify since it is not a bank or financial institution and does not hold securities directly on behalf of such entities. The court examined the debenture trust deed, which indicated that the petitioner had created a charge on its movable and immovable properties in favor of the first respondent, acting as a trustee for the debenture holders (LIC, CB, and OBC). These entities are banks and financial institutions, thus qualifying as secured creditors. The court concluded that the first respondent, holding securities on behalf of these entities, qualifies as a secured creditor under Section 2(zd)(iii) of the SARFAESI Act. II. Is the Classification of Debenture Holders, Between Those Which Are Banks/Financial Institutions and Those Which Are Not, in Violation of Article 14 of the Constitution? The petitioner argued that the SARFAESI Act's preferential treatment of debenture holders who are banks/financial institutions over other debenture holders violates Article 14 of the Constitution. The petitioner contended that such classification is arbitrary and lacks a rational basis. The court noted that the SARFAESI Act aims to facilitate faster recovery of non-performing assets (NPAs) of banks and financial institutions, which is in the public interest. The classification between debenture holders who are banks/financial institutions and those who are not is based on an intelligible differentia that has a rational nexus with the Act's objective. The court held that this classification does not violate Article 14, as it is reasonable and serves a legitimate purpose. III. Sections 13(2) & (4) and Section 14 of the SARFAESI Act: Its Scope The petitioner contended that the first respondent could not invoke the provisions of the SARFAESI Act, as it is not a secured creditor and the debenture holders do not have any security interest. The petitioner also argued that the three entities (LIC, CB, and OBC) are not secured creditors since no security interest is held by them in the petitioner-company. The court found that the debenture trust deed created a security interest in favor of the first respondent as a trustee for the debenture holders. The court noted that the debenture holders had classified the petitioner's account as a non-performing asset and had requested the first respondent to initiate action under the SARFAESI Act. The court concluded that the first respondent, as a debenture trustee holding securities on behalf of the debenture holders, is entitled to issue notices under Sections 13(2) and 13(4) and to seek assistance under Section 14 of the SARFAESI Act. IV. Alternative Remedy The respondent argued that the petitioner has an effective alternative statutory remedy under Section 17 of the SARFAESI Act. The court acknowledged the availability of this remedy but chose to address and reject the petitioner's contentions on their merits. Conclusion The court held that the notices issued by the first respondent under Section 13(2), the actions taken under Section 13(4), and the requests made to the Chief Metropolitan Magistrate under Section 14 of the SARFAESI Act are in accordance with the Act's provisions and do not suffer from any illegality. The writ petition was dismissed as devoid of merits.
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