Delhi High Court
S.R.F. Finance Ltd. vs Prakash Industries Ltd. And Anr. on 23 August, 2002
JUDGMENT S. Mukherjee, J.
1. The prayer made in this petition under Section 9 of the Arbitration and Conciliation Act, 1986, is for appointment of a Receiver in relation to plant, machinery and equipment leased out by the petitioner to the respondent company, under a lease agreement in which it is provided inter-alia, in Clauses 3, 16 and 24, respectively that ownership of the plant and equipment is to remain with the Lesser and further that in the event of termination, the said plant and equipment will be delivered back to the Lesser; and furthermore that in the event of default in payment, the Lesser can re-possess the same.
2. These are three matters which have been heard together. Facts of the present case (OMP 184/97) involving purchase of respondent's agreement and leasing back to respondent are slightly different from that of the other two cases and therefore the said additional aspect which is being dealt with in the present case is not relevant for purposes of the other two matters.
3. The factual matrix which is not in dispute, is as under:-
The petitioner, having its registered office at AB/4, Safdarjung Enclave, New Delhi-110029, is a non-banking financial company offering a wide range of facilities to its customers, such as leading, hire-purchase, and bill-discounting among others.
4. The Respondent No. 1 is also a company incorporated under the Companies Act, 1956, and the Respondent No. 2 is its managing director.
5. The respondent No. 1 company entered into a transaction with the petitioner whereby certain existing plant, machinery and equipment of respondent No. 1, were purchased by sale in favor of the petitioner company and thereafter were leased back to respondent No. 1 under lease agreement being agreement No. J 5580 dated 21.3.1994.
6. The agreed term of the lease was six months, and as per covenant contained in Article 6 thereto, respondent No. 1 had agreed to pay monthly rental as stipulated.
7. Apart from Clauses 3, 16 and 24, referred to in the opening para, it was also stipulated in Article 23 and 24 of the agreement, that in the event of the respondent No. 1 failing to pay any of the lease rentals or part thereof or in making other payments under the agreement, and such failure continuing unremedied for a period of fourteen days after written notice, the Lesser could declare all sums due under the agreement, to become immediately payable. Thereupon, in the event of the failure to pay the entire sum continuing for a period of 14 days, the Lesser (i.e the petitioner), could upon notice to lessee (the respondent No. 1), terminate the agreement.
8. Furthermore as already stated above, as per the said agreement, in the eventuality referred to above, the petitioner was also entitled to take possession of the plant, machinery and equipment covered by the said lease agreement.
9. Respondent No. 2 is a guarantor who has agreed to pay on demand any money due under the agreement, but which has not been paid by respondent No. 1.
10. It is the case of the petitioner that soon after availing the lease facility from it, the respondent No. 1, while continuing to enjoy the use of the leased equipment, started defaulting in the payment of the lease rentals. When faced with the Petitioner's exhortations to pay the amounts due, or face the consequences as envisaged under the agreement, the respondent No. 1 repeatedly sought accommodation from the Petitioner, in relation to making the payment of the amount due.
11. Vide its legal notice addressed to the respondents on the 15th of July, 1997, the petitioner terminated the agreement that was earlier subsisting between the parties, and required the respondents to Lender unto it (petitioner), the amount owing to it, and also the return the equipment that had been leased out to the respondent No. 1. The amount owing to the Petitioner is the sum of Rs. 65,11,345/-.
12. The petitioner has filed on record a statement of account. The respondent, while replying to the notice of demand, has raised certain disputes/claims from its side which are presently pending in arbitration and therefore need not be commented upon. However purely by way of prima facie consideration in the context of the relief/direction under Section 9 of the Arbitration Act 1996, it may be mentioned that the sum and substance of the claim of the respondents is that at one stage they had allegedly asked for permission to carry out some repairs/improvements allegedly to make up for certain shortcomings in the working of the plant/equipment, which permission having not been granted, the withholding of permission renders the petitioner liable to compensate the respondents by way of damages.
13. Purely by way of prima facie consideration, as submitted above, it does appear that the claims/disputes of the respondent are based on certain communications by which the permission was allegedly sought for repair/renovation, which communications themselves are not admitted documents.
14. Even otherwise, the respondents were duty bound, if they felt aggrieved, to have filed some proceedings before the competent Court or arbitrator with the prayer that the petitioner is unreasonably with-holding its consent to the repair/modification work.
15. However no attempt was made in this direction. After writing the letters (even assuming that such letters are actually written at the contemporaneous point of time), the respondent just sat back and allowed the situation to continue and now wants to adopt this defense for resisting the petitioner's prayer for appointment of a Receiver.
16. Since similar matters, involving the same very respondent company, have come up for consideration before this Court in a number of earlier matters, I need not go into aspects which stand concluded thereby as under:-
ORDER DATED 11.9.2001 PASSED BY SINGLE JUDGE OF THIS COURT IN I.A. NO. 1164/2000 IN SUIT NO. 239/2000 (GUJARAT LEASE FINANCE LTD. v. PRAKASH INDUSTRIES.) "Defendant is already engaged in several similar litigation wherein his resistance against appointment of the Receiver in respect of the goods (in this case these are two) leased out to it and installed at its premises under the garb of the provision of Section 22 of the Sick Industrial Companies (Special Provision) Act 1985 has met with failure. In the appeal filed by the defendant this Court has in Prakash Industries Ltd. v. Bajaj Auto Finance Ltd. 93 (2001) Delhi Law Times 159 (DB) has held that since the defendant was not paying the Installments it can not be allowed to continue to use the machinery and earn money from it in an un-business like manner. In another case Space Capital Service Ltd. v. Prakash Industries Ltd. (2001) 30 SCL 420 (Delhi) which too was filed against the defendant the plea of the defendant that the appointment of the Receiver is hit by Section 22 of SICA was repelled with the observations that such a plea, if accepted would defeat the very purpose of leasing out the equipment by the petitioner.
In the instant case also the leased equipments were purchased by the plaintiff/applicant and acquired in its name and thereafter leased out to the defendant company. An amount of Rs. 7,51,27,851.00 has become due towards lease amount. It was observed that the construction of Section 22 as accorded by the defendant would affect unfairly the rights of a company which is the owner of the leased equipment as such a construction is not unwarranted as the lessee company would in such an event would deprive the Lesser company to secure its own equipment in respect of which the sick company has defaulted in making payment.
The aforesaid view receives support and confirmation from various other decisions of this Court, namely, GE Capital Transportation Financial Services Ltd. v. Dee Pharma Ltd. 76 (1998) Delhi Law Times 278; Wipro Finance Ltd. v. Dee Pharma Ltd. 86 (2000) Delhi Law Times 45 and Credit Capital Finance Corporation v. Foremost Industries Ltd. 1996 Companies Cases (Delhi) 251.
In view of the settled position of law that a sick company to whom the equipment has been given on lease can not claim protection under Section 22 of the SICA as this Section only applies to the property belonging to the company and not to the leased property, the application is allowed.' ORDER DATED 17TH JULY, 2001 PASSED BY DIVISION BENCH OF THIS COURT WHILE DISMISSING FAO (OS) 263/2001 AND FAO (OS) 265/2001.
"We are unable to accept this contention advanced by learned Senior Counsel for the appellant. The ratio of the judgment of Supreme Court is not restricted to only leased premises protected by the provisions of a Rent Control Act. Infact in the preset case the period of lease agreement has now expired and yet the appellant has continued to be in possession and use of the wind-mills. The wind-mills are not owned by the appellant. The provisions of Section 22 of the SICA would thus not come to the rescue of the appellant in view of the judgment of M/s. Chamundi Mopeds' case (supra).
Mr. Chandhiok, learned Senior Counsel for the appellant also sought to advance an argument that the wind-mills are embedded in the earth and thus are immovable property and as a consequence thereof the Courts at Delhi would have no jurisdiction in the matter. We are unable to accept this contention of Mr. Chandhiok as the wind-mills were delivered and subsequently installed. These wind-mills are capable of being removed and cannot be said to be immovable property.' "We have considered the submissions of learned Counsel for the parties and it is our considered view that it is not a case where jurisdiction of Competent Courts have been clearly, unambiguously and explicitly excluded. Though the word 'exclusive' has been used the clause seems to suggest that restriction may have been placed only on the lessee i.e., appellant. Be that as it may, if there are two interpretations of a clause then a wider interpretation must be given for the purposes of jurisdiction and the jurisdiction of a competent Court should not be ousted unless the case is clear and unambiguous."
17. However while adopting the reasoning and the conclusion of another Single Judge of this Court as laid down in order dated 11.9.2001, in petition No. 239/2000, relevant portion whereof is extracted below this paragraph, I still do wish to deal with certain aspects which have been argued by Mr. A.S. Chandhiok Sr. Advocate with his customary eloquence.
18. Firstly, according to him there is already an interim order in operation whereunder a Receiver was appointed to take custody of the plant and equipment, and to hand-back the same to the respondent company, on superdari, which order is continuing till date and therefore the same adequately safeguards the rights of the parties, and as such the orders of appointment of a Receiver to take away the plant and equipment, from the factory installation of respondent No. 1, it is submitted is not warranted.
19. It is further submitted that the plant and equipment in question is only one part of the total gamut of integrated plant equipment and machinery of the entire factory, and removing the equipment of any one operation in isolation, will cause irreparable loss and damage. Rather it will render the balance plant, equipment etc. to become un-usable/unsaleable.
20. Another contention put forward by Sh. A.S. Chandhiok, learned senior counsel for the petitioner is that the petitioner having itself formulated the dispute in a manner so as to include the determination of petitioner's right to take possession of the plant and equipment by the Arbitrator, and therefore the main issue as such being before the Arbitrator, the relief for appointment of a Receiver, ought to have also been raised by way of a petition under Section 17 of the Act filed before the arbitrator and not by way of an independent petition before this Court under Section 9 of the Arbitration and Conciliation Act, 1996.
21. Thirdly, it has been contended in the present case (but not common with the other two cases viz OMP No. 185/97 & OMP No. 195/97), that in this case the plant and equipment had already been owned by the respondent and was lying installed at the factory location even before petitioner claims to have purchased the same and leased it back to respondent. According to the learned counsel for the respondent, the sale on paper of the said plant and equipment in favor of the petitioner and the further paper transaction leasing back to the respondent, is nothing else but only a device to give a colour of lease to the transaction which is essentially in the nature of a financing transaction. In the latter status, which is the correct status according to him, the petitioner would not have the right to ask for a Receiver to be appointed and/or for a Receiver taking possession of the equipment, atleast not till the arbitration proceedings attain finality, and an outstanding is generated by virtue of a final and binding award being passed.
22. I propose to deal with these additional submissions briefly since in my view, the major aspects stand already covered in the various orders of Single Bench and also of the Division Bench referred to above.
23. As regards the first point viz of the interim order being already in operation, whereunder a receiver has been appointed to take custody of the plaint and equipment but hand back the same on "Superdari" to the respondent, in my view the same would not preclude the relief being now claimed at the stage of final disposal of this petition under Section 9 of the Act.
24. It is the admitted case, that the defendant company is in financial doldrums. It is nobody's case, that the plant and equipment is un-useable or is not being used or has become obsolete. In fact the respondent admits that it is utilising the plant and equipment even as on date. Thus apart from all other aspects, the unavoidable possibility of the value of the plant and equipment suffering diminution with the further user, both in terms of normal depreciation of which judicial notice can be taken, and also taking into account the circumstance that the respondent company with its financial constraints, is unlikely to be possessing adequate funds and infrastructure to ensure the upkeep of the equipment in the desired manner. Rather, at such a stage when the respondent company is before BIFR, and there may be a possibility of change of management or some other similar development, the leased plant and equipment may rather be in a vulnerable situation of theft of vital/valuable components, mishandling, sabotage etc. and therefore the circumstances would warrant ordering a Receiver to take possession of the plant and equipment from the factory installation, and for ensuring the proper maintenance thereof under the custody and control of the petitioner who is the owner of the said plant and equipment.
25. It has been pointed out by learned counsel for the petitioner that petitioner being a professionally managed organisation, have got all types of personnel and also adequate arrangements for ensuring that the plant and equipment remains in the best possible condition, and therefore the relief of directing a receiver, to take charge of the plant and machinery, is the proper order to be passed in the interests of justice.
26. As regards the contention that the leased plant and equipment is only one part of an arrangement of integrated plant and equipment, which ultimately adds up to the entire production process of the factory, and therefore the appointment of a Receiver who will remove a part of the total factory infrastructure (which constitutes leased equipment), could operate to render the rest of the plant and equipment to be unusable and unsaleable, is another argument which simply begs the question. The Lesser of plant and equipment, is in law entitled to appointment of Receiver to take possession of the same and the effect thereof becomes immaterial once the party which is not paying the leased rent, and which is in established default, has reached the stage of contract terminated, and huge outstanding.
27. This is not a case of just one or two Installments being in default. The default is continuing for long and is conclusively established.
28. The third contention put forward by the petitioner (in OMP No. 184/97) viz that the financial agreement was only a sham or make belief, cannot be entertained since there has been in fact and as per law well recognised by accountancy practices and income tax etc, a sale and then a leasing back to the respondent company. To view the transaction now in any other manner, would be to rewrite the accountancy and taxation transactions. Furthermore a party who has entered into such an agreement, and has signed a document in token thereof, cannot be permitted to make a submission about what is to be described as the unwritten background understanding in relation to a written contract containing clear-cut stipulations being now enforced. Rather the respondent No. 1 would be clearly estopped from so contending even.
29. Yet another submission has been put forward by the respondent, viz that the petitioner having formulated the dispute to include a determination on the aspect of petitioner's right to take the possession, and consequences of petitioner not having approached the arbitration tribunal under Section 17 of the Act. Even this submission is mis-conceived and devoid of merits. The recourse under Section 17 is an enabling additional recourse, and is not in substitution of Section 9 of the Act.
30. The petitioner has rightly prayed for the determination of its right to take possession in the arbitration because that is the final relief on the aspect of possession, and that relief has been asked in addition to the relief of payment of the leased amount. By way of the present petition on the other hand, this Court's orders have been sought regarding interim protection to be granted under Section 9 of the Act, by the appointment of a Receiver who is to take possession. It is not right for the respondent to contend that the same relief is before the Arbitrator as well. Even otherwise, where the circumstances so warrant, as in the present case, even if the main relief is pending before the Arbitration Tribunal, the interim relief can always be granted by the Court under Section 9 of course to an extent less than the final relief which is to be received at the conclusion of the arbitration.
31. Moreover as regards the submission regarding not adopting the proceedings under Section 17 of the Arbitration and Conciliation Act, 1996 is concerned, there can be no ouster of jurisdiction of this Court as contemplated under Section 9 of the Act.
32. In view of the above I find that the case as made out by the petitioner warrants the appointment of a Receiver under Section 9 of the Act, to take possession of the leased plant and equipment and for the said purpose I direct that Shri Venkata Ayer, Manager of the petitioner company who was already appointed as the Receiver vide order dated 22.10.1998 passed in this case as the Receiver for the purposes of this order allowing the present petition. He will stand duly authorised to seize and take possession of the plant and machinery in question described as "Heavy Structural Rolling Mills" and installed in the factory of respondent No. 1 at Champa District, Bilaspur (MP) where it is stated to be lying, or from any other place where it may be found/available. The Receiver shall stand duly empowered to take all necessary steps and actions for removal/detachment of the said plant and equipment from the fastening in the foundation/floor and/or from any other connected machinery and equipment which may be other than or beyond the leased plant and equipment. The Receiver will be entitled to enter any premises for the said purposes by opening or breaking of any locks and doors/obstruction of any kind whatsoever. He shall prepare an inventory of the plant and equipment Along with accessories which are so seized and removed from the said premises. The Receiver will obtain atleast five photographs from different angles both before and after carrying out his functions. He will be entitled to take away and/or remove the said plant and equipment to any other premises belonging to the petitioner and will ensure that the said plant and equipment is properly preserved by adopting all required means measures for ensuring that the said plant and equipment is kept safe both in the sense of remaining intact and as regards the condition thereof at the time of taking possession. The Receiver will be entitled to avail the assistance of the local police authorities, who will extend necessary assistance and protection upon request being made in that behalf by the Receiver. Upon relocating the plant and equipment Receiver will inform this Court and the respondent about the location and details of arrangements regarding upkeep thereof including expenditure thereon.
33. The petition stands disposed of as allowed. Parties are however left to bear their own costs.