Secured Creditor’s Action Under SARFAESI Act Abates References to AAIFR, Including Appellant Co.’s SICA Reference | HC

Case Details: Swadeshi Cement Ltd. v. Asset Care Enterprise Ltd. (ACE) - [2024] 161 taxmann.com 347 (HC - Rajasthan)

Judiciary and Counsel Details

• Manindra Mohan Shrivastava, CJ. & Praveer Bhatnagar, J.
• Aarohi Bhalla, Rishabh Khandelwal & Anuraag Sharma for the Appellant.
• Kamlakar Sharma, Ajeet Bhandari, Sr. Advs., Ms Alankrita Sharma, Jitendra Mishra, R.K. Salecha, Ms Tanisa Khoob Chandani, Dheeraj Verma, Anil Mehta, AAG, Rajendra Soni, AAG, Ms Archana, Yashodhar Pandey, Jaivardhan Singh, R.P. Singh  & Ms Nidhi Khandelwal for the Respondent.

Facts of the Case

In the instant case, the appellant company availed financial facilities by way of common loan from various financial institutions. Subsequently, the company became sick and a reference was made to the Board for Industrial and Financial Reconstruction (BIFR) u/s 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) for the formulation of a rehabilitation scheme.

Upon reviewing the implementation of the scheme, the BIFR issued a show cause notice for the winding up of the appellant company. The financial institution assigned the facilities owed by the appellant to the respondent/asset restructuring company.

The appellant filed a writ petition against the said notice. However, the BIFR cancelled the said notice and the writ petition was dismissed. Upon reconsideration, the BIFR issued a fresh notice to the appellant for winding up and passed an order initiating proceedings for the same against the appellant.

An appeal was filed before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) against the said order. Meanwhile, the Respondent took recourse to section 13 of the SARFAESI Act against the appellant and moved an application for abatement of the reference under the proviso of section 15 of the SICA, which was allowed by the AAIFR.

The appellant filed a writ petition assailing the order passed by the AAIFR, arguing that once the matter of the sick company was taken up for the preparation of the scheme under SICA, the provisions of section 15 of the SICA were not attracted.

The Single Judge vide the impugned order, held that since the he fresh notice of BIFR was not challenged in the said petition, any order would not affect subsequent orders passed by the BIFR. Further, the order passed by the AAIFR was in accordance with the law, hence, the said petition was dismissed.

High Court Held

The High Court observed that an asset reconstruction company was included in the definition of a secured creditor for the purpose of the third proviso to section 15 (1) of SICA

The High Court held that if there are a number of secured creditors who have taken any measure to recover their secured debt under section 13(4) which is not less than three-fourth of the outstanding amount, the third proviso to section 15(1) of SICA would apply, resulting in the abatement of proceedings by operation of law.

The High Court, further held that since before the repeal of SICA, the reference proceedings abated in view of provisions contained in the third proviso to section 15(1) of SICA, the third proviso to section 4(b) of SIC Repeal Act of 2003 was not attracted and therefore, the instant appeal was to be dismissed.