The State Bank of IndiaSathy Road v. Mr.A.K.Kandaswamy Proprietor Sri Ranga Industries No.80

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 27.04.2007CORAM:THE HON'BLE MR.A.P.SHAH, THE CHIEF JUSTICEandTHE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMANW.A.No.662 of 2007The State Bank of IndiaSathy Road, GanapathyCoimbatore-641 006rep. by its Executive Committee.. Appellant/1st Respondent in WP No. 41049/05versus1. Mr.A.K.Kandaswamy Proprietor Sri Ranga Industries No.80, Athipalayam Road Ganapathy Coimbatore-641 006.... Respondent./petitioner in WP NO. 41049/052. Asset Reconstruction Company (India) Ltd. 17th Floor, Express Towers Nariman Point Mumbai-400 021 rep. by its Chief Manager... 2nd Respondent/2nd Respondent in WP NO. 41049/05-----PRAYER: Writ Appeal filed under Clause 15 of the Letters Patentagainst the order of the learned single Judge of this Court dated16.3.2007 made in W.P.M.P.No.44088 of 2005 in W.P.No.41049 of2005.Restraining the respondent and all their agents employees,servants, successors-in-interest and assignees to transfer, selland assign the liability of the petitioner and his family heldcompany M/s. Llaser Flow Control Pvt. Ltd along with thesecurities attached thereto, as stated as item nos. 11 and 12 tothe Annexure to the impugned resolution dated 02.12.2005 passed by https://hcservices.ecourts.gov.in/hcservices/ the Executive committee of the Central Board (ECCB) of StateBank of India under Ref, NO. 35/2005-2006 and the securitiesattached thereto, pending disposal of the WP NO. 41049/05Certiorarified Mandamus to call for the records of the impugnedresolution dated 2.12.2005 passed by the Executive Committee ofthe Central Board (ECCB)of State Bank of India under Ref. 35/2005-2006 for sale to ARCIL the financial Assets in so far ASIL relatesto the petitioner M/s. Sri Ranga Industries and his family heldcompany M/s. Llaser Flow Control Pvt. Ltd as stated item Nos. 11and 12 to the annexure to the said resolution and to quash thesame and to direct the respondent to consider the proposal dated20.11.2005 of the petitioner.-----For appellant :Mr.K.SankaranFor 1st respondent :Mr.Sundar MuthaiahFor 2nd respondent :Mr.Murali ofM/s.Rangarajan Prabhakaran-----JUDGMENT(Judgment of the Court was delivered by CHITRA VENKATARAMAN,J.)This writ appeal is against the order of the learned singleJudge in W.P.M.P.No.44088 of 2005 in W.P.No.41049 of 2005 dated16.3.2007, granting an order of stay in favour of the writpetitioner on the ground that there was no notice to the writpetitioner herein before the transfer and assignment of the bookdebt with the securities of the first respondent to the secondrespondent by the appellant herein, namely, the State Bank ofIndia. 2. The writ petitioner, the first respondent herein, availedfinancial facility of a sum of Rs.64 lakhs in the form of termloan, working capital finance and cash credit facility from theappellant herein in the year 1982. It is stated that the firstrespondent was engaged in the manufacture of railway wagons andallied products. Due to various problems, the writ petitionersuffered setbacks in his business activities. It is also statedthat the squeezing of credit limits by the appellant also had itsimpact on the functioning of the first respondent company. 3. The first respondent owed a sum of Rs.77.80 lakhs as on27.12.1990. The liability of the writ petitioner/first https://hcservices.ecourts.gov.in/hcservices/ respondent's closely held company M/s.Llaser Flow Controls Pvt.Ltd., was Rs.72.77 lakhs. The appellant instituted a civil suitin O.S.No.72 of 1991 on the file of the Sub Court, Coimbatore, on3.2.1991 for the recovery of the amount due from the firstrespondent and its associate company. The said suit wastransferred to the file of the Debts Recovery Tribunal,Coimbatore, in T.A.No.2038 of 2002.4. By order dated 28.3.2001 in A.A.I.F.R. Case No.409 of2000, the Associate Company, namely, M/s.Llaser Flow Controls Pvt.Ltd., was recommended for winding up. The assets of the saidassociate Company was hypothecated by way of second charge to theappellant herein. In view of the action taken by T.I.I.C. againstthe associate company for recovery of the amount due from it, theappellant herein took steps to delete the associate companyM/s.Llaser Flow Controls Pvt. Ltd.5. It is stated that the first respondent approached theappellant herein for a one-time settlement. Based on thediscussion, the first respondent agreed to discharge its liabilityas well as that of the associate company, to the tune of Rs.50lakhs. To that end, the first respondent had remitted a sum ofRs.2.50 lakhs to show their bona fides.6. It is stated by the first respondent that in spite of theagreement, the appellant did not pass the resolution forsettlement. It is further stated that the appellant herein sent aletter dated 16.8.2005, calling upon the first respondent debtorcompany to improve his one-time settlement of Rs.50 lakhs towardsthe resolution of the dispute. Accordingly, the first respondentimproved his one-time settlement offer to Rs.54 lakhs as againstthe original offer of Rs.50 lakhs, under letters dated 5.9.2005and 10.11.2005. When the matter stood thus, the appellantrejected the same by letter dated 18.11.2005 and returned theadvance amount of Rs.2.50 lakhs to the first respondent herein.It is stated by the first respondent herein that by resolutiondated 2.12.2005, passed by the Executive Committee of the CentralBoard of State Bank of India, under Ref.No.35/2005-2006, theappellant resolved to assign and transfer the book debt of thefirst respondent and the Associate company M/s.Llaser FlowControls Pvt. Ltd. together with collateral securities attachedthereto, to M/s.Asset Reconstruction Company (India) Ltd., thesecond respondent herein, for a sale consideration of Rs.40 lakhs.7. The contention of the first respondent is that when theyhave offered to discharge their liability and that of M/s.LlaserFlow Controls Pvt. Ltd. at Rs.54 lakhs to the appellant herein,the appellant was not justified in their transferring andassigning the said liability together with the attached securityto the second respondent at Rs.40 lakhs without notice and giving https://hcservices.ecourts.gov.in/hcservices/ an opportunity to the first respondent to discharge his liability.The first respondent had preferred the writ petition challengingthe said action, stating that when the dispute was pending beforethe Debts Recovery Tribunal, Coimbatore, the appellant herein hadno right to assign and transfer the liability to M/s.AssetReconstruction Company (India) Ltd., and therefore stated that asper the Securitisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002, the appellant wasbound to terminate the proceedings pending before the DebtsRecovery Tribunal, Coimbatore, before enforcing the security.Pending consideration of the writ petition, the first respondentprayed for an injunction restraining the appellant fromtransferring and selling Item Nos.11 and 12 to the annexure to theimpugned resolution dated 2.12.2005. 8. The stand of the first respondent was countered by theappellant herein stating that the claim of the writ petitionerthat he would purchase the property at Rs.54 lakhs which would bein the interest of public was misconceived. The attitude of thefirst respondent was only to stop the sale. It is also statedthat the sale was one in the lot and if any security is removedfrom the lot, it would frustrate the sale. It is also stated thatthe first respondent offered to settle the dues at Rs.2.0071crores as one time settlement, but later on went back. Theappellant further stated that the claim of the first respondentwas mala fide. The assignment of the financial assets wasdone pursuant to Section 5 of the Securitisation andReconstruction of Financial Assets and Enforcement of SecurityInterest Act, 2002, . 9. A counter affidavit was also filed on behalf of theappellant herein stating that the first respondent's right ofredemption of the securities is not lost and the pending DebtsRecovery Tribunal case would be continued by the second respondentherein, which would be substituted for the appellant bank in allthe legal proceedings. It pointed out that the claim before theDebts Recovery Tribunal was for recovery of a sum ofRs.5,15,00,000/-; that the offer to settle at Rs.54 lakhs was onlya means of compelling the appellant to settle for a sum far belowthe amount due. They also pointed out that for more than one andhalf decades, it could not recover the said sum. It is alsostated that the notice of sale of the 26 financial assets wereadvertised. The appellant also rejected the plea that noticeunder Section 13(2) was not issued, as incorrect. 10. They submitted that along with the two securities of thefirst respondent, another 24 items of securities were notified forsale. The second respondent's offer was the highest and hence thesame was in favour of the second respondent. Item Nos.11 and 12thereof were the securities owned by the first respondent. https://hcservices.ecourts.gov.in/hcservices/

11. By order dated 16.3.2007 made in W.P.M.P.No.44088 of 2005in W.P.No.41049 of 2005, the learned single Judge noted that thefirst respondent was willing to pay a sum of Rs.54 lakhs and thatsince the assignment of the securities was made without notice tothe first respondent, there was a prima facie case made out by thewrit petitioner and hence, granted an order of interim stay.Aggrieved of this, the writ appeal is preferred by the appellantherein, the first respondent bank in the writ proceedings.12. Learned counsel appearing for the appellant submittedthat What has been assigned was only the book debt along with thesecurities in favour of the second respondent. Further, theappellant had complied with the requirements under theSecuritisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002, by issuing noticeunder Section 13(2). Reiterating the contention that the twosecurities form part of the other assets to be sold as one basketsale, the question of giving notice again is not sustainable inlaw. He emphasized that Section 5 of the Securitisation andReconstruction of Financial Assets and Enforcement of SecurityInterest Act, 2002, has an overriding provision under which thesecond respondent would acquire financial assets of the appellantbank. As such, the question of issuing notice did not arise. Hefurther submitted that after the approval of the financial assetsby the Assets Reconstruction Company (India) Ltd., there would notbe a stay of transfer of the financial assets as per theresolution in this connection.13. Learned counsel referred to the decision reported in 2006(5) CTC 753 (TRANSCORE Vs. UNION OF INDIA). He submitted thatgiven the purport of the Securitisation and Reconstruction ofFinancial Assets and Enforcement of Security Interest Act, 2002,particularly under Section 5, the question of giving notice to thefirst respondent did not arise. 14. Countering the stand of the appellant herein, the firstrespondent stated that when it had offered to settle the liabilityat Rs.54 lakhs, the appellant was not justified to sell theproperty to the second respondent at Rs.40 lakhs. He also deniedthe allegation that there was no need for the bank to write to thefirst respondent to call for offer and that when the firstrespondent had made an offer of Rs.54 lakhs, the action of theappellant to sell the assets for Rs.40 lakhs was improper. It isalso submitted that as per the decision reported in (2004) 4 SCC311 (MARDIA CHEMICALS LTD. Vs. UNION OF INDIA), the appellantought to have issued notice to the borrower on the security inquestion.15. Heard learned counsel for both sides. https://hcservices.ecourts.gov.in/hcservices/

16. A perusal of Section 5 of the Securitisation andReconstruction of Financial Assets and Enforcement of SecurityInterest Act, 2002, shows that notwithstanding anything containedin any agreement or any other law for the time being in force, anysecuritisation company or reconstruction company may acquirefinancial assets of any bank or financial institution by issuing adebenture or bond or any other security in the nature of thedebenture, for consideration agreed upon between such company andthe bank. Section 6 provides that the bank or financialinstitution may, if it considers appropriate, give a notice ofacquisition of financial assets by any securitisation company orreconstruction company, to the concerned obligor and any otherconcerned person. Where no notice of acquisition is given, moniesor properties received by the financial institutions or the banksshall be held in trust for the benefit of and on behalf of thesecuritisation company or reconstruction company. 17. Referring to the scheme of the Securitisation andReconstruction of Financial Assets and Enforcement of SecurityInterest Act, 2002, NPA Act (Non-Performing Assets Act, andinterpreting Sections 13(2) and 13(4), the Apex Court, in thedecision reported in 2006 (5) CTC 753 (TRANSCORE Vs. UNION OFINDIA), held:" The NPA Act proceeds on the basis that securityinterest vests in the bank/FI. Sections 5 and9 of NPA Act is also important for preservationof the value of the assets of the banks/FIs.Quick recovery of debt is important. It is theobject of the DRT Act as well as NPA Act. Butunder NPA Act, authority is given to thebanks/FIs, which is not there in the DRT Act,to assign the security interest tosecuritisation company/asset reconstructioncompany. In cases where the borrower hasbought an asset with the finance of thebank/FI, the latter is treated as a lender andon assignment the securitisation company/assetreconstruction company steps into the shoes ofthe lender bank/FI and it can recover the lentamounts from the borrower. "The Supreme Court held that the scheme of NPA Act gives discretionof the bank/FI to take steps to protect its assets from beingalienated, transferred, disposed of in any manner. 18. Section 13 falls under Chapter III dealing withenforcement of security interest. Section 13(2) proceeds on thebasis that where a borrower commits a default in payment of asecured debt and had defaulted in payment of the debt and further https://hcservices.ecourts.gov.in/hcservices/ his account in the books of the bank is classified as sub-standard, doubtful or loss, the NPA Act comes into force. TheApex Court held:"22. ..... The scheme of sub-sections (2), (3) and(3-A) of Section 13 of NPA Act shows that thenotice under Section 13(2) is not merely a showcause notice, it is a notice of demand. Thatnotice of demand is based on the footing thatthe debtor is under a liability and that hisaccount in respect of such liability has becomesub-standard, doubtful or loss. Theidentification of debt and the classificationof the account as NPA is done in accordancewith the guidelines issued by RBI. Such noticeof demand, therefore, constitutes an actiontaken under the provisions of NPA Act and suchnotice of demand cannot be compared to a showcause notice. In fact, because it is a noticeof demand which constitutes an action, Section13(3-A) provides for an opportunity to theborrower to make representation to the securedcreditor. Section 13(2) is a conditionprecedent to the invocation of Section 13(4) ofNPA Act by the bank/FI. Once the twoconditions under Section 13(2) are fulfilled,the next step which the bank or FI is entitledto take is either to take possession of thesecured assets of the borrower or to take overmanagement of the business of the borrower orto appoint any manager to manage the securedassets or require any person, who has acquiredany of the secured assets from the borrower, topay the secured creditor towards liquidation ofthe secured debt. 23. Reading the scheme of Section 13(2) withSection 13(4), it is clear that the noticeunder Section 13(2) is not a mere show causenotice and it constitutes an action taken bythe bank/FI for the purposes of the NPA Act. "Under Section 13(2), the notice of demand which gives anopportunity under Section 13(3-A) enables the borrower to makerepresentation/objection to the secured creditor. Hence, Section13(2) is a condition precedent for invoking Section 13(4) of theNPA Act. 19. Further interpreting the provisions, the Supreme Court,in the aforesaid decision, held:" The point to be noted is that the scheme of theNPA Act does not deal with disputes between thesecured creditors and the borrower. On the https://hcservices.ecourts.gov.in/hcservices/ contrary, the NPA Act deals with the rightof the secured creditors inter se. "20. Referring to the scheme of the NPA Act, the Supreme Courtfurther held that the very object of Section 13 of the NPA Act isthe recovery by non-adjudicatory process. Essentially, NPA Actdeals with the rights of the secured creditors. 21. Going by the Scheme of the NPA Act, all that wasnecessary under the Act was to give notice as contemplated underSection 13(2). Once the borrower commits a default under Section13(4), no further notice is contemplated except as provided forunder Section 6 as regards the further action of assignment andtransfer of the financial institution's interest in the securitiesin favour of the second respondent.Considering the protection given under Section 13(2) and inthe light of the decision of the Supreme Court, as stated above,the action of the appellant could not be faulted with. In thecircumstances, we uphold the contention of the appellant hereinand reject the prayer of the first respondent. Consequently, wehereby set aside the order of the learned single Judge dated16.3.2007 made in W.P.M.P.No.44088 of 2005 in W.P.No.41049 of 2005and allow the writ appeal. There will, however, be no order as tocosts. Connected M.P.No.1 of 2007 is closed. ksvSd/Asst.Registrar/true copy/Sub Asst.RegistrarToThe Executive CommitteeState Bank of India,Sathy Road, GanapathyCoimbatore 641 006 https://hcservices.ecourts.gov.in/hcservices/

2. The Chief Manager,. Asset Reconstruction Company (India) Ltd. 17th Floor, Express Towers Nariman Point Mumbai-400 021+ one cc to Mr. K. Sankaran, Advocate sr o. 29347asm(co)nm(17.07.07)W.A.No.662 of 2007