Allahabad High Court
M/S Uniword Telecom Ltd. And Anr. vs State Of U.P. And 4 Others on 8 January, 2014
Equivalent citations: AIR 2014 ALLAHABAD 77, 2014 (3) ALL LJ 700, (2014) 103 ALL LR 821, (2014) 3 ADJ 405 (ALL), (2014) 3 ALL WC 3072, (2014) 122 REVDEC 609, (2014) 138 ALLINDCAS 21 (ALL)
Bench: Ashok Bhushan, Vipin Sinha
HIGH COURT OF JUDICATURE AT ALLAHABAD
Reserved on 17/12/2013.
Delivered on 08/1/2014
A.F.R.
Case :- WRIT - C No. - 48250 of 2013
Petitioner :- M/S Uniword Telecom Ltd. And Anr.
Respondent :- State Of U.P. And 4 Others
Counsel for Petitioner :- Smt. Komal Khare,Somesh Khare
Counsel for Respondent :- C.S.C.,Rakesh Mishra
With
Case :- WRIT - C No. - 6853 of 2013
Petitioner :- M/S Uniword Telecom Ltd. And Another
Respondent :- State Of U.P. And Another
Counsel for Petitioner :- R.K. Mishra
Counsel for Respondent :- C.S.C.,Rakesh Mishra
Hon'ble Ashok Bhushan,J.
Hon'ble Vipin Sinha,J.
(Delivered by Hon'ble Ashok Bhushan,J) These two writ petitions filed by the same petitioners have been heard together and are being decided by this common judgment. Counter and rejoinder affidavits have been exchanged in Writ Petition No.48250/2013, which is being treated as leading writ petition.
Brief facts giving rise to both the writ petitions are: The petitioner no.1 is a registered company under the Companies Act, 1956, and has been carrying out its activities since 1995. The petitioners' company suffered heavy losses in the financial year 2008-09 and 2009-2010. A reference under Section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter called the "Act, 1985") was made by the petitioners Company before the Board for Industrial and Financial Reconstruction (hereinafter called the "BIFR") in the Month of October, 2010. The reference was registered as BIFR Case No. 53/2010. The Board proceeded with the reference and called for certain informations and in its proceedings dated 12/12/2011 recorded that the company has become a sick industrial company under Section 3(1) (o) of the Act, 1985. A direction was issued for preparation of Draft Rehabilitation Scheme for the company. The State Bank of Bikaner and Jaipur was appointed as Operating Agency under Section 17 (3) of the Act, 1985 who were to prepare a Draft Rehabilitation Scheme. Draft Rehabilitation scheme claims to have been prepared in the month of December, 2012. The petitioners' company was granted various credit facilities by way of financial assistance by consortium of banks. The consortium of banks appointed the State Bank of Bikaner and Jaipur as their Lead Bank for all legal proceedings. The consortium of banks issued a notice dated 01/8/2012, under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter called the "Act, 2002") to the petitioners to discharge in full all liabilities to the consortium of banks within 60 days. The liability owing to the consortium of banks as on 31/5/2012 was mentioned in the notice as Rs.201,90,00,254.45/-(Rupees Two Hundred One Crores Ninety Lakhs Two Hundred Fifty Four and Paisa Forty Five Only). The petitioners having failed to discharge their liabilities within 60 days from the receipt of the aforesaid notice issued under Section 13(2) of the Act, 2002, the Bank invoked power under Section 13 (4) of the At, 2002 and issued a possession notice dated 12/10/2012. The petitioners filed Writ Petition No.6853/2013 on 05/2/2013 praying for following reliefs:
"i) Issue, a writ, order or direction in the nature of certiorari quashing the impugned consortium notice dated 1.8.2012 under section 13(2) SARFAESI Act send by respondent no.2 and consequential recovery proceedings against the petitioner (Annexure No.3) of the writ petition.
ii) Issue, a writ, order or direction in the nature of mandamus staying recovery proceedings in pursuance to the impugned notice dated 1.8.2012 during pendency of present writ petition before this Hon'ble Court.
iii) issue any other writ, order or direction which this Hon'ble Court may deem fit and proper under the facts and circumstances of the case."
On a request made by the learned counsel for the petitioners the above case was directed to be listed in the next cause list and no other orders were passed in the said writ petition. An application dated 26/12/2012 was filed by the Bank before the BIFR which was registered as Misc. Application No. 103/2012 praying that a direction be issued by the BIFR that proceedings before the BIFR has abated in view of the third proviso to Section 15 of the Act, 1985. An objection dated 18/3/2013 was filed by the petitioners before the BIFR objecting to the Application No. M.A. 103/2012 praying that the said application be kept in abeyance till the writ petition No.6853/2013, filed by the petitioners in this Court is considered. The respondent Bank filed an application under Section 14 of the Act, 2002 before the District Magistrate Gautam Budh Nagar for taking physical possession of the mortgaged assets situate in District Gautambudh Nagar. Another application was also filed by the Bank under Section 14 of the 2002, before the District Magistrate, Jaipur on 09/4/2013 praying for handing over the physical possession of the mortgaged assets. The Bank claims to have taken symbolic possession of the secured assets i.e. residential plot at Jaipur as well as secured assets at District Gautambudh Nagar. At this juncture, petitioners filed Writ Petition No.48250/2013 on 06/9/2013 in this Court praying for following reliefs:
"i)Issue, a writ, order or direction in the nature of certiorari quashing the impugned proceedings/communication dated 11.3.2013 and 9.4.2013 (Annexure No. 7 and 8 to the Writ Petition) under Section 14 of the SARFAESI Act 2002.
ii) Issue, a writ, order or direction in the nature of mandamus restraining the Respondent No.2 and its agents and Respondent No.3 and 4 and their agents from taking forcible physical possession of properties of the Petitioners i.e. (i)Plot No.D-149,Sector 63 Phase III Noida, District Gautam Budh Nagar and (ii) 13, Lal Niwas, Sawai Ram Sigh Road, Jaipur Rajasthan.
iii) issue any other writ, order or direction which this Hon'ble Court may deem fit and proper under the facts ad circumstances of the case.
iv) award the cost of the petition in favour of the petitioners."
From the facts as noted above, it is clear that after issuing the notice dated 01/8/2012, under Section 13 (2) of the Act, 2002 the consortium of banks has invoked Section 13(4) of the Act, 2002 by issuing notice to take physical possession of the mortgaged assets as well by filing an application under Section 14 of the Act, 2002. The petitioners aggrieved by the notice dated 01/8/2012 issued under Section 13(2) of the Act, 2002 has filed the first writ petition and aggrieved by the action taken by the Bank under Section 13(4) of the Act, 2002 has filed the second writ petition.
We have heard Shri R.Venkatramani, learned Senior Advocate, assisted by Shri Somesh Khare for the petitioners, Shri Rakesh Mishra has appeared for the respondent no.2 and the learned Standing Counsel for the State respondents.
Shri R. Venkatramani, learned Senior Advocate, appearing for the petitioners questioning the action of the Bank under Sections 13(2) and 13(4) of the Act, 2002 contended that the Bank cannot invoke the provisions of the Act, 2002 in view of the prohibition as contained under Section 22 of the Act, 1985. It is submitted that the third proviso to Section 15 of the Act, 1985 cannot be availed by the Bank since the reference which was made by the petitioners under Section 15 of the Act, 1985 can no longer be treated to be pending within the meaning of third proviso to Section 15 of the Act, 1985, since the reference has been registered and a decision has been taken by the Board on 12/12/2011 declaring the petitioners company as a sick company and the matter is pending at the stage of Section 17 of the Act, 1985 and it has crossed the stage of reference. It is submitted that once a reference is registered and proceedings have commenced under Sections 16,17,18 and 19 of the Act, 2002, reference cannot be treated to be pending within the meaning of third proviso to Section 15 of the Act, 1985. It is submitted that putting any other interpretation to the third proviso to Section 15 of the Act, 1985 shall defeat the very object and purpose of the Act, 1985. It is submitted that the BIFR before whom the matter is pending has all powers which can be exercised under the Act, 2002 hence no power under the Act, 2002 can be exercised by the Bank by virtue of Section 22 of the Act, 1985. It is further submitted that the proceedings under the Act, 2002 if any, can be initiated by the respondent bank only after seeking permission from the BIFR. It is submitted that the Bank having already filed M.A. No.103/2012, seeking an order from the BIFR as to whether the proceedings before the BIFR shall abate or not the Bank has to press the said application and when no decision of the BIFR has come on the said application, the Bank ought not to have proceeded under Section 13(4) of the Act, 2002. It is submitted that the Act, 1985 is a special act enacted with an object and purpose and the Act, 2002 shall have no overriding effect on the provisions of the Act, 1985. He further submits that the action of the Bank including the issuance of notice under Sections 13(2) and 13(4) of the Act, 2002 are liable to be struck down relegating the Bank before the BIFR to seek its remedy in accordance with the Act, 1985.
Shri Rakesh Mishra, learned counsel appearing for the respondent Bank refuting the submission of the learned counsel for the petitioners raised a preliminary objection and submitted that the Bank having already invoked power under Section 13(4) of the Act, 2002 the petitioners have a statutory remedy of filing an appeal under Section 17 of the Act, 2002 where all issues which are sought to be raised in the present writ petitions can be raised. On merits he submits that the reference made by the petitioners before the BIFR is still pending and it having yet not been finally decided, the third proviso to Section 15 of the Act, 1985 is fully applicable and after taking measures by the respondent Bank under Section 13(4) of the Act, 2002, the reference has automatically abated. He submits that neither any adjudication regarding abatement is required nor any order is required to be passed by the BIFR for abatement. He submits that the abatement is automatic by taking measures under Section 13(4) of the Act, 2002. He submits that the reference under Section 15 of the Act, 1985 shall be treated to be pending even though the proceedings under Sections 16,17,18 and 19 of the Act, 1985 are going on. He submits that the proceedings initiated by the Bank under the Act, 2002 are fully in accordance with law. The bank has already taken symbolic possession of the mortgaged assets of the petitioners and the remedy of the petitioners, if any, is to file a appeal under Section 17 of the Act, 2002.
Learned counsel for the parties have referred to and relied on various judgments of the Apex Court as well as of different High Court's in support of their respective submissions which shall be referred to while considering their submissions in detail.
Shri R. Venkatramani, learned Senior Advocate, appearing for the petitioners replying the preliminary objection raised by the learned counsel for the Bank submitted that the petitioners cannot be relegated to avail the statutory remedy of filing an appeal since the petitioners are challenging the jurisdiction of the Bank and the proceedings initiated under the Act, 2002. He submits that when the entire proceedings are without jurisdiction, petitioners need not be relegated to avail the statutory remedy of appeal.
From the pleadings of the parties and the submissions raised by the learned counsel for the parties following are the issues which arises for consideration in these writ petitions.
(1) Whether the writ petitions be dismissed on the ground that the Bank having invoked Section 13(4) of the Act, 2002, petitioners are to seek statutory remedy under Section 17 of the Act, 2002 and the Court may not enter into the submissions on merit.
(2) Whether the Reference No.53/2010 registered before the BIFR on an application submitted by the petitioners stands abated in accordance with the third proviso to Section 15 of the Act, 1985 on taking measures by the respondent Bank under Section 13 (4) of the Act, 2002.
(3) Whether the words "reference is pending" as used in third proviso to Section 15 of the Act, 1985 shall be treated to mean the period till which the reference is not registered or a declaration is not made under Section 3(1) (o) of the Act, 1985.
(4) Whether after the registration of the reference when proceedings under Sections 16,17,18 and 19 of the Act, 1985 have begun, the reference cannot be treated to be pending disabling the secured creditors to invoke power under Section 13 (4) of the Act, 2002 consequently not affecting the proceedings under Sections 16,17,18 and 19 of the Act, 1985.
(5) Whether in the facts of the present case the proceedings under the Act, 2002 specially under Section 13(4) of the Act, 2002 cannot be proceeded with by the Bank and whether the petitioners are entitled for protection under Section 22 of the Act. 1985.
The first issue which is to be considered is as to whether the writ petitions be thrown out on the ground of availability of alternative remedy under Section 17 of the Act, 2002, since the Bank has already invoked Section 13(4) of the Act, 2002. After an action is taken by the Bank under Section 13(4) of the Act, 2002, the remedy of the aggrieved party is to take recourse to the statutory remedy provided under Section 17 of the Act, 2002.
The Apex Court in United Bank of India Vs. Satyawati Tandon & Ors, 2010 (8) SCC 110, laid down down that normally the High Court is not to entertain a writ petition where the effective remedy is available to the aggrieved person. The Apex Court in the said case held that the High Court committed error in ignoring the availability of statutory remedy under the Act, 2002. Following was laid down by the apex court in paragraphs 43,44 and 45 which are quoted below:
"43.Unfortunately, the High Court overlooked the settled law that the High Court will ordinarily not entertain a petition under Article 226 of the Constitution if an effective remedy is available to the aggrieved person and that this rule applies with greater rigour in matters involving recovery of taxes, cess, fees, other types of public money and the dues of banks and other financial institutions. In our view, while dealing with the petitions involving challenge to the action taken for recovery of the public dues, etc., the High Court must keep in mind that the legislations enacted by Parliament and State Legislatures for recovery of such dues are code unto themselves inasmuch as they not only contain comprehensive procedure for recovery of the dues but also envisage constitution of quasi judicial bodies for redressal of the grievance of any aggrieved person. Therefore, in all such cases, High Court must insist that before availing remedy under Article 226 of the Constitution, a person must exhaust the remedies available under the relevant statute.
44. While expressing the aforesaid view, we are conscious that the powers conferred upon the High Court under Article 226 of the Constitution to issue to any person or authority, including in appropriate cases, any Government, directions, orders or writs including the five prerogative writs for the enforcement of any of the rights conferred by Part III or for any other purpose are very wide and there is no express limitation on exercise of that power but, at the same time, we cannot be oblivious of the rules of self-imposed restraint evolved by this Court, which every High Court is bound to keep in view while exercising power under Article 226 of the Constitution.
45.It is true that the rule of exhaustion of alternative remedy is a rule of discretion and not one of compulsion, but it is difficult to fathom any reason why the High Court should entertain a petition filed under Article 226 of the Constitution and pass interim order ignoring the fact that the petitioner can avail effective alternative remedy by filing application, appeal, revision, etc. and the particular legislation contains a detailed mechanism for redressal of his grievance."
The remedy of the writ petitioner under Article 226 of the Constitution is not available to an aggrieved person unless his case falls in any of the exceptions as carved out by the Apex Court in several judgments.
In Whirlpool Corporation Vs. Registrar of Trade Marks,Mumbai & Ors, (1998) 8 SCC 1, similar proposition was laid down by the apex court. Following was laid down in paragraphs 14,15,16,17,18,19 and 20:
"14. The power to issue prerogative writs under Article 226 of the Constitution is plenary in nature and is not limited by any other provision of the Constitution. This power can be exercised by the High Court not only for issuing writs in the nature of habeas corpus, mandamus, prohibition, quo warranto and certiorari for the enforcement of any of the Fundamental Rights contained in Part III of the Constitution but also for "any other purpose".
15. Under Article 226 of the Constitution, the High Court, having regard to the facts of the case, has a discretion to entertain or not to entertain a writ petition. But the High Court has imposed upon itself certain restrictions one of which is that if any effective and efficacious remedy is available, the High Court would not normally exercise its jurisdiction. But the alternative remedy has been consistently held by this Court not to operate as a bar in at least three contingencies, namely, where the writ petition has been filed for the enforcement of any of the Fundamental Rights or where there has been a violation of the principle of natural justice or where the order or proceedings are wholly without jurisdiction or the vires of an Act is challenged. There is a plethora of case law on this point but to cut down this circle of forensic whirlpool, we would rely or some old decisions of the evolutionary era of the constitutional law as they still hold the field.
16. Rashid Ahmad vs. Municipal Board, Kairana, AIR 1950 SC 163, laid down that existence of an adequate legal remedy was a factor to be taken into consideration in the matter of granting writs. This was followed by another Rashid case, namely, K.S.Rashid & Son Vs. Income Tax Investigation Commissioner, AIR 1954 SC 207 which reiterated the above proposition and held that where alternative remedy existed, it would be a sound exercise of discretion to refuse to interfere in a petition under Article 226. This proposition was, however, qualified by the significant words, "unless there are good grounds therefor", which indicated that alternative remedy would not operate as an absolute bar and that writ petition under Article 226 could still be entertained in exceptional circumstances.
17. A specific and clear rule was laid down in State of U.P. vs. Mohd. Nooh, AIR 1958 SC 86, as under :
"But this rule requiring the exhaustion of statutory remedies before the writ will be granted is a rule of policy, convenience and discretion rather than a rule of law and instances are numerous where a writ of certiorari has been issued in spite of the fact that the aggrieved party had other adequate legal remedies."
18. This proposition was considered by a Constitution Bench of this Court in A.V.Venkateswaran, Collector of Customs. vs Ramchand Sobhraj Wadhwani, AIR 1961 SC 1506 and was affirmed and followed in the following words "The passages in the judgments of this Court we have extracted would indicate (1) that the two exceptions which the learned Solicitor General formulated to the normal rule as to the effect of the existence of an adequate alternative remedy were by no means exhaustive and (2) that even beyond them a discretion vested in the High Court to have entertained the petition and granted the petitioner relief notwithstanding the existence of an alternative remedy. We need only add that the broad lines of the general principles on which the Court should act having been clearly laid down, their application to the facts of each particular case must necessarily be dependent on a variety of individual facts which must govern the proper exercise of the discretion of the Court, and that in a matter which is thus per-eminently one of discretion, it is not possible or even if it were, it would not be desirable to lay down inflexible rules which should be applied with rigidity in every case which comes up before the Court".
19. Another Constitution Bench decision in Calcutta Discount Co.Ltd. vs ITO, Companies Distt. AIR 1961 SC 372 laid down :
"Though the writ of prohibition or certiorari will not issue against an executive authority, the High Courts have power to issue in a fit case an order prohibiting an executive authority from acting without jurisdiction. Where such action of an executive authority acting without jurisdiction subjects or is likely to subject a person to lengthy proceedings and unnecessary harassment, the High Courts will issue appropriate orders or directions to prevent such consequences. Writ of certiorari and prohibition can issue against Income Tax Officer acting without jurisdiction under Section 34, Income Tax Act".
20. Much water has since flown under the bridge, but there has been no corrosive effect on these decisions which though old, continue to hold the field with the result that law as to the jurisdiction of the High Court in entertaining a writ petition under Article 226 of the Constitution, in spite of the alternative statutory remedies, is not affected, specially in a case where the authority against whom the writ is filed is shown to have had no jurisdiction or had purported to usurp jurisdiction without any legal foundation."
One of the grounds on which the High Court can entertain a writ petition under Article 226 of the Constitution of India despite availability of alternative remedy is the ground of lack of jurisdiction in the authority whose action has been challenged. In the present case the petitioners have questioned the jurisdiction of the respondent bank in invoking Section 13(4) of the Act, 2002 on the ground that the third proviso to Section 15 of the Act, 1985 is not applicable and further on the ground that due to prohibitions under Section 22 of the Act, 1985, the respondent Bank cannot exercise its power under Section 13(4) of the Act, 2002.
Shri R. Venkatramani, learned Senior Counsel appearing for the petitioners having challenged the very jurisdiction of the Bank to exercise power under Section 13(4) of the Act, 2002, we deem it a fit case to examine such contention on merits and not to throw out the writ petitions at the thresh hold.
We, therefore, proceed to examine the contentions raised by the learned counsel for the parties on merits.
Issue nos. 2 to 5 are all interconnected, hence we proceed to examine the said issues together.
The 1985 Act was enacted as a special provision with a view to securing the timely detection of sick and potentially sick companies owning industrial undertakings, the speedy determination by a Board of experts of the preventive, ameliorative, remedial and others measures which need to be taken with respect to such companies and the expeditious enforcement of the measures so determined and for matters connected therewith or incidental thereto.
Section 15 of the the 1985 Act provides for reference to the Board. Section 22 of the 1985 Act provides for suspension of legal proceedings, contracts etc. Section 15 (unamended) and Section 22 of the 1985 Act are quoted below:-
"15. Reference to Board (1) Where an industrial company has become a sick industrial company, the Board of Directors of the company, shall, within sixty days from the date of finalisation of the duly audited accounts of the company for the financial year as at the end of which the company has become a sick industrial company, make a reference to the Board for determination of the measures which shall be adopted with respect to the company:
Provided that if the Board of Directors had sufficient reasons even before such finalisation to form the opinion that the company had become a sick industrial company, the Board of Directors shall, within sixty days after it has formed such opinion, make a reference to the Board for the determination of the measures which shall be adopted with respect to the company.
(2) Without prejudice to the provisions of sub-section (1), the Central Government or the Reserve Bank or a State Government or a public financial institution or a State level institution or a scheduled bank may, if it has sufficient reasons to believe that any industrial company has become, for the purposes of this Act, a sick industrial company, make a reference in respect of such company to the Board for determination of the measures which may be adopted with respect to such company:
Provided that a reference shall not be made under this sub-section in respect of any industrial company by -
(a) the Government of any State unless all or any of the industrial undertakings belonging to such company are situated in such State;
(b) a public financial institution or a State level institution or a scheduled bank unless it has, by reason of any financial assistance or obligation rendered by it, or undertaken by it, with respect to, such company, an interest in such company.
22. Suspension of legal proceedings, contracts, etc. (1) Where in respect of an industrial company, an inquiry under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956) or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof 3[and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company] shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority.
(2) Where the management of the sick industrial company is taken over or changed, 3[in pursuance of any scheme sanctioned under section 18], notwithstanding anything contained in the Companies Act, 1956 (1 of 1956) or any other law or in the memorandum and articles of association of such company or any instrument having effect under the said Act or other law- (a) it shall not be lawful for the shareholders of such company or any other person to nominate or appoint any person to be a director of the company; (b) no resolution passed at any meeting of the shareholders of such company shall be given effect to unless approved by the Board.
(3) [Where an inquiry under section 16 is pending or any scheme referred to in section 17 is under preparation or during the period] of consideration of any scheme under section 18 or where any such scheme is sanctioned thereunder, for due implementation of the scheme, the Board may by order declare with respect to the sick industrial company concerned that the operation of all or any----------------------------------------------------------------------------------------- 1 Subs. by Act 12 of 1994, s. 11. 2 Subs. by s. 12, ibid. 3 Ins. by s. 12, ibid. 17 of the contracts, assurances of property, agreements, settlements, awards, standing orders or other instruments in force, to which such sick industrial company is a party or which may be applicable to such sick industrial company immediately before the date of such order, shall remain suspended or that all or any of the rights, privileges, obligations and liabilities accruing or arising thereunder before the said date, shall remain suspended or shall be enforceable with such adaptations and in such manner as may be specified by the Board: Provided that such declaration shall not be made for a period exceeding two years which may be extended by one year at a time so, however, that the total period shall not exceed seven years in the aggregate.
(4) Any declaration made under sub-section (3) with respect to a sick industrial company shall have effect notwithstanding anything contained in the Companies Act, 1956 (1 of 1956) or any other law, the memorandum and articles of association of the company or any instrument having effect under the said Act or other law or any agreement or any decree or order of a court, tribunal, officer or other authority or of any submission, settlement or standing order and accordingly,- (a) any remedy for the enforcement of any right, privilege, obligation and liability suspended or modified by such declaration, and all proceedings relating thereto pending before any court, tribunal, officer or other authority shall remain stayed or be continued subject to such declaration; and (b) on the declaration ceasing to have effect- (i) any right, privilege, obligation or liability so remaining suspended or modified, shall become revived and enforceable as if the declaration had never been made; and (ii) any proceeding so remaining stayed shall be proceeded with, subject to the provisions of any law which may then be in force, from the stage which had been reached when the proceedings became stayed.
(5) In computing the period of limitation for the enforcement of any right, privilege, obligation or liability, the period during which it or the remedy for the enforcement thereof remains suspended under this section shall be excluded."
The SARFAESI Act, 2002 was enacted to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. Section 3 of the SARFAESI Act,2002 provides for registration of securitisation companies or reconstruction companies. Section 5 of the SARFAESI Act, 2002 provides for acquisition of rights or interest in financial assets. The respondent No.4 has been assigned by various assignment deed the debts of ICICI Bank and other Banks and has stepped into the shoes of the secured creditors. Section 13 of the SARFAESI Act, 2002 provides for enforcement of security interest. Sections 13(2), 13(4) and 13(9), which are relevant for the purpose, are quoted below:-
"13. Enforcement of security interest (1) .........
(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under subsection (4).
(3) ...........
(4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following meaures to recover his secured debt, namely:--
(a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;
(b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset:
PROVIDED that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt:
PROVIDED FURTHER that where the management of whole of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security for the debt.
(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor;
(d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.
(5) ...........
(6) ...........
(7) ...........
(8) ...........
(9) In the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to subsection (4) unless exercise of such right is agreed upon by the secured creditors representing not less than three-fourth in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors:
PROVIDED that in the case of a company in liquidation, the amount realised from the sale of secured assets shall be distributed in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of 1956):
PROVIDED FURTHER that in the case of a company being wound up on or after the commencement of this Act, the secured creditor of such company, who opts to realise his security instead of relinquishing his security and proving his debt under proviso to subsection (1) of section 529 of the Companies Act, 1956 (1 of 1956), may retain the sale proceeds of his secured assets after depositing the workmen's dues with the liquidator in accordance with the provisions of section 529A of that Act:
PROVIDED ALSO that the liquidator referred to in the second proviso shall intimate the secured creditors the workmen's dues in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of 1956) and in case such workmen's dues cannot be ascertained, the liquidator shall intimate the estimated amount of workmen's dues under that section to the secured creditor and in such case the secured creditor may retain the sale proceeds of the secured assets after depositing the amount of such estimated dues with the liquidator:
PROVIDED ALSO that in case the secured creditor deposits the estimated amount of workmen's dues, such creditor shall be liable to pay the balance of the workmen's dues or entitled to receive the excess amount, if any, deposited by the secured creditor with the liquidator:
PROVIDED ALSO that the secured creditor shall furnish an undertaking to the liquidator to pay the balance of the workmen's dues, if any.
Explanation : For the purposes of this sub-section,-
(a) "record date" means the date agreed upon by the secured creditors representing not less than three-fourth in value of the amount outstanding on such date;
(b) "amount outstanding" shall include principal, interest and any other dues payable by the borrower to the secured creditor in respect of secured asset as per the books of account of the secured creditor."
Section 35 of the SARFAESI Act, 2002 gives overriding effect to the provisions of the said Act. Section 35 of the SARFAESI Act, 2002 is quoted below:-
"35. The provisions of this Act to override other laws.- The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law."
Section 41 of the SARFAESI Act, 2002 provides for amendment in certain enactments as specified in the schedule. Section 41 read with schedule inserts two proviso (second and third proviso) in Section 15 of the 1985 Act. Relevant part of the schedule is as follows:-
THE SCHEDULE (See Section 41) Year Act No. Short title Amendment 1986 1 The Sick Industrial Companies (Special Provisions) Act 1985.
In section 15 in sub-section (1) after the proviso insert the following:--
"PROVIDED FURTHER that no reference shall be made to the Board for Industrial and Financial Reconstruction after the commencement of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 where financial assets have been acquired by any securitisation company or reconstruction company under subsection (1) of section 5 of that Act:
PROVIDED ALSO that on or after the commencement of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 where a 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."
After noticing the statutory provisions governing the field, it is useful to recapitulate the sequence of events in the present case. A reference was made by the petitioners under Section 15 of the Act, 1985 in the month of October, 2010. The said application was registered as Case No. 53/2010. The Board considered the application on different dates and vide proceedings dated 12/12/2011, the Board was satisfied that the Company has become a sick industrial company under Section 3(1) (o) of the Act, 1985. The respondent bank which has been treated to be the lead bank by the consortium of bank which is the secured creditor issued a notice dated 01/8/2012 under Section 13(2) of the Act, 2002 which was served on the petitioners on 03/8/2012 and 04/8/2012 respectively. The petitioners having failed to discharge their liabilities, the Bank invoked Section 13(4) of the Act, 2002 by issuing possession notice dated 07/10/2012, copy of which has been filed by the petitioners as Annexure-2 to the writ petition at page 181 of the paper book and the same has also been published in the newspaper "Statesman" on 18/10/2011, copy of which has been filed at page 185 of the paper book. The Bank thereafter filed an application under Section 14 of the Act, 2002 before the District Magistrate for taking physical possession on 11/3/2013 and 09/4/2013. Petitioners' case further in the writ petition is that the scheme of rehabilitation was prepared and submitted in December, 2011 before the BIFR and the matter is pending before the BIFR for taking measures for rehabilitation of the petitioners company.
Third proviso to Section 15 of the Act, 1985 which has been inserted in the Act, 1985 by Act No. 54 of 2002 is a subject matter of consideration in the present writ petitions. Whether the third proviso to Section 15 of the Act, 1985 is applicable in the facts of the present case, and whether the Bank can take measures under Section 13(4) of the Act, 2002 resulting in abatement of proceedings before the BIFR are the questions to be answered.
Third proviso to Section 15 of the Act, 1985 reads as under:
"Provided also that on or after the commencement of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 , where a 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."
What is the meaning and scope of the phrase used in the third proviso to Section 15 of the Act, 1985 "where a reference is pending before the Board for Industrial and Financial Reconstruction", the submission of Shri R.Venkatramani, learned Senior Counsel appearing for the petitioners is that the word "reference is pending" means that till the reference has not been registered or till a declaration of sickness is not made be the BIFR. He submits that a reference which is made under Section 15 of the Act, 1985 by the industrial company before the BIFR comes to an end after it is registered or sickness is declared. He submits that Section 16 of the Act, 1985 contemplates enquiry by the BIFR and Section 17 of the Act, 1985 empowers the Board to make suitable order on the completion of the inquiry and further Section 18 of the Act provides for preparation and sanction of schemes which proceedings are not the proceedings which are comprehended in the term "reference" as used in the third proviso to Section 15 of the Act, 1985. He submits that the proceedings under Sections 16,17,18 and 19 of the Act, 1985 are all independent and separate proceedings than the reference and when the proceedings under Sections 17 and 18 of the Act 1985 are pending said proceedings cannot be treated to mean that "reference is pending". He submits that reference exhausts itself after its registration or after declaration of sick unit. What the legislature meant by the words "reference is pending" under the third proviso to Section 15 of the Act, 1985 has to be found out from the scheme of the Act, 1985 as amended.
Shri R.Venkatramani, learned Senior Counsel appearing for the petitioners has also referred to Board for Industrial and Financial Reconstruction Regulations, 1987. He has specifically referred to Regulation 19 which provides for references under Section 15. He submits that Regulation 20 deals with general provisions regarding enquiries and regulation 21 deals with inquiry under Section 16 and further regulations deals with subsequent proceedings. He submits that the scheme under the said regulation clearly indicates inquiry under Section 16, Powers of Board to make suitable order on the completion of the inquiry under Section 17 and procedure for preparation and sanction of schemes under Section 18 are all separate proceedings. Regulation 19 provides for procedure for making references under Section 15. Regulation 19 is quoted below:
"19.[(1) Every reference to the Board under sub-section (1) of section 15 shall be made--
(i) in Form A in respect of an industrial company other than a Government company;
(ii) in Form AA in respect of a Government Company,] and shall be accompanied by five further copies thereof alongwith four copies each of all the enclosures thereto.
[(2) Every reference to the Board under sub-section (2) of section 15 shall be made--
(i) in Form B in respect of an industrial company other than a Government company;
(ii) in Form BB in respect of a Government company,] and shall be accompanied by five further copies thereof alongwith four copies each of all the enclosures thereto.
(3) A reference may be filed, either by delivering it at the office of the Board or by sending it by registered post.
[(4) On receipt of a reference, the Secretary, or as the case may be, the Registrar shall cause to be endorsed on each reference, the date on which it is filed or received in the office of the Board.] (5) If on scrutiny, the reference is found to be in order, it shall be registered, assigned a serial number and submitted to the Chairman or assigning it to a Bench. Simultaneously, remaining information/documents required, if any, shall be called for from the informant.
(6) If on scrutiny, the reference is not found to be in order, the Secretary or, as the case may be, the Registrar may, by order, decline to register the reference and shall communicate the same to the informant.
(7) A reference declined to be registered shall be deemed not to have been made.] (8) (1) An appeal against the order of the Registrar declining to register a reference shall be made by the aggrieved person to the Secretary within fifteen days of communication to him of such an order.
(2) An appeal against the order of the Secretary declining to register a reference shall be made by the aggrieved person to the Chairman within fifteen days of communication to him of such an order and the Chairman's decision thereon shall be final."
Regulation 19 sub-regulation (5) indicates that if on scrutiny, the reference is found to be in order, it shall be registered, assigned a serial number and submitted to the Chairman or assigning it to a Bench. The scheme indicates that after registration of reference, serial number is to be allotted and the reference has to be submitted to the Chairman or assigning it to a bench. It is the same reference which is registered, which is assigned to the Bench and submitted to the Chairman for further proceedings. Serial number which is allotted to the reference remains in all proceedings, which fact is borne out from the materials brought on the records. Here the reference was registered and the case number was allotted as 53/2010. Proceedings were thereafter taken by the BIFR. In case No. 53/2010, various proceedings including the proceedings taken on 12/12/2011, has been brought on the record in which the same case No. 53/2010 has been mentioned. Thus, the inquiry and further proceedings under Sections 16,17,18 and 19 of the Act, 1985 are undertaken on the same reference. The reference continues to be the same and subsequent proceedings are to be taken in the same proceedings of reference. We are not persuaded to accept the argument of the learned senior counsel appearing for the petitioners that reference comes to an end after its registration or after declaration of its sickness is granted by the Board. The Scheme of Section 15 of the Act,1985 as amended by Act No. 54 of 2002, indicates that after enforcement of the Act, 2002, no reference can be made to the BIFR, where financial assets have been acquired by any securitisation company or reconstruction company which is provided in the second proviso of Section 15 of the Act, 1985. The intent is clear that when financial assets have been acquired under sub-section (1) of Section 5 of the Act, 2002, reference to the Board is prohibited. The third proviso to Section 15 of the Act, is with regard to the reference which is pending before the BIFR and obviously which reference was made before the financial assets have been acquired under sub-section (1) of Section 5 of the Act, 2002. The abatement of reference pending before the Board is to take place when secured creditors 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 the Act, 2002. The intent is clear that when secured creditors not less than three-fourth in value of the amount outstanding decides to take measure under Section 13(4) of the Act, 2002, proceedings before the BIFR stands abated. In case the interpretation put by the learned senior counsel appearing for the petitioners on the third proviso to Section 15 of the Act, 1985 is accepted, there may be two category of cases before the BIFR (1) where although the reference has been received, but has not yet been registered and, (2) where the reference has been registered and proceedings under Sections 16 to 19 of the Act are going on. The third proviso to Section 15 of the Act, 1985 does not appear to contemplate different category of the reference which has been received by the Board. The abatement of reference has been made dependent on invoking Section 13(4) of the Act, 2002, of not less than three-fourth of the secured creditors. We are thus of the view that reference which has been pending before the Board at any stage is to abate on the measures taken under Section 13(4) of the Act, 2002 by not less than three-fourth of the secured creditors. The distinction between the two category of reference, i.e firstly, registered and secondly, proceedings after registration is an artificial distinction, whereas the Legislature never intended any kind of distinction in the references pending before the Board.
Regulation 19 of the 1987 Regulation as quoted above, has to be read to mean that as and when reference is made to the Board by an industrial company, either by delivering it at the office of the Board or by sending it by registered post, the reference becomes pending before the Board. All proceedings subsequent to receipt of the reference has to be treated to be the proceedings in the reference including the proceedings for registration of the reference. Interpreting the third proviso to Section 15 of the Act, 1985 in the above manner shall advance the object and purpose of the Act, 2002.
Shri R. Venkatramani, learned Senior Counsel, appearing for the petitioners, has heavily relied on a Division Bench judgment of the Orissa High Court in Noble Aqua Pvt Ltd & Ors. Vs. State Bank of India & Ors decided on 21/2/2008, reported in AIR 2008 Orissa, 103. In the aforesaid case, reference made by the company was registered by order dated 26/12/2005. BIFR thereafter issued notices to different parties and fixed the date for hearing. The company was declared a sick unit and bank was appointed as an operating agency and a direction was issued to prepare a revival scheme. Notice under Section 13(2) of the Act, 2002 had already been issued on 10/9/2004. Bank issued possession notice under Section 13(4) of the Act, 2002 on 07/4/2007. Writ petition was filed challenging the notice issued under Section 13(4) of the Act, 2002 on the ground that such notice is contrary to Section 22 of the Act, 1985. The Orissa High Court took the view that before invoking Section 13(4) of the Act, 2002, reference had proceeded and was not at the stage of reference, hence protection under section 22 of the Act, 1985 was available. It is useful to quote paragraphs 18,20 and 21 which are as under:
"18. In the instant case, admittedly the notice under Sub-section (4) of Section 13 of the Securitization 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.
20. 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 Securitization Act. The Securitization Act is a later Act and in the Securitization 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 Securitization 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 the Securitization Act in view of the statutory bar created under Section 22 of SICA.
21. So this writ petition succeeds and the notice under Section 13(4) of the Securitization Act is quashed. But this Court makes it clear that even after this decision, it is open to the bank to apply for the consent of the BIFF under Section 22(1) of SICA to proceed against the petitioner in terms of its notice under Section 13(4) of the Securitization Act."
It is also relevant to note that against the above judgment of the Orissa High Court the State Bank of India & Ors, filed Special Leave to Appeal (Civil) No(s).13284/2008 in which the appeal the apex court passed the following order on 23/3/2012.
"UPON hearing counsel the Court made the following ORDER IA8/11 has been filed on behalf of the respondents/applicants, praying that the Special Leave Petition be disposed of, since the matter has been settled between the parties.
Having heard learned counsel for the respective parties and also having considered the contents in the order of 27th September, 2010, while disposing of the Special Leave Petition has having become infructuous, we leave the question referred to in the said order of 27th September, 2010, open for decision in a further case."
The Apex Court left the questions open to be decided in a future case and the Special Leave Petition was disposed of in terms of the settlement. The judgment of the Orissa High Court which has been heavily relied on by the learned Senior Counsel appearing for the petitioners has been disagreed by the other High Court's namely: Madras High Court, Gujarat High Court and Bombay High Court.
In Bank of Rajasthan Vs. Shobhagya Steels Ltd, Chennai & Anr,(2007) 4 MLJ, 1129, the company was communicated vide letter dated 23/3/2002 that it has been registered with the BIFR. Proceedings under Sections 13(2) and 13(4) of the Act, 2002 were initiated and possession was taken on 21/12/2003. Bank issued an auction notice under the Act, 2002 which was challenged by the company before the Madras High Court. The two issues which had arisen before the Madras High Court has been noted in paragraph 5 which is quoted below:
"5. The questions which are required to be determined in the present case are:-
a) Whether there will be any effect of 3rd proviso to sub-section (1) of Section 15 of of SICA, 1985 on an application pending under the RDDB and FI Act; and
b) Whether the respondent-company is entitled to derive any advantage of Section 22 of SICA, 1985, and for that the original application before the DRT cannot proceed without prior permission of BIFR."
In paragraph 9 of the judgment the Madras High Court held that in view of the 3rd proviso to sub-section (1) of Section 15 of the Act, 1985 the reference as was pending before the BIFR shall abate.
There are two jugments of the Gujrat High Court (1) Tensile Steel Ltd & Anr Vs. Punjab and Sind Bank & Ors, AIR 2007 Gujrat 126, and (2) Paschim Petrochem Ltd. Vs. Kotak Mahindra Bank Ltd.2010 (4) Bank CLR 122(Guj). In both the above cases, the learned Single Judges of the Gujrat High Court have taken the view that in accordance with the 3rd proviso to Section 15 of the Act, 1985 proceedings pending before the BIFR shall stand abate. It is useful to refer to the case of Paschim Petro Ltd (supra). In the said case, on a reference made by a company, registration was made by the BIFR in the year 2001. The BIFR issued certain directions by declaring the company sick and appointed IDBI as an operating agency under Section 17(3) of the Act, 1985 and directed for preparation of the rehabilitation scheme. During the pendency of the said case before the BIFR the Bank issued notice under Section 13(2) of the Act, 2002 and possession of the secured assets were taken on 23/6/2009. Challenging the notice issued under the Act, 2002, the Bank approached the High Court. The Company contended before the High Court that the company having been declared sick on 19/12/2005, the company is entitled for protection under Section 22 of the Act, 1985. The judgment of the Orissa High Court in Noble Aqua Pvt. Ltd. (supra) was relied on by the company before the Gujarat High Court. The Gujarat High Court considered the submissions of the parties and after noticing the relevant facts took the view that reference takes into its sweep, Sections 16,17,18 and 19 of the Act and continues and remain pending when the scheme is sanctioned, modified and reviewed. It is useful to quote paragraphs 16,17,18,22 and 26 of the judgment which are as under:
"16.That, reference takes into its sweep, Sections 16,17,18 and 19 of the Act and continues and remain pending when the scheme is sanctioned, modified, reviewed, monitored and operates successfully or in case of failure, result into forwarding opinion by the Board under Section 20 to concerned High Court subject to order if any appeal under Section 25 of the Act before appellate Board. The above findings are in consonance with object and reason of the Act inasmuch as function of the Board is to inquire into sickness and suggest measures to be adopted for removal of suck sickness so that sick industrial company can be revived or rehabilitated by making its net worth more than accumulated losses.
17.Therefore, contention of learned Advocate for the petitioner that reference ceases to continue or gets terminated on passing an order under Section 17(3) of the Act is devoid of any merit.
18.Now, in view of the above discussion, it is necessary to refer to the decision of Orissa High Court in the case of Noble aqua Pvt. Ltd. v.State Bank of India, (supra) where the Division Bench of Orissa High Court was concerned with somewhat identical facts where a company became sick industrial unit as defined under Section 3(1) (o) of SIC Act and in terms of the power available to B.I.F.R. under Section 17(3), operating agency was appointed with directions to prepare a revival scheme for it, if feasible. At the same time by an order dated 14th November, 2006 request made by the opposite Bank for permission under Section 22 (1) of SIC Act was opposed by the consultant of company which was ultimately not granted.
22.The above decision of the Noble Aqua Pvt Ltd. v. State Bank of India (supra) was considered in Madras Petrochem Ltd. v. B.I.F.R. (supra) and by Delhi High Court in Integrated Rubian Exports Ltd. v. Industrial Finance Corporation of India Ltd. (supra) of Kerala High Court, referred newly introduced proviso by Act 54 of 2002, all the Courts have considered effect of the above proviso in light of a measures taken under Section 13(4) of the SARFAESI Act, 2002 and it was held in Madras Petrochem Ltd. v. B.I.F.R. (supra) that view taken by Delhi High Court in Punjab and also another decision of Bombay High Court in Ravi Spinning Ltd. Unioin of India, 2006 (2) Mah. LJ. 145, and ultimately concluded that even if a scheme is framed then also it would make no difference to the merit of the third proviso to Section 15 of SIC Act and once the jurisdiction of B.I.F.R. was divested by the mandatory impact of third proviso to Section 15(1), the B.I.F.R. could not pass any orders under SIC Act notwithstanding the subsequent developments. Orders sought by the petitioner from the B.I.F.R. could have been passed either under the SARFAESI Act, 2002 or by a writ Court exercising jurisdiction under Article 226 of the Constitution of India.
26.This Court is also in agreement with the decision given by the above High Court (supra) with regard to interpretation to third proviso to Section 15(1) of SIC Act, 1985 as introduced by Act 54 of 2002 and Section 41 and Schedule to SARFAESI Act, 2002 and other provisions of Sections 35, 37 etc. also of SARFAESI Act, 2002, and therefore, contention of learned Advocate for the petitioner that it is incumbent upon respondent Bank to obtain permission under Section 22 of SIC Act, 1985 fails. It is held that reference under Chapter III of SIC Act is a genus and inquiry under Section 16, orders under Section 17 and measures for revival and rehabilitation of sick industrial company under Sections 18 and 19 of the Act are species, and therefore, though order under Sections 17(1), (2) or (3) of the Act, as the case may be is passed, reference under Chapter III of the Act continues to hold field and remain pending, but once a measure under Section 13(4) of SARFAESI Act, 2002is taken, by virtue of insertion of unnumbered third proviso to Section 15(1) by Act 54 of 2002, reference stands abated, and therefore, no permission under Section 22 of SIC Act, 1985 is necessary. All other objections about validity of deed of assignment by the creditor Bank in favour of K.M.B.L. and further relevant pleas can be taken before the D.R.T., where recovery proceedings filed by the Bank are pending."
The Madhya Pradesh High Court in Dhar Textiles Mills Ltd., Indore Vs. Canara Bank, Siyaganj Branch, Indore & Ors2011 (2) DRTC 228, has also taken the same view as of the Gujrat High Court as noted above. The Division Bench judgment of the Bombay High Court in Nouveaw Exports Pvt. Ltd. Vs. AAIFR Co. & Ors, 2010 (2) D.R.T.C. 344, also took the same view which we are taking in the present case.
While interpreting the third proviso to Section 15 of the Act, the Bombay High Court held that reference even at the stage of the implementation of the scheme will have to be treated as pending. The Orissa High Court judgment which has been referred to was disagreed. It is useful to quote paragraphs 18,24 and 25 of the said judgment which are are under:
"18. We shall now analyse the decision of the Orissa High Court in some detail. In that case BIFR proceedings were pending against the Company. In the said proceedings, the opposite party bank opposed the plea of the Company for declaring it a sick company. Nevertheless, the company was declared as a sick company as on 31st March, 2005. Thereafter the BIFR appointed the bank as operating agency with direction to prepare revival scheme for it, if feasible. Further, the opposite party-bank had applied for permission under Sec.22(1) of the Act of 1985, which was opposed for and on behalf of the Company on the ground that such permission would delay the revival of the company. The permission asked by the opposite party-bank under Sec.22(1) was refused by order dated 14th November, 2006. That order had become final. In the meantime, the Company had filed petition before the DRT on 10th July, 2006 for suspension of further proceedings before DRT. What is relevant to notice is that the opposite party-bank vide letter dated 26th December, 2006 emphasised about the DRT proceedings and stated that the DRT will take measures for seizure of the factory premises and other fixed assets of the company for sale through public auction for recovery of the decretal dues of the bank. Thereafter, notice under Sec.13(4) of the SRFAESI Act was issued to the Company. In this background, the Company rushed to the High Court by way of writ petition challenging the said notice under Sec.13(4) of the SRFAESI Act received by it being in contravention of provisions of Sec.22 of the Act of 1985. The bank, on the other hand, asserted that on invocation of action under Sec.13 of the SRFAESI Act, the proceedings before the BIFR abates and the protection which the Company claims under Sec.22 of the Act of 1985 is no longer available. The Orissa High Court, after considering the provisions contained in proviso to Sec.15(1) of the Act of 1985 read with Sec. 22 of the Act of 1985, negatived the stand of the bank. Instead, held that the third proviso will come into force where reference is pending before the BIFR. It held that the notice under Sec.13(4) of the SRFAESI Act was issued on 7th April, 2007. But long before that the Company was already declared sick company by order dated 14th November, 2006, therefore, the proceedings before the BIFR were not at the stage of reference, as such. But the same had proceeded far ahead and culminated with the order of company being declared sick on 14th November, 2006. Moreover, the said order was passed by the BIFR after hearing the bank and the bank was appointed as operating agency with direction to prepare the revival scheme.
24. As aforesaid, none of these decisions have any bearing on the interpretation of the third proviso to Sec. 15(1) of the Act of 1985. With utmost respect to the Division Bench of Orissa High Court, which has decided the case of Noble Aqua (supra), we are in disagreement with their opinion that the reference does not abate because the company has already been declared as a sick company. The fact that upon submission of reference, the Board is immediately called upon to determine the measures to be adopted with respect to the Company in question; and as a consequence of which the Board may either initiate enquiry into the working of the company by taking recourse to Sec.16 of the Act or make suitable order on the completion of enquiry in exercise of powers under Sec. 17 of the Act and frames a scheme and issue direction under Sec. 18 of the Act, does not mean that the reference is not pending before the Board. There are only two situations, which may result in disposal of the reference. Firstly, on rejection of the reference by the Board and that order attaining finality. The second situation is, when the scheme as framed is implemented in its entirety or otherwise and taken to its logical end one way or the other. So long as the scheme is being operated or implemented, the reference submitted under Sec.15 would continue to remain pending. Suffice it to observe that the reference envisaged in the third proviso to Sec.15(1) of the Act of 1985, is ascribable to reference proceedings till the same are finally terminated one way or the other. The steps of enquiry and suitable orders to be passed on completion of enquiry or of preparation of scheme and other incidental actions are integral part of the said reference submitted before the Board. The extreme argument of the petitioner, if accepted, would result in a pedantic approach of construing the third proviso to Sec. 15(1) of the Act of 1985 and would result in rendering the same as otiose. We say so because, immediately on submission of reference under Sec. 15(1) of the Act of 1985 the Board is obliged to pass some direction with promptitude to exercise powers under Sec. 16 and then proceed further under Chapter III of the said Act. According to the petitioner, on issuing initial direction upon submission of the reference, the reference comes to an end. In other words, as soon as the direction to initiate inquiry under Sec. 16 is passed, the action on reference as per Sec.15 is complete and therefore it comes to an end for the purpose of that provision and cannot be treated as pending within the meaning of the third proviso to Sec. 15(1) of the Act of 1985. Notably, the time gap between the submission of reference and passing of such initial direction/order may vary, depending on the facts of each case. We cannot countenance the interpretation that the expression "reference" occurring in the third proviso is only referable to the stage of determining the measures and it will cease to be a reference after passing of such initial direction/ order by the Board. The fact that Sec. 22 of the Act of 1985 uses the expression of :
(i) an inquiry under Sec. 16 is pending; or
(ii) any scheme referred to under Sec. 17 is under preparation or consideration; or
(iii) a sanctioned scheme is under implementation; or
(iv) where an appeal under Sec. 25 is pending -
in contradistinction to the expression "reference is pending" used in the third proviso to Sec. 15(1), does not mean that upon issuing direction to initiate inquiry under Sec. 16 of the Act, the said reference comes to an end. In our view, the language of Sec. 22 does not further this argument as it is noticed that it includes the proceedings in appeal under Sec 25 of the Act of 1985 - which in turn can be filed even in respect of an order of the BIFR passed at the stage of Secs. 15, 16, 17 or Sec. 18 of that Act - which plainly means it is continuation of that stage and can be treated as "reference is pending" within the meaning of the third proviso to Sec. 15(1) of that Act. For, the appeal provision (Sec.25) of that Act makes no distinction between the different stages under Chapter III of that Act. Moreover, Sec.22 merely describes the different stages except the initial direction to be issued by the Board to determine the measures to be adopted. The expression "reference" used in the third proviso to Sec.15(1) of the Act of 1985 is a generic term, which has not been defined in that Act. It will have to be given purposive meaning and not to render the objection and reason for enacting SRFAESI Act of 2002 nugatory; and more importantly, to effectuate the intent behind insertion of the third proviso to Sec. 15(1) of the Act, 1985, which was contemporaneous with coming into force of SRFAESI Act of 2002. The Objects and Reasons for introducing SRFAESI Act of 2002 can be culled out from the statement of objects and reasons, which read thus :
Statement of Objections and Reasons.- The financial sector has been one of the key drivers in India's efforts to achieve success in rapidly developing its economy. While the banking industry in India is progressively complying with the international prudential norms and accounting practices, there are certain areas in which the banking and financial sector do not have a level playing field as compared to other participants in the financial markets in the world. There is no legal provision for facilitating securitisation of financial assets of banks and financial institutions. Further, unlike international banks, the banks and financial institutions in India do not have power to take possession of securities and sell them. Our existing legal framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms. This has resulted in slow pace of recovery of defaulting loans and mounting levels of non-performing assets of banks and financial institutions. Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms have considered the need for changes in the legal system in respect of these areas. These Committees, inter alia, have suggested enactment of a new legislation for securitisation and empowering banks and financial institutions to take possession of the securities and to sell them without the intervention of the Court. Acting on these suggestions, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002 was promulgated on 21st June, 2002 to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. The provisions of the Ordinance would enable banks and financial institutions to realise long-term assets, manage problem of liquidity, asset liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or reconstruction."
(emphasis supplied) A priori, we find it difficult to agree with the opinion of the Orissa High Court in "Noble Aqua's case", that there is clear statutory bar under Sec. 22 of the Act of 1985. We are conscious of the fact that the Orissa High Court has adverted to Sec.37 of the SRFAESI Act of 2002. The purport of Sec. 37 is to make it clear that the provisions of the Act of 2002 will not be in derogation of any other law for the time being in force. Relying on this provision, it has been held by the Orissa High Court that the protection which has been given to a sick industrial company under the provisions of special statute, namely, Act of 1985, has not been taken away by Sec. 37 of the SRFAESI Act. It is on that premises that Division Bench of the Orissa High Court opined that the proceedings under the Act of 1985 cannot abate once the company has been declared a sick industrial company and therefore, it was not open to the bank to proceed with the action under Sec.13 of the SRFAESI Act without taking consent of the Board, as required by Sec. 22 of the Act of 1985.
25. In our opinion, what is significant to consider is to examine the efficacy of the third proviso to Sec. 15(1) of the Act of 1985. On bare perusal of the said provision, it is seen that it is in the nature of carving out exception to the general category of cases referred to in Sec.22 of the Act of 1985. The fact that company has already been declared as sick company or that the Board has propounded a scheme and which is being implemented, does not take the matter any further and will have no impact on the exception provided in the third proviso to Sec.15(1) of the Act. The reference even at the stage of implementation of the scheme, for all purposes, will have to be treated as pending before the Board and more particularly in the context of the third proviso to Sec. 15(1) of the Act of 1985. Ordinarily, if the scheme is framed under the provisions of Act of 1985, that would bind all the creditors in terms of Sec.18(8) of that Act. But, once the secured creditors representing not less than three fourth in value of the amount outstanding against the financial assistance disbursed take measures to recover their secured debt, under Sec. 13(4) of the SRFAESI Act, the reference would abate. With abatement of the reference, the scheme will have no legal effect whatsoever and thus, cannot continue to bind the specified class of secured creditors, who have invoked the provisions of the SRFAESI Act. In absence of provision, such as the third proviso to Sec.15(1) of the Act of 1985, it would have been possible to contend that upon framing of the scheme under Sec. 18 of the Act of 1985, the secured creditor would be bound by the same and cannot resort to any other action without the consent of the Board. But the third proviso under Sec. 15(1) of the Act of 1985 relieves the specified strength of secured creditors from that shackle and permits them to pursue their remedy under the provisions of SRFAESI Act, which have been introduced as a special enactment to further the cause of financial sector and the financial institutions to which the same is applicable. Suffice it to observe that the above position is reinforced from the provisions and in particular the third proviso to Sec.15(1) read with Sec.22 of the Act of 1985 itself. Thus, Sec.37 of the SRFAESI Act cannot be pressed into service to whittle down the sweep of the third proviso to Sec.15(1) of the Act of 1985."
A Full Bench of the Madras High Court in Salem Textiles Ltd. Vs. Authorised Officer, Phoenix ARC Pvt. Ltd. & Ors, 2013 (2) D.R.T.C., 56, after referring to almost all relevant cases on the subject has taken the same view which is being taken by us in these writ petitions. It is useful to refer to the issues considered by the Madras High Court and the decisions taken thereof. In paragraph 1 of the judgment the questions which fell into consideration before the Madras High Court were noted which are as under:
"(i) Whether an action initiated in terms of Section 13(4) of the SRFAESI Act, by the secured creditors, representing three-fourths in value of the total amount outstanding, would result in the automatic abatement of the proceedings before BIFR, in view of the third proviso to section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985, inserted by way of amendment under Act 54 of 2002 ?
(ii) Whether the secured creditors are obliged to seek permission of BIFR, for taking action under Section 13(4), for bringing to an end the proceedings before BIFR, when the matter is pending at the stage of Section 15 of Sick Industrial Companies (Special Provisions) Act, 1985 ?
(iii) Whether the ratio decidendi in Triveni Alloys Limited requires reconsideration or represents the correct view ?"
After noticing the judgment of the Orissa High Court, Bombay High Court and the Gujarat High Court following was observed in paragraph 23 by the Full Bench which is quoted below:.
"23. From the above discussion, the following positions emerge:-
(i) The decision of the Division Bench of the Orissa High Court stands isolated in its opinion that abatement in terms of the third proviso to Section 15(1) of SICA would arise only at the stage of reference and not when the proceedings before BIFR had gone beyond the stage of reference. All other High Courts, namely, Bombay, Delhi, Madras, Kerala, Gujarat and Punjab and Haryana High Courts, are of the view that the proceedings would abate irrespective of the stage at which the reference stands or the stage to which the proceedings had gone.
(ii) Even among the High Courts which take a view contrary to that of the Orissa High Court, there is no unanimity of opinion on one aspect and that aspect is this. While some of them take the extreme view that SRFAESI Act, 2002 overrides SICA in view of Section 35 and hence one need not even take recourse to the third proviso to Section 15(1) of SICA, the other High Courts stop only with the opinion that the expression "reference" would include (a) an enquiry under Section 16, (b) declaration of sickness under Section 17(1), (c) appointment of Operating Agency under Section 17 (3), (d) preparation and sanction of Schemes under Section 18, (e) rehabilitation under Section 19 and (f) winding up under Section 20.
(iii) The divergence of views expressed by various High Courts, appears to have arisen primarily on account of two things, namely, (a) that under Section 32(1) of SICA 1985, the provisions of the Act and even the Schemes made thereunder, were given effect notwithstanding anything inconsistent with any other law except the provisions of the Foreign Exchange Regulation Act, 1973 (now FEMA 1999) and the Urban Land (Ceiling and Regulation) Act, 1976; (b) that though the SRFAESI Act, 2002 also contained a similar provision under Section 35, a confusion was created by Section 37 of the SRFAESI Act, 2002, retaining the application of other laws. Section 37 did not merely stop by making the provisions of the SRFAESI Act, 2002 in addition and to not in derogation of the Companies Act, 1956, the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of Act, 1992 and the RDDBFI Act, 1993, but also contained an additional (perhaps unnecessary) expression "or any other law for the time being in force". By amending SICA 1985 under Section 41 read with the Schedule to the SRFAESI Act, 2002, the Parliament also gave an indication that they had taken note of the existence of Section 32 in SICA 1985 and yet did not choose to give overriding effect for SRFAESI Act, 2002 over SICA 1985. It is this confusion that has created a judicial divide, on the purport of (a) the effect of SRFAESI Act, 2002 and (b) the third proviso to Section 15(1) of SICA."
The Full Bench summarised its opinion in paragraph 69 which is quoted below:
"69. To summarise, our answer to all the 3 questions referred to the Full Bench, are as follows:-
(i) Once an action is initiated in terms of Section 13(4) of the SRFAESI Act, 2002, by the secured creditors representing three-fourths in value of the total amount outstanding, the proceedings before BIFR would automatically abate, in view of the third proviso inserted by Act 54 of 2002 under Section 15(1) of SICA 1985. This is the position irrespective of whether the reference is at the stage of budding under section 15 or at the stage of blossoming under sections 16 and 17 or at the stage of fruition under sections 18 and 19 or at the stage of rotting (deserving only winding up) under section 20.
(ii) The secured creditors are not obliged to seek permission of BIFR under Sec 22 (1) of SICA, for taking action under Section 13(4) and for bringing to an end the proceedings before BIFR, provided they represent three-fourths in value of the total amount outstanding and they take a concerted decision to initiate action under Section 13(4) of SRFAESI Act, 2002.
(iii) The view expressed in Triveni Alloys Limited v. Board for Industrial and Financial Reconstruction, 2006 (132) Comp. Cas. 190 (Mad), does not require reconsideration."
The Full Bench of the Madras High Court has also taken the view that reference shall be treated to be pending whether it is at the stage of Section 15 of the Act, 1985 or it is at the stage of Sections 16 to 19 of the Act.
A Division Bench judgment of this Court in which one of us (Hon'ble Ashok Bhushan,J) was a member in Shamken Spinners Limited Vs. State of U.P. & Ors, 2011 (2) ADJ, 18 had occasion to consider the third proviso to Section 15 of the Act, 1985 as well as Section 22 of the Act, 1985 and the provisions of the Act, 2002.
In the above case, an application for reference was filed by the Company under Section 15 of the BIFR on 06/4/2004. The reference was rejected by the Board on 04/9/2006, against which an appeal was filed. Second reference was again filed in the year 2006 by the petitioner Company which was rejected on 30/5/2007. Against the said order an appeal was filed which was allowed by the AAIFR on 29/11/2007, remanding the matter to the BIFR for reconsideration. The secured creditors in the meantime has issued notice dated 26/5/2009 under Section 13(2) of the Act, 2002. Writ petition was filed by the company praying for quashing the notice dated 26/5/2009 and for issuing a mandamus restraining the respondents from taking any of the measures under Section 13(4) of the Act, 2002. The submission was raised by the company that in view of the pendency of the reference no proceedings under the Act, 2002 can be issued. The Division Bench after considering the issues laid down in paragraph 20 that reference shall abate if secured creditors representing not less than three-fourth in value of the amount outstanding decides to take any measures to recover their secured debt. It was further held that for abatement neither any formal order is contemplated nor any adjudication is contemplated by the third proviso to Section 15 of the Act. Following was laid down in paragraph 20 which is quoted below:
"20.The second proviso to Section 15 provides that no reference shall be made to the BIFR after the commencement of SARFAESI Act, 2002, where financial assets have been acquired by any securitisation company or reconstruction company under sub-section (1) of Section 5 of the SARFAESI Act, 2002. Thus where financial assets have been acquired by any securitisation company, no reference shall be made to the BIFR. The second proviso to Section 15 of the 1985 Act having been inserted by the SARFAESI Act, 2002, the legislative intend is clear. The third proviso as inserted by the SARFAESI Act, 2002 contemplates that on or after enforcement of the SARFAESI Act, 2002, where a reference is pending before the BIFR, 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 the SARFAESI Act, 2002. Thus if secured creditors representing three-fourth of the value decides to take any measure to recover its debt, the reference shall abate. For abatement in consequence to the measures taken in the aforesaid manner, neither any formal order is contemplated nor any adjudication is contemplated by third proviso. A Division Bench of the Bombay High Court in Writ Petition No.358 of 2009 (Rama Shree Conductors Limited vs. The Appellate Authority for Industrial and Financial Reconstruction and others) decided on 12th September, 2009 has taken the view which supports the interpretation put by us. Following was laid down in paragraph 5 of the said judgment:-
"5. Perusal of the above quoted provisions shows that if there is a valid action taken under Section 13(4), then one of the consequence is that any reference pending in relation to that company before BIFR automatically abates. In our opinion, provisions of Section 15 do not contemplate any order being passed by the Board for Industrial and Financial Reconstruction in relation to the abatement. The abatement of the reference is a consequence, which occurs automatically on a valid action being taken under Section 13(4). In our opinion, therefore, the AAIFR was perfectly justified in taking the view that if it is the case of the Petitioner that the action taken by Respondent No.3 under Section 13(4)is invalid for any reason, the appropriate remedy for the Petitioner was to approach the D.R.T., which is the Forum provided by the Securitisation Act for deciding such questions. If the finding is recorded by that Forum that the action taken under Section 13(4) is invalid as it lacks consent of three-fourth secured creditors, then the Reference of the Petitioner-company pending in the BIFR will automatically stand revived and no order will be necessary to be passed by any authority under the Sick Industrial Companies Act for that purpose."
In view of the foregoing discussion, the pre-ponderence of the authorities of different High Court including the view taken by Orissa High Court as noted above is that if a reference under Section 15 of the Act, 1985 remains pending even if it is at the stage of Sections 16, 17,18 and 19 of the Act, 1985, the reference cannot be said to be not pending after its registration under Section 15 of the Act, 1985 or after declaration of the company as a sick unit. We thus, do not subscribe to the submissions made by Shri R.Venkatramani, learned Senior Counsel appearing for the petitioners that in the facts of the present case reference cannot be said to be pending so as to make applicable the third proviso to Section 15 of the Act, 1985.
Shri R. Venkatramani, learned Senior Counsel appearing for the petitioners has also referred to various judgments of the Apex Court where the scope of the Act, 1985 has been considered. Reference is made to the case of Raheja Universal Limited Vs. NRC Limited & Ors, (2012) 4 SCC 148.
In the aforesaid case, the Court considered the provisions of the Act, 1985 and held that the scheme for rehabilitation or reconstructing of a sick industrial company undertaken by a specialised body like BIFR/AAIFR should, as far as legally permissible, remain obstruction free. There cannot be any dispute to the above proposition. However, in the said case the provisions of the Act, 2002 or the third proviso to Section 15 of the Act, 1985 was not under consideration, hence the said case does not help the petitioners in the present case.
Shri R. Venkatramani, learned Senior Counsel appearing for the petitioners has also referred to the Apex Court judgment in KSL & Industries Limited Vs. Arihant Threads Limited & Ors, (2008) 9 SCC 763. In the said case in view of difference of opinion on interpretation of Section 34 of the Recovery of Debts Due to Banks and Financial Institution Act, 1993, the matter was directed to be placed before the Hon'ble the Chief Justice for taking appropriate action. The said judgment also does not help the petitioners in the present case. The submission of Shri R. Venkatramani, learned Senior Counsel appearing for the petitioners that the application having been filed by the Company before the BIFR being M.A. No.103/2012, the Bank may press its application before the BIFR for an order of abatement also cannot be accepted. The application M.A. No.103/2012, which is on the record has not been filed by the Bank so that an abatement order be passed rather, his prayer in the application is that proceedings having been abated a direction be issued accordingly. The abatement of pending proceedings of reference is automatic when 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 the Act, no formal order is contemplated.
In view of the foregoing discussion, our answer to issue nos. 2 to 5 are as follows:
(2) On taking measures under Section 13(4) of the Act, 2002 i.e. by the respondent no.2 by issuing possession notice dated 07/10/2012, the reference pending before the BIFR being Case No.53/2010 stands abated.
(3) The words "reference is pending" as used in third proviso to Section 15 of the Act, 1985 shall mean the reference which is at the stage of Section 15 of the Act, 1985 or is at any stage of Sections 16,17,18 and 19 of the Act, 1985. Registration of reference or declaration of unit as a sick unit shall not amount to coming to an end of reference.
(4) Even if the reference is proceeding under Section 16, 17,18 and 19 of the Act,1985 the secured creditors are fully empowered to take measures under Section 13(4) of the Act, 2002 in accordance with the third proviso to Section 15 of the Act, 1985.
(5) In the facts of the present case, the respondent no.2 is fully entitled to proceed under Section 13(4) of the Act, 2002 and reference being Case No. 53/2010 having abated on taking measures under Section 13(4) of the Act, 2002, petitioners are not entitled for the benefit under Section 22 of the Act, 1985.
In view of the above, discussion, we are of the view that the proceedings initiated by the Bank under Section 13(4) of the Act, 2002 are not without jurisdiction. The reference being Case No.53/2010 stands abated. However, it is still open for the petitioners to avail their statutory remedy under Section 17 of the Act, 2002 against any of the measures taken by the Bank under Section 13(4) of the Act, 2002.
Subject to above, both the writ petitions are dismissed.
Order Date :- 08/1/2014 SB