Introduction:

In the landmark case of ARCL Organics Ltd. Versus Stressed Asset Stabilization Fund [CA 136 of 2017], the Calcutta High Court, through the judgment delivered by Hon’ble Justice Raja Basu Chowdhury on June 30, 2025, has decisively clarified the legal interplay between court-sanctioned schemes under Section 391 of the Companies Act, 1956, and the enforcement powers of secured creditors under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). This case stemmed from an application filed by ARCL Organics Ltd. seeking the execution of a scheme of arrangement/compromise, which had earlier been sanctioned under Section 391(2) of the Companies Act, 1956. The applicant also sought a direction upon the respondent, Stressed Asset Stabilization Fund (SASF), to issue a “No Objection Certificate” (NOC) for the release of charges on its assets and properties, contending that the sanctioned scheme operated as a deemed decree under the Code of Civil Procedure, 1908. The dispute arose when the respondent, a secured creditor, sought to invoke its rights under Section 13(2) of the SARFAESI Act due to alleged defaults committed by the applicant between April 2010 and July 2011, despite the existence of the court-approved compromise scheme.

Arguments:

The applicant, represented by senior counsel Mr. Ratnanko Banerji and a legal team comprising Mr. Kanishk Kejriwal, Mr. Patit Paban Bishwal, Ms. Sohini Dey, and Mr. Oishij Mukhopadhyay, contended that once a scheme has been sanctioned by the Company Court under Section 391, it assumes statutory character and cannot be unilaterally terminated or frustrated by either party. According to the applicant, any deviation or cancellation of the scheme could only be pursued by taking recourse to Section 392 of the Companies Act, which empowers the Company Court to supervise and make modifications to such schemes. The applicant also highlighted that the respondent had continued to accept payments from it even after issuing the SARFAESI notice, thereby affirming continued adherence to the compromise scheme and waiving the right to unilateral enforcement under the SARFAESI framework.

On the other hand, the respondent, represented by senior counsel Mr. Sakya Sen and supported by Mr. Sayan Banerjee, Ms. Pallavi Chatterjee, Mr. Ajay Gaggar, and Mr. Uttiyo Mallick, argued that the applicant had failed to honor its repayment obligations under the sanctioned scheme, which justified the issuance of the notice under Section 13(2) of the SARFAESI Act. The respondent further invoked Sections 34 and 35 of the SARFAESI Act to assert the overriding effect of SARFAESI over any other legislation, including the Companies Act, thereby contending that they did not require the leave of the Company Court to enforce their statutory rights under SARFAESI. The respondent’s legal position was grounded in the doctrine of statutory supremacy, arguing that the SARFAESI Act’s purpose is to ensure speedy recovery and enforcement by secured creditors, which cannot be thwarted by procedural restrictions under other laws.

Judgement:

Upon hearing the arguments, the Calcutta High Court provided a detailed interpretation of the applicable statutory framework and legal precedents. Justice Raja Basu Chowdhury emphasized that once a scheme of arrangement or compromise is sanctioned by the Company Court under Section 391, it acquires the status of a statutory contract that binds all stakeholders, including dissenting creditors. In this context, the Court referred to the Supreme Court’s ruling in S.K. Gupta v. K.P. Jain & Anr. (1979) 3 SCC 54, which held that a sanctioned scheme becomes binding and enforceable by law and cannot be repudiated unilaterally. The Court also referred to Hindustan Lever & Anr. v. State of Maharashtra & Anr. (2004) 9 SCC 438, reinforcing the principle that a scheme sanctioned under Section 391 has the force of law and is to be treated as a legislative act of the court. Applying these precedents, the Court observed that if the respondent had issues regarding the applicant’s performance under the compromise, it ought to have approached the Company Court under Section 392 for appropriate directions or modifications. The respondent’s unilateral issuance of a notice under the SARFAESI Act, without such recourse, was therefore held to be impermissible. The Court found it particularly significant that despite issuing the SARFAESI notice in November 2011, the respondent continued to receive payments under the scheme, which indicated its willingness to remain bound by the sanctioned compromise. The Court held that such conduct constituted implied reaffirmation of the scheme’s validity and enforceability. The respondent’s continued participation and benefit under the scheme created an estoppel, preventing it from resiling unilaterally. Furthermore, the Court rejected the respondent’s argument regarding the overriding effect of Sections 34 and 35 of the SARFAESI Act. It held that these provisions cannot be interpreted so broadly as to permit creditors to override a statutory scheme sanctioned by the Company Court, particularly when issues under the scheme have been closed and payments have been accepted. The Court stressed that the SARFAESI Act cannot be weaponized to subvert a judicially approved compromise, especially when the creditor has not pursued its SARFAESI notice to logical enforcement and instead opted to continue receiving payments under the compromise scheme. Justice Chowdhury emphasized that the statutory sanctity of a scheme under Section 391 cannot be diluted or nullified by parallel enforcement mechanisms unless there is a specific direction or modification issued under Section 392. The judgment stated that allowing unilateral termination of court-approved compromises would destroy the essence of corporate restructuring and rehabilitation mechanisms provided under the Companies Act. The Court also dismissed the respondent’s contention that the scheme had become unworkable due to defaults, holding that it was not within the respondent’s purview to make such a determination. Only the Company Court can decide the viability or failure of a sanctioned scheme under Section 392, and until such adjudication, all parties are bound to perform their obligations as per the sanctioned terms. In the concluding portion of the judgment, the Court noted that the respondent had accepted the entire dues along with interest from the applicant, and no further steps were taken under SARFAESI after the issuance of the notice. This indicated acquiescence to the terms of the compromise and precluded any claim of frustration or termination of the scheme. Thus, the Court allowed the application and directed the respondent to issue a “No Objection Certificate” to facilitate the release of charges on the applicant’s assets and properties. The ruling reinforces the position that once a court-sanctioned compromise is in effect, it enjoys statutory backing and cannot be nullified at the whim of one party, even a secured creditor armed with SARFAESI powers. It strikes a fine balance between creditor rights and the sanctity of judicial orders under corporate law. This judgment is expected to serve as a key precedent in future corporate litigation where secured creditors seek to enforce their rights in derogation of court-sanctioned restructuring or compromise schemes. It brings clarity to the interrelationship between SARFAESI and the Companies Act, 1956, and sends a strong message that statutory arrangements arising out of judicial orders cannot be overridden unilaterally.