Delhi High Court Rules: SARFAESI Act Proceedings Shall Remain Unaffected by Orders Passed under SEBI Act

Delhi High Court Rules: SARFAESI Act Proceedings Shall Remain Unaffected by Orders Passed under SEBI Act

The Delhi High Court has held that proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) shall remain unaffected by orders passed under the Securities and Exchange Board of India Act, 1992 (SEBI Act).

The single judge Justice Purushaindra Kumar Kaurav observed, “an interpretation of Section 35 and Section 37 of the SARFAESI Act, 2002 would reveal that the proceedings under the SARFAESI Act, 2002 are to be treated as a carve out to, and remain unaffected by, the orders passed under the SEBI Act, 1992.”

In the present case a petition was filed by ICICI Bank seeking a declaration that the orders passed by the Whole Time Members of the SEBI dated 29 May, 2018 and 14 December, 2018 are not applicable to the petitioner bank and that those orders do not prevent the petitioner bank from proceeding further under the provisions of SARFAESI Act, 2002 to sell the mortgaged property being at The Palm Springs, Gurgaon.

The petitioner bank had prayed for directions to respondents 1- Deputy General Manager and 2- SEBI not to take any further actions pursuant to the impugned e-mails dated 29 January, 2021 and 18 March, 2021 and not to thwart the petitioner bank in any manner with respect to selling the mortgaged property.

Respondents 3 and 4 had availed a home loan facility from the petitioner bank amounting to Rs.6,03,99,231 vide facility agreement mortgaging the property in question which was thereby granted. A deed of Guarantee was executed by respondents 3 and 4 by creating a security interest in respect of the property in favor of the petitioner bank while depositing with the petitioner bank the original title document of the said mortgaged property including the Sale Deed. Thus, the mortgaged property was registered with the Central Registry of Securitisation Assets Reconstruction and Security Interest of India.

However, in 2017 SEBI initiated an investigation against F6 Commodities Private Limited of which respondents 3 and 4 were directors and an ex parte order was passed prohibiting them from buying, selling or otherwise dealing in securities, either directly or indirectly, or being associated with the securities market and not to dispose of or alienate any assets, whether movable or immovable, or any interest or investment or charge in any of such assets excluding money lying in bank accounts except with the prior permission of SEBI.

In the meantime, petitioner bank noted loan repayment default by the respondents and called them and the guarantor to repay the outstanding amount. On failure of the repayment, the petitioner bank took over the physical possession of the mortgaged property under Section 14 of the SARFAESI Act, 2002. A sale notice was issued which was thereby challenged by SEBI via emails which stood challenged in the present petition.

On the aspect of whether SEBI has the requisite legal power vested in it to direct the petitioner bank, the Court noted that Section 11-B(1)(iii)(a) of the SEBI Act, 1992 allows for directions to be given to persons or class of persons referred to in Section 12 of the SEBI Act, 1992 irrespective of the persons or class of persons being registered with SEBI. Thus, the power to direct a bank is necessary for the proper functioning of SEBI.

The Court observed, “Such powers are incidental to ensuring that the purpose of the investigation or enquiry conducted by SEBI fructifies. But for this power, an individual may, without more, dissipate its assets.”

The Court further noted that the exercise of power by SEBI, which is conferred upon it by the SEBI Act, 1992 remains a legal and legitimate exercise of power only, and insofar as, it does not breach the mandate of other laws. Thus, SEBI does have the power to direct the petitioner bank, however, that power must be exercised with due caution. It must not be exercised so as to curtail the effect of other laws, affirmed the Court.

Further, with respect to the issue as to whether the said order dated 29 May, 2018, prevented the petitioner bank from alienating the mortgaged property of respondents 3 and 4, the Court observed that the petitioner bank falls under the category of a ‘bank’, therefore directions contained in the order does apply to the petitioner bank. A scrutiny of the directions revealed that they did not prevent the petitioner bank from alienating the assets of respondent no.3 and 4, including the mortgaged property.

The Court was of the considered view that the direction contained in order levied a restriction upon the assets of the ‘entities’ from being alienated. These ‘entities’ are distinct from ‘persons’, and the directions enlists certain companies namely F6 Finserve Pvt. Ltd. and F6 Commodities Pvt. Ltd. as well as certain individuals, including respondent 3 and 4. The companies have been referred to as ‘entities’ while the individuals are termed as ‘persons.’

Thus, the Court avowed, “The mortgaged property undoubtedly belongs to respondent nos.3 and 4, who are individuals or “persons” as opposed to “entities”. It is therefore the case that the directions contained in paragraph no.27(e) do not prevent the assets of respondent no.3 and 4, including the mortgaged property, from being alienated.”

Apropos to the issue as to whether orders passed under Sections 11(4), 11-B and 11-D of the SEBI Act, 1992 and Regulation 35 of the Regulations, 2008 operate in rem or in personam, the Court concluded that impugned emails were erroneous and wholly without jurisdiction, because the direction in paragraph no.27(e) as well, relates to the assets of the entities and not of the individuals. The assets of respondent 3 and 4 therefore, fell outside the scope of the direction contained in paragraph no.27(e).

The Court opined that since the impugned e-mails/communications were erroneous and wholly without jurisdiction, and the said Orders do not prevent the petitioner bank from auctioning the mortgaged property, the present writ petition was maintainable.

Lastly, on the aspect of whether SEBI in exercise of powers conferred under the SEBI Act, 1992 could prevent the petitioner bank from proceeding under the SARFAESI Act, 2002, the Court noted that Section 35 of the SARFAESI Act, 2002 is not subject to Section 37 of the SARFAESI Act, 2002.

“The mortgaged property, is neither a security in the context of the securities market nor is associated with such a security, and is also not specifically governed by the SEBI Act, 1992. There is, therefore, a functional aspect that needs to be considered in the present issue. SEBI and the said Orders function in a field different from the field in which the petitioner bank has taken their actions under the SARFAESI Act, 2002,” the Court observed.

Thus, the Court held that in such a case, the operation of the SARFAESI Act, 2002 is the specific legislation that applies to a specified secured debt while the directions under the SEBI Act, 1992, which prevent the dissipation or alienation of assets, is the generalized law applicable to a broader set of assets.

The Court asserted that such harmonization should be prioritized so as to prevent the two provisions coming into direct conflict with each other. Applying the mischief rule to the present case, the Court observed that the mischief sought to be cured was the lack of a statutory mechanism that provided and further allowed, banks to realize their security interests with minimum interference from Courts.

The Court highlighted that, “The SARFAESI Act, 2002 was thus enacted to provide a statutory framework that allows for swifter and prioritised recovery of the bank’s secured debt. There is thus a clear intention to prioritise the bank’s realisation of its security under the SARFAESI Act, 2002.”

Therefore, the Court ruled that proceedings under the SARFAESI Act, 2002 are to be treated as a carve out, and therefore remain unaffected by, orders under the SEBI Act, 1992.

The Court concluded that an interpretation of Section 35 and Section 37 of the SARFAESI Act, 2002 would reveal that the proceedings under the SARFAESI Act, 2002 are to be treated as a carve-out to, and remain unaffected by, the orders passed under the SEBI Act, 1992. The Court held that the said orders do not prevent the petitioner bank from proceeding further under the SARFAESI Act, 2002 to auction its mortgaged property.

Accordingly, the Court disposed of the writ petition.