SARFAESI Act Prevails: Court Upholds Company’s Right to Possession Despite Arbitration Claim.
18 December 2024
Arbitration >> Corporate Law | Sarfaesi >> Corporate Law
In a significant legal development of Brij Systems Limited, Maharashtra v/s Kirti Manharlal Mehta & Others, a company (the "Petitioner") has successfully obtained a direction from the High Court for the enforcement of a Sale Certificate issued under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The case involved a complex interplay between the SARFAESI Act and the Arbitration and Conciliation Act, 1996, where the petitioner sought possession of a property it purchased in an auction conducted under the SARFAESI Act, despite a Receiver being appointed in the same property by an arbitrator. This case highlights the legal supremacy of the SARFAESI Act in enforcing a secured creditor’s rights over other proceedings, including arbitration.
Background:
The subject property in question was a flat owned by three individuals (the "Borrowers") who had secured financial assistance from DCB Bank Ltd. (the "Creditor"). To secure the loan, the property was mortgaged under Section 26D of the SARFAESI Act, and a charge was registered in favor of the Creditor in August 2012. However, the Borrowers defaulted on their repayment, leading the Creditor to initiate enforcement actions under the SARFAESI Act. A notice under Section 13(2) was issued in September 2019, followed by the appointment of a Court Commissioner on January 20, 2020, to take possession of
the property.
Subsequently, the Creditor assigned its rights to Encore Asset Reconstruction Company Pvt. Ltd. (the "Assignee") in 2021. The Assignee initiated an auction of the property in November 2023, and the petitioner, a company, won the auction for Rs. 6.2 crore. A Sale Certificate was issued in December 2023, granting the company legal ownership of the property, followed by symbolic possession.
However, the petitioner’s efforts to take physical possession were thwarted by an order passed by the Sole Arbitrator in December 2023, which appointed a Receiver over the property in arbitration proceedings initiated by the Claimant against the Borrowers. The Arbitrator’s final award, passed in May 2024, upheld the Claimant's monetary claim and directed the sale of the property for recovery of dues.
Petitioner’s Argument:
The petitioner argued that it had acquired lawful ownership of the property through the auction process conducted under the SARFAESI Act. With the Sale Certificate issued in its favor, the petitioner contended it was entitled to possession of the property, and that the arbitration proceedings involving the Claimant and the Borrowers should not interfere with its rights as a bona fide purchaser. The petitioner also asserted that the SARFAESI Act’s provisions, particularly Section 35, which provides that the Act overrides other laws, should prevail over the arbitration award.
The petitioner further argued that, as the purchaser in the auction, it was not a party to the arbitration proceedings and should not be bound by the orders or the final award. Therefore, it sought directions for the Assignee (respondent no. 7) to take steps to enforce possession, citing its statutory rights under the SARFAESI Act.
Opposition by Borrowers and Claimant:
The Borrowers and the Claimant raised objections to the petitioner's claim for possession. The Borrowers argued that the Company was not entitled to any relief as the arbitration award had not been set aside, and the property had already been attached in the arbitration proceedings. The Claimant further contended that the petitioner's rights, if any, could be adjudicated only in the execution proceedings of the arbitration award.
The opposition also emphasized that the petitioner could not invoke the writ jurisdiction of the Court for seeking possession of the property. They suggested that the appropriate remedy for the petitioner was to file a civil suit for possession.
Court’s Analysis and Decision:
The High Court, after considering the arguments from all parties, ruled in favor of the petitioner. The Court emphasized that the SARFAESI Act provides a clear statutory framework for the enforcement of security interest, and Section 35 of the Act overrides other legal provisions, including those under the Arbitration and Conciliation Act, 1996. The Court noted that the petitioner, as the lawful purchaser of the property through the SARFAESI Act auction, was entitled to possession, irrespective of the ongoing arbitration proceedings.
The Court also found that the Borrowers had lost their title to the property upon the sale of the property at auction, and the rights of the Creditor, and subsequently the Assignee, had been duly registered under the SARFAESI Act. Therefore, the Arbitrator’s order appointing a Receiver and the final award in favor of the Claimant could not interfere with the petitioner’s right to possession.
The Court directed the Assignee to take immediate steps to secure and hand over the physical possession of the property to the petitioner in terms of the Sale Certificate issued on December 20, 2023. The Court clarified that the Claimant could still pursue execution of the arbitration award against the Borrowers, but the petitioner’s right to possession would not be affected.
Conclusion:
The High Court’s decision reinforces the legal strength of the SARFAESI Act in enforcing the rights of secured creditors, even in the face of conflicting legal proceedings such as arbitration. The judgment also highlights the role of judicial intervention in ensuring that the legal rights of bona fide purchasers, such as the petitioner, are upheld against encumbrances created by parallel proceedings.
This case serves as a reminder to all stakeholders in financial and legal transactions involving secured assets that the SARFAESI Act provides a robust mechanism for the enforcement of security interests, and that its provisions will take precedence over other legal claims, including those arising from arbitration awards, provided the statutory requirements are met.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
Arbitration and Conciliation Act, 1996