A COMPANY COURT HAS NO JURISDICTION OVER THE SECURED CREDITOR

[Mr. M. GOVINDARAJAN]

In ‘Kingfisher Airlines Limited V. State Bank of India’ – 2014 (12) TMI 486 - KARNATAKA HIGH COURT  the State Bank of India has filed an application under Section 14 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘Act’ for short) before the Court of the Chief Judicial Metropolitan Magistrate, Esplanade, Mumbai.   The bank contended that they are entitled to take physical possession of the building known as ‘Kingfisher House’, Andheri, Mumbai under provisions of the Act.

Against this the petitioner company approached the High Court.   The petitioner admitted that the said property was mortgaged by the company in favor of the banks to secure the various credit facilities made available to the company.  The petitioner prayed the High Court to direct the banks not to take physical possession of the said property.    The petitioner company contended the following before High Court:

• By invoking the jurisdiction of the High Court the banks are deemed to have relinquished and surrendered all security interest over such assets of the petitioner;
• Therefore the banks seeking to invoke Section 14 of the Act, after filing the present petition, is wholly illegal and without jurisdiction;
• The proceedings under the Act by the bank would jeopardize the interest of a large number of shareholders, other creditors and employees of the petitioner company;
• A large number of petitions seeking the winding up of the company are pending before the High Court and they are at the stage of admission; if the action of the bank is allowed, then such winding up would be deemed to have commenced and all matters would come within the jurisdiction of the High Court;
• The Service Tax department already attached the very same property ;
• SBICAP Trustee Co. Limited, the security trustee issued notices under Section 13(2) of the Act to the company and the guarantor, UB (Holdings) limited;
• Without affording opportunity to the company and without regard to the time frame of 60 days prescribed under the Act the banks had filed an application before the Debts Recovery Tribunal which was not maintainable;
• The SBICAP issued an order on 14.08.2013 in which the Tax Recovery Officer was said to have attached the said property;
• The banks being secured creditors, would have the option of enforcing their security, while choosing to stand outside the winding up proceedings, but if once the banks have invited themselves before the High Court and have sought the winding up of the company, the banks would be precluded from seeking to lay claim to properties of the company with reference to the proceedings under the SARFAESI Act

The banks contended the following before the High Court:

• There is direct bar of jurisdiction for this court to intervene in terms of Sections 34 and 35 of SARFAESI Act;
• The remedy, if any, of the company is in terms of Section17 of the Act and an appeal may be filed before the Debt Recovery Tribunal, in  respect of the measures under Section13 (4) of the SARFAESI Act;
• The banks have instituted the company petition by standing outside the winding up insofar as their secured interests are concerned and without relinquishing their rights and interests as secured creditors;
• Even if all the secured interests of the company are brought to sale, the banks are not in a position to realize all of their outstanding dues and, hence, have filed the company petition and that this unequivocally stated in the petition itself;
• The authorized officer of SBICAP having rejected the replies by the company to the notices issued under Section 13(2) of the SARFAESI Act, is said to have taken ‘symbolic’ possession of ‘Kingfisher House’ on behalf of the petitioners on 10.08.2013 on behalf of the banks on 10.08.2013;
• It is thereafter than an application is filed before the Court of the Chief Metropolitan Magistrate, Esplanade, Mumbai;
• Thus the banks have acted in accordance with law;
• The attachment by the Service Tax department in respect of the same property is not relevant to the present application;
• The rights created in favor of the secured creditors over the secured asset in question, has precedence over charges, if any, of the taxation authorities.

The High Court considered the Section 34 of the SARFAESI Act.  The Court observed that a plain reading  of Section 34 of the Act would indicate that the jurisdiction of all civil courts to entertain any suit or proceeding in respect of any matter which a Debt Recovery Tribunal or an Appellate Tribunal is empowered to determine under the Act is barred.   No injunction can be granted by any court or other authority in respect of any action taken or to be taken pursuant to the aforesaid Act.   The bar would apparently apply to the High Court as well.

The High Court further observed that Section 35 of the SARFAESI Act would declare that the provisions of the Act would prevail over other laws notwithstanding anything inconsistent contained therein.

The High Court further observed the objects of the SARFAESI Act. The object indicated that unlike international banks, the banks and financial institutions in India did not have the power to take possession of securities and sell them, resulting in delayed recovery of loans. It was in that direction that the Central Government had constituted certain committees to examine the reforms necessary in the banking sector and it is on the basis of reports of those Committees, inter alia, suggesting the legislation for securitization and empowerment of banks and financial institutions to take possession of the securities and sell them without the intervention of the court, that the SARFAESI Act had come into being.   Hence any intervention by any court or authority in respect of proceedings under the Act would defeat the object of the Act.

The High Court held that it is clear that the High Court would not have jurisdiction to interfere in the present circumstances of the case with the impugned action.   Thus it is evident that a company court has no jurisdiction over the secured creditors.