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Successor-in-interest can initiate recovery action under SARFAESI

In Indiabulls Housing Finance Ltd. vs M/S Deccan Chronicle Holdings Ltd on 23 February, 2018, the appeal was against the judgment of the Andhra High Court which had ruled in favour of the respondents who had raised the following issues :-

(a) loan agreements contained arbitration clauses which were invoked by the appellant with the filing of cases under Section 9 of the Arbitration and Conciliation Act, 1996. In view thereof, initiation of any other proceedings under the SARFAESI Act are impermissible in law; and

(b) the loan was initially given by IBFSL. IBFSL was not a banking company or financial institution within the meaning of Section 2(d) and (m) of the SARFAESI Act and, therefore, it had no jurisdiction to take any steps by invoking the provisions of this Act. However, IBFSL got merged with the appellant company. No doubt, the appellant is a financial institution under the SARFAESI Act. However, since IBFSL had no right to initiate any action under the said Act, as a successor-in-interest, the appellant steps into the shoes of IBFSL and, therefore, it also cannot initiate any action under the SARFAESI Act. If that is allowed, held the High Court, substantive rights of the contesting respondents which accrued to them under Sections 69 and 69A of the Transfer of Property Act, 1882 would be adversely affected, which cannot be countenanced.

The Supreme Court found that the above issues have been conclusively decided in favour of the lender upon almost similar issues the Supreme Court in M.D. Frozen Foods Exports Pvt. Ltd. & Ors. v. Hero Fincorp Ltd. 

The Supreme Court  decided that the only difference is that here the loan was initially sanctioned by IBFSL which stands merged with the appellant and the appellant is the successor-in-interest which is covered by the SARFAESI Act. In the aforesaid case, though the entity which disbursed the loan remained the same, however, at the time when the loan was given by the respondent to the appellant it was not a financial institution covered under the SARFAESI Act, which status was attained by the respondent in view of notification dated August 05, 2016 issued much after the loan was disbursed to the appellant therein. This does not make any difference in the outcome and hat respondent No.1 would be treated as ‘borrower’ within the meaning of Section 2(1)(f) of the SARFAESI Act; the arrangement would be classified as ‘security arrangement’ under Section 2(1) (zb); the agreements created ‘security interest’ under Section 2(1) (zf); and the appellant became ‘secured creditor’ within the meaning of Section 2(1)(zd) of SARFAESI Act.

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