M/S MADRAS PETROCHEM LTD.& ANR. Vs. BIFR & ORS.
Supreme Court of India (Division Bench (DB)- Two Judge)
Appeal (Civil), 614-615 of 2016, Judgment Date: Jan 29, 2016
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS._614-615 OF 2016
(ARISING OUT OF SLP(CIVIL) NOS. 26170-26171 OF 2008)
M/S MADRAS PETROCHEM LTD.
& ANR. … APPELLANTS
VERSUS
BIFR & ORS. … RESPONDENTS
J U D G M E N T
R.F. Nariman, J.
1. Leave granted.
2. The present appeals raise interesting questions on the interplay
between the Sick Industrial Companies (Special Provisions) Act, 1985 and
the Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002. The facts in appeals arising out of
Special Leave Petition (Civil) Nos.26170-26171 of 2008 are as follows.
3. The net worth of the Appellant No.1 Company, having eroded
completely, the appellant No.1 company filed a reference under Section
15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985
before the BIFR, which was registered as BIFR Case No.115 of 1989. On
13.12.1989, after making an inquiry under Section 16(1) of the Sick
Industrial Companies (Special Provisions) Act, 1985, the Appellant company
was declared sick and ICICI was appointed as the Operating Agency to
formulate a rehabilitation scheme. On 3.7.1991, the first rehabilitation
scheme prepared by the Operating Agency was sanctioned, which envisaged the
takeover of the appellant company by one Mahavir Plantation Limited - i.e.
appellant No.2. The first scheme was finally declared a failure, and the
Appellant No.1 company, on 17.1.1995, was directed to submit a fresh,
comprehensive, revised rehabilitation scheme which was duly circulated.
Objections to the said scheme were heard by the BIFR and the scheme finally
sanctioned was in the form of a change of management of the appellant no.1
company subject to various modifications to be carried out. After the
Appellant No.1 company’s management changed hands, the second scheme, after
being reviewed from time to time, was declared as failed on 16.5.2000.
Despite efforts by the Operating Agency to attempt to revive the company,
all such efforts failed, and ultimately, on 30.4.2001, BIFR, on the basis
of the recommendation of the Operating Agency, formed a prima facie opinion
that the appellant No.1 company should be wound up under Section 20(1) of
the Sick Industrial Companies (Special Provisions) Act, 1985. On
27.7.2001, the BIFR confirmed its prima facie opinion after noting that the
appellant No.1 company had been enjoying protection under the Sick
Industrial Companies (Special Provisions) Act, 1985 for the last 12 years.
There being no acceptable viable rehabilitation proposal after the failure
of two schemes, the appellant no.1 company was not likely to make its net
worth exceed its accumulated losses, and therefore BIFR recommended to the
High Court of Bombay that the said company be wound up. On 4.2.2002,
appellant No.1’s challenge to the BIFR order was dismissed by the AAIFR.
4. While matters stood thus, ICICI issued a notice dated 20.11.2002
under Section 13(2) of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 to the appellant No.1
company and followed it up with a possession notice dated 9.5.2003. On
8.8.2003, ICICI issued a sale notice for and on behalf of all the secured
creditors of the appellant No.1 company. Meanwhile, appellant Nos. 1 & 2
filed a writ petition before the Delhi High Court being Writ Petition
Nos.48-49 of 2004 challenging the AAIFR order dated 4.2.2002 and the BIFR
order dated 25.7.2001. On 7.1.2004, the Delhi High Court stayed both the
orders, which stay continued until 24.7.2008, when, by the impugned
judgment, the Writ Petition was dismissed.
5. Meanwhile, the sale notice of 8.8.2003 was challenged before the DRT
by the appellants. The said challenge was unsuccessful, as a result of
which an appeal was filed before the DRAT, which, by its order dated
30.6.2005, upset the DRT order and set aside the sale notice. However, by
a judgment of the Madras High Court, in a challenge to the aforesaid order
dated 30.6.2005, the Madras High Court set aside the DRAT order. The sale
of movable assets for a sum of Rs.4.65 crores was also confirmed by the
Madras High Court in favour of one M/s Rahamath Steel. Vide the said order
the Madras High Court also permitted the creditors of the Company to
proceed with the sale of its immovable property subject to a minimum
reserve price of Rs.25 crores. This order was never challenged and has
attained finality.
6. Meanwhile, based on a winding up proceeding by M/s BHEL, an unsecured
creditor, and another winding up proceeding based on the opinion of the
BIFR under Section 20 of the Sick Industrial Companies (Special Provisions)
Act, 1985, the Bombay High Court wound up the appellant No.1 company.
7. While matters stood thus, the Delhi High Court passed the impugned
order on 24.7.2008, as has been stated hereinabove, in which it was of the
view that Section 15(1) proviso 3 of the Sick Industrial Companies (Special
Provisions) Act, 1985, when construed to include all proceedings under the
Sick Industrial Companies (Special Provisions) Act, 1985, would make the
present proceedings under the Sick Industrial Companies (Special
Provisions) Act, 1985, abate on the facts of this case. Ultimately, in
this view of the matter, and differing with a judgment of the Orissa High
Court, the Delhi High Court disposed of the appellants’ writ petition as
having become infructuous.
8. Appeals have been filed against the said order by the present
appellants which appeals, as has been stated hereinabove, raise interesting
questions of law on the interplay of the Sick Industrial Companies (Special
Provisions) Act, 1985 with the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002.
9. A few subsequent events also need to be stated for the sake of
completion. On 20.11.2008, the Bombay High Court modified its order dated
30.8.2007 and restrained the Official Liquidator from taking possession of
the secured assets of the company, and permitted the creditors to pursue
their remedies under the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002. M/s. Alchemist ARC
Ltd. issued a sale notice on behalf of all the creditors of the appellant
No.1 company for a sum of Rs.222.59 crores on 6.4.2013. Appellant No.2,
being the corporate guarantor of the appellant no.1 company, filed an
appeal challenging the sale notice of 6.4.2013. On 13.5.2013, DRT Chennai
dismissed this petition. Vide an order dated 19.3.2014, the DRAT, Chennai,
in an appeal made to it, directed, by way of an interim order, that
appellant No.2 pay a sum of Rs.53.77 crores within the time stated therein.
This DRAT order was challenged before the Madras High Court which, by its
order dated 21.4.2014, refused to interfere with the said order dated
19.3.2014, and granted some additional time to appellant No.2 to pay the
said amount of Rs.53.77 crores. We have been informed that the said amount
has not been paid till date. The appellant No.2 has challenged this order
of 21.4.2014 before this Court. However, the said SLP is lying in defect
as on date despite the expiry of more than one and a half years.
10. Mr. C.N. Sreekumar, learned counsel appearing on behalf of the
appellant No.1 company, submitted before us that the effect of the interim
order of 7.1.2004 of the Delhi High Court is that the reference made by the
appellant No.1 company gets revived. He further submitted that no winding
up order could be made in view of such revival, and that such orders are
therefore non est, and the present appeals cannot be regarded as
infructuous. He added that Section 22(1) of the Sick Industrial Companies
(Special Provisions) Act, 1985 would automatically come into play to
protect the assets of the appellant No.1 company. He also submitted before
us, that in any case, regard being had to the object of the Sick Industrial
Companies (Special Provisions) Act, 1985, it would override the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002. For this purpose, he relied on a judgment by
this Court in KSL & Industries Ltd. v. Arihant Threads Ltd., (2015) 1 SCC
166, which held that the Sick Industrial Companies (Special Provisions)
Act, 1985 has overridden the Recovery Of Debts Due To Banks And Financial
Institutions Act, 1993. The said Act, being a predecessor to the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002, and dealing with the same subject matter as
the Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 – namely, recovery of debts due to banks and
financial institutions, would lead to the conclusion that the 2002 Act is
also overridden. He further contended that Section 37 of the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 expressly refers to the Recovery Of Debts Due To Banks And
Financial Institutions Act, 1993, and since Section 34(2) of the Recovery
Of Debts Due To Banks And Financial Institutions Act, 1993, refers to the
Sick Industrial Companies (Special Provisions) Act, 1985, Section 37 of the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 should also be construed so as to include a
reference to the Sick Industrial Companies (Special Provisions) Act, 1985.
His further contention is that on a true construction of Section 15(1)
proviso 3 of the Sick Industrial Companies (Special Provisions) Act, 1985,
the Orissa High Court is correct and that since the expression “reference”
would only include the initial stage of filing and registration of a
reference before the BIFR, such stage having gone long ago, the proceedings
before BIFR are very much alive and have not abated.
11. Shri C.A. Sundaram, learned senior counsel, appearing on behalf of
M/s Alchemist Asset Reconstruction Company Limited, which is substituted in
place of respondent Nos.2,3,4,6 and 9, has submitted that the effect of the
interim order dated 7.1.2004 does not revive the reference of the appellant
No.1 company before BIFR. For this purpose he relied upon Shree Chamundi
Mopeds Ltd. v. Church of South India Trust Assn., (1992) 3 SCC 1. He also
submitted that in any event the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 would
override the provisions of the Sick Industrial Companies (Special
Provisions) Act, 1985, so that even if the stay order dated 7.1.2004 had
the effect of reviving the reference, that in itself would not restrain the
secured creditors from proceeding under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002, nor would it render the winding up order passed by Bombay High
Court non est. He also submitted that a large number of judgments of
various High Courts have taken the view which is taken in the impugned
judgment, and that the expression “reference” would include all stages of a
proceeding under the Sick Industrial Companies (Special Provisions) Act,
1985 including the stage of operation of a scheme. For this purpose, in
particular, he relied heavily on a full bench decision of the Madras High
Court in M/s. Salem Textiles Limited v. The Authorized Officer and Ors.,
reported in AIR 2013 Madras 229. He also argued that since the Recovery Of
Debts Due To Banks And Financial Institutions Act, 1993 expressly named the
Sick Industrial Companies (Special Provisions) Act, 1985 in Section 34(2),
the Sick Industrial Companies (Special Provisions) Act, 1985 obviously
overrode that Act. What is significant is that the corresponding section,
namely, Section 37 of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002, expressly omits any
reference to the Sick Industrial Companies (Special Provisions) Act, 1985,
making it clear that the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 would prevail over
the Sick Industrial Companies (Special Provisions) Act, 1985. That being
the case, he argued that this Court’s judgment in KSL & Industries Ltd. Vs.
Arihant Threads Ltd., (2015) 1 SCC 166, is, therefore, clearly
distinguishable. He also argued that at the end of the day, since the
movable property of the appellant No.1 company had been sold off, and since
various High Courts – including Bombay and Madras – have passed a number of
orders, both winding up the company and dismissing petitions challenging
the action of his client in proceedings under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002, all that remains is sale of the immovable property of the
appellant No.1 Company and that, therefore, nothing really remains in these
appeals, which have become infructuous.
Discussion:-
12. The arguments of counsel have been wide ranging, but at the end of
the day various Sections of three statutes have to be interpreted by this
Court. Before embarking on a consideration of the arguments and the
interpretation of these provisions, it will be important to first set them
out.
THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985
“Section 15. Reference to Board
When 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:
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 sub-section (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.
Section 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
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 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 of the contracts, assurance 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 adoptions 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.
Section 32. Effect of the Act on other laws
(1) The provisions of this Act and of any rules or schemes made thereunder
shall have effect notwithstanding anything inconsistent therewith contained
in any other law except the provisions of the Foreign Exchange Regulation
Act, 1973 (46 of 1973) and the Urban Land (Ceiling and Regulation) Act,
1976 (33 of 1976) for the time being in force or in the Memorandum or
Articles of Association of an industrial company or in any other instrument
having effect by virtue of any law other than this Act.
(2) Where there has been under any scheme under this Act an amalgamation of
a sick industrial company with another company, the provisions of section
72A of the Income-tax Act, 1961 (43 of 1961), shall, subject to the
modifications that the power of the Central Government under that section
may be exercised by the Board without the Central Government under that
section may be exercised by the Board without any recommendation by the
specified authority referred to in that section, apply in relation to such
amalgamation as they apply in relation to the amalgamation of a company
owning an industrial undertaking with another company.
The Recovery Of Debts Due To Banks And Financial Institutions Act, 1993
Section 17. Jurisdiction, powers and authority of Tribunals.
(1) A Tribunal shall exercise, on and from the appointed day, the
jurisdiction, powers and authority to entertain and decide applications
from the banks and financial institutions for recovery of debts due to such
banks and financial institutions.
(2) An Appellate Tribunal shall exercise, on and from the appointed day,
the jurisdiction, powers and authority to entertain appeals against any
order made, or deemed to have been made, by a Tribunal under this Act.
Section 18. Bar of Jurisdiction.
On and from the appointed day, no court or other authority shall have, or
be entitled to exercise, any jurisdiction, powers or authority (except the
Supreme Court, and a High Court exercising jurisdiction under articles 226
and 227 of the Constitution) in relation to the matters specified in
section 17.
34. Act to have over-riding effect.—
(1) Save as provided under sub- section (2), the provisions of this Act
shall have effect notwithstanding anything inconsistent therewith contained
in any other law for the time being in force or in any instrument having
effect by virtue of any law other than this Act.
(2) The provisions of this Act or the rules made thereunder shall be in
addition to, and not in derogation of, the Industrial Finance Corporation
Act, 1948 (15 of 1948), the State Financial Corporations Act, 1951 (63 of
1951), the Unit Trust of India Act, 1963 (52 of 1963), the Industrial
Reconstruction Bank of India Act, 1984 (62 of 1984), the Sick Industrial
Companies (Special Provisions) Act, 1985 (1 of 1986) and the Small
Industries Development Bank of India Act, 1989 (39 of 1989).
The Securitisation And Reconstruction Of Financial Assets And Enforcement
Of Security Interest Act, 2002
Section 13. Enforcement of security interest
(1) Notwithstanding anything contained in section 69 or section 69A of the
Transfer of Property Act, 1882 (4 of 1882), any security interest created
in favour of any secured creditor may be enforced, without the intervention
of court or tribunal, by such creditor in accordance with the provisions of
this Act.
(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 sub- section (4).
(3) The notice referred to in sub-section (2) shall give details of the
amount payable by the borrower and the secured assets intended to be
enforced by the secured creditor in the event of non-payment of secured
debts by the borrower.
(3A) If, on receipt of the notice under sub-section (2), the borrower makes
any representation or raises any objection, the secured creditor shall
consider such representation or objection and if the secured creditor comes
to the conclusion that such representation or objection is not acceptable
or tenable, he shall communicate within one week of receipt of such
representation or objection the reasons for non-acceptance of the
representation or objection to the borrower: PROVIDED that the reasons so
communicated or the likely action of the secured creditor at the stage of
communication of reasons shall not confer any right upon the borrower to
prefer an application to the Debts Recovery Tribunal under section 17 or
the Court of District Judge under section 17A.
(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 measures 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) Any payment made by any person referred to in clause (d) of sub-section
(4) to the secured creditor shall give such person a valid discharge as if
he has made payment to the borrower.
(5A) Where the sale of an immovable property, for which a reserve price has
been specified, has been postponed for want of a bid of an amount not less
than such reserve price, it shall be lawful for any officer of the secured
creditor, if so authorised by the secured creditor in this behalf, to bid
for the immovable property on behalf of the secured creditor at any
subsequent sale.
(5B) Where the secured creditor, referred to in sub-section (5A), is
declared to be the purchaser of the immovable property at any subsequent
sale, the amount of the purchase price shall be adjusted towards the amount
of the claim of the secured creditor for which the auction of enforcement
of security interest is taken by the secured creditor, under sub-section
(4) of section 13.
(5C) The provisions of section 9 of the Banking Regulation Act, 1949(10 of
1949) shall, as far as may be, apply to the immovable property acquired by
secured creditor under sub-section (5A).]
(6) Any transfer of secured asset after taking possession thereof or take
over of management under sub-section (4), by the secured creditor or by the
manager on behalf of the secured creditor shall vest in the transferee all
rights in, or in relation to, the secured asset transferred as if the
transfer had been made by the owner of such secured asset.
(7) Where any action has been taken against a borrower under the provisions
of sub-section (4), all costs, charges and expenses which, in the opinion
of the secured creditor, have been properly incurred by him or any expenses
incidental thereto, shall be recoverable from the borrower and the money
which is received by the secured creditor shall, in the absence of any
contract to the contrary, be held by him in trust, to be applied, firstly,
in payment of such costs, charges and expenses and secondly, in discharge
of the dues of the secured creditor and the residue of the money so
received shall be paid to the person entitled thereto in accordance with
his rights and interests.
(8) If the dues of the secured creditor together with all costs, charges
and expenses incurred by him are tendered to the secured creditor at any
time before the date fixed for sale or transfer, the secured asset shall
not be sold or transferred by the secured creditor, and no further step
shall be taken by him for transfer or sale of that secured asset.
(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 sub-section (4) unless exercise of
such right is agreed upon by the secured creditors representing not less
than sixty per cent 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 sub-section (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.
(10) Where dues of the secured creditor are not fully satisfied with the
sale proceeds of the secured assets, the secured creditor may file an
application in the form and manner as may be prescribed to the Debts
Recovery Tribunal having jurisdiction or a competent court, as the case may
be, for recovery of the balance amount from the borrower.
(11) Without prejudice to the rights conferred on the secured creditor
under or by this section, the secured creditor shall be entitled to proceed
against the guarantors or sell the pledged assets without first taking any
of the measures specified in clauses (a) to (d) of sub-section (4) in
relation to the secured assets under this Act.
(12) The rights of a secured creditor under this Act may be exercised by
one or more of his officers authorised in this behalf in such manner as may
be prescribed.
(13) No borrower shall, after receipt of notice referred to in sub-section
(2), transfer by way of sale, lease or otherwise (other than in the
ordinary course of his business) any of his secured assets referred to in
the notice, without prior written consent of the secured creditor.
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS._614-615 OF 2016
(ARISING OUT OF SLP(CIVIL) NOS. 26170-26171 OF 2008)
M/S MADRAS PETROCHEM LTD.
& ANR. … APPELLANTS
VERSUS
BIFR & ORS. … RESPONDENTS
J U D G M E N T
R.F. Nariman, J.
1. Leave granted.
2. The present appeals raise interesting questions on the interplay
between the Sick Industrial Companies (Special Provisions) Act, 1985 and
the Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002. The facts in appeals arising out of
Special Leave Petition (Civil) Nos.26170-26171 of 2008 are as follows.
3. The net worth of the Appellant No.1 Company, having eroded
completely, the appellant No.1 company filed a reference under Section
15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985
before the BIFR, which was registered as BIFR Case No.115 of 1989. On
13.12.1989, after making an inquiry under Section 16(1) of the Sick
Industrial Companies (Special Provisions) Act, 1985, the Appellant company
was declared sick and ICICI was appointed as the Operating Agency to
formulate a rehabilitation scheme. On 3.7.1991, the first rehabilitation
scheme prepared by the Operating Agency was sanctioned, which envisaged the
takeover of the appellant company by one Mahavir Plantation Limited - i.e.
appellant No.2. The first scheme was finally declared a failure, and the
Appellant No.1 company, on 17.1.1995, was directed to submit a fresh,
comprehensive, revised rehabilitation scheme which was duly circulated.
Objections to the said scheme were heard by the BIFR and the scheme finally
sanctioned was in the form of a change of management of the appellant no.1
company subject to various modifications to be carried out. After the
Appellant No.1 company’s management changed hands, the second scheme, after
being reviewed from time to time, was declared as failed on 16.5.2000.
Despite efforts by the Operating Agency to attempt to revive the company,
all such efforts failed, and ultimately, on 30.4.2001, BIFR, on the basis
of the recommendation of the Operating Agency, formed a prima facie opinion
that the appellant No.1 company should be wound up under Section 20(1) of
the Sick Industrial Companies (Special Provisions) Act, 1985. On
27.7.2001, the BIFR confirmed its prima facie opinion after noting that the
appellant No.1 company had been enjoying protection under the Sick
Industrial Companies (Special Provisions) Act, 1985 for the last 12 years.
There being no acceptable viable rehabilitation proposal after the failure
of two schemes, the appellant no.1 company was not likely to make its net
worth exceed its accumulated losses, and therefore BIFR recommended to the
High Court of Bombay that the said company be wound up. On 4.2.2002,
appellant No.1’s challenge to the BIFR order was dismissed by the AAIFR.
4. While matters stood thus, ICICI issued a notice dated 20.11.2002
under Section 13(2) of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 to the appellant No.1
company and followed it up with a possession notice dated 9.5.2003. On
8.8.2003, ICICI issued a sale notice for and on behalf of all the secured
creditors of the appellant No.1 company. Meanwhile, appellant Nos. 1 & 2
filed a writ petition before the Delhi High Court being Writ Petition
Nos.48-49 of 2004 challenging the AAIFR order dated 4.2.2002 and the BIFR
order dated 25.7.2001. On 7.1.2004, the Delhi High Court stayed both the
orders, which stay continued until 24.7.2008, when, by the impugned
judgment, the Writ Petition was dismissed.
5. Meanwhile, the sale notice of 8.8.2003 was challenged before the DRT
by the appellants. The said challenge was unsuccessful, as a result of
which an appeal was filed before the DRAT, which, by its order dated
30.6.2005, upset the DRT order and set aside the sale notice. However, by
a judgment of the Madras High Court, in a challenge to the aforesaid order
dated 30.6.2005, the Madras High Court set aside the DRAT order. The sale
of movable assets for a sum of Rs.4.65 crores was also confirmed by the
Madras High Court in favour of one M/s Rahamath Steel. Vide the said order
the Madras High Court also permitted the creditors of the Company to
proceed with the sale of its immovable property subject to a minimum
reserve price of Rs.25 crores. This order was never challenged and has
attained finality.
6. Meanwhile, based on a winding up proceeding by M/s BHEL, an unsecured
creditor, and another winding up proceeding based on the opinion of the
BIFR under Section 20 of the Sick Industrial Companies (Special Provisions)
Act, 1985, the Bombay High Court wound up the appellant No.1 company.
7. While matters stood thus, the Delhi High Court passed the impugned
order on 24.7.2008, as has been stated hereinabove, in which it was of the
view that Section 15(1) proviso 3 of the Sick Industrial Companies (Special
Provisions) Act, 1985, when construed to include all proceedings under the
Sick Industrial Companies (Special Provisions) Act, 1985, would make the
present proceedings under the Sick Industrial Companies (Special
Provisions) Act, 1985, abate on the facts of this case. Ultimately, in
this view of the matter, and differing with a judgment of the Orissa High
Court, the Delhi High Court disposed of the appellants’ writ petition as
having become infructuous.
8. Appeals have been filed against the said order by the present
appellants which appeals, as has been stated hereinabove, raise interesting
questions of law on the interplay of the Sick Industrial Companies (Special
Provisions) Act, 1985 with the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002.
9. A few subsequent events also need to be stated for the sake of
completion. On 20.11.2008, the Bombay High Court modified its order dated
30.8.2007 and restrained the Official Liquidator from taking possession of
the secured assets of the company, and permitted the creditors to pursue
their remedies under the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002. M/s. Alchemist ARC
Ltd. issued a sale notice on behalf of all the creditors of the appellant
No.1 company for a sum of Rs.222.59 crores on 6.4.2013. Appellant No.2,
being the corporate guarantor of the appellant no.1 company, filed an
appeal challenging the sale notice of 6.4.2013. On 13.5.2013, DRT Chennai
dismissed this petition. Vide an order dated 19.3.2014, the DRAT, Chennai,
in an appeal made to it, directed, by way of an interim order, that
appellant No.2 pay a sum of Rs.53.77 crores within the time stated therein.
This DRAT order was challenged before the Madras High Court which, by its
order dated 21.4.2014, refused to interfere with the said order dated
19.3.2014, and granted some additional time to appellant No.2 to pay the
said amount of Rs.53.77 crores. We have been informed that the said amount
has not been paid till date. The appellant No.2 has challenged this order
of 21.4.2014 before this Court. However, the said SLP is lying in defect
as on date despite the expiry of more than one and a half years.
10. Mr. C.N. Sreekumar, learned counsel appearing on behalf of the
appellant No.1 company, submitted before us that the effect of the interim
order of 7.1.2004 of the Delhi High Court is that the reference made by the
appellant No.1 company gets revived. He further submitted that no winding
up order could be made in view of such revival, and that such orders are
therefore non est, and the present appeals cannot be regarded as
infructuous. He added that Section 22(1) of the Sick Industrial Companies
(Special Provisions) Act, 1985 would automatically come into play to
protect the assets of the appellant No.1 company. He also submitted before
us, that in any case, regard being had to the object of the Sick Industrial
Companies (Special Provisions) Act, 1985, it would override the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002. For this purpose, he relied on a judgment by
this Court in KSL & Industries Ltd. v. Arihant Threads Ltd., (2015) 1 SCC
166, which held that the Sick Industrial Companies (Special Provisions)
Act, 1985 has overridden the Recovery Of Debts Due To Banks And Financial
Institutions Act, 1993. The said Act, being a predecessor to the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002, and dealing with the same subject matter as
the Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 – namely, recovery of debts due to banks and
financial institutions, would lead to the conclusion that the 2002 Act is
also overridden. He further contended that Section 37 of the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 expressly refers to the Recovery Of Debts Due To Banks And
Financial Institutions Act, 1993, and since Section 34(2) of the Recovery
Of Debts Due To Banks And Financial Institutions Act, 1993, refers to the
Sick Industrial Companies (Special Provisions) Act, 1985, Section 37 of the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 should also be construed so as to include a
reference to the Sick Industrial Companies (Special Provisions) Act, 1985.
His further contention is that on a true construction of Section 15(1)
proviso 3 of the Sick Industrial Companies (Special Provisions) Act, 1985,
the Orissa High Court is correct and that since the expression “reference”
would only include the initial stage of filing and registration of a
reference before the BIFR, such stage having gone long ago, the proceedings
before BIFR are very much alive and have not abated.
11. Shri C.A. Sundaram, learned senior counsel, appearing on behalf of
M/s Alchemist Asset Reconstruction Company Limited, which is substituted in
place of respondent Nos.2,3,4,6 and 9, has submitted that the effect of the
interim order dated 7.1.2004 does not revive the reference of the appellant
No.1 company before BIFR. For this purpose he relied upon Shree Chamundi
Mopeds Ltd. v. Church of South India Trust Assn., (1992) 3 SCC 1. He also
submitted that in any event the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 would
override the provisions of the Sick Industrial Companies (Special
Provisions) Act, 1985, so that even if the stay order dated 7.1.2004 had
the effect of reviving the reference, that in itself would not restrain the
secured creditors from proceeding under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002, nor would it render the winding up order passed by Bombay High
Court non est. He also submitted that a large number of judgments of
various High Courts have taken the view which is taken in the impugned
judgment, and that the expression “reference” would include all stages of a
proceeding under the Sick Industrial Companies (Special Provisions) Act,
1985 including the stage of operation of a scheme. For this purpose, in
particular, he relied heavily on a full bench decision of the Madras High
Court in M/s. Salem Textiles Limited v. The Authorized Officer and Ors.,
reported in AIR 2013 Madras 229. He also argued that since the Recovery Of
Debts Due To Banks And Financial Institutions Act, 1993 expressly named the
Sick Industrial Companies (Special Provisions) Act, 1985 in Section 34(2),
the Sick Industrial Companies (Special Provisions) Act, 1985 obviously
overrode that Act. What is significant is that the corresponding section,
namely, Section 37 of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002, expressly omits any
reference to the Sick Industrial Companies (Special Provisions) Act, 1985,
making it clear that the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 would prevail over
the Sick Industrial Companies (Special Provisions) Act, 1985. That being
the case, he argued that this Court’s judgment in KSL & Industries Ltd. Vs.
Arihant Threads Ltd., (2015) 1 SCC 166, is, therefore, clearly
distinguishable. He also argued that at the end of the day, since the
movable property of the appellant No.1 company had been sold off, and since
various High Courts – including Bombay and Madras – have passed a number of
orders, both winding up the company and dismissing petitions challenging
the action of his client in proceedings under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002, all that remains is sale of the immovable property of the
appellant No.1 Company and that, therefore, nothing really remains in these
appeals, which have become infructuous.
Discussion:-
12. The arguments of counsel have been wide ranging, but at the end of
the day various Sections of three statutes have to be interpreted by this
Court. Before embarking on a consideration of the arguments and the
interpretation of these provisions, it will be important to first set them
out.
THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985
“Section 15. Reference to Board
When 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:
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 sub-section (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.
Section 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
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 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 of the contracts, assurance 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 adoptions 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.
Section 32. Effect of the Act on other laws
(1) The provisions of this Act and of any rules or schemes made thereunder
shall have effect notwithstanding anything inconsistent therewith contained
in any other law except the provisions of the Foreign Exchange Regulation
Act, 1973 (46 of 1973) and the Urban Land (Ceiling and Regulation) Act,
1976 (33 of 1976) for the time being in force or in the Memorandum or
Articles of Association of an industrial company or in any other instrument
having effect by virtue of any law other than this Act.
(2) Where there has been under any scheme under this Act an amalgamation of
a sick industrial company with another company, the provisions of section
72A of the Income-tax Act, 1961 (43 of 1961), shall, subject to the
modifications that the power of the Central Government under that section
may be exercised by the Board without the Central Government under that
section may be exercised by the Board without any recommendation by the
specified authority referred to in that section, apply in relation to such
amalgamation as they apply in relation to the amalgamation of a company
owning an industrial undertaking with another company.
The Recovery Of Debts Due To Banks And Financial Institutions Act, 1993
Section 17. Jurisdiction, powers and authority of Tribunals.
(1) A Tribunal shall exercise, on and from the appointed day, the
jurisdiction, powers and authority to entertain and decide applications
from the banks and financial institutions for recovery of debts due to such
banks and financial institutions.
(2) An Appellate Tribunal shall exercise, on and from the appointed day,
the jurisdiction, powers and authority to entertain appeals against any
order made, or deemed to have been made, by a Tribunal under this Act.
Section 18. Bar of Jurisdiction.
On and from the appointed day, no court or other authority shall have, or
be entitled to exercise, any jurisdiction, powers or authority (except the
Supreme Court, and a High Court exercising jurisdiction under articles 226
and 227 of the Constitution) in relation to the matters specified in
section 17.
34. Act to have over-riding effect.—
(1) Save as provided under sub- section (2), the provisions of this Act
shall have effect notwithstanding anything inconsistent therewith contained
in any other law for the time being in force or in any instrument having
effect by virtue of any law other than this Act.
(2) The provisions of this Act or the rules made thereunder shall be in
addition to, and not in derogation of, the Industrial Finance Corporation
Act, 1948 (15 of 1948), the State Financial Corporations Act, 1951 (63 of
1951), the Unit Trust of India Act, 1963 (52 of 1963), the Industrial
Reconstruction Bank of India Act, 1984 (62 of 1984), the Sick Industrial
Companies (Special Provisions) Act, 1985 (1 of 1986) and the Small
Industries Development Bank of India Act, 1989 (39 of 1989).
The Securitisation And Reconstruction Of Financial Assets And Enforcement
Of Security Interest Act, 2002
Section 13. Enforcement of security interest
(1) Notwithstanding anything contained in section 69 or section 69A of the
Transfer of Property Act, 1882 (4 of 1882), any security interest created
in favour of any secured creditor may be enforced, without the intervention
of court or tribunal, by such creditor in accordance with the provisions of
this Act.
(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 sub- section (4).
(3) The notice referred to in sub-section (2) shall give details of the
amount payable by the borrower and the secured assets intended to be
enforced by the secured creditor in the event of non-payment of secured
debts by the borrower.
(3A) If, on receipt of the notice under sub-section (2), the borrower makes
any representation or raises any objection, the secured creditor shall
consider such representation or objection and if the secured creditor comes
to the conclusion that such representation or objection is not acceptable
or tenable, he shall communicate within one week of receipt of such
representation or objection the reasons for non-acceptance of the
representation or objection to the borrower: PROVIDED that the reasons so
communicated or the likely action of the secured creditor at the stage of
communication of reasons shall not confer any right upon the borrower to
prefer an application to the Debts Recovery Tribunal under section 17 or
the Court of District Judge under section 17A.
(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 measures 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) Any payment made by any person referred to in clause (d) of sub-section
(4) to the secured creditor shall give such person a valid discharge as if
he has made payment to the borrower.
(5A) Where the sale of an immovable property, for which a reserve price has
been specified, has been postponed for want of a bid of an amount not less
than such reserve price, it shall be lawful for any officer of the secured
creditor, if so authorised by the secured creditor in this behalf, to bid
for the immovable property on behalf of the secured creditor at any
subsequent sale.
(5B) Where the secured creditor, referred to in sub-section (5A), is
declared to be the purchaser of the immovable property at any subsequent
sale, the amount of the purchase price shall be adjusted towards the amount
of the claim of the secured creditor for which the auction of enforcement
of security interest is taken by the secured creditor, under sub-section
(4) of section 13.
(5C) The provisions of section 9 of the Banking Regulation Act, 1949(10 of
1949) shall, as far as may be, apply to the immovable property acquired by
secured creditor under sub-section (5A).]
(6) Any transfer of secured asset after taking possession thereof or take
over of management under sub-section (4), by the secured creditor or by the
manager on behalf of the secured creditor shall vest in the transferee all
rights in, or in relation to, the secured asset transferred as if the
transfer had been made by the owner of such secured asset.
(7) Where any action has been taken against a borrower under the provisions
of sub-section (4), all costs, charges and expenses which, in the opinion
of the secured creditor, have been properly incurred by him or any expenses
incidental thereto, shall be recoverable from the borrower and the money
which is received by the secured creditor shall, in the absence of any
contract to the contrary, be held by him in trust, to be applied, firstly,
in payment of such costs, charges and expenses and secondly, in discharge
of the dues of the secured creditor and the residue of the money so
received shall be paid to the person entitled thereto in accordance with
his rights and interests.
(8) If the dues of the secured creditor together with all costs, charges
and expenses incurred by him are tendered to the secured creditor at any
time before the date fixed for sale or transfer, the secured asset shall
not be sold or transferred by the secured creditor, and no further step
shall be taken by him for transfer or sale of that secured asset.
(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 sub-section (4) unless exercise of
such right is agreed upon by the secured creditors representing not less
than sixty per cent 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 sub-section (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.
(10) Where dues of the secured creditor are not fully satisfied with the
sale proceeds of the secured assets, the secured creditor may file an
application in the form and manner as may be prescribed to the Debts
Recovery Tribunal having jurisdiction or a competent court, as the case may
be, for recovery of the balance amount from the borrower.
(11) Without prejudice to the rights conferred on the secured creditor
under or by this section, the secured creditor shall be entitled to proceed
against the guarantors or sell the pledged assets without first taking any
of the measures specified in clauses (a) to (d) of sub-section (4) in
relation to the secured assets under this Act.
(12) The rights of a secured creditor under this Act may be exercised by
one or more of his officers authorised in this behalf in such manner as may
be prescribed.
(13) No borrower shall, after receipt of notice referred to in sub-section
(2), transfer by way of sale, lease or otherwise (other than in the
ordinary course of his business) any of his secured assets referred to in
the notice, without prior written consent of the secured creditor.
Section 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 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.
Section 41. Amendments of certain enactments
The enactments specified in the Schedule shall be amended in the manner
specified therein.”
THE SCHEDULE
(Section 41)
|Year |Act No. |Short title | Amendment |
|1956 |1 |The Companies Act |In section 4A in |
| | |1956 |sub-section (1) after |
| | | |clause (vi) insert the |
| | | |following:-- "(vii) the |
| | | |securitisation company or |
| | | |the reconstruction company |
| | | |which has obtained a |
| | | |certificate of registration|
| | | |under sub-section (4) of |
| | | |section 3 of the |
| | | |Securitisation and |
| | | |Reconstruction of Financial|
| | | |Assets and Enforcement of |
| | | |Security Interest Act |
| | | |2002". |
|1956 |42 |The Securities |In section 2 in clause (h) |
| | |Contracts |after sub-clause (ib) |
| | |(Regulation) Act |insert the following:-- " |
| | |1956 |(ic) security receipt as |
| | | |defined in clause (zg) of |
| | | |section 2 of the |
| | | |Securitisation and |
| | | |Reconstruction of Financial|
| | | |Assets and Enforcement of |
| | | |Security Interest Act |
| | | |2002". |
|1986 |1 |The Sick |In section 15 in |
| | |Industrial |sub-section (1) after the |
| | |Companies (Special|proviso insert the |
| | |Provisions) Act |following:-- "PROVIDED |
| | |1985 |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 sub-section (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." |
13. It is important at this stage to refer to the genesis of these three
legislations. Each of them deals with different aspects of recovery of
debts due to banks and financial institutions. Two of them refer to
creditors’ interests and how best to deal with recovery of outstanding
loans and advances made by them on the one hand, whereas the Sick
Industrial Companies (Special Provisions) Act, 1985, on the other hand,
deals with certain debtors which are sick industrial companies (i.e.
companies running industries named in the schedule to the Industries
(Development and Regulation) Act, 1951) and whether such “debtors” having
become “sick”, are to be rehabilitated. The question, therefore, is
whether the public interest in recovering debts due to banks and financial
institutions is to give way to the public interest in rehabilitation of
sick industrial companies, regard being had to the present economic
scenario in the country, as reflected in Parliamentary Legislation.
14. We begin, first, with the Sick Industrial Companies (Special
Provisions) Act, 1985. The Statement of Objects and Reasons for this Act
reads as under:
“THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985
STATEMENT OF OBJECTS AND REASONS
The ill effects of sickness in industrial companies such as loss of
production, loss of employment, loss of revenue to the Central and State
Governments and locking up of investible funds and financial institutions
are of serious concern to the Government and the society at large. The
concern of the Government is accentuated by the alarming increase in the
incidence of sickness in industrial companies. It has been recognized that
in order to fully utilize the productive industrial assets, afford maximum
protection of employment and optimize the use of the funds of the banks and
financial institutions, it would be imperative to revive and rehabilitate
the potentially viable sick industrial companies as quickly as possible.
It would also be equally imperative to salvage the productive assets and
realize the amounts due to the banks and financial institutions, to the
extent possible, from the non-viable sick industrial companies through
liquidation of those companies.
It has been the experience that the existing institutional
arrangements and procedures for revival and rehabilitation of potentially
viable sick industrial companies are both inadequate and time-consuming. A
multiplicity of laws and agencies makes the adoption of coordinated
approach for dealing with sick industrial companies difficult. A need has,
therefore, been felt to enact in public interest a legislation to provide
for timely determination by a body of experts of the preventive,
ameliorative, remedial and other measures that would need to be adopted
with respect to such companies and for enforcement of the measures
considered appropriate with utmost practicable despatch.
The salient features of the Bill are-
application of the legislation to the industries specified in the First
Schedule to the Industries (Development and Regulation) Act, 1951, with the
initial exception of the scheduled industry relating to ships and other
vessels drawn by power, which may however be brought within the ambit of
the legislation in due course;
Identification of sickness in an industrial company, registered for not
less than seven years, on the basis of the symptomatic indices of cash
losses for two consecutive financial years and accumulated losses equalling
or exceeding the net worth of the company as at the end of the second
financial year;
the onus of reporting sickness and impending sickness at the stage of
erosion of fifty per cent. or more of the net worth of an industrial
company is being laid on the Board of Directors of such company; where the
Central Government or the Reserve Bank is satisfied that an industrial
company has become sick, it may make a reference to the Board, likewise if
any State Government, scheduled bank or public financial institution having
an interest in an industrial company is satisfied that the industrial
company has become sick, it may also make a reference to the Board;
establishment of Board consisting of experts in various relevant fields
with powers to enquire into and determine the incidence of sickness in
industrial companies and devise suitable remedial measures through
appropriate schemes or other proposals and for proper implementation
thereof;
constitution of an Appellate Authority consisting of persons who are or
have been Supreme Court Judges, senior High Court Judges and Secretaries to
the Government of India, etc., for hearing appeals against the order of the
Board.”
15. A cursory reading of the Act shows that a Board for Industrial and
Financial Reconstruction is set up by the Act, before which references are
made. Such references can be made under Section 15 of the Act, not only by
an industrial company as defined, which, as has been stated above, is a
company which runs any of the industries specified in the first schedule to
the Industries (Development and Regulation) Act, 1951, but also by the
Central or State Government, or public financial institution, or State
level institution, or a scheduled bank, as the case may be. Such reference
can only be made if the company concerned has turned sick i.e. it has to be
a company running an industry mentioned in the first schedule to the
Industries (Development and Regulation) Act, 1951, and must be a
company registered for not less than 5 years, which has at the end
of any financial year accumulated losses equal to or exceeding its entire
net worth. An inquiry into the working of such “sick industrial company”
is to be made by the said Board on receipt of a reference or upon
application or suo motu. If the Board is satisfied that the Company has
indeed become a sick industrial company, the Board shall decide as to
whether it is practicable for the Company to make its net worth positive
within a reasonable time. This it may do under Section 17 of the Act, by
order under sub-section (2) of Section 17. If this is not possible, then
the Board may appoint an Operating Agency who will prepare a scheme for
rehabilitation mentioned in Section 18 which the Board may then sanction.
The scheme may provide for all or any of the things mentioned in the said
Section, and finally, the scheme may work successfully, resulting in the
Company’s net worth turning positive, or may be unsuccessful. In the event
of it being unsuccessful, the Board may modify such scheme or ask for the
preparation of a new scheme. If, at the end of the day, the first scheme
or any successive schemes ultimately fail, the Board has then to be of the
opinion that such Company is not likely to make its net worth positive, and
that therefore it is to forward its opinion under Section 20 of the Act to
the concerned High Court to proceed with the winding up of the said
company. Section 22, which is of crucial importance in the working of the
Act, suspends various legal proceedings, contracts etc., while a reference
before the Board is pending, for the duration of the inquiry to be made
and/or scheme prepared and finally sanctioned, and for the entire period of
the working of the said scheme. Both Section 22(1) and (4) contain non
obstante clauses overriding inter alia the Companies Act and any other law.
In order to better implement the provisions of this Act, Section 32 also
contains a non obstante clause overriding all other laws including
Memoranda and Articles of Association of the industrial company or any
other instrument having effect by virtue of any other law, except the
Foreign Exchange Regulation Act of 1973 and The Urban Land (Ceiling and
Regulation) Act, 1976.
16. While this Act had worked for a period of about 7 years, the Recovery
of Debts Due to Banks and Financial Institutions Act, 1993 was brought
into force, pursuant to various Committee reports. The Statement of
Objects and Reasons for this Act reads as follows:-
“STATEMENT OF OBJECTS AND REASONS OF THE RECOVERY OF DEBTS DUE TO BANKS AND
FINANCIAL INSTITUTIONS ACT, 1993
Banks and financial institutions at present experience considerable
difficulties in recovering loans and enforcement of securities charged with
them. The existing procedure for recovery of debts due to the banks and
financial institutions has blocked a significant portion of their funds in
unproductive assets, the value of which deteriorates with the passage of
time. The Committee on the Financial System headed by Shri M. Narasimham
has considered the setting up of the Special Tribunals with special powers
for adjudication of such matters and speedy recovery as critical to the
successful implementation of the financial sector reforms. An urgent need
was, therefore, felt to work out a suitable mechanism through which the
dues to the banks and financial institutions could be realized without
delay. In 1981, a Committee under the Chairmanship of Shri T. Tiwari had
examined the legal and other difficulties faced by banks and financial
institutions and suggested remedial measures including changes in law. The
Tiwari Committee had also suggested setting up of Special Tribunals for
recovery of dues of the banks and financial institutions by following a
summary procedure. The setting up of Special Tribunals will not only
fulfill a long-felt need, but also will be an important step in the
implementation of the Report of Narasimham Committee. Whereas on 30th
September, 1990 more than fifteen lakhs of cases filed by the public sector
banks and about 304 cases filed by the financial institutions were pending
in various courts, recovery of debts involved more than Rs.5622 crores in
dues of Public Sector Banks and about Rs.391 crores of dues of the
financial institutions. The locking up of such huge amount of public money
in litigation prevents proper utilisation and recycling of the funds for
the development of the country.
The Bill seeks to provide for the establishment of Tribunal and Appellate
Tribunals for expeditious adjudication and recovery of debts due to banks
and financial institutions. Notes on clauses explain in detail the
provisions of the Bill.”
17. The Recovery Of Debts Due To Banks And Financial Institutions Act,
1993 took away the jurisdiction of the courts and vested this jurisdiction
in tribunals established by the Act so as to ensure speedy recovery of
debts due to the banks and financial institutions mentioned therein. This
Act also included one appeal to the Appellate Tribunal, and transfer of all
suits or other proceedings pending before any court to tribunals set up
under the Act. The Act contained a non obstante clause in Section 34
stating that its provisions will have effect notwithstanding anything
inconsistent contained in any other law for the time being in force or in
any instrument having effect by virtue of any other law. In the year 2000,
this Act was amended so as to incorporate a new sub-section (2) in Section
34 together with a saving provision in sub-section (1). It is of some
interest to note that this Act was to be in addition to and not in
derogation of various Financial Corporation Acts and the Sick Industrial
Companies (Special Provisions) Act, 1985. Clearly, therefore, the object
of the 2000 amendment to the Recovery of Debts due to Banks and Financial
Institutions Act, 1993 was to make The Sick Industrial Companies (Special
Provisions) Act, 1985 prevail over it.
18. Regard being had to the poor working of the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993, the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 was brought into force in the year 2002. The statement
of objects and reasons for this Act reads as under:-
“STATEMENT OF OBJECTS AND REASONS OF THE SECURITISATION AND RECONSTRUCTION
OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002
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
nonperforming 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 the 21st June, 2002 to
regulate securitisition 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 nonperforming
assets by adopting measures for recovery or reconstruction.
2. It is now proposed to replace the Ordinance by a Bill, which, inter
alia, contains provisions of the Ordinance to provide for—
(a) registration and regulation of securitisation companies or
reconstruction companies by the Reserve Bank of India;
(b) facilitating securitisation of financial assets of banks and financial
institutions with or without the benefit of underlying securities;
(c) facilitating easy transferability of financial assets by the
securitisation company or reconstruction company to acquire financial
assets of banks and financial institutions by issue of debentures or bonds
or any other security in the nature of a debenture;
(d) empowering securitisation companies' or reconstruction companies to
raise funds by issue of security receipts to qualified institutional
buyers;
(e) facilitating reconstruction of financial assets acquired by exercising
powers of enforcement of securities or change of management or other powers
which are proposed to be conferred on the banks and financial institutions;
(f) declaration of any securitisation company or reconstruction company
registered with the Reserve Bank of India as a public financial institution
for the purpose of section 4A of the Companies Act, 1956;
(g) defining 'security interest' as any type of security including mortgage
and change on immovable properties given for due repayment of any financial
assistance given by any bank or financial institution;
(h) empowering banks and financial institutions to take possession of
securities given for financial assistance and sell or lease the same or
take over management in the event of default, i.e. classification of the
borrower's account as non-performing asset in accordance with the
directions given or under guidelines issued by the Reserve Bank of India
from time to time;
(i) the rights of a secured creditor to be exercised by one or more of its
officers authorised in this behalf in accordance with the rules made by the
Central Government;
(j) an appeal against the action of any bank or financial institution to
the concerned Debts Recovery Tribunal and a second appeal to the Appellate
Debts Recovery Tribunal;
(k) setting up or causing to be set up a Central Registry by the Central
Government for the purpose of registration of transactions relating to
securitisation, asset reconstruction and creation of security interest;
(l) application of the proposed legislation initially to banks and
financial institutions and empowerment of the Central Government to extend
the application of the proposed legislation to non-banking financial
companies and other entities;
(m) non-application of the proposed legislation to security interests in
agricultural lands, loans not exceeding rupees one lakh and cases where
eighty per cent, of the loans are repaid by the borrower.
3. The Bill seeks to achieve the above objects.”
19. This Act was brought into force as a result of two committee reports
which opined that recovery of debts due to banks and financial institutions
was not moving as speedily as expected, and that, therefore, certain other
measures would have to be put in place in order that these banks and
financial institutions would better be able to recover debts owing to them.
20. In a challenge made to the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 in Mardia
Chemicals Ltd. Etc. v. Union of India (UOI) and Ors. Etc. Etc., (2004) 4
SCC 311, this Court went into the circumstances under which the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 was enacted, as follows:-
“Some facts which need to be taken note of are that the banks and the
financial institutions have heavily financed the petitioners and other
industries. It is also a fact that a large sum of amount remains
unrecovered. Normal process of recovery of debts through courts is lengthy
and time taken is not suited for recovery of such dues. For financial
assistance rendered to the industries by the financial institutions,
financial liquidity is essential failing which there is a blockade of large
sums of amounts creating circumstances which retard the economic progress
followed by a large number of other consequential ill effects. Considering
all these circumstances, the Recovery of Debts Due to Banks and Financial
Institutions Act was enacted in 1993 but as the figures show it also did
not bring the desired results. Though it is submitted on behalf of the
petitioners that it so happened due to inaction on the part of the
Governments in creating Debts Recovery Tribunals and appointing presiding
officers, for a long time. Even after leaving that margin, it is to be
noted that things in the spheres concerned are desired to move faster. In
the present-day global economy it may be difficult to stick to old and
conventional methods of financing and recovery of dues. Hence, in our view,
it cannot be said that a step taken towards securitisation of the debts and
to evolve means for faster recovery of NPAs was not called for or that it
was superimposition of undesired law since one legislation was already
operating in the field, namely, the Recovery of Debts Due to Banks and
Financial Institutions Act. It is also to be noted that the idea has not
erupted abruptly to resort to such a legislation. It appears that a thought
was given to the problems and the Narasimham Committee was constituted
which recommended for such a legislation keeping in view the changing times
and economic situation whereafter yet another Expert Committee was
constituted, then alone the impugned law was enacted. Liquidity of finances
and flow of money is essential for any healthy and growth-oriented economy.
But certainly, what must be kept in mind is that the law should not be in
derogation of the rights which are guaranteed to the people under the
Constitution. The procedure should also be fair, reasonable and valid,
though it may vary looking to the different situations needed to be tackled
and object sought to be achieved.
In its Second Report, the Narasimham Committee observed that NPAs in 1992
were uncomfortably high for most of the public sector banks. In Chapter
VIII of the Second Report the Narasimham Committee deals about legal and
legislative framework and observed:
“8.1. A legal framework that clearly defines the rights and liabilities of
parties to contracts and provides for speedy resolution of disputes is a
sine qua non for efficient trade and commerce, especially for financial
intermediation. In our system, the evolution of the legal framework has not
kept pace with changing commercial practice and with the financial sector
reforms. As a result, the economy has not been able to reap the full
benefits of the reforms process. As an illustration, we could look at the
scheme of mortgage in the Transfer of Property Act, which is critical to
the work of financial intermediaries….”
One of the measures recommended in the circumstances was to vest the
financial institutions through special statutes, the power of sale of the
assets without intervention of the court and for reconstruction of assets.
It is thus to be seen that the question of non-recoverable or delayed
recovery of debts advanced by the banks or financial institutions has been
attracting attention and the matter was considered in depth by the
Committees specially constituted consisting of the experts in the field. In
the prevalent situation where the amounts of dues are huge and hope of
early recovery is less, it cannot be said that a more effective legislation
for the purpose was uncalled for or that it could not be resorted to. It is
again to be noted that after the Report of the Narasimham Committee, yet
another Committee was constituted headed by Mr. Andhyarujina for bringing
about the needed steps within the legal framework. We are therefore, unable
to find much substance in the submission made on behalf of the petitioners
that while the Recovery of Debts Due to Banks and Financial Institutions
Act was in operation it was uncalled for to have yet another legislation
for the recovery of the mounting dues. Considering the totality of
circumstances and the financial climate world over, if it was thought as a
matter of policy to have yet speedier legal method to recover the dues,
such a policy decision cannot be faulted with nor is it a matter to be gone
into by the courts to test the legitimacy of such a measure relating to
financial policy.
We may now consider the main enforcing provision which is pivotal to the
whole controversy, namely, Section 13 in Chapter III of the Act. It
provides that a secured creditor may enforce any security interest without
intervention of the court or tribunal irrespective of Section 69 or Section
69-A of the Transfer of Property Act where according to sub-section (2) of
Section 13, the borrower is a defaulter in repayment of the secured debt or
any instalment of repayment and further the debt standing against him has
been classified as a non-performing asset by the secured creditor. Sub-
section (2) of Section 13 further provides that before taking any steps in
the direction of realizing the dues, the secured creditor must serve a
notice in writing to the borrower requiring him to discharge the
liabilities within a period of 60 days failing which the secured creditor
would be entitled to take any of the measures as provided in sub-section
(4) of Section 13. It may also be noted that as per sub-section (3) of
Section 13 a notice given to the borrower must contain the details of the
amounts payable and the secured assets against which the secured creditor
proposes to proceed in the event of non-compliance with the notice given
under sub-section (2) of Section 13.” [at para 34,36 and 38]
21. The “pivotal” provision namely Section 13 of the said Act makes it
clear that banks and financial institutions would now no longer have to
wait for a Tribunal judgment under the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993 to be able to recover debts owing to them.
They could, by following the procedure laid down in Section 13, take
direct action against the debtors by taking possession of secured assets
and selling them; they could also take over the management of the business
of the borrower. They could also appoint any person to manage the secured
assets possession of which has been taken over by them, and could require,
at any time by notice in writing to any person who has acquired any of the
secured assets from the borrower and from whom any money is due or may
become due from the borrower, to pay the secured creditor so much of the
money as is sufficient to pay the secured debt.
22. In order to further the objects of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002, the Act contains a non obstante clause in Section 35 and also
contains various Acts in Section 37 which are to be in addition to and not
in derogation of the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002. Three of these Acts,
namely, the Companies Act, 1956, the Securities Contracts (Regulation) Act,
1956 and the Securities and Exchange Board of India Act, 1992, relate to
securities generally, whereas the Recovery Of Debts Due To Banks And
Financial Institutions Act, 1993 relates to recovery of debts due to banks
and financial institutions. Significantly, under Section 41 of this Act,
three Acts are, by the schedule to this Act, amended. We are concerned
with the third of such Acts, namely, the Sick Industrial Companies (Special
Provisions) Act, 1985, in Section 15(1) of which two provisos have been
added. It is the correct interpretation of the second of these provisos on
which the fate of these appeals ultimately hangs.
23. It is in this background that we need to embark on the next step,
namely, to consider the following two questions which arise on the facts of
this case:
(1) Whether the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 prevails over the Sick
Industrial Companies (Special Provisions) Act, 1985; and
(2) Whether the expression “where a reference is pending” in Section 15
(1) proviso 3 of the Sick Industrial Companies (Special Provisions) Act,
1985 would include all proceedings before the BIFR or only proceedings at
the initial reference stage.
24. The occasion for answering question no. 1 is Shri Sreekumar’s
argument that the effect of the Delhi High Court’s stay order dated
7.1.2004 is that the reference before the BIFR springs back into life, and
with it Section 22(1) of the Sick Industrial Companies (Special Provisions)
Act, 1985. It is also occasioned by a further argument that the winding
up order passed by the Bombay High Court dated 30.8.2007 being in the teeth
of the stay order and Section 22 of the Sick Industrial Companies (Special
Provisions) Act, 1985, is non est and therefore the appeals before this
Court have not become infructuous. If Shri C.N. Sreekumar is right, then
after enactment of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002, because of the
presence of Section 22(1) of the Sick Industrial Companies (Special
Provisions) Act, 1985, none of the measures taken by the secured creditors
under Section 13 of Securitisation Act can be proceeded with because of the
bar contained in Section 22(1) of the Sick Industrial Companies (Special
Provisions) Act, 1985. Hence, we have first to determine whether the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 overrides Section 22 of the Sick Industrial
Companies (Special Provisions) Act, 1985 as such overriding is only to the
extent of the inconsistency between the two enactments. Such
inconsistency is found in Section 22(1) of the Sick Industrial Companies
(Special Provisions) Act, 1985, by which any action taken to realize debts
owing to the secured creditors of sick industrial companies cannot be
proceeded with under the 2002 Act unless the BIFR accords permission under
Section 22(1) of the Sick Industrial Companies (Special Provisions) Act,
1985.
25. It is now necessary to undertake a survey of the case law laid down
by this court in relation to the Sick Industrial Companies (Special
Provisions) Act, 1985 and its relation with other enactments. In an early
judgment, namely, Maharashtra Tubes Ltd. v. State Industrial And
Investment, (1993) 2 SCC 144, this Court had to deal with the Sick
Industrial Companies (Special Provisions) Act, 1985, vis-à-vis the State
Financial Corporations Act, 1951. In paragraph 9 of the judgment it was
held that both Acts were special Acts, the 1951 Act dealing with the
recovery of debts of a company pre-sickness and the 1985 Act dealing with
such recovery post-sickness. Since both the Acts contained non obstante
clauses, it was held that the 1985 Act, being later in point of time, would
prevail over the 1951 Act.
26. On the other hand, in Solidaire India Ltd. v. Fairgrowth Financial
Services Ltd. and Ors., (2001) 3 SCC 71, it was the Special Courts (Trial
of Offences Relating to Transactions in Securities), Act, 1992 which came
up for consideration vis-à-vis the Sick Industrial Companies (Special
Provisions) Act, 1985. In paragraphs 9 and 10 of this Court’s judgment,
this Court noted that both Acts were special Acts. In a significant extract
from a Special Court judgment, which was approved by this Court, it was
stated that The Special Courts Act, 1992, being a later enactment and also
containing a non obstante clause, would prevail over the Sick Industrial
Companies (Special Provisions) Act, 1985. Had the legislature wanted to
exclude the provisions of the Sick Industrial Companies (Special
Provisions) Act, 1985, from the ambit of the said Act, the legislature
would specifically have so provided (Emphasis ours). The fact that the
legislature did not specifically so provide necessarily means that the
legislature intended that the provisions of the said Act were to prevail
over the provisions of the Sick Industrial Companies (Special Provisions)
Act, 1985. In short, when property of notified persons under the Special
Courts Act, 1992 stands attached, it is only the Special Court which can
give directions to the custodian under the said Act as to disposal of such
property of a notified party. The legislature expressly overrode Section
22 of the Sick Industrial Companies (Special Provisions) Act, 1985 and
permitted the custodian to give directions under Section 11 of the Special
Courts Act, 1979, notwithstanding Section 22 of the Sick Industrial
Companies (Special Provisions) Act, 1985.
27. In Jay Engineering Works Ltd. v. Industry Facilitation Council and
Anr., (2006) 8 SCC 677, this time this Court had to deal with the Interest
on Delayed Payment to Small Scale and Ancillary Industrial Undertakings
Act, 1993 vis-à-vis the Sick Industrial Companies (Special Provisions) Act,
1985. Both Acts contained non obstante clauses. This Court referred to
the 1994 amendment to the Sick Industrial Companies (Special Provisions)
Act, 1985 and stated that the amending Act being later than the 1993 Act,
the Sick Industrial Companies (Special Provisions) Act, 1985 would,
therefore, prevail. (See paragraph 27).
28. Similarly, in Morgan Securities and Credit Pvt. Ltd. v. Modi Rubber
Ltd., (2006) 12 SCC 642, the Arbitration and Conciliation Act, 1996
contained a non obstante clause in Section 5 thereof. Despite this being a
later Act, vis-à-vis the Sick Industrial Companies (Special Provisions)
Act, 1985, this Court held that the Sick Industrial Companies (Special
Provisions) Act, 1985 would prevail, inasmuch as the non obstante clause
contained in the Arbitration and Conciliation Act, 1996 had only a limited
application - it applied only insofar as the extent of judicial
intervention in arbitration proceedings is concerned. (See paragraph nos.
66 and 68).
29. In an interesting concurring judgment, Balasubramanyan,J., in
paragraph 76 held:
“Occasions are not infrequent when not so scrupulous debtors approach
B.I.F.R. to stall the proceedings and to keep their creditors at bay. The
delay before the B.I.F.R. is sought to be taken advantage of. The
Parliament has apparently taken note of this and has repealed SICA by the
Sick Industrial Companies (Special Provisions) Repeal Act, 2003. The
vacuum, thus created has been filled by an amendment to the Companies Act.
But, so far, the provisions of the Amending Act and the Companies Act
introduced, have not been brought into force. It appears to be time to
consider whether these enactments should not be notified.”
30. Similarly, in Tata Motors Ltd. v. Pharmaceutical Products of India
Ltd. and Anr., (2008) 7 SCC 619, it was held, following the judgment in
NFEF Ltd. v. Chandra Developers (P) Ltd., (2005) 8 SCC 219, that the
Companies Act being a general enactment would have to give way to the Sick
Industrial Companies (Special Provisions) Act, 1985 which is a later and
special enactment. (see paragraphs 22 to 24).
31. And in Raheja Universal Limited v. NRC Limited and Ors., (2012) 4 SCC
148, the Transfer of Property Act,1882 had to yield to the Sick Industrial
Companies (Special Provisions) Act, 1985 being a general Act, as against
the Sick Industrial Companies (Special Provisions) Act, 1985 which was a
special Act, together with a reading of the non obstante clause contained
in the Sick Industrial Companies (Special Provisions) Act, 1985 (see
paragraphs 91 to 93).
32. In KSL & Industries Ltd. v. Arihant Threads Ltd., (2015) 1 SCC 166,
it was the turn of the Recovery Of Debts Due To Banks And Financial
Institutions Act, 1993 vis-à-vis the Sick Industrial Companies (Special
Provisions) Act, 1985. This Court in resolving the controversy in favour of
the Sick Industrial Companies (Special Provisions) Act, 1985 held:-
“Sub-section (2) was added to Section 34 of the RDDB Act w.e.f. 17-1-2000
by Act 1 of 2000. There is no doubt that when an Act provides, as here,
that its provisions shall be in addition to and not in derogation of
another law or laws, it means that the legislature intends that such an
enactment shall coexist along with the other Acts. It is clearly not the
intention of the legislature, in such a case, to annul or detract from the
provisions of other laws. The term “in derogation of” means “in abrogation
or repeal of”. The Black's Law Dictionary sets forth the following meaning
for “derogation”:
“derogation.—The partial repeal or abrogation of a law by a later Act that
limits its scope or impairs its utility and force.”
It is clear that sub-section (1) contains a non obstante clause, which
gives the overriding effect to the RDDB Act. Sub-section (2) acts in the
nature of an exception to such an overriding effect. It states that this
overriding effect is in relation to certain laws and that the RDDB Act
shall be in addition to and not in abrogation of, such laws. SICA is
undoubtedly one such law.
There is no doubt that both are special laws. SICA is a special law, which
deals with the reconstruction of sick companies and matters incidental
thereto, though it is general as regards other matters such as recovery of
debts. The RDDB Act is also a special law, which deals with the recovery of
money due to banks or financial institutions, through a special procedure,
though it may be general as regards other matters such as the
reconstruction of sick companies which it does not even specifically deal
with. Thus the purpose of the two laws is different.
Parliament must be deemed to have had knowledge of the earlier law i.e.
SICA, enacted in 1985, while enacting the RDDB Act, 1993. It is with a view
to prevent a clash of procedure, and the possibility of contradictory
orders in regard to the same entity and its properties, and in particular,
to preserve the steps already taken for reconstruction of a sick company in
relation to the properties of such sick company, which may be charged as
security with the banks or financial institutions, that Parliament has
specifically enacted sub-section (2). SICA had been enacted in respect of
specified and limited companies i.e. those which owned industrial
undertakings specified in the Schedule to the IDR Act, as mentioned
earlier, whereas the RDDB Act deals with all persons, who may have taken a
loan from a bank or a financial institution in cash or otherwise, whether
secured or unsecured, etc.
In view of the observations of this Court in the decisions referred to and
relied on by the learned counsel for the parties we find that, the purpose
of the two enactments is entirely different. As observed earlier, the
purpose of one is to provide ameliorative measures for reconstruction of
sick companies, and the purpose of the other is to provide for speedy
recovery of debts of banks and financial institutions. Both the Acts are
“special” in this sense. However, with reference to the specific purpose of
reconstruction of sick companies, SICA must be held to be a special law,
though it may be considered to be a general law in relation to the recovery
of debts. Whereas, the RDDB Act may be considered to be a special law in
relation to the recovery of debts and SICA may be considered to be a
general law in this regard. For this purpose we rely on the decision
in LIC v. Vijay Bahadur [(1981) 1 SCC 315 : 1981 SCC (L&S) 111] . Normally
the latter of the two would prevail on the principle that the legislature
was aware that it had enacted the earlier Act and yet chose to enact the
subsequent Act with a non obstante clause. In this case, however, the
express intendment of Parliament in the non obstante clause of the RDDB Act
does not permit us to take that view. Though the RDDB Act is the later
enactment, sub-section (2) of Section 34 thereof specifically provides that
the provisions of the Act or the Rules made thereunder shall be in addition
to, and not in derogation of, the other laws mentioned therein including
SICA.” [at paras 36, 39, 40, and 48]
33. A conspectus of the aforesaid decisions shows that the Sick
Industrial Companies (Special Provisions) Act, 1985 prevails in all
situations where there are earlier enactments with non obstante clauses
similar to the Sick Industrial Companies (Special Provisions) Act, 1985.
Where there are later enactments with similar non obstante clauses, the
Sick Industrial Companies (Special Provisions) Act, 1985 has been held to
prevail only in a situation where the reach of the non obstante clause in
the later Act is limited – such as in the case of the Arbitration and
Conciliation Act, 1996 – or in the case of the later Act expressly yielding
to the Sick Industrial Companies (Special Provisions) Act, 1985, as in the
case of the Recovery Of Debts Due To Banks And Financial Institutions Act,
1993. Where such is not the case, as in the case of Special Courts Act,
1992, it is the Special Courts Act, 1992 which was held to prevail over the
Sick Industrial Companies (Special Provisions) Act, 1985.
34. We have now to undertake an analysis of the Acts in question. The
first thing to be noticed is the difference between Section 37 of the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 and Section 34 of the Recovery Of Debts Due To
Banks And Financial Institutions Act, 1993. Section 37 of the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 does not include the Sick Industrial Companies
(Special Provisions) Act, 1985 unlike Section 34(2) of the Recovery of
Debts Due To Banks and Financial Institutions Act, 1993. Section 37 of the
Securities and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 states that the said Act shall be in addition
to and not in derogation of four Acts, namely, the Companies Act, the
Securities Contracts (Regulation) Act, 1956, the Securities and Exchange
Board of India Act, 1992 and the Recovery Of Debts Due To Banks And
Financial Institutions Act, 1993. It is clear that the first three Acts
deal with securities generally and the Recovery Of Debts Due To Banks And
Financial Institutions Act, 1993 deals with recovery of debts due to banks
and financial institutions. Interestingly, Section 41 of the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 makes amendments in three Acts – the Companies
Act, the Securities Contracts (Regulation) Act, 1956, and the Sick
Industrial Companies (Special Provisions) Act, 1985. It is of great
significance that only the first two Acts are included in Section 37 and
not the third i.e. the Sick Industrial Companies (Special Provisions) Act,
1985. This is for the obvious reason that the framers of the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 intended that the Sick Industrial Companies (Special Provisions)
Act, 1985 be covered by the non obstante clause contained in Section 35,
and not by the exception thereto carved out by Section 37. Further,
whereas the Recovery of Debts Due to Banks and Financial Institutions Act,
1993 is expressly mentioned in Section 37, the Sick Industrial Companies
(Special Provisions) Act, 1985 is not, making the above position further
clear. And this is in stark contrast, as has been stated above, to Section
34(2) of the Recovery of Debts Due to Banks and Financial Institutions Act,
1993, which expressly included the Sick Industrial Companies (Special
Provisions) Act, 1985. The new legislative scheme qua recovery of debts
contained in the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 has therefore to be given
precedence over the Sick Industrial Companies (Special Provisions) Act,
1985, unlike the old scheme for recovery of debts contained in the Recovery
of Debts Due to Banks and Financial Institutions Act, 1993.
35. Another interesting pointer to the same conclusion is the fact that
Section 35 of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 is not made subject to Section
37 of the said Act. This statutory scheme is at complete variance with the
statutory scheme contained in Section 34 of the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993 in which sub-section (1) of
Section 34 containing the non obstante clause is expressly made subject to
sub-section (2) (containing the Sick Industrial Companies (Special
Provisions) Act, 1985) by the expression “save as provided under sub-
section (2)”.
36. This is what then brings us to the doctrine of harmonious
construction, which is one of the paramount doctrines that is applied in
interpreting all statutes. Since neither Section 35 nor Section 37
of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 is subject to the other, we
think it is necessary to interpret the expression “or any other law for the
time being in force” in Section 37. If a literal meaning is given to the
said expression, Section 35 will become completely otiose as all other laws
will then be in addition to and not in derogation of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002. Obviously this could not have been the Parliamentary
intendment, after providing in Section 35 that the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 will prevail over all other laws that are inconsistent
therewith. A middle ground has therefore necessarily to be taken.
According to us, the two apparently conflicting Sections can best be
harmonized by giving meaning to both. This can only be done by limiting
the scope of the expression “or any other law for the time being in force”
contained in Section 37. This expression will therefore have to be held to
mean other laws having relation to the securities market only, as the
Recovery of Debts Due to Banks and Financial Institutions Act, 1993 is the
only other special law, apart from the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002, dealing
with recovery of debts due to banks and financial institutions. On this
interpretation also, the Sick Industrial Companies (Special Provisions)
Act, 1985 will not be included for the obvious reason that its primary
objective is to rehabilitate sick industrial companies and not to deal with
the securities market.
37. An interesting pointer to the direction Parliament has taken after
enactment of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 is also of some relevance in
this context. The Eradi Committee Report relating to insolvency and
winding up of companies dated 31.7.2000, observed that out of 3068 cases
referred to the BIFR from 1987 to 2000 all but 1062 cases have been
disposed of. Out of the cases disposed of, 264 cases were revived, 375
cases were under negotiation for revival process, 741 cases were
recommended for winding up, and 626 cases were dismissed as not
maintainable. These facts and figures speak for themselves and place a big
question mark on the utility of the Sick Industrial Companies (Special
Provisions) Act, 1985. The Committee further pointed out that effectiveness
of the Sick Industrial Companies (Special Provisions) Act, 1985 as has been
pointed out earlier, has been severely undermined by reason of the enormous
delays involved in the disposal of cases by the BIFR. (See paragraphs 5.8,
5.9 and 5.15 of the Report). Consequently, the Committee recommended that
the Sick Industrial Companies (Special Provisions) Act, 1985 be repealed
and the provisions thereunder for revival and rehabilitation should be
telescoped into the structure of the Companies Act, 1956 itself.
38. Pursuant to the Eradi Committee report, the Companies Act was amended
in 2002 by providing for the constitution of a National Company Law
Tribunal as a substitute for the Company Law Board, the High Court, the
BIFR and the AAIFR. The Eradi Committee Report was further given effect to
by inserting Sections 424A to 424H into the Companies Act, 1956 which, with
a few changes, mirrored the provisions of Sections 15 to 21 of the Sick
Industrial Companies (Special Provisions) Act, 1985. Interestingly, the
Companies Amendment Act of 2002 omitted a provision similar to Section
22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985.
Consequently, creditors were given liberty to file suits or
initiate other proceedings for recovery of dues despite pendency
of proceedings for the revival or rehabilitation of sick companies before
the National Company Law Tribunal.
39. This Amendment Act came under challenge, which challenge culminated
in the Constitution Bench decision in Union of India v. R, Gandhi,
President, Madras Bar Association, (2010) 11 SCC 10 by which the amendments
were upheld, with certain changes recommended by the Constitution Bench of
this Court.
40. Close on the heels of the amendment made to the Companies Act came
The Sick Industrial Companies (Special Provisions) Repeal Act, 2003. This
particular Act was meant to repeal the Sick Industrial Companies (Special
Provisions) Act, 1985 consequent to some of its provisions being telescoped
into the Companies Act. Thus, the Companies Amendment Act of 2002 and the
SICA Repeal Act formed part of one legislative scheme, and neither has yet
been brought into force. In fact, even the Companies Act, 2013, which
repeals the Companies Act, 1956, contains Chapter 19 consisting of Sections
253 to 269 dealing with revival and rehabilitation of sick companies along
the lines of Sections 424A to 424H of the amended Companies Act, 1956.
Conspicuous by its absence is a provision akin to Section 22(1) of the Sick
Industrial Companies (Special Provisions) Act, 1985 in the 2013 Act.
However, this Chapter is also yet to be brought into force. These
statutory provisions, though not yet brought into force, are also an
important pointer to the fact that Section 22(1) of the Sick Industrial
Companies (Special Provisions) Act, 1985 has been statutorily sought to be
excluded, Parliament veering around from wanting to protect sick industrial
companies and rehabilitate them to giving credence to the public interest
contained in the recovery of public monies owing to banks and financial
institutions. These provisions also show that the aforesaid construction
of the provisions of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 vis-à-vis the Sick
Industrial Companies (Special Provisions) Act, 1985, leans in favour of
creditors being able to realize their debts outside the court process over
sick industrial companies being revived or rehabilitated. In fact, another
interesting document is the Report on Trend and Progress of Banking in
India 2011-2012 for the year ended 30.6.2012 submitted by the Reserve Bank
of India to the Central Government in terms of Section 36(2) of the Banking
Regulation Act, 1949. In table IV.14 the report provides statistics
regarding trends in Non-performing Assets bank-wise, group-wise. As per
the said table, the opening balance of Non-performing Assets in public
sector banks for the year 2011-2012 was Rs.746 billion but the closing
balance for 2011-2012 was Rs.1,172 billion only. The total amount recovered
through the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 during 2011-2012 registered a
decline compared to the previous year, but, even then, the amounts
recovered under the said Act constituted 70 percent of the total amount
recovered. The amounts recovered under the Recovery Of Debts Due To Banks
And Financial Institutions Act, 1993 constituted only 28 per cent. All
this would go to show that the amounts that public sector banks and
financial institutions have to recover are in staggering figures and at
long last at least one statutory measure has proved to be of some efficacy.
This Court would be loathe to give such an interpretation as would thwart
the recovery process under the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 which Act
alone seems to have worked to some extent at least.
41. It will thus be seen that notwithstanding the non obstante clauses in
Section 22(1) and (4), read with Section 32, Section 22 of the Sick
Industrial Companies (Special Provisions) Act, 1985 will have to give way
to the measures taken under the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 more
particularly referred to in Section 13 of the said Act, and that this being
the case, the sale notices issued both in 2003 and 2013 could continue
without in any manner being thwarted by Section 22 of the Sick Industrial
Companies (Special Provisions) Act, 1985.
42. It remains to consider one argument of Shri C.N. Sreekumar. Learned
counsel argued that Section 37 of the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 refers to
the Recovery of Debts Due to Banks and Financial Institutions Act, 1993
which in turn contains Section 34(2) which makes the Sick Industrial
Companies (Special Provisions) Act, 1985 prevail over the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993. It was therefore argued
that since Section 37 refers to the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993 and since Section 34(2) of the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 refers to the Sick
Industrial Companies (Special Provisions) Act, 1985, Section 37 should also
be construed so as to include a reference to the Sick Industrial Companies
(Special Provisions) Act, 1985. Quite apart from driving a coach-and-four
through the object sought to be achieved by the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002, this argument does not commend itself to us for the obvious
reason that Section 34(2) refers to the Sick Industrial Companies (Special
Provisions) Act, 1985 only for the purpose of the Recovery Of Debts Due To
Banks And Financial Institutions Act, 1993 and for no other purpose. This
is quite apart from the fact that, as has been noted hereinabove, the non-
reference to the Sick Industrial Companies (Special Provisions) Act, 1985
in Section 37 of the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 was deliberate, as has been
held by us hereinabove.
43. Shri Sundaram is also correct when he refers to the judgment of this
Court in Shree Chamundi Mopeds v. Church of South India Trust Association,
(1992) 3 SCC 1. In the said judgment, this Court has held:
“In the instant case, the proceedings before the Board under
Sections 15 and 16 of the Act had been terminated by order of the Board
dated April 26, 1990 whereby the Board, upon consideration of the facts and
material before it, found that the appellant-company had become
economically and commercially non-viable due to its huge accumulated losses
and liabilities and should be wound up. The appeal filed by the appellant-
company under Section 25 of the Act against said order of the Board was
dismissed by the Appellate Authority by order dated January 7, 1991. As a
result of these orders, no proceedings under the Act was pending either
before the Board or before the Appellate Authority on February 21, 1991
when the Delhi High Court passed the interim order staying the operation of
the Appellate Authority dated January 7, 1991. The said stay order of the
High Court cannot have the effect of reviving the proceedings which had
been disposed of by the Appellate Authority by its order dated January 7,
1991. While considering the effect of an interim order staying the
operation of the order under-challenge, a distinction has to be made
between quashing of an order and stay of operation of an order. Quashing of
an order results in the restoration of the position as it stood on the date
of the passing of the order which has been quashed. The stay of operation
of an order does not, however, lead to such a result. It only means that
the order which has been stayed would not be operative from the date of the
passing of the stay order and it does not mean that the said order has been
wiped out from existence. This means that if an order passed by the
Appellate Authority is quashed and the matter is remanded, the result would
be that the appeal which had been disposed of by the said order of the
Appellate Authority would be restored and it can be said to be pending
before the Appellate Authority after the quashing of the order of the
Appellate Authority. The same cannot be said with regard to an order
staying the operation of the order of the Appellate Authority because in
spite of the said order, the order of the Appellate Authority continues to
exist in law and so long as it exists, it cannot be said that the appeal
which has been disposed of by the said order has not been disposed of and
is still pending. We are, therefore, of the opinion that the passing of the
interim order dated February 21,1991 by the Delhi High Court staying the
operation of the order of the Appellate Authority dated January 7,1991 does
not have the effect of reviving the appeal which had been dismissed by the
Appellate authority by its order dated January 7, 1991 and it cannot be
said that after February 21, 1991, the said appeal stood revived and was
pending before the Appellate Authority. In that view of the matter, it
cannot be said that any proceedings under the Act were pending before the
Board or the Appellate Authority on the date of the passing of the order
dated August 14, 1991 by the learned Single Judge of the Karnataka High
Court for winding up of the company or on November 6, 1991 when the
Division Bench passed the order dismissing O.S.A.No. 16 of 1991 filed by
the appellant company against the order of the learned Single Judge dated
August 14, 1991. Section 22(1) of the Act could not, therefore, be invoked
and there was no impediment in the High Court dealing with the winding up
petition filed by the respondents…..” [at para 10]
44. A reading of the said judgment also shows that the order of stay of
the BIFR’s opinion to wind up the company and the dismissal of the appeal
therefrom by the AAIFR would not in any manner revive the reference under
Section 15 of the Appellant No. 1 Company. For this reason also, it is
clear that after the orders of the BIFR and AAIFR have been upheld by
dismissal of the writ petition filed before the Delhi High Court by the
impugned judgment, there can be said to be no revival of reference
proceedings before the BIFR.
45. However, Shri Sreekumar referred to three judgments in support of the
proposition that interim orders preserve the status quo and that,
therefore, the interim order of stay has to be obeyed during the pendency
of the Writ Petition. For this purpose, he cited Kihoto Hollohan v.
Zachillhu & Ors., (1992) Supp. (2) SCC 651, Ravi S. Naik v. Union of India
& Ors., (1994) Supp. (2) SCC 641 and BPL Ltd. & Ors. v. R. Sudhakar & Ors.,
(2004) 7 SCC 219. Each of these judgments was delivered in different
contexts. The first judgment of Kihoto Hollohan was delivered in the
context of landslide changes that would have taken place had a stay order
not been passed in the context of the 10th Schedule to the Constitution of
India, which was enacted to remedy the evil of defection. The second
judgment, namely, Ravi S. Naik was also delivered in the same context and
the third judgment was delivered in the context of Section 33(2)(b) of the
Industrial Disputes Act, 1947. None of these judgments has any direct
bearing on the facts before us, which can be said to be covered directly by
the judgment in Shree Chamundi Mopeds Ltd. (supra).
46. Question No.2 arises on the facts of this case because of a conflict
between the High Courts on the interpretation of Section 15(1) proviso 3.
A large number of High Courts have, in judgments differing in detail only,
taken the broad view that the expression “where a reference is pending”
under Section 15(1) proviso 3 would include all proceedings before the BIFR
right till the stage of the successful culmination of a scheme for
reconstruction or the recommendation for winding up of the sick
industrial company. These High Courts are Madras, Delhi, Bombay,
Kerala, Punjab, Gujarat and Calcutta. All these judgments are
referred to in an exhaustive full bench decision of the Madras High Court
in M/s. Salem Textiles Limited v. The Authorized Officer and Ors., reported
in AIR 2013 Madras 229. The only dissenting voice is that of the Orissa
High Court in a judgment reported in Noble Aqua Pvt. Ltd. v. State Bank of
India, AIR 2008 Orissa 103, which has held that the expression “reference”
would only refer to the initial stage of filing a reference before the BIFR
and not to subsequent stages thereof, namely inquiry, preparation and
sanction of schemes. It has to be determined as to which of these two sets
of judgments is a correct exposition of the law.
47. It is clear that a purely literal interpretation of the expression
“where a reference is pending” can yield the result that the Orissa High
Court reached. In fact, Chapter III of the Sick Industrial Companies
(Special Provisions) Act, 1985 specifically refers, in the Chapter heading,
to references, inquiries and schemes. While Section 15 of the Sick
Industrial Companies (Special Provisions) Act, 1985 deals with references,
Section 16 deals with inquiries into the working of Sick Industrial
Companies. Section 18 then deals with preparation and sanction of schemes.
48. What has to be examined is whether this purely literal rendering of
the expression “where a reference is pending” is correct or not. First and
foremost, it is important to note that the third proviso to Section 15(1)
uses the words “is pending”. A reference has been held to be pending the
moment it is received by the Board. In Real Value Appliances Ltd. v.
Canara Bank & Ors., (1998) 5 SCC 554, this Court had to decide whether the
mere registration of a reference by the BIFR would result in the automatic
cessation of all proceedings which are pending in civil courts and the
company court against its assets. It was argued that in order that Section
22 of the Act can come into operation, the BIFR must, subsequent to the
registration of the reference under Section 15, apply its mind and consider
whether it is necessary under Section 16 to make an inquiry. Unless an
inquiry is pending, the provisions of Section 22 of the Act do not get
attracted. It was held that once the reference is registered after a
preliminary scrutiny, it is mandatory for the BIFR to conduct an inquiry.
This being so, it is in furtherance of the legislative intention to see
that no proceedings against the assets are taken before the BIFR decides,
after the inquiry, to continue with the reference. It was thus held,
having particular regard to Section 16(3) explanation, that an inquiry
shall be deemed to have commenced upon the receipt by the Board of any
reference or information or upon its knowledge reduced to writing by the
Board. This being the case, this Court held that once the reference is
registered and once it is mandatory to simultaneously call for
information/documents from the informant, then an inquiry under Section 16
must be deemed to have commenced. In that view of the matter, Section 22
would immediately come into play. It is clear, therefore, that if a
literal meaning were to be applied to the expression “where a reference is
pending”, the third proviso to Section 15(1) of the Sick Industrial
Companies (Special Provisions) Act, 1985 would be rendered otiose and the
purpose for which it was inserted would completely fail. On a literal
reading of the provision, such reference shall abate on steps being taken
by the secured creditors to recover their secured debts under Section 13(4)
of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, the moment a reference is
registered. And this Court has held that the moment the reference is
registered, an inquiry as contemplated by Section 16 shall be deemed to
commence. If that is so, then a reference can never be said to be pending
after an inquiry commences, if learned counsel for the Appellants is
correct. This can never be the case. It is clear, therefore, that the
expression “where a reference is pending” would necessarily include the
inquiry stage before the Board under Section 16 of the Act. If this be the
case, then the reference can be said to be pending not only when an inquiry
is instituted, but also after preparation and sanction of a scheme right
till the stage the scheme has worked out successfully or till the BIFR
gives its opinion to wind up the company.
49. The expression “reference” used in Section 15(1) proviso 3 is used in
contra distinction to the expression “proceedings” in Section 22.
“Proceedings” under Section 22 are actions taken against the sick company,
whereas “references” are actions initiated by a sick company – it is
perhaps for this reason that the third proviso to Section 15(1) uses the
expression “reference” instead of the expression “proceedings”.
50. Another important aspect as to the construction of the third proviso
to Section 15(1) is the meaning of the expression “such reference shall
abate”. One of the meanings of the expression “abate” is “to put an end
to; to curtail; to come to naught”. (See Ramanatha Aiyar’s Law Lexicon). A
reference can be said to abate in one or several ways. One obvious way that
a reference abates is where the Board, after inquiry, rejects the reference
for the reason that the Board is satisfied that the Company is not a sick
industrial company as defined under the Act. Another way in which a
reference can abate is where a scheme is implemented successfully, and the
sick industrial company is taken out of the woods successfully. A third
manner in which a reference can abate is when a scheme or schemes have
failed in respect of the sick industrial company, and in the opinion of the
BIFR, the said Company ought to be wound up. A fourth instance of
abatement is provided by the third proviso to Section 15(1) of the Sick
Industrial Companies (Special Provisions) Act, 1985. And that is that a
reference which is pending in the sense understood hereinabove shall abate
if the secured creditors of not less than 3/4th in value of the amount
outstanding against the financial assistance disbursed to the borrower,
have taken measures to recover secured debts under Section 13(4) of the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002. It is clear that the third proviso to Section
15(1) seeks to strike a balance between getting a sick industrial company
out of the woods and secured creditors being able to recover the debt owed
to them by such company. The legislature has thought it fit to annul all
proceedings before the BIFR only when at least 3/4th of the amount
outstanding against financial assistance disbursed to the borrower of such
secured creditors have taken the measures listed in Section 13(4) of the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002. The balance is therefore struck by the figure
of “not less than 3/4th”. The legislature has inserted this provision so
that, if 3/4th or more of the secured creditors get together to take
measures under Section 13(4) of the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002, they will
not be thwarted by the provisions of Section 22 of Sick Industrial
Companies (Special Provisions) Act, 1985, and it will not be necessary for
them to obtain BIFR permission before taking any such measures. This
construction of the third proviso to Section 15(1) is in keeping with the
march of events post 2002, when the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 came to be
enacted pursuant to various committee reports, and for the reasons outlined
hereinabove.
51. A recent judgment of this Court in Pegasus Assets Reconstruction P.
Ltd. v. M/s. Haryana Concast Limited & Anr., (Civil Appeal No. 3646 of
2011), has held, agreeing with a judgment of the Delhi High Court, and
disapproving a judgment of the Punjab and Haryana High Court, that a
Company Court exercising jurisdiction under the Companies Act, has no
control in respect of sale of a secured asset by a secured creditor in
exercise of powers available to such creditor under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002. Some of the observations made by this Court are interesting in
that this Court has held that the Securitisation Act is a complete code in
itself, and that earlier judgments rendered in the context of the State
Financial Corporation Act, 1951 or the Recovery Of Debts Due To Banks And
Financial Institutions Act, 1993 cannot be held applicable to the
Securitisation Act. Further, the very incorporation of certain provisions
of the Companies Act in the Securitisation Act themselves harmonise the
latter Act with the Companies Act in respect of workers debts under Section
529A of the Companies Act. In a significant paragraph, this Court has
held:
“The aforesaid view commends itself to us also because of clear intention
of the Parliament expressed in Section 13 of the SARFAESI Act that a
secured creditor has the right to enforce its security interest without the
intervention of the court or tribunal. At the same time, this Act takes
care that in case of grievance, the borrower, which in the case of a
company under liquidation would mean the liquidator, will have the right of
seeking redressal under Sections 17 and 18 of the SARFAESI Act.” (At para
25)
52. The matter can be viewed from a slightly different angle also. There
are many situations in which Section 22 of the Sick Industrial Companies
(Special Provisions) Act, 1985 will not apply. One such situation is a
situation where an eviction petition is filed under a State Rent Act for
eviction on the ground of non-payment of rent. Such eviction petitions have
been held not to be suits for recovery of money. Consequently, Section 22
of the Sick Industrial Companies (Special Provisions) Act, 1985 has been
held not to apply - See Gujarat Steel Tube Co. Ltd. v. Virchandbhai B.
Shah, (1999) 8 SCC P.11 (paragraphs 9 and 10).
53. Similarly, in Kailash Nath Agarwal v. Pradeshiya Industrial &
Investment Corpn. of U.P. Ltd., (2003) 4 SCC 305, the U.P. Act under which
recovery proceedings initiated against guarantors at a post-decree stage
were held to be outside the purview of Section 22 of the Sick Industrial
Companies (Special Provisions) Act, 1985. (see paragraph 35).
54. The resultant position may be stated thus:
Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985
will continue to apply in the case of unsecured creditors seeking to
recover their debts from a sick industrial company. This is for the reason
that the Sick Industrial Companies (Special Provisions) Act, 1985 overrides
the provisions of the Recovery Of Debts Due To Banks And Financial
Institutions Act, 1993.
Where a secured creditor of a sick industrial company seeks to recover its
debt in the manner provided by Section 13(2) of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002, such secured creditor may realise such secured debt under
Section 13(4) of the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002, notwithstanding the
provisions of Section 22 of the Sick Industrial Companies (Special
Provisions) Act, 1985.
In a situation where there are more than one secured creditor of a sick
industrial company or it has been jointly financed by secured creditors,
and at least 60 per cent of such secured creditors in value of the amount
outstanding as on a record date do not agree upon exercise of the right to
realise their security under the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002, Section 22
of the Sick Industrial Companies (Special Provisions) Act, 1985 will
continue to have full play.
Where, under Section 13(9) of the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002, in the
case of a sick industrial company having more than one secured creditor or
being jointly financed by secured creditors representing 60 per cent or
more in value of the amount outstanding as on a record date wish to
exercise their rights to enforce their security under the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002, Section 22 of the Sick Industrial Companies (Special Provisions)
Act, 1985, being inconsistent with the exercise of such rights, will have
no play.
Where secured creditors representing not less than 75 per cent in value of
the amount outstanding against financial assistance decide to enforce their
security under the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002, any reference pending under
the Sick Industrial Companies (Special Provisions) Act, 1985 cannot be
proceeded with further – the proceedings under the Sick Industrial
Companies (Special Provisions) Act, 1985 will abate.
55. In conclusion, it is held that the interim order dated 17.1.2004 by
the Delhi High Court would not have the effect of reviving the reference so
as to thwart taking of any steps by the respondent creditors in this case
under Section 13 of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002. This is because the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 prevails over the Sick Industrial Companies
(Special Provisions) Act, 1985 to the extent of inconsistency therewith.
Section 15(1) proviso 3 covers all references pending before the BIFR, no
matter whether such reference is at the inquiry stage, scheme stage, or
winding up stage. The Orissa High Court is not correct in its conclusion
on the interpretation of Section 15(1) proviso 3 of the Sick Industrial
Companies (Special Provisions) Act, 1985. This being so, it is clear that
in any case the present reference under Section 15(1) of the Appellant No.
1 company has abated inasmuch as more than 3/4th of the secured creditors
involved have taken steps under Section 13(4) of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002. The appeals are accordingly dismissed.
……………………J.
(Kurian Joseph)
……………………J.
(R.F. Nariman)
New Delhi;
January 29, 2016.