Supreme Court of India · 29 December 2015
Pegasus Assets Reconstruction Pvt Ltd v. Haryana Concast Ltd
(2016) 4 SCC 47
Court
Supreme Court of India
Bench
Vikramajit Sen & Shiva Kirti Singh, JJ.
Date
29 December 2015
Citation
(2016) 4 SCC 47
Background & Facts
Haryana Concast Ltd was ordered to be wound up by the Punjab and Haryana High Court in 1999. Its only secured creditor, Bank of India, had obtained a recovery certificate from the Debts Recovery Tribunal, Chandigarh, and had lodged its claim with the Official Liquidator, but the assets remained unsold. On 27 August 2008 Pegasus Assets Reconstruction, a registered securitisation company, took an assignment of the bank's debt and told the Official Liquidator that it would stay outside the winding up and enforce its security under the SARFAESI Act, subject to the workmen's rights under Section 529A of the Companies Act, 1956.
On 20 March 2009 the Company Judge allowed Pegasus to stay outside the winding up and sell under Section 13 of the SARFAESI Act, but imposed conditions: transparency, submission of sale proposals and valuations to the Official Liquidator, advertisement of the pending winding up, deduction of the Official Liquidator's expenses, placing its claim before the Company Court before appropriation, and deposit of any surplus with the Official Liquidator. A Division Bench upheld these conditions on 15 December 2009. About 36 acres of the company's land were then sold, with the Official Liquidator associated, for Rs.32 crores. Pegasus did not challenge the sale but appealed to have the legal question settled.
The Supreme Court heard the appeal with an appeal against a Delhi High Court Division Bench judgment in the Megnostar Telecommunications case, which had taken the opposite view: that the Company Judge or Official Liquidator has no say in a secured creditor's sale under the SARFAESI Act. It also heard an appeal by HSIIDC, which objected to Pegasus staying outside the winding up, and a challenge by Vinod Rajaliwala to the confirmed sale.
Key Issues Before the Court
Holdings of the Court
Holding 1 — No Company Court Fetters on a SARFAESI Sale
The Court approved the Delhi High Court's view and disapproved that of the Punjab and Haryana High Court, holding that “powers under the Companies Act cannot be wielded by the Company Judge to interfere with proceedings by a secured creditor to realize its secured interests as per provisions of the SARFAESI Act.” Pegasus was entitled to stay outside the winding up and to exercise its rights “without any fetters” of the kind the Company Judge had imposed.
Holding 2 — The SARFAESI Act Is a Complete Code; Workmen Are Protected Within It
For the purpose for which it was enacted, the SARFAESI Act “is a complete code”, and there is nothing lacking in it that needs to be borrowed from the Companies Act up to the sale of the secured assets. Section 13(9) and its provisos already incorporate Section 529A of the Companies Act: where the borrower is a company in liquidation, a secured creditor standing outside the winding up may retain the sale proceeds after depositing the workmen's dues (or the liquidator's estimate of them) with the liquidator. The harmonising exercise the Court had undertaken under the SFC Act and the RDB Act is therefore not warranted for the SARFAESI Act.
Holding 3 — The Official Liquidator's Role Is as the Borrower
Section 13 and the Security Interest (Enforcement) Rules, 2002 require notice to the borrower at various stages, which for a company in winding up means notice to the Official Liquidator. No order of the Company Judge is required to associate the Official Liquidator to protect the workers' dues. As the borrower's representative, the Official Liquidator can place the ascertained workers' dues before the authorised officer and, if dissatisfied, appeal under Section 17 to the Debts Recovery Tribunal and further under Section 18.
Holding 4 — A Fairly Confirmed Sale Is Not Reopened for a Higher Offer
The sale to Venus Realcon for Rs.32 crores was not disturbed. No illegality or irregularity in the auction was established, and, relying on Valji Khimji & Co. and Vedica Procon, the Court held that later higher offers cannot normally be the basis for reopening a confirmed sale that was otherwise valid.
Outcome
Pegasus's appeal was allowed only for a declaration of law, without interfering with the sale. The appeals of HSIIDC and Vinod Rajaliwala, and the appeals against the Delhi High Court's judgment in Megnostar, were dismissed.
Statutory Note
The case was decided under the winding-up provisions of the Companies Act, 1956. Since 15 November 2016, Section 13(9) of the SARFAESI Act has opened with the words “Subject to the provisions of the Insolvency and Bankruptcy Code, 2016” (substituted by Act 31 of 2016); its provisos continue to refer to Section 529A of the Companies Act, 1956. The effect of the Insolvency and Bankruptcy Code on a particular enforcement should be checked separately.
Practical Implications
A secured creditor, including an asset reconstruction company that has taken an assignment of the debt, may stay outside the winding up of a borrower company and sell the secured assets under the SARFAESI Act without seeking the Company Court's supervision or accepting conditions imposed by it. It must, however, comply with Section 13 and the Rules — including notices to the borrower, which in a winding up go to the Official Liquidator — and deal with workmen's dues as the provisos to Section 13(9) require.
For an Official Liquidator or other stakeholder dissatisfied with the secured creditor's steps, the route is an application under Section 17 to the Debts Recovery Tribunal and an appeal under Section 18, not directions from the Company Court.
Relevant Statutory Provisions
Practical Application Note
Where the borrower company is in winding up and a secured creditor or ARC proposes to sell the secured assets under the SARFAESI Act, Pegasus Assets Reconstruction v. Haryana Concast governs the relationship between the sale and the Company Court. This note is general legal information, not legal advice. Our partner-led team advises ARCs, banks and NBFCs on enforcement, and borrowers and other stakeholders on Section 17 applications.