A significant judgment, by the Delhi High Court (Delhi HC) provides relief to banks for enforcement of securities under the provisions of SARFAESI Act. The Delhi HC has held 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.
Priority of dues of secured creditors
As per RBI’s Scheduled Bank’s Statement of Position in India, the outstanding credit of banks stood at INR 136.75 trillion at the end of March 24, 2023. This is a significant exposure which needs to be recycled and redeployed and also demands protection by way of priority. Up until the year 2016, banks were struggling to protect their securities as respective States had built-in priority enactments to provide for priority for their tax dues. However, in the year 2016 with a view to settle the issue of priority, Section 31B was inserted in the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act), and Section 26E was inserted in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) to provide for priority of dues of secured creditors over tax dues.
This philosophy was also followed up in the Insolvency and Bankruptcy Code, 2016 (the Code) where dues of secured creditors were given priority (in the waterfall mechanism) over the dues of the Government and statutory bodies. This protection is necessary for the banking industry to maintain the steady flow of funds to industry and minimize the cost of funding. However, the banking industry continues to face intermittent challenges on account of the overzealous governmental machinery which sometimes overlooks the concept of priority of secured creditors as also Parliamentary thinking (as reflected in the changes brought about in the above mentioned enactments). This not only creates confusion and uncertainty in the workings of the financial sector but also proves costly by way of litigation costs and manpower wasted on such exercises. The case of Rainbow is the perfect example of the attitude of the statutory bodies in such matters. Though, the effect of the Rainbow judgment, to a large extent, has been addressed by the Supreme Court in the matter of Paschimanchal Vidhut Vtran Nigam Ltd however, the confusion still persist which is leading to delays in approval of resolution plan under the Code. In Paschimanchal Vidhut Vtran Nigam Ltd case the Hon’ble Supreme Court clarified that separate and distinct treatments of amounts payable to the secured creditor vis-a-vis the dues payable to the government clearly signify the Parliament’s intention to treat the latter differently – and in the present case, have lower priority.
Recently, a similar issue arose on account of an email communication issued by the Securities and Exchange Board of India (SEBI) to ICICI Bank which sought to restrain the Bank from proceeding with realization of its securities under the SARFAESI Act, based on an order passed by Whole Time Member of SEBI in the exercise of power under Section 19 read with Sections 11(1), 11(4), 11B and 11D of the Securities and Exchange Board of India Act, 1992 (SEBI Act). Post this, the Hon’ble Delhi High Court was moved to clarify the legal position on the right of the Bank in light of provisions of the SARFAESI Act and SEBI Act.
The issue arose in the case of ICICI Bank Ltd Vs DGM SEBI & Ors, on account of the investigation initiated by SEBI against M/s F6 Commodities Private Limited, of which respondent nos.3 and 4 were directors. The respondent nos.3 and 4 had earlier availed a home loan from ICICI Bank by mortgaging their property in favor of ICICI Bank on 22.09.2017. The impugned order came to be passed on 29.05.2018 by the Whole Time Member (WTM) of SEBI in exercise of power under Section 19 read with Sections 11(1), 11(4), 11B and 11D of the SEBI Act, read with Regulation 35 of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, (the Regulations). The WTM restrained the noticees from inter alia disposing off or alienating any assets, whether moveable or immovable, or any interest or investment or change in any of such assets, excluding money lying in bank accounts, without the prior permission of SEBI (the said orders).
In the meantime, on account of the default committed by the said respondent nos.3 and 4, ICICI Bank initiated the process under the provisions of SARFAESI Act and issued a notice for auction sale of the mortgaged property. In response to this, SEBI sent an email on 29.01.2021 to ICICI to ensure compliance of the said orders of SEBI. SEBI’s plea was that the said orders partake the character of orders “in rem” and bind all constituents dealing with the broker or his assets/liabilities till the completion of investigation/forensic audit. Pursuant to this, ICICI Bank filed the writ before the Delhi HC.
The Delhi HC had to broadly deal with three issues. First, whether SEBI has powers to issue direction to ICICI Bank. Second, which Act will prevail when it comes to the right of the Bank to enforce its securities under the SARFAESI Act. Finally, the interplay between Section 26E of the SARFAESI Act, 2002, Section 31B of the RDB Act, 1993 and Section 28A(3) of the SEBI Act, 1992. The Delhi HC after an elaborate discussion on various aspects of the SEBI Act and SARFESI Act went on to hold that:
On the issue of power of SEBI to issue Broad Directions:
It was held that section 11B(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. The Delhi HC explained that the power to direct a bank is necessary for the proper functioning of SEBI. Such powers are incidental to ensuring that the purpose of the investigation or enquiry conducted by SEBI actually fructifies. However, the Delhi HC clarified that this power must be exercised with due caution. It must not be exercised to curtail the effect of other laws.
As regards the direction issued in the above case, it was clarified by the Court that the said Orders do contain directions that are applicable to the petitioner bank, and SEBI does indeed have powers vested in it by law. However, the precise wording of the directions contained within them do not contain an order that prevents the petitioner bank from dealing with the property of respondent nos.3 and 4 which is mortgaged to it, and realizing it, in accordance with law.
On the second issue of conflict between provisions of SARFAESI Act and SEBI Act
The Delhi HC clarified that in light of the unbridled non-obstante clause contained in Section 35 of the SARFAESI Act, 2002; which is not made subject to Section 37 of the SARFAESI Act, 2002, the SEBI Act, 1992 must give way to the SARFAESI Act, 2002. The Court also clarified that “the scheme of the statutes would reveal that in the facts and circumstances similar to the present case, a carve can be made to allow banks to realise their security which they had registered through a statutorily prescribed process. Indeed in such a case, the operation of the SARFAESI Act, 2002 is the specific legislation which applies to a specified secured debt while the directions under the SEBI Act, 1992, which prevent the dissipation or alienation of assets, is the generalised law applicable to a broader set of assets”. Thus, the Court upheld the priority and right of the secured creditors under section 26 E of the SARFAESI Act.
On the issue related to the interpretation of Section 26E of the SARFAESI Act, 2002, Section 31B of the RDB Act, 1993 and Section 28A(3) of the SEBI Act, 1992
It was held by the Court that the non-obstante clause contained in Section 34(1) of the RDB Act, 1993 explicitly provides for a carve out, and makes itself subject to Section 34(2). This is not the case with the nonobstante clause contained in Section 35 of the SARFAESI Act. 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.
Based on the analysis of the law, the HC Court found the emails dated 29.01.2021 and 18.03.2021 issued by SEBI to be erroneous and wholly without jurisdiction. The High Court relied and referred to some of the important judgments of the Hon’ble Supreme Courts and other High Courts on the issue.
Hopefully, the intent reflected in the statues enacted by the Parliament and the law as interpreted by the Hon’ble Courts would be recognized and implemented by statutory bodies in India. This is essential to ensure the sanctity of the present financial mechanism of security-based credit flow to the industry.
Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.
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 ICICI Bank Limited Vs DGM SEBI & Ors- W.P.(C) 3796/2022- Decided on 21.07.2023
 CIVIL APPEAL NO. 1661 OF 2020 decided by the Supreme Court on September 06 2022.
 Paschimanchal Vidhut Vtran Nigam Ltd Vs Raman Ispat Pvt Ltd decided on July 17 2023
 Mathew Varghese v. M. Amritha Kumar and Ors- 2014 (5) SCC 610.
Madras Petrochem Ltd. v. Board for Industrial & Financial Reconstruction &Ors- (2016) 4 SCC 1.
Pegasus Assets Reconstruction Private Limited v. M/s Haryana Concast Limited and Anr- (2016) 4 SCC 47.
Authorised Officer State Bank of India v. C. Natarajan & Anr- 2023 SCC OnLine SC 510
Bank of Baroda v. Commissioner of Sales Tax, Indore and Ors- e High Court of Madhya Pradesh adjudicated upon the conflict between the Madhya Pradesh Value Added Tax Act, 2002 and the rights of the petitioner bank therein to realise its assets.
The Assistant Commissioner (CT), Anna Salai-III Assessment Circle v. The Indian Overseas Bank and Ors – MANU/TN/3743/2016
Kalupur Commercial Co-operative Bank Ltd v. State of Gujarat – ANU/GJ/188512019. 2 2019 SCC Online Guj 1892.
Sahara India Real Estate Corporation Limited as regards nature of power of SEBI-
Shivji Nathubhai v. Union of India & Ors- (1960) 2 SCR 775