P.K. MISRA, J The facts in brief are as follows :-
Petitioner is a registered Company which had involved itself in the manufacturing of cotton and cotton blended with man-made fibre yarns. The South Indian Bank of which second respondent is the Chief Manager and third respondent is the Branch Manager at Gudiyatham, had extended financial facilities to the petitioner. However, since 1999, the petitioner company started incurring heavy loss, which ultimately resulted in default in paying the loans advanced by the Bank. Third respondent, at that stage, had filed O.A.No.193 of 2002 before the Debt Recovery Tribunal (in short "DRT") under
Section 19 of The Recovery of Debts Due to Banks and Financial Institutions Act, 1993, for recovery of Rs.1,76,15,284/-. The petitioner company had also entered into a refinance facility for its machineries with a Non-banking finance company M/s. Sundaram Finance Limited and such transaction had been registered with the Registrar of Companies under Section 125 of the Indian Companies Act. The petitioner had also availed finance facility from M/s. Haritha Finance Ltd., and M/s. Upasana Finance Ltd. M/s. Sundaram Finance Limited had obtained a consent award, dated 30.7.2001, to the tune of Rs.32,68,662/- with interest under the Arbitration and Conciliation Act, 1996, and on that basis, execution proceedings was initiated, which is pending in the Special Court, Gudiyatham. The petitioner has filed objection in the said execution case on the plea that Reference was pending before the BIFR under the Sick Industries Company (Special Provisions) Act, 1985 (hereinafter referred to as "SICA"). Such Reference has been registered as Case No.280 of 2002 and it is stated to be still pending. It is claimed that on being made aware of pendency of such Reference under
Section 22 of SICA, the DRT, Chennai, had been adjourning O.A.No.193 of 2002 from time to time as per the prevalent practice. The South Indian Bank is fully aware of pendency of such proceedings before the BIFR and had in fact filed its objection before BIFR. At one stage, the proceedings before the BIFR was rejected, but the AAIFR by its order dated 9.10.2006, set aside such order dated 24.8.2005 and remitted the same to the BIFR to consider the matter afresh. However, at a stage when BIFR had rejected the application on technical consideration, the Bank had got the present petitioner set ex-parte in O.A.No.193 of 2002. But, thereafter, the petitioner and others have filed application to set aside the ex-parte order and to suspend the proceedings in O.A.No.193 of 2002. In the interregnum the petitioner and the Bank had entered into a negotiation for amicable settlement for which the petitioner has paid a sum of Rs.10 lakhs, but, subsequently the Bank had changed its attitude. While the matter stood thus, the Bank has issued notice dated 20.1.2007 to the petitioner and guarantors under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as "SARFAESI Act") claiming that it is a secured creditor as envisaged under
Section 2(zd) of SARFAESI Act.
2. In the above factual background, the petitioner has sought for a Writ of Mandamus forbearing the second and third respondents (the Bank) from interfering with " petitioner affairs, asset, administration and peaceful possession and occupation of the properties situated in S.No.16/2B1, Old S.No.16/2, 2.04, S.No.16/2B2, 1.00 Acre, 44 cents out of 2.61 acres comprised in S.No.17/4B, 92 cents comprised in S.No.16/2A1 in Sedukkarai Village, Gudiyatham Taluk, pursuant to the notice issued under Section 13(2) of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 pending disposal of the Reference case No.280/2002 before the 1st respondent filed under the provisions of The Sick Industrial Companies (Special Provisions) Act, 1985".
3. It is the contention of the petitioner that the Respondent Bank is not the only secured creditor entitled to invoke
Section 13(2) of the SARFAESI Act. Moreover, the respondent Bank is aware of the existence of other secured creditors, who had registered their transactions as a charge under Section 125 of the Indian Companies Act. The respondent Bank has registered its transaction only on 11.6.1997, though the instrument creating charge had been made on 16.11.1994. It is further claimed that since the other Non-banking finance company, namely, M/s. Sundaram Finance Limited, has registered its transaction, and in such a background, the respondent Bank cannot be characterized as three-fourth secured creditors to invoke
Section 13(2) of the SARFAESI Act. It is contended in this connection that in view of
Section 13(9) of the SARFAESI Act, action can be taken only if agreed upon by the secured creditors representing not less than three-fourth in value of the amount outstanding and the respondent Bank has advanced only 25% of the transaction and therefore the respondent Bank cannot be considered as a secured creditor to issue notice under
Section 13(2) of the SARFAESI Act and no such action can be taken without taking consent of the other creditors such as M/s. Upasana Finance Ltd., and M/s. Haritha Finance (subsequently known as TVS Motor Company) Ltd.. The petitioner has raised the contention that in view of the pendency of the proceedings before the BIFR, no coercive steps should be taken without the consent of the BIFR.
4. The respondent Bank has contended that merely because a proceeding is pending before the BIFR, it cannot be said that there is any embargo for the secured creditor to invoke power under SARFAESI Act.
5.
Section 22 of SICA envisages that during pendency of an inquiry into one of sick industrial company as envisaged under
Section 16 of such Act or when a scheme is under preparation or consideration as envisaged under
Section 17 or a sanctioned scheme is under implementation as envisaged under
Section 25 is pending, no proceeding for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company, shall lie or be proceeded with further, except with the consent of the Board or the Appellate Authority, as the case may be. This provision, which was enacted in the year 1985, has been made applicable notwithstanding anything contained in the Companies Act or any other law.
Section 35 of the SARFAESI Act contemplates that provisions of such Act shall have effect, notwithstanding any thing inconsistent therewith contained in any other law for the time being in force.
6.
Section 41 of the SARFAESI Act has the effect of amending certain other enactments specified in the Schedule in the manner specified therein. Such Schedule refers to The Sick Industrial Companies (Special Provisions) Act, 1985. It envisages insertion of two provisos after the existing proviso in
Section 15(1).7. In the present case, we are concerned with the second proviso, which is deemed to have been inserted by way of amendment. Such proviso is in the following terms :-
"Provided also that on or after the commencement of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, where reference is pending before the Board for Industrial and Financial Reconstruction, such reference shall abate if the secured creditors, representing not less than three-fourth in value of the amount outstanding against financial assistance disbursed to the borrower of such secured creditors, have taken any measures to recover their secured debt under sub-section (4) of
section 13 of that Act."
8. A reading of the aforesaid proviso makes it clear that on or after commencement of the SARFAESI Act, a reference pending before BIFR shall abate, if the secured creditors representing not less than three-fourth in value of the amount outstanding have taken any measures to recover their secured debt under
Section 13(4) of the SARFAESI Act.
9. Learned counsel for the petitioner has placed reliance upon the decision of the Supreme Court reported in AIR 2007 SC 683 (MORGAN SECURITIES AND CREDIT PVT. LTD. v. MODI RUBBER LTD.). In the said decision, the primary question was as to whether the provisions of the Arbitration and Conciliation Act, 1996 would prevail over the provisions of SICA. The High Court had passed an order in accordance with
Section 22(3) of SICA, which was under question. The contention raised was to the effect that
Section 5 of the Arbitration and Conciliation Act, 1996 had an overriding effect and, therefore, the Board under BIFR could not have been interfered with the award and similarly no action could have been taken by applying
Section 22(3) of SICA. After analysing various provisions contained in SICA and the provisions contained in the Arbitration and Conciliation Act, 1996, it was observed :-
"67.
Section 5 of the 1996 Act also provides for a non obstante clause. It has, however, a limited application aiming at the extent of judicial intervention. Its application would be attracted only when an order under sub-section (3) of
Section 22 is required to be passed. If the said provision is to be given effect to, the Board would not intervene in the matter of the implementation of the award. It would merely suspend the operation of it. It may even pass an order suspending the liabilities or obligations of the industrial company under the award. Even otherwise in the facts of the present case it stands suspended.
68. The Board, however, has not passed an order under sub-section (3) of
Section 22 of SICA. The court, therefore, must proceed with the objection filed by the respondent under
Section 34 of the 1996 Act. However, if the objection filed by the respondent is rejected, the question of its enforceability would come into being. Once the arbitral award having the force of a decree is put into execution, sub-section (1) of
Section 22 of SICA would come in its way from being enforced. The contention raised by Mr Sundaram that having regard to the provisions of
Section 5 of the 1996 Act, the Board would have no jurisdiction, therefore, does not seem to have any force.
69. Sub-section (3) of
Section 22 of SICA provides for a specific power in the Board. The said provision contemplates a larger public interest. In the event an arbitral award is held to be outside the purview of sub-section (3) of
Section 22 thereof, it may be difficult to frame a scheme or in a given case implement the same under SICA. SICA provides for a time-frame for all the stages of proceedings. Proviso appended thereto assumes significance in this behalf.
70. Parliament presumed that the suspension of an award shall not be for a long period. In a given case, a party to an award may face some hardships owing to its suspension; but in such an event, it would always be open to it to bring the same to the notice of the Board. The Board under sub-section (3) of
Section 22 of SICA may pass such an order or may not do so. If an order is passed by the Board, an appeal lies there against. The provisions of SICA, it will bear repetition to state, have been made to seek to achieve a higher goal and, thus, the provisions of SICA would be applicable, despite
Section 5 of the 1996 Act."
10. Ratio of the above decision was extended by a Division Bench of Orissa High Court to a matter reported in AIR 2008 ORISSA 103 (NOBLE AQUA PVT. LTD., & OTHERS v. STATE BANK OF INDIA & OTHERS), where the provisions contained in the SARFAESI Act had been invoked. In the said case, the Company had approached the BIFR under
Section 15(1) of SICA, which was pending, and a declaration was given that the company had become sick in terms of
Section 3(1)(o) of SICA and the BIFR had appointed the State Bank of India, which was also the secured creditor of the company, as operating agency. The order of BIFR also indicated that, even though the State Bank of India has sought for permission under
Section 22(1) of SICA, no such permission had been ultimately granted. The order passed by the BIFR had not been challenged by the State Bank of India by filing any appeal. However, hearing before the BIFR had taken place, the Bank had already issued notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (in short 'Securitisation Act') to the company. Subsequently, the Bank had issued possession notice under Section 13(4) of the Securitisation Act and, at that stage, the writ petition was filed for quashing such notice on the ground that issuance of such notice was contrary to
Section 22 r/w.16, 17 and 18 of SICA. In the above context, the Division Bench of Orissa High Court observed as follows:-
"9. This is not in dispute that the rehabilitation scheme of the petitioner-company is either under preparation or consideration and that being the position, the protection is given to such a company against any initiation or continuation of any winding up proceeding or execution of such proceeding or distress or any proceeding of the like nature against the properties of the industrial company. The position is that there is no blanket ban in respect of such proceeding, but such proceeding cannot be either initiated or proceeded against such company, except with the consent of the BIFR or the Appellate Authority as the case may be.
. . .
11. The provisions of
Section 22 of SICA have been considered by the Apex Court in several judgments. Reference in this connection may be made to the decision of the Supreme Court in the case of Real Value Applicances Ltd. v. Canara Bank and others, reported in AIR 1998 SC 2064. In that case, even though the Apex Court deprecated the conduct of the company as unfair inasmuch as its attempt to keep the High Court in the dark about the BIFR proceeding was frowned upon by the Ape Court, even then the Apex Court held that the same will not vitiate the BIFR proceeding and refused to accept the contention of the respondents that in view of the company's conduct before the High Court, the reference proceeding under
Section 15 of SICA and its registration would become bad. After saying so, the Court examined the protection given under
Section 22 of SICA and in paragraph 23 of the said judgment learned Judges held that it is the legislative intention to see that no proceedings against the assets are taken before any such decision is given by the BIFR and the learned Judges further held that the "action against the Company's assets must remain stayed as stated in
Section 22 till final decisions are taken by the BIFR". (See para 23 at page 2071 of the report). The same thing has been reiterated in paragraph 29 of the judgment where the learned Judges held that once the reference is registered . . . . . . prohibition contained in
Section 22 shall immediately come into play. (see para 29 at page 2072 of the report).
. . .
17. In view of such consistent judicial opinion, this Court hold that the petitioner company is entitled to protection to
Section 22 of SICA. In this case, there is an order, on a contested hearing in which the Bank participated, that the company is sick and its revival package is under process."
While dealing with the contention of the Bank relating to amendment to Securitisation Act under Section 41, it was observed:-
"20. This Court is unable to appreciate the aforesaid contention. The proviso makes it very clear that same will come into force where a reference is pending before the BIFR. Such reference will abate if the secured creditors representing not less than three-fourths in value of the amount outstanding against financial assistance disbursed to the borrower, have taken any measures to recover their secured debt under sub-section (4) of Section 13 of the Securtisation Act.
21. In the instant case, admittedly the notice under sub-section (4) of Section 13 of the Securtisation Act has been issued on 7-4-2007. But long before that, the company has been declared a sick industrial company by an order of the BIFR dated 14-11-2006. Therefore, the proceeding under the SICA was not at the stage of reference. The proceeding has gone far ahead of that and culminated in an order by which the company was declared sick on 14-11-2006. The said order was passed by the BIFR after hearing the bank and by the said order the bank was appointed an operating agency with a direction to prepare the revival scheme. Therefore, in the facts of this case, the reference cannot abate since the matter under SICA is not pending in reference before the BIFR. Even though the bank is a party to the said order, it has neither filed any appeal therefrom nor has it asked for consent under
Section 22 to proceed against the petitioner company. Therefore, this argument raised by the learned counsel for the Bank cannot be accepted.
. . .
23. Apart from that in the instant case, the Court has to give a harmonious construction of the overriding clauses contained both in SICA and in the Securitisation Act. The Securitisation Act is a later Act and in the Securitisation Act the overriding clause is contained in Section 37, which is as follows :
"37. Application of other laws not barred. - The provisions of this Act or the rules made thereunder shall be in addition to and not in derogation of the Companies Act, 1956 (1 of 1956), the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) or any other law for the time being in force."
A perusal of the said section makes it clear that the same will not be in derogation of any other law for the time being in force. Therefore, the protection which has been given to a sick industrial company under a previous special statute, namely, SICA of 1985 has not been taken away by Section 37 of the Securtisation Act. The aforesaid amendment which has been made in Section 41 of the Securitisation Act has been discussed above and this Court has also held that as a result of such amendment the present proceeding under SICA cannot abate. Since the proceeding under SICA cannot abate and the petitioner has been declared a sick industrial company, the bank cannot proceed against the petitioner in respect of its notice under
Section 13(4) of t he Securitisation Act in view of the statutory bar created under
Section 22 of SICA."
11. Even though it may appear in the first blush the Division Bench decision of the Orissa High Court is squarely applicable, on deeper scrutiny, we find that the said decision is distinguishable.
It is not the case of the petitioner in the present case that the Company has been declared as a sick industrial company by BIFR. On the other hand, what appears to be pending is, at the stage of reference unlike in the Orissa decision, wherein the proceedings had gone far ahead and "culminated in an order by which the company was declared sick" as has been observed by the Division Bench. In fact in the said case it was also observed :-
". . . Therefore, in the facts of this case, reference cannot abate since the matter under SICA is not pending in reference before the BIFR".
In other words, the Orissa High Court made a distinction where a reference was pending and, on the basis of reference, the Company had already been declared a sick company and steps for rehabilitating the company had already been taken. The proviso to
Section 15, which was added by way of amendment as per
Section 41 of the SARFAESI Act contemplates abatement of a reference if three-forth of the secured creditors have taken steps contemplated under
Section 13(4) of the SARFAESI Act. It is only a reference which is pending and which would abate and not a reference which had already culminated in some other order as has been observed by the Division Bench of the Orissa High Court.
12. In the present case, therefore, it is required to be seen whether action under
Section 13(4) of the SARFAESI Act has been taken by the secured creditors representing not less than three fourth of the amount advanced to the petitioner.
13.
Section 2(1)(zd) defines "Secured Creditor" to mean any bank or financial institution or any consortium of group of banks or financial institutions in whose favour security interest is created for due repayment by any borrower of any financial assistance.
As per
Section 2(1)(c) "bank" means (i) a banking company or (ii) a corresponding new bank; or (iii) The State Bank of India; or (iv) a subsidiary bank; or (v) such other bank which is specified by the Central Government.
As per
Section 2(1)(m), "financial institution" means
(i) a public financial institution within the meaning of
Section 4-A of the Companies Act, 1956 (1 of 1956);
(ii) any institution specified by the Central Government under sub-clause (ii) of clause (h) of
section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993);
(iii) the International Finance Corporation established under the International Finance Corporation (Status, Immunities and Privileges) Act, 1958 (42 of 1958);
(iv) any other institution or non-banking financial company as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934), which the Central Government may, by notification, specify as financial institution for the purposes of this Act."
14. It is not disputed that in the present case the respondent Bank comes within the definition of "bank" as per Section 2(1)(c). However, there is nothing on record to indicate that M/s. Sundaram Finance Limited is considered as a "bank" within the meaning of Section 2(1)(c) or Section 2(1)(m). In other words, though the amount payable to M/s. Sundaram Finance Limited by the present petitioner is considered as a charge within the meaning of
Section 125 of the Companies Act, for the purpose of SARFAESI Act, M/s. Sundaram Finance Limited does not come within the scope of the "bank" or "financial institution". In other words, such M/s. Sundaram Finance cannot be construed as a secured creditor within the meaning of
Section 2(1)(zd).15.
Section 13(9) of the SARFAESI Act itself envisages that in cases where financing is more than one secured creditors, the power under
Section 13(4) can be exercised only if such right is agreed upon by the secured creditors representing not less than three-fourth in value of the amount outstanding. Where there is a single secured creditor, it is obvious that such secured creditor represents the entire 100%. On the other hand, where there are more than one secured creditors, the question of applying the test envisaged under
Section 13(9) would arise and if such secured creditors holding not less than three-fourth initiate proceedings by amendment as envisaged in
Section 13(9) under
Section 13(4), reference would come to an end or would stand abated.
16. For the aforesaid reasons, we are unable to accept the contention of the petitioner for issuance of writ of Mandamus. The writ petition is, therefore, liable to be dismissed. No costs.
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