M/s. Kanakadhara Spinning Mills (P) Ltd v. Registrar,Board for Industrial Financial Reconstruction (B.I.F.R.)

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED:23-07-2009CORAMTHE HONOURABLE MR. JUSTICE P.K. MISRAANDTHE HONOURABLE MR.JUSTICE R.SUBBIAHWRIT PETITION NO.10600 OF 2007M/s. Kanakadhara Spinning Mills (P) Ltd.,Rep. by its Managing Director Ananda Kumar,having its Registered Office atPallikonda Road (Railway Station Road),Gudiyatham 632 602.Vellore District... PetitionerVs.1.The Registrar,Board for Industrial Financial Reconstruction (B.I.F.R.)Jawahar Viyapar Bhawan,No.1, Tolstoy Marg,New Delhi 110 001.2.The Authorised signatory-cum- Chief Manager,The South Indian Bank Limited,Regional Office at Niagra Apartments,Nungambakkam,Chennai 600 034.3.The Branch Manager,The South Indian Bank Limited,227, Thayattam Bazaar,Gudiyatham,Vellore District... RespondentsPetition filed under Article 226 of the Constitution of India forthe issuance of Writ of Mandamus forbearing the 2nd and 3rd respondentsfrom in any manner interfering with the petitioner affairs, asset,administration and peaceful possession and occupation of theproperties 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, 92cents comprised in S.No.16/2A1 in Sedukkarai Village, Gudiyatham https://hcservices.ecourts.gov.in/hcservices/ Taluk, pursuant to the notice issued under Section 13(2) of TheSecuritisation and Reconstruction of Financial Assets and Enforcementof Security Interest Act, 2002 pending disposal of the Reference caseNo.280/2002 before the 1st respondent filed under the provisions ofThe Sick Industrial Companies (Special Provisions) Act, 1985.For Petitioner: Mr.S. ThiruvengadaswamyFor Respondents 2&3: Mr.D. Ravichandar for Mr.T.R. Rajaraman- - -J U D G M E N TP.K. MISRA, JThe facts in brief are as follows :-Petitioner is a registered Company which had involved itself inthe manufacturing of cotton and cotton blended with man-made fibreyarns. The South Indian Bank of which second respondent is the ChiefManager and third respondent is the Branch Manager at Gudiyatham, hadextended financial facilities to the petitioner. However, since1999, the petitioner company started incurring heavy loss, whichultimately resulted in default in paying the loans advanced by theBank. Third respondent, at that stage, had filed O.A.No.193 of 2002before the Debt Recovery Tribunal (in short "DRT") under Section 19of The Recovery of Debts Due to Banks and Financial Institutions Act,1993, for recovery of Rs.1,76,15,284/-. The petitioner company hadalso entered into a refinance facility for its machineries with aNon-banking finance company M/s. Sundaram Finance Limited and suchtransaction had been registered with the Registrar of Companies underSection 125 of the Indian Companies Act. The petitioner had alsoavailed finance facility from M/s. Haritha Finance Ltd., and M/s.Upasana Finance Ltd. M/s. Sundaram Finance Limited had obtained aconsent award, dated 30.7.2001, to the tune of Rs.32,68,662/- withinterest under the Arbitration and Conciliation Act, 1996, and onthat basis, execution proceedings was initiated, which is pending inthe Special Court, Gudiyatham. The petitioner has filed objection inthe said execution case on the plea that Reference was pending beforethe BIFR under the Sick Industries Company (Special Provisions) Act,1985 (hereinafter referred to as "SICA"). Such Reference has beenregistered as Case No.280 of 2002 and it is stated to be stillpending. It is claimed that on being made aware of pendency of suchReference under Section 22 of SICA, the DRT, Chennai, had beenadjourning O.A.No.193 of 2002 from time to time as per the prevalentpractice. The South Indian Bank is fully aware of pendency of suchproceedings before the BIFR and had in fact filed its objectionbefore BIFR. At one stage, the proceedings before the BIFR wasrejected, but the AAIFR by its order dated 9.10.2006, set aside suchorder dated 24.8.2005 and remitted the same to the BIFR to consider https://hcservices.ecourts.gov.in/hcservices/ the matter afresh. However, at a stage when BIFR had rejected theapplication on technical consideration, the Bank had got the presentpetitioner set ex-parte in O.A.No.193 of 2002. But, thereafter, thepetitioner and others have filed application to set aside the ex-parte order and to suspend the proceedings in O.A.No.193 of 2002. Inthe interregnum the petitioner and the Bank had entered into anegotiation for amicable settlement for which the petitioner has paida sum of Rs.10 lakhs, but, subsequently the Bank changed itsattitude. While the matter stood thus, the Bank has issued noticedated 20.1.2007 to the petitioner and guarantors under Section 13(2)of the Securitisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002 (hereinafter referred toas "SARFAESI Act") claiming that it is a secured creditor asenvisaged under Section 2(zd) of SARFAESI Act. 2.In the above factual background, the petitioner hassought for a Writ of Mandamus forbearing the second and thirdrespondents (the Bank) from interfering with " petitioner affairs,asset, administration and peaceful possession and occupation of theproperties 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, 92cents comprised in S.No.16/2A1 in Sedukkarai Village, GudiyathamTaluk, pursuant to the notice issued under Section 13(2) of TheSecuritisation and Reconstruction of Financial Assets and Enforcementof Security Interest Act, 2002 pending disposal of the Reference caseNo.280/2002 before the 1st respondent filed under the provisions ofThe Sick Industrial Companies (Special Provisions) Act, 1985". 3.It is the contention of the petitioner that theRespondent Bank is not the only secured creditor entitled to invokeSection 13(2) of the SARFAESI Act. Moreover, the respondent Bank isaware of the existence of other secured creditors, who had registeredtheir transactions as a charge under Section 125 of the IndianCompanies Act. The respondent Bank has registered its transactiononly on 11.6.1997, though the instrument creating charge had beenmade on 16.11.1994. It is further claimed that since the other Non-banking finance company, namely, M/s. Sundaram Finance Limited, hasregistered its transaction, and in such a background, the respondentBank cannot be characterized as three-fourth secured creditors toinvoke Section 13(2) of the SARFAESI Act. It is contended in thisconnection that in view of Section 13(9) of the SARFAESI Act, actioncan be taken only if agreed upon by the secured creditorsrepresenting not less than three-fourth in value of the amountoutstanding and the respondent Bank has advanced only 25% of thetransaction and therefore the respondent Bank cannot be considered asa secured creditor to issue notice under Section 13(2) of theSARFAESI Act and no such action can be taken without taking consentof the other creditors such as M/s. Upasana Finance Ltd., and M/s.Haritha Finance (subsequently known as TVS Motor Company) Ltd.. The https://hcservices.ecourts.gov.in/hcservices/ petitioner has raised the contention that in view of the pendency ofthe proceedings before the BIFR, no coercive steps should be takenwithout the consent of the BIFR.4.The respondent Bank has contended that merely because aproceeding is pending before the BIFR, it cannot be said that thereis any embargo for the secured creditor to invoke power underSARFAESI Act.5.Section 22 of SICA envisages that during pendency of aninquiry into one of sick industrial company as envisaged underSection 16 of such Act or when a scheme is under preparation orconsideration as envisaged under Section 17 or a sanctioned scheme isunder implementation as envisaged under Section 25 is pending, noproceeding for the winding up of the industrial company or forexecution, distress or the like against any of the properties of theindustrial company, shall lie or be proceeded with further, exceptwith the consent of the Board or the Appellate Authority, as the casemay be. This provision, which was enacted in the year 1985, has beenmade applicable notwithstanding anything contained in the CompaniesAct or any other law. Section 35 of the SARFAESI Act contemplatesthat provisions of such Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the timebeing in force.6.Section 41 of the SARFAESI Act has the effect ofamending certain other enactments specified in the Schedule in themanner specified therein. Such Schedule refers to The SickIndustrial Companies (Special Provisions) Act, 1985. It envisagesinsertion of two provisos after the existing proviso in Section 15(1). 7.In the present case, we are concerned with the secondproviso, 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 theSecuritisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002, where referenceis pending before the Board for Industrial and FinancialReconstruction, such reference shall abate if the securedcreditors, representing not less than three-fourth in valueof the amount outstanding against financial assistancedisbursed to the borrower of such secured creditors, havetaken 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 thaton or after commencement of the SARFAESI Act, a reference pendingbefore BIFR shall abate, if the secured creditors representing not https://hcservices.ecourts.gov.in/hcservices/ less than three-fourth in value of the amount outstanding have takenany measures to recover their secured debt under Section 13(4) of theSARFAESI Act.9.Learned counsel for the petitioner has placed relianceupon the decision of the Supreme Court reported in AIR 2007 SC 683(MORGAN SECURITIES AND CREDIT PVT. LTD. v. MODI RUBBER LTD.). In thesaid decision, the primary question was as to whether the provisionsof the Arbitration and Conciliation Act, 1996 would prevail over theprovisions of SICA. The High Court had passed an order in accordancewith Section 22(3) of SICA, which was under question. The contentionraised was to the effect that Section 5 of the Arbitration andConciliation Act, 1996 had an overriding effect and, therefore, theBoard under BIFR could not have been interfered with the award andsimilarly no action could have been taken by applying Section 22(3)of SICA. After analysing various provisions contained in SICA andthe provisions contained in the Arbitration and Conciliation Act,1996, it was observed :-"67. Section 5 of the 1996 Act also provides for a nonobstante clause. It has, however, a limited applicationaiming at the extent of judicial intervention. Itsapplication would be attracted only when an order under sub-section (3) of Section 22 is required to be passed. If thesaid provision is to be given effect to, the Board would notintervene in the matter of the implementation of the award.It would merely suspend the operation of it. It may evenpass an order suspending the liabilities or obligations ofthe industrial company under the award. Even otherwise inthe facts of the present case it stands suspended.68. The Board, however, has not passed an order undersub-section (3) of Section 22 of SICA. The court, therefore,must proceed with the objection filed by the respondentunder Section 34 of the 1996 Act. However, if the objectionfiled by the respondent is rejected, the question of itsenforceability would come into being. Once the arbitralaward having the force of a decree is put into execution,sub-section (1) of Section 22 of SICA would come in its wayfrom being enforced. The contention raised by Mr Sundaramthat having regard to the provisions of Section 5 of the1996 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 fora specific power in the Board. The said provisioncontemplates a larger public interest. In the event anarbitral award is held to be outside the purview of sub-section (3) of Section 22 thereof, it may be difficult toframe a scheme or in a given case implement the same under https://hcservices.ecourts.gov.in/hcservices/ SICA. SICA provides for a time-frame for all the stages ofproceedings. Proviso appended thereto assumes significancein this behalf.70. Parliament presumed that the suspension of an awardshall not be for a long period. In a given case, a party toan award may face some hardships owing to its suspension;but in such an event, it would always be open to it to bringthe same to the notice of the Board. The Board under sub-section (3) of Section 22 of SICA may pass such an order ormay not do so. If an order is passed by the Board, an appeallies there against. The provisions of SICA, it will bearrepetition to state, have been made to seek to achieve ahigher goal and, thus, the provisions of SICA would beapplicable, despite Section 5 of the 1996 Act."10.Ratio of the above decision was extended by a DivisionBench of Orissa High Court to a matter reported in AIR 2008 ORISSA103 (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 Section15(1) of SICA, which was pending, and a declaration was given thatthe company had become sick in terms of Section 3(1)(o) of SICA andthe BIFR had appointed the State Bank of India, which was also thesecured creditor of the company, as operating agency. The order ofBIFR also indicated that, even though the State Bank of India hassought for permission under Section 22(1) of SICA, no such permissionhad been ultimately granted. The order passed by the BIFR had notbeen challenged by the State Bank of India by filing any appeal.However, hearing before the BIFR had taken place, the Bank hadalready issued notice under Section 13(2) of the Securitisation andReconstruction of Financial Assets and Enforcement of SecurityInterest 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 petitionwas filed for quashing such notice on the ground that issuance ofsuch notice was contrary to Section 22 r/w.16, 17 and 18 of SICA. Inthe above context, the Division Bench of Orissa High Court observedas follows:-"9. This is not in dispute that the rehabilitationscheme of the petitioner-company is either under preparationor consideration and that being the position, the protectionis given to such a company against any initiation orcontinuation of any winding up proceeding or execution ofsuch proceeding or distress or any proceeding of the likenature against the properties of the industrial company.The position is that there is no blanket ban in respect ofsuch proceeding, but such proceeding cannot be eitherinitiated or proceeded against such company, except with the https://hcservices.ecourts.gov.in/hcservices/ consent of the BIFR or the Appellate Authority as the casemay be.. . .11. The provisions of Section 22 of SICA have beenconsidered by the Apex Court in several judgments.Reference in this connection may be made to the decision ofthe Supreme Court in the case of Real Value Applicances Ltd.v. Canara Bank and others, reported in AIR 1998 SC 2064. Inthat case, even though the Apex Court deprecated the conductof the company as unfair inasmuch as its attempt to keep theHigh Court in the dark about the BIFR proceeding was frownedupon by the Ape Court, even then the Apex Court held thatthe same will not vitiate the BIFR proceeding and refused toaccept the contention of the respondents that in view of thecompany's conduct before the High Court, the referenceproceeding under Section 15 of SICA and its registrationwould become bad. After saying so, the Court examined theprotection given under Section 22 of SICA and in paragraph23 of the said judgment learned Judges held that it is thelegislative intention to see that no proceedings against theassets are taken before any such decision is given by theBIFR and the learned Judges further held that the "actionagainst the Company's assets must remain stayed as stated inSection 22 till final decisions are taken by the BIFR".(See para 23 at page 2071 of the report). The same thinghas been reiterated in paragraph 29 of the judgment wherethe learned Judges held that once the reference isregistered . . . . . . prohibition contained in Section 22shall immediately come into play. (see para 29 at page 2072of the report).. . . 17. In view of such consistent judicial opinion, thisCourt hold that the petitioner company is entitled toprotection to Section 22 of SICA. In this case, there is anorder, on a contested hearing in which the Bankparticipated, that the company is sick and its revivalpackage is under process."While dealing with the contention of the Bank relating toamendment to Securitisation Act under Section 41, it was observed:-"20. This Court is unable to appreciate the aforesaidcontention. The proviso makes it very clear that same willcome into force where a reference is pending before theBIFR. Such reference will abate if the secured creditorsrepresenting not less than three-fourths in value of the https://hcservices.ecourts.gov.in/hcservices/ amount outstanding against financial assistance disbursed tothe borrower, have taken any measures to recover theirsecured debt under sub-section (4) of Section 13 of theSecurtisation Act.21. In the instant case, admittedly the notice undersub-section (4) of Section 13 of the Securtisation Act hasbeen issued on 7-4-2007. But long before that, the companyhas been declared a sick industrial company by an order ofthe BIFR dated 14-11-2006. Therefore, the proceeding underthe SICA was not at the stage of reference. The proceedinghas gone far ahead of that and culminated in an order bywhich the company was declared sick on 14-11-2006. The saidorder was passed by the BIFR after hearing the bank and bythe said order the bank was appointed an operating agencywith a direction to prepare the revival scheme. Therefore,in the facts of this case, the reference cannot abate sincethe matter under SICA is not pending in reference beforethe BIFR. Even though the bank is a party to the saidorder, it has neither filed any appeal therefrom nor has itasked for consent under Section 22 to proceed against thepetitioner company. Therefore, this argument raised by thelearned counsel for the Bank cannot be accepted.. . .23. Apart from that in the instant case, the Court hasto give a harmonious construction of the overriding clausescontained both in SICA and in the Securitisation Act. TheSecuritisation Act is a later Act and in the SecuritisationAct the overriding clause is contained in Section 37, whichis as follows :"37. Application of other laws not barred. - Theprovisions of this Act or the rules made thereundershall be in addition to and not in derogation of theCompanies Act, 1956 (1 of 1956), the SecuritiesContracts (Regulation) Act, 1956 (42 of 1956), theSecurities and Exchange Board of India Act, 1992 (15of 1992), the Recovery of Debts Due to Banks andFinancial Institutions Act, 1993 (51 of 1993) or anyother law for the time being in force."A perusal of the said section makes it clear thatthe same will not be in derogation of any other law forthe time being in force. Therefore, the protectionwhich has been given to a sick industrial company undera previous special statute, namely, SICA of 1985 has notbeen taken away by Section 37 of the Securtisation Act.The aforesaid amendment which has been made in Section41 of the Securitisation Act has been discussed aboveand this Court has also held that as a result of such https://hcservices.ecourts.gov.in/hcservices/ amendment the present proceeding under SICA cannotabate. Since the proceeding under SICA cannot abate andthe petitioner has been declared a sick industrialcompany, the bank cannot proceed against the petitionerin respect of its notice under Section 13(4) of t heSecuritisation Act in view of the statutory bar createdunder Section 22 of SICA."11.Even though it may appear in the first blush theDivision Bench decision of the Orissa High Court is squarelyapplicable, on deeper scrutiny, we find that the said decision isdistinguishable. It is not the case of the petitioner in the present case that theCompany has been declared as a sick industrial company by BIFR. Onthe other hand, what appears to be pending is, at the stage ofreference unlike in the Orissa decision, wherein the proceedings hadgone far ahead and "culminated in an order by which the company wasdeclared sick" as has been observed by the Division Bench. In factin the said case it was also observed :-". . . Therefore, in the facts of this case, referencecannot abate since the matter under SICA is not pending inreference before the BIFR". In other words, the Orissa High Court made a distinction where areference was pending and, on the basis of reference, the Company hadalready been declared a sick company and steps for rehabilitating thecompany had already been taken. The proviso to Section 15, which wasadded by way of amendment as per Section 41 of the SARFAESI Actcontemplates abatement of a reference if three-forth of the securedcreditors have taken steps contemplated under Section 13(4) of theSARFAESI Act. It is only a reference which is pending and whichwould abate and not a reference which had already culminated in someother order as has been observed by the Division Bench of the OrissaHigh Court.12.In the present case, therefore, it is required to beseen whether action under Section 13(4) of the SARFAESI Act has beentaken by the secured creditors representing not less than threefourth of the amount advanced to the petitioner.13.Section 2(1)(zd) defines "Secured Creditor" to mean anybank or financial institution or any consortium of group of banks orfinancial institutions in whose favour security interest is createdfor 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 https://hcservices.ecourts.gov.in/hcservices/ subsidiary bank; or (v) such other bank which is specified by theCentral Government. As per Section 2(1)(m), "financial institution" means (i) a public financial institution within the meaningof Section 4-A of the Companies Act, 1956 (1 of 1956);(ii) any institution specified by the CentralGovernment under sub-clause (ii) of clause (h) of section 2of the Recovery of Debts Due to Banks and FinancialInstitutions Act, 1993 (51 of 1993);(iii) the International Finance Corporationestablished under the International Finance Corporation(Status, Immunities and Privileges) Act, 1958 (42 of 1958);(iv) any other institution or non-banking financialcompany as defined in clause (f) of section 45-I of theReserve Bank of India Act, 1934 (2 of 1934), which theCentral Government may, by notification, specify asfinancial institution for the purposes of this Act."14.It is not disputed that in the present case therespondent Bank comes within the definition of "bank" as per Section2(1)(c). However, there is nothing on record to indicate that M/s.Sundaram Finance Limited is considered as a "bank" within the meaningof Section 2(1)(c) or Section 2(1)(m). In other words, though theamount payable to M/s. Sundaram Finance Limited by the presentpetitioner is considered as a charge within the meaning of Section125 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. SundaramFinance cannot be construed as a secured creditor within the meaningof Section 2(1)(zd).15.Section 13(9) of the SARFAESI Act itself envisages thatin cases where financing is more than one secured creditors, thepower under Section 13(4) can be exercised only if such right isagreed upon by the secured creditors representing not less thanthree-fourth in value of the amount outstanding. Where there is asingle secured creditor, it is obvious that such secured creditorrepresents the entire 100%. On the other hand, where there are morethan one secured creditors, the question of applying the testenvisaged under Section 13(9) would arise and if such securedcreditors holding not less than three-fourth initiate proceedings byamendment as envisaged in Section 13(9) under Section 13(4),reference would come to an end or would stand abated. https://hcservices.ecourts.gov.in/hcservices/

16.For the aforesaid reasons, we are unable to accept thecontention of the petitioner for issuance of writ of Mandamus. Thewrit petition is, therefore, liable to be dismissed. No costs.Sd/Asst.Registrar/true copy/Sub Asst.RegistrardpkTo1.The Registrar,Board for Industrial Financial Reconstruction (B.I.F.R.)Jawahar Viyapar Bhawan,No.1, Tolstoy Marg,New Delhi 110 001.2.The Authorised signatory-cum-Chief Manager,The South Indian Bank Limited,Regional Office at Niagra Apartments,Nungambakkam,Chennai 600 034.3.The Branch Manager,The South Indian Bank Limited,227, Thayattam Bazaar,Gudiyatham,Vellore District.1 cc To Mr.S.Thiruvengadasami, Advocate, SR.340041 cc To Mr.T.R.Rajaraman, Advocate, SR.33946JUDGMENT IN WP.10600/2007BK(CO)SRA(14/08/2009)