SARFAESI act to prevail in case of conflict with Company Act. HC

1. Company in liquidation availed of credit facilities from appellant bank and hypothecated its plant and machinery and other movables as security thereof. Apart from such securities, two directors of company stood as guarantors for repayment of dues of company to bank.

2. There being default in repayment of loan by company to bank, bank as secured creditor took possession of securities under provisions of SARFAESI Act, followed by sale of both mortgaged and hypothecated properties.

3. The highest bidder was declared auction purchaser and accordingly in terms of the conditions of sale, he deposited 25 per cent of the consideration amount.

4. In the meanwhile, another secured creditor filed company petition for winding up which was allowed. Consequently, offcial liquidator took over possession of assets of company.

5. The bank did not approach the Company Court either before or after winding up order seeking leave of the court for sale. After depositing 25 per cent of the sale price, the auction purchaser applied for a loan for payment of 75 per cent of the balance consideration which was sanctioned and granted, and out of the loan amount, 75 per cent consideration money was adjusted. After that the sale certificate was issued and possession was also handed over to the auction purchaser. The tender agreement and other documents connected with the sale were sent to the sub-registrar for registration. 

6. At this stage the official liquidator addressed a letter to the sub-registrar, informing him that the company had been wound up and requested him not to register any documents with regard to the properties in question.

7. The bank filed a writ petition for a direction to the sub-registrar to register the sale certificate with regard to auction of the properties. Simultaneously, the bank also filed an application for a direction to the official liquidator to clarify suitably with regard to the mortgaged properties in his letter addressed to the sub-registrar.

8. The bank threatened auction purchaser to treat its loan account as a non-performing asset. The auction purchaser filed a writ petition and a company application for setting aside the sale alleging several irregularities, suppression of facts and violation of sections 531, 531A and 537.

9. The single Judge held that the sale conducted by the authorised officer was hit by the provisions of sections 531, 531A and 537. He also held that since no leave of Court was obtained, as required under section 537(1)(b), the sale was void. That apart, the single Judge held that as the mandatory requirement for holding the sale as provided under rule 9 of the rules framed unde 2002 Act had not been adhered to, the sale was invalid.

10. Thus, the sale was set aside and the writ petition and the company application filed by the auction purchaser were allowed, and those filed by the bank were dismissed. 

On appeal HC held as under:

11. There is no denial of fact that two individual persons are owners of the immovable properties mortgaged. However in reply affidavit itself, it was vaguely stated that the said land was given to the company on lease till January, 2015. However, there is no document to support the statement, as under the law lease is required to be created by written registered document, in the absence thereof, by virtue of the provisions of section 17, read with section 49 of the Registration Act, 1908 such transaction is not admissible in evidence and need not be taken into consideration.

12. Moreover, going by the provisions of section 92 of the Evidence Act, the fact which is required to be established by document no oral evidence is admissible. It is also settled provision of law under section 102 of Evidence Act the burden of proof of any fact rest on him who will fail if no evidence is brought. Under these circumstances, it cannot be accepted that the company has got any interest in any of immovable properties which have been mortgaged. These immovable properties exclusively belong to two private individuals. This is pointed out in the company application filed by the appellant.

13. The question whether mortgaged securities can be brought for scrutiny before the Company Judge or not was not addressed by the single Judge at all. It appears that the single Judge proceeded on the basis that all the securities belonged to the company. It is settled position of law that shareholders and directors stands separate from the company, as far as the legal status is concerned. It is therefore clarified and held that the Company Court has no jurisdiction in any manner whatsoever to deal with mortgaged properties even assuming the contention raised by the auction purchaser that the question of illegality and invalidity with regard to sale, is correct. This is absolutely inherent lack of jurisdiction. Therefore, it is to be held that in exercise of jurisdiction under the Companies Act finding and decision of the single Judge with regard to mortgaged properties is without jurisdiction. The Company Court is concerned with regard to the assets and properties of the company in liquidation.

14. It appears that the single Judge rendered the judgment not only entertaining above company applications but also the writ petitions as well. On proper scanning of the two proceedings brought by the auction purchaser, it appears in the writ petition the auction purchaser questions the right of the appellant Bank demanding the alleged outstanding dues in connection with the loan transaction, granted to the auction purchaser. 

15. It seems that the auction purchaser has tried to correlate the loan transaction with completion of sale of the secured properties. It is asserted that since the sale is not valid and proper in view of the various provisions under SARFAESI Act and the rules framed thereunder, there is no transfer of ownership and as such subsequent loan transaction become redundant and illegal and adjustment of consideration money from the loan account is consequently illegal and invalid. In the company application filed by the auction purchaser, it is asserted that in view of sections 531, 531A & 537, sale held become void and invalid. So, the single Judge by combining two questions decided the matter with the reasoning given therein.

16. On reading of sections 531, 531A & 537, it appears that any transfer of assets of the company effected in violation of sections 531 & 531A is void altogether incurably, but it is void under section 537 if it is done without leave of the Company Court. Here, admittedly, no leave of the Company Court was obtained. In this context, the appellant contended that no leave is required, as jurisdiction of Company Court is ousted in view of the provisions of sections 13, 37 & 35 of the SARFAESI Act.

17. A reading of section 37 makes it apparently clear that the provisions of the Companies Act also are saved to the extent of consistency with the provisions of the SARFAESI Act. In other words, any of the provisions of the SARFAESI Act expressly run counter to the provisions of the Companies Act, the provisions of SARFAESI Act will prevail over the Companies Act because it is special and later legislation. It is settled position of law by the Supreme Court that subsequent special legislation overrides general legislation in the same field or in case of inconsistency.

18. It will appear from section 34 of the SARFAESI Act the jurisdiction of the civil court has been ousted absolutely in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to determine. It will appear from section 17 of the SARFAESI Act that any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of section 13 taken by this secured creditor or his authorized officer under this Chapter may make application to the Debts Recovery Tribunal having jurisdiction in the matter within fortyfive days from the date on which such measures had been taken. 

19. If aforesaid provision of sub-section (1) of section 17 is read with section 34, it would be clear that the Civil Court has no jurisdiction to entertain any move to challenge the action of secured creditor under this Act. A fairly recent decision of the Supreme Court in the case ofOfficial Liquidator v. Allahabad Bank [2013] 177 Comp Cas 426 ruled that the Official Liquidator can only take recourse to the mode of appeal and further appeal under the RDB Act and not approach the Company Court to set aside the auction or confirmation of sale when a sale has been confirmed by the Recovery Officer under the RDB Act.

20. Again the Apex Court in case of Jagdish Singh v. Heeralal [2014] 124 SCL 291/41 taxmann.com 408 lays down that civil court has no jurisdiction to entertain any suit or proceedings in respect of those matters which fall under sub- section (4) of section 13 of the Securitisation Act because those matters fell within the jurisdiction of the DRT and the Appellate Tribunal. Further, section 35 says, the Securitisation Act overrides other laws, if they are inconsistent with the provisions of that Act, which takes in section 9 CPC as well.

21. When the legislature intends legality and validity of sale under the provisions of section 13 of SARFAESI Act has to be brought for scrutiny before the Debts Recovery Tribunal, by virtue of section 17 of SARFAESI Act, the jurisdiction of the Company Court cannot be inferred to have been conferred rather by necessary implication, the same is held to be ousted. It is true that section 34 mentioned the words Civil Court (not apparently Company Court), but after winding up order is passed by virtue of the provisions of section 446 (2) of the Companies Act, the Company Court exercises jurisdiction of the Civil Court. So, essentially, the Company Court becomes Civil Court. What is important is not the nomenclature of the Court, but power and functions exercised by that Court. Thus, in view of discussions above, it is to be held that the company court has no jurisdiction to deal with the issues arising out of action of secured creditor under section 13 of SARFAESI Act.

22. Thus, writ Court has jurisdiction within its own power as enshrined in articles 226 & 227 of the Constitution of India to entertain any dispute and it cannot be taken away by way of simple legislation.

23. Section 13 (1), clearly provides that without intervention of the Court or Tribunal, action can be taken for sale of securities, whereas the provisions of section 537 of Companies Act requires leave of Company Court. Accordingly, it is held that there is apparent inconsistency in two competing provisions in two different Acts on the same subject. Therefore, the provisions of SARFAESI Act will prevail over the provisions of section 537 of the Companies Act to the extent of inconsistency. Thus, no leave is required under section 537 of the Companies Act, moreover jurisdiction of the Company Court is also ousted.

24. As has already been held, to the extent of inconsistency, provision of the Companies Act are to be overlooked. To find element of inconsistency on this issue, the provisions of sub-sections (4) & (6) of section 13 of the SARFAESI Act are to be examined. 

25. It is clear from sub-section (6) the moment action taken under sub-section (4) by the secured creditor or any manager on his behalf of the secured creditor for transfer all rights shall vest in the transferee in relation to the secured assets. In other words, if action taken under section 13 (4) is found to be lawful and valid in accordance with SARFAESI Act, no other legal provision can invalidate it. Whereas Sections 531 & 531A provide otherwise if any transfer including sale is effected in violation thereof the same is invalid and void. Thus it appears that there has been glaring inconsistency. 

26. Thus, it is to be held that the provisions of sections 531 & 531A have no manner of application and the same do not apply in case of valid sale undertaken under the SARFAESI Act and the rules framed thereunder. Besides it cannot be comprehended as to how section 531A is applicable carefully reading the same on fact in this case. In order to apply this section, three factual conditions must be satisfied viz., (i) transfer must be by the company (ii) it must be voluntary (iii) such transfer must be within one year before presentation of winding up petition.

27. In this case admittedly transfer is not made by company not even on behalf of the company, but by secured creditor, appellant herein, by virtue of power coupled with right under sub-section (4) of section 13 of the SARFAESI Act. This could have been decided by the Debts Recovery Tribunal itself since writ court has decided on the admitted fact. Thus, the decision of the single judge while applying the aforesaid provisions in the instant sale without examining the implications of sub-sections (1), (4) & (6) of section 13 of SARFAESI Act at all, is unacceptable legally. Accordingly, these findings and decisions in this regard are overruled.

28. The single Judge himself has noted that there is not enough material to examine the allegations made by writ petitioners and countered by the appellant. All materials namely advertisement, conditions of sale and other things are not produced before instant Court also. Therefore, this issue cannot be decided conclusively nor such decision of the single Jugde in absence of materials is acceptable.

29. The single Judge has not rendered any findings as to whether the loan granted to the auction purchaser subsequent to the auction being held are correlated to sale of the securities. In other words, whether repayment of the loan is dependent upon lawful and valid completion of sale held by the appellant under the SARFAESI Act. It is the contention of the auction purchaser that since sale was not valid nor complete, so also sale certificate issued in the context of the provisions of the Companies Act as well as the provisions of the rules 7, 8 & 9 framed under the SARFAESI Act adjustment of balance consideration amount against loan amount is illegal. The single Judge without deciding this issue granted relief as prayed for to the auction purchaser in the writ petition. 

30. Whether the demand of the Bank for repayment of loan after adjustment of the sale consideration money is lawful or not, whether the same have been linked with the sale and whether the sale under the law is complete or not, or whether the auction purchaser can back out after bidding and offering to pay price for sale by depositing 25 per cent of the same, all these questions are required to be decided in great detail.

31. The single Judge by necessary implication proceeded assuming that the loan transaction between the appellant and the auction purchaser are having correlation with the completion of sale namely handing over possession of the property and payment of balance sale consideration money. This approach in exercise of writ jurisdiction is absolutely unwarranted and the writ petitions should not have been entertained at all. It is not a pure question of law on admitted fact. 

32. All the questions and controversy are disputed questions of fact and law and could not be decided in writ jurisdiction. Hence, granting relief to the auction purchaser as prayed for in the writ petition is not sustainable under the law. Therefore, the same is set aside and the writ petitions are dismissed leaving all questions open. It would be open for the auction purchaser to approach the Debts Recovery Tribunal so also Official Liquidator or any other claimant. These Appeals are accordingly allowed.