Supreme Court Resolves Conflict Between SARFAESI Act and Companies Act

Pegasus Asset
Reconstruction P. Ltd. v. Haryana Concast Ltd.
, the Supreme Court was
concerned with a conflict between the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (for brevity
‘the SARFAESI Act’) on the one hand and the Companies Act, 1956 on the other.
The specific conflict was identified as follows:
Whether a Company Court, directly or
through an Official Liquidator, can wield any control in respect of sale of a
secured asset by a secured creditor in exercise of powers available to such
creditor under the [SARFAESI Act].
clarify further, the issue becomes relevant in the case of a company under
liquidation, where the Company Court and the liquidator are seized of the
issue had acquired greater significance in viewing differing views adopted by
High Courts. The Punjab and Haryana High Court, in the Pegasus case which was
on appeal before the Supreme Court, held that the Company Court was entitled to
place fetters upon the exercise of powers by a secured creditor in effecting a
sale of the secured assets. The Delhi High Court had taken a diametrically
opposite view in another case involving Megnostar Telecommunications Private
Limited, (which was also on appeal in the same batch of matters before the
Supreme Court, by holding that the Companies Act cannot be used to impose
fetters against the sale of secured assets by the secured creditors and that
the liquidator did not have any say whatsoever in such sale.  The Supreme Court was effectively left with
having to choose between the two views, and decided to accept the Delhi High
Court position giving primacy to the SARFAESI Act and thereby curbing the
powers of the Company Court and the liquidator in a sale of assets by a secured
coming to its conclusion, the Supreme Court analysed various provisions of the
SARFAESI Act, which contained non
clauses that indicated that it operated as a complete code, a
position that was accepted by previous judicial decisions. The principal
concern in opposition to this conclusion was the position of preferential
creditors (such as workmen) who possess priorities under section 529A of the
Companies Act, 1956. Here, the Court concluded that several protections were
already present in the legislative scheme, and that the neither the Company
Court nor the liquidator can exercise greater interference in the sale process.
the issue involves a somewhat technical interpretation of the SARFAESI Act and
the Companies Act, the Supreme Court’s decision certainty strengthens the hands
of secured creditors in a liquidation scenario, perhaps in essence giving
effect to the legislative intention of the SARFAESI Act. The entire gamut of
insolvency laws, including the Companies Act, the SARFAESI Act and the Recovery
of Debts due to Banks and Financial Institutions Act, 1993 have experienced
similar conflicts and turf wars in the past that have required judicial
intervention to resolve them, thereby resulting in loss of precious time and
cost. The proposed reforms to bankruptcy and insolvency laws would hopefully
minimise such issues.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


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