The Supreme Court on Wednesday declined to set aside a Bombay High Court ruling that allows asset reconstruction companies (ARCs) to take over pending cheque dishonour cases initiated by banks after acquiring their loans and related securities.
A Bench of Justices Dipankar Datta and Sheel Nagu dismissed a special leave petition challenging the High Court’s decision.
The court held that the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, permit an ARC to continue legal proceedings connected with a financial asset transferred to it by a bank.
The case concerned the interpretation of Sections 5(4) and 5(5) of the SARFAESI Act. These provisions allow an ARC to pursue pending legal proceedings relating to an acquired financial asset and provide for its substitution in place of the original lender.
Senior advocate Siddharth Dave, appearing for the petitioner, argued that the transfer of a financial asset could not automatically make an ARC the complainant in an ongoing criminal case under Section 138 of the Negotiable Instruments Act, 1881 (dishonour of a cheque).
He submitted that criminal prosecutions involved considerations different from civil suits and appeals. Referring to Section 302 of the Code of Criminal Procedure, he argued that the question of who could conduct a prosecution required separate consideration.
The Bench, however, pointed out that Section 5(4) of the SARFAESI Act covers “other proceedings of whatever nature”. It also drew attention to Section 5(5), which provides for an ARC to seek substitution before the court or authority where proceedings are pending.
Dave maintained that these provisions should not be read as permitting automatic substitution in criminal complaints. The Bench was not persuaded to interfere with the High Court’s ruling and dismissed the petition.
The dispute arose from an overdraft facility of ₹75 crore that Avarsekar & Sons Private Limited took from Axis Bank in December 2013. The borrower had issued three post-dated cheques of ₹25 crore each as security for the facility.
After the cheques were returned unpaid due to insufficient funds, Axis Bank initiated proceedings under Section 138 of the Negotiable Instruments Act in January 2017.
While the complaint was pending, the bank transferred the loan, securities, cheques and related legal proceedings to Assets Care and Reconstruction Enterprises Limited (ACRE) through an assignment agreement dated March 27, 2017.
ACRE subsequently approached the magistrate seeking to replace Axis Bank as the complainant. The magistrate allowed the application on September 5, 2018. The borrowers’ challenge to this order was rejected by the Sessions Court on February 11, 2021.
The Bombay High Court upheld the substitution, holding that the SARFAESI Act’s provisions were broad enough to cover criminal proceedings under the Negotiable Instruments Act as well.
