Company Law Board & SARFAESI proceedings?

Company Law Board exercises very important functions under section 397/398 of the Companies Act, 1956 providing relief to the shareholders against ‘oppression and mis-management’ in the Company. When a group of shareholders are oppressed in any company or the company is mis-managed causing loss to the interests of the shareholders, shareholders very frequently exercise the option of approaching the Company Law Board under section 397/398 of the Companies Act, 1956 if they are qualified to do so under section 399. The shareholders have the option and can even approach the High Court seeking to wind-up the Company on ‘just and equitable cause’. In appropriate cases, the shareholders do approach even the Civil Courts seeking some relief against the Company though there always remains a confusion about the jurisdiction of Civil Court in dealing with the cases of ‘oppression and mis-management’ and also there is a strong belief that it is extremely difficult to get speedy relief from a Civil Court. In the cases of ‘oppression and mis-management’, the affected shareholders expect immediate relief in order to get their interests in the Company protected and this is the reason why the shareholders approach the Company Law Board under section 397/398 of the Companies Act, 1956 where the CLB is supposed to ignore technicalities and is supposed to ‘put an end to the matters complained of’.

In the process of adjudication under section 397/398 of the Companies Act, 1956 and where mis-management in the Company is alleged, the applicant shareholders can even make many other group companies or third parties etc., as parties to the petition and can be seeking to get certain transactions cancelled. This happens when the majority group in the Company or the directors in actual control of the Company, deal with the properties and funds of the company in an illegal manner and with the ultimate intention of siphoning off funds of the Company. These things are very frequently alleged in respect of ‘closely-held companies’ and rarely seen in-respect of ‘Listed Public Limited Companies’ in view of the shareholding-pattern and the authority of the SEBI to look into certain issues and the authority of the stock-exchanges where the shares are listed if it is a listed Company. 

In appropriate cases, the Company Law Board can be passing suitable orders under section 397/398 of the Companies Act read-with section 402 of the Act and these orders can affect even the third parties including Banks at times in my opinion.

Competency of Company Law Board to interfere with SARFAESI proceedings:

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is meant to enable the Banks to speedily recover their ‘secured dues’ without approaching any Court or Tribunal and even when there exists a grievance to any person affected, he can only file an appeal under section 17 of SARFAESI Act, 2002. It is settled that when a Bank initiates proceedings against a Company under SARFAESI Act, 2002, the aggrieved party can give their objections to the Bank, can seek mandatory reply from the Bank under section 13 (3A) and if they are not satisfied at the reply given by the Bank, the aggrieved party can file an appeal under section 17 of the SARFAESI Act, 2002. There is a specific provision under section 34 of SARFAESI Act, 2002 that no Civil Court can interfere with SARFAESI proceedings and even the High Court exercises caution in interfering SARFAESI proceedings though there can never be a complete bar on the jurisdiction of High Court under section 226 and 227 of Constitution of India with regard to the proceedings initiated by Public Sector Banks or Banks. However, in view of the perceived failure of the Debt Recovery Tribunals in providing speedy and effective relief, High Courts can entertain challenge to the SARFAESI proceedings in appropriate cases as otherwise; there will not be any relief to the aggrieved even when the Bank proceeds illegally and unreasonably. Though, Civil Court’s jurisdiction is not completely barred in respect of SARFAESI proceedings in view of the scope established with Mardia Chemicals Case and other subsequent cases, it is highly difficult to convince any Civil Court and get the relief against the Bank. Again, aggrieved are often afraid to approach the Civil Courts in view of the lack of expertise on the part of Civil Courts in dealing with SARFAESI issues, the technicalities, the expenses and the delay involved.

As such, though section 34 of the SARFAESI Act, 2002 specifically deals with the jurisdiction of Civil Court, it is implied that no court or the forum can interfere with the proceedings initiated by the Bank under SARFAESI Act, 2002. This is established even when the liquidation proceedings are pending against a Company and the Bank will be proceeding against the ‘Secured Assets’ even when the liquidation proceedings are taking place against the Company.

Under these circumstances, it would be interesting to look into the jurisdiction of Company Law Board to pass any order or orders under section 397/398 of the Companies Act, 1956 affecting the proceedings initiated by the Bank against the Company. Two things are very important in this regard and those are as follows:

a.                           One is that the power of the Company Law Board to pass orders section 402 of the Companies Act, 1956 affecting the third party transactions and agreements.

b.                           Second is that the relief provided to the affected person under section 17 of the SARFAESI Act, 2002.

Though it is frequently referred that the Debt Recovery Tribunal can look into all issues under section 17 of the Companies Act, 1956, the Tribunal may not be able to effectively look into certain issues. For example, there is a precedent now that the rights of Tenants under the Tenancy Laws made by the State Governments will prevail over the rights of the Bank under SARFAESI Act, 1002; and if the Bank wants to get any tenant vacated from the premises; it has to mandatorily approach the Rent Control Tribunals. Same is the case, where the Bank can not claim the complete ownership of the ‘Secured Asset’ and these issues arise when the property mortgaged is a ‘Joint Family Property’ and the Bank was negligent in accepting the property as a security. In these cases, the appropriate authority to look into the rights of the members of a family in the property is the Civil Court and the Debt Recovery Tribunal may not be competent enough to look into partition and related property issues. These are the complications with which there was a precedent initially with regard to SARFAESI proceedings that the Debt Recovery Tribunal is supposed to only look into the fact as whether the Bank has followed the procedure under SARFAESI Act, 2002 or not. But, this precedent now has changed and the authority of the Debt Recovery Tribunal under section 17 of the Act is expanded at-least as a matter of principle irrespective of practical issues and difficulties.

Like-wise, a group of shareholders in a Company may allege mis-management in the Company and can oppose any proceedings initiated by the Bank against the Company under the provisions of SARFAESI Act, 2002. If it is established that the Bank is negligent and is also at fault while sanctioning the loan to the Company, the minority shareholders can definitely be opposing the proceedings initiated by the Bank against the Company. For example, if the Bank grants loan to the Company upon certain terms without bothering at the regulations under Companies Act, 1956 and without looking into the fact as to whether the people processed the loan transaction with the Company are authorized to do so or not, then, certainly, the minority shareholders would even be questioning the Bank and the Bank can not say that they are not supposed to look into any rules and regulations; and they will only look into the security provided. This argument may not be accepted always. There may be a contention here that even the minority shareholders or a shareholder of a Company can approach the Debt Recovery Tribunal under section 17 of the Companies Act, 1956 and as such, Company Law Board can do nothing with regard to the proceedings initiated by the Bank against the Company under SARFAESI Act, 2002. It is true that the shareholders can approach the Debt Recovery Tribunal under section 17 of the SARFAESI Act, 2002 according to me if they could establish that their interests in the Company are affected and the Bank is wrong in sanctioning the loan without looking into the required issues. However, the Debt Recovery Tribunal may not be competent enough to look into the corporate rights of the shareholders and the Company Law principles. The Debt Recovery Tribunal can say that the affected shareholders can only proceed against the Company or the management and they can approach the High Court seeking winding-up and can approach the Company Law Board alleging mis-management. The Debt Recovery Tribunal may be right in its contention and it’s a very complicated issue and I don’t think that these issues would arise frequently, but, there is a possibility.

The issues of Bank negligently sanctioning loans to the Company and the interests of the shareholders, is very important when the Bank intends to proceed against the Company beyond the security provided.  Even when the Company gives security, if it is wrongful on the face of it and if the minority group or the shareholders are affected because of it, then, the minority group or the shareholders can definitely be questioning even the loan transactions with the Bank. 

If any individual guarantees the repayment of loan given to the Company and individual properties were mortgaged, then, the mortgagor may have no option if he feels aggrieved, except to approach the Debt Recovery Tribunal or the High Court in appropriate cases seeking relief. The issue is when the Bank proceeds against the Company assets and the Company and the interests of the shareholders in the Company are affected. This is certainly a very complicated issue to deal-with.

Few important points to be noted:

1.     It can not be said that the Company Law Board can not pass orders under section 397. 398 and 402 of Companies Act affecting the SARFAESI proceedings initiated against the Company. 

2.     Even if there is a mis-management in the Company, if the Bank has taken due and reasonable care while sanctioning the loan to the Company, then, the CLB may hesitate to interfere with any SARFAESI proceedings initiated by the Bank against the Company.

3.     Though the Debt Recovery Tribunal can look into all objections under section 17 of the SARFAESI Act, 2002, it may not be competent enough to deal with the issues of ‘oppression & mis-management’ requiring expertise and there can be a clear link at times between the SARFAESI proceedings against the Company and the interests of the minority group as protected under Companies Act, 1956.

4.     Though every shareholder is entitled for certain rights in the Company and for the relief at times, it is certainly complicated to say that the shareholder/s not qualified to approach High Court seeking liquidation etc. and shareholders not qualified under section 397/398 of the Companies Act, 1956, can approach the Debt Recovery Tribunal under section 17 of the SARFAESI Act, 2002. It is important in the light of a single shareholder alleging that his interests in the Company are affected with the Bank proceeding against the Company.

5.     If the Bank’s sanction of loan to the Company is clear and independent of other issues in the Company, then, the allegations of mis-management in the Company may not affect the rights of the Bank in proceeding against the Company or the security provided.

6.     The Bank’s interests can in no way be affected by any orders of the Company Law Board when the loan sanctioned to the Company is guaranteed with the sufficient assets of individuals and the CLB in those cases, may hesitate to interfere with the SARFAESI proceedings initiated by the Bank.

7.     Except the issues of fraud, gross negligence and the interests of the minority group in the Company, no other issues can be raised against the Bank if Bank is involved in a proceeding under section 397, 398 and 402 of Companies Act, 1956.

8.     There are no established precedents so far on these issues, but, these issues are very significant and real with the routine commercial transactions between the Banks and Companies.

Note: the views expressed are my personal only.