Introduction

In Pegasus Assets Reconstruction P Ltd v M/s Haryana Concast Limited(1) a division bench of the Supreme Court held that a company court (through the official liquidator) cannot wield any control in respect of a sale of secured assets by a secured creditor in exercise of powers available to the creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002. The decision clarifies the position of law and reconciles conflicting decisions from several high courts.

In India, company courts are generally designated benches of the high courts within whose jurisdiction the registered office of a company is situated. An official liquidator is an authority appointed by the company court to take charge of the insolvent company's assets and affairs. Once declared insolvent, the company ceases to act through its management and instead acts through the official liquidator.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act is India's central legislation which, among other things, empowers secured creditors such as banks, notified public financial institutions and registered securitisation/asset reconstruction companies to enforce securities furnished by borrowers without court interference.

Conflicting high court decisions

The question of law addressed by the Supreme Court was a result of a differing interpretations of the law by the Punjab and Haryana High Court and the Delhi High Court.

While the various appeals which were joined and heard by the Supreme Court had different facts and circumstances, the question of law was the same. All three appeals(2) from the Punjab and Haryana High Court were orders upholding company court orders which called for the sale of secured assets by a creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act under the aegis of the official liquidator.

The fourth appeal before the Supreme Court was from a Delhi High Court decision,(3) which held that a company court judge or official liquidator has no say and cannot place any fetters on the sale of secured assets by a secured creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, since a secured creditor's right to enforce security under the act does not require court or tribunal intervention.

Company court's interference

The facts in the lead appeal in Pegasus effectively demonstrate the manner in which company courts and official liquidators often impinge on secured creditors' right to enforce security under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. In Pegasus the secured creditor obtained a recovery certificate from the Debts Recovery Tribunal against the borrower, while the borrower also received an order of insolvency from a company court.

Thereafter, the secured creditor assigned the debts to Pegasus, a registered securitisation company, and Pegasus informed the official liquidator that it wished to stay out of the insolvency proceedings and of its intentions to enforce the security under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. Under these terms, Pegasus applied to the company court for a direction requiring the official liquidator to hand over the relevant secured assets of the company in its favour so that it could move forward with the proposed sale.

Although the company court permitted Pegasus to proceed with the sale of the securities under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, it imposed various conditions under Section 529A(4) of the Companies Act 1956 on how to go about the sale, such as requiring the company to:

  • submit all details of the bidding process to the official liquidator;
  • provide details of the proceedings before the company court in the ad for the sale; and
  • provide details of valuation to the official liquidator.

While Pegasus was able to enforce the security of the insolvent borrower, in the Delhi High Court appeal, the official liquidator interfered once the secured assets had already been sold by the secured creditor and title deeds of the immoveable property had been handed over to the purchaser. On the day that the possession was to be handed over to the purchaser, representatives of the official liquidator took possession of the property under a company court order.

Sale without court intervention

The Supreme Court concurred with the Delhi High Court's decision and observed that in Pegasus the Punjab and Haryana High Court had arrived at the incorrect conclusion that there is no inconsistency between the Companies Act and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act if the company court issues supervisory directions to achieve the objective set out in Section 529A of the Companies Act, despite the fact that Section 13(9) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act accounts for Section 529A of the Companies Act.

Referring to various precedents that have settled the law on the overlap between the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act and other legislation, the Supreme Court held as follows:

  • Section 9 read with Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act leaves no doubt that a secured creditor may enforce security interest without court intervention.
  • The provisos to Section 13(9) account for a situation where the borrower company is insolvent, while keeping in mind the provisions of Section 529 and Section 529A of the Companies Act.
  • The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (like the Recovery of Debts Due to Banks and Financial Institutions Act 1993) overrides the effect of other laws, including the Companies Act.
  • The official liquidator, stepping into the shoes of the borrower company, may seek proper distribution of the amounts realised from sale of the secured assets in accordance with the provisos to Section 13(9) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act.
  • No company court order is required to protect the interests of employees and realise their dues. Sufficient rules are already in place under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act to ensure that employees' interests are protected.
  • The official liquidator, stepping into the shoes of a borrower, may approach the Debt Recovery Tribunal under Section 17(5) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act in the event it is not satisfied by the steps taken by the secured creditor.

For further information on this topic please contact Jyoti Singh or Vishnu Shriram at Phoenix Legal by telephone (+91 22 4340 8500) or email (jyoti.singh@phoenixlegal.in or vishnu.shriram@phoenixlegal.in). The Phoenix Legal website can be accessed at www.phoenixlegal.in.

Endnotes

(1) 2015 SCC Online SC 1387.

(2) CA 3646/2011, SLP (C) 7074/2010 and SLP (C) 117-118/2011.

(3) CA 9293-94/2014.

(4) This section deals with the hierarchy of distribution of assets of an insolvent company and, among other things, gives preference and priority to dues owed to the employees of the company.

(5) This section provides the right to appeal against the steps taken by a secured creditor towards enforcement of security.

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