2014 (2) TMI 1438 - HC - Indian Laws

Applicability of the SARFAESI Act to the loan transaction post-merger - it is urged that once the proceedings under Section 9 of the Arbitration Act have been initiated it is not permissible for the 4th respondent to initiate proceedings of any other form that are prohibited under Section 8 of that Act - HELD THAT - The validity of the Sarfaesi Act has been dealt with by the Hon ble Supreme Court in Mardia Chemicals Ltd. v. Union of India others 2004 (4) TMI 294 - SUPREME COURT . It was upheld in all respects observing that enough safeguards are provided in it. It was also observed that even if proceedings in relation to a loan transaction are pending before the Tribunal the financial agency can invoke its powers under the Sarfaesi Act and proceed against the security. The reason that appears to have weighed with the Hon ble Supreme Court is that the amounts advanced as loan by Banks and other agencies constitute public finance and it is in the national interest that the procedure is streamlined for recovery of such amounts. Once the Sarfaesi Act is upheld any amount of argument advanced by the petitioners vis- -vis its provisions cannot be countenanced. Ultimately it is for the Supreme Court to say anything further if it comes to the conclusion that the beneficiaries under that Act are heckling at the age old legal system. It is trite that an individual or a corporate personality has the freedom to contract and while taking a decision in the course of their business several factors assume importance. If an individual intends to purchase an item he would take into account several factors such as the quality of the item its price structure the reliability of the supplier and the like. Similarly if a person is in need of money he has to take several aspects into account. Even where an agency is willing to lend the amount the conditions subject to which the money is lent would assume importance. The 1st petitioner is in existence for the past several decades and it is running a reputed newspaper. May be for expansion or other purposes it wanted some finances. By the time it has chosen to borrow the amounts the Sarfaesi Act has already come into force. It has deliberately chosen to approach a non-discrepit financial agency IBFSL even while several Nationalized Banks were prepared to lend the amount by taking the same security. What prompted the 1st petitioner to approach IBFSL appears to be that it was not under the purview of the Sarfaesi Act. It is also essential to mention that the 4th respondent a sister concern of the IBFSL was also in existence at that time - The sequence of events in the instant case discloses that the predominant purpose for which the IBFSL was merged with the 4th respondent was to bring the loan transaction of the 1st petitioner-company under the purview of the Sarfaesi Act. The proceedings initiated by the 4th respondent against the petitioners are set aside - petition allowed.

Summary

Issues Involved:

1. Applicability of the Sarfaesi Act to the loan transaction post-merger.
2. Validity of proceedings under the Sarfaesi Act when arbitration proceedings are already initiated.
3. Rights of the borrower under the National Housing Bank Act versus the Sarfaesi Act.
4. Legality of changing the terms of a loan agreement post-merger without the borrower's consent.

Issue-wise Detailed Analysis:

1. Applicability of the Sarfaesi Act to the Loan Transaction Post-Merger:

The petitioners argued that the original lender, IBFSL, was not registered under the Sarfaesi Act and therefore not subject to its provisions. They contended that the merger with the 4th respondent, a company registered under the Sarfaesi Act, should not retroactively apply the Act's provisions to their loan agreements. The court noted the significant deviation of the Sarfaesi Act from traditional legal frameworks, emphasizing that the Act allows lenders to bypass traditional adjudication processes. The court observed that the merger's primary purpose seemed to be bringing the loan under the Sarfaesi Act's purview, which was not permissible without the borrower's consent. The court sided with the Orissa High Court's view that a loan transaction initially outside the Sarfaesi Act's purview cannot be brought under it post-merger without consent.

2. Validity of Proceedings Under the Sarfaesi Act When Arbitration Proceedings are Already Initiated:

The petitioners highlighted that arbitration proceedings had been initiated under Section 9 of the Arbitration Act, based on the arbitration clause in the loan agreement. They argued that under Section 8 of the Arbitration Act, once arbitration is invoked, other proceedings, including those under the Sarfaesi Act, are prohibited. The court agreed, stating that the initiation of proceedings under the Sarfaesi Act cannot override the arbitration process, which had already commenced. The court emphasized that the Sarfaesi Act does not hold a superior position over arbitration proceedings, and the 4th respondent could not proceed against the security while arbitration was pending.

3. Rights of the Borrower Under the National Housing Bank Act Versus the Sarfaesi Act:

The petitioners contended that the 4th respondent, as a housing finance company, should be governed by the National Housing Bank Act, which prescribes specific recovery procedures that do not align with the Sarfaesi Act. The court noted that the 4th respondent, although governed by the NHB Act, chose to invoke the Sarfaesi Act's provisions post-merger. The court underscored that the Sarfaesi Act's non-obstante clauses do not automatically override other laws unless explicitly stated, and the NHB Act's provisions must be respected unless legally superseded.

4. Legality of Changing the Terms of a Loan Agreement Post-Merger Without the Borrower's Consent:

The court examined whether the merger could alter the legal regime governing the loan agreement without the borrower's consent. It reiterated the principle that changes detrimental to a party's rights in a contract should not be imposed without consent. The court found that the merger was orchestrated to bring the loan under the Sarfaesi Act, which was not permissible. The court highlighted that the borrower's choice to engage with IBFSL, not covered by the Sarfaesi Act, was a deliberate decision to avoid the stringent recovery mechanisms of the Act.

Conclusion:

The court allowed the writ petition, setting aside the proceedings initiated by the 4th respondent under the Sarfaesi Act. The court directed that the status quo regarding possession of the security be maintained for four weeks, allowing the 4th respondent to pursue other lawful recovery methods. The court's decision underscores the importance of respecting contractual terms and the legal framework chosen by parties at the time of agreement, even in the face of subsequent corporate restructuring.