If any ARC acquires an asset of a sick company, does reference before BIFR abate?

Yes, says the Bombay High court. 

In Paper Prints (India) Pvt. Ltd vs Phoenix Arc Pvt. Ltd http://indiankanoon.org/doc/57289971/ , a Division Bench of the Bombay High court interpreted the second proviso to section 15 (1) of the SICA to suggest that where any financial assets have been acquired by an ARC. The ruling says that the second proviso and third proviso to sec 15 (1) are independent, and there is no presumption as to taking of action by any particular percentage of secured creditors under the second proviso. Under the second proviso, once the “financial assets” have been acquired by an ARC, reference shall not be made at all.

Our comments: So, the SICA becomes completely irrelevant! If there is any philosophy at all behind the SICA, that purpose or philosophy is completely rendered redundant. The drafting of the second and third provisos to sec 15 (1) is as bad as the whole of the SARFAESI Act itself, but with the interpretation placed by the Hon’ble Court, just because any loan or facility extended to a borrower have been acquired  by an ARC, the very process of rehabilitation gets negated. This seems like saying – move over rehabilitation, realisation takes over!

In fact, the onus of making reference under section 15 (1) is on the borrower, that is, the sick company. The board of directors of the sick company needs to make a reference, if the entity has become sick. The reference e has a wholesome purpose, which has been discussed by lots of authorities in lots of cases. If entities become sick, it does not serve the cause of economic development if such entities are allowed to fall dead freely. If a person becomes sick, humanity cannot allow him to die. Death of economic entities is even more serious than death of persons – as livelihoods of lots of families depends upon an economic entity.

The transfer of a financial asset is a transaction between a lender and the ARC. The sick company is not a party to it at all.  In many cases, the sick company may not have been notified, or may be notified much later.

With the interpretation placed by  the Hon’ble High court, a sick company shall not make a reference, if financial assets have been sold by a creditor to an ARC. The law does not specify, which financial assets, or how much financial assets? Sure enough, the “financial asset” in question cannot be the asset of the sick company. In any event, the proviso is an exception to the mandatory requirement under section 15 (1) on making of a reference. Unlike third proviso, the second proviso does not say that a reference already made shall abate.

The correct interpretation of second proviso should have been – if all loans/financial assets pertaining to a sick company have been sold to an ARC, then there is no role of the BIFR in such a case, as a secured creditor under the SARFAESI Act has the right to proceed with repossession even in case of sick companies. But if what is sold is just a one of the many loans, there is no reason whatsoever as to the hope of revival of the company fading away. It is not at all proper to allow the wholesome process of revival of entities to be overshadowed by the self-centric provisions of SARFAESI Act.