Calcutta HC holds that SARFAESI Act can’t nullify a court-sanctioned compromise scheme under the Companies Act. Big relief for corporate debtors.
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In a key judgment safeguarding judicially approved debt restructuring, the Calcutta High Court has ruled that SARFAESI provisions cannot override court-sanctioned schemes under the Companies Act.
In a significant ruling that could reshape the contours of creditor-debtor relations, the Calcutta High Court has held that a compromise or arrangement scheme sanctioned under Section 391 of the Companies Act, 1956, cannot be overridden by a secured creditor invoking the SARFAESI Act, 2002. This decision reiterates the sanctity of court-approved arrangements in the corporate debt resolution process.
The case came before the court on an application seeking execution of an order under Section 391(2) of the Companies Act. The petitioner, a corporate entity, argued that a secured creditor could not bypass or undermine the binding terms of the compromise scheme by taking unilateral action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act).
Justice Shekhar B. Saraf, delivering the verdict, stated unequivocally that once a scheme is sanctioned by the court under the Companies Act, it becomes binding on all creditors, including dissenting secured creditors. He observed that allowing enforcement under SARFAESI in such a situation would amount to undermining the court’s authority and defeating the very purpose of compromise proceedings.
“The SARFAESI Act, while powerful in enforcing secured creditor rights, must yield to a judicially sanctioned compromise when one exists,” the Court ruled.
This judgment assumes significance in the context of corporate debt restructuring, where companies under financial stress often resort to compromise or arrangement schemes to restructure obligations. These schemes, once approved by requisite majorities and sanctioned by the High Court, attain the force of law.
⚖️ Clash Between Statutes: Companies Act vs. SARFAESI
The SARFAESI Act allows banks and financial institutions to seize and auction secured assets of defaulting borrowers without court intervention. However, this ruling underscores that the statutory power granted under SARFAESI is not absolute, particularly when it comes in conflict with a court-approved arrangement that reflects the collective will of stakeholders.
This position is also consistent with previous rulings by the Supreme Court, which has emphasized that statutory rights must be exercised in accordance with the overarching principles of justice and should not disrupt court-decreed resolutions.
📌 Precedents and Implications
Legal experts have welcomed the verdict, viewing it as a reaffirmation of judicial oversight in the debt restructuring process. It draws a sharp boundary between creditor rights and judicially sanctified schemes, bringing clarity on how different legal frameworks interact.
In line with the ruling, secured creditors will now have to honor existing compromise arrangements, or seek modification through judicial channels rather than bypassing them.
Further, the ruling could have wide implications on SARFAESI proceedings already underway across India, particularly in cases where similar schemes have been approved under the Companies Act or Companies Act, 2013 (Section 230).
🔎 Legal Community Reacts
Commenting on the decision, a senior advocate from Kolkata said,
“This restores the primacy of court-supervised compromise schemes and prevents arbitrary enforcement by secured creditors. It strikes the right balance.”
The ruling also serves as a cautionary note to financial institutions, compelling them to reassess their recovery strategies in light of judicially approved arrangements.
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