PEGASUS ASSETS RECONSTRUCTION P.LTD. Vs. M/S HARYANA CONCAST LIMITED & ANR
Supreme Court of India (Division Bench (DB)- Two Judge)
Appeal (Civil), 3646 of 2011, Judgment Date: Dec 29, 2015
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 3646 OF 2011
Pegasus Assets Reconstruction P. Ltd. …..Appellant
Versus
M/s. Haryana Concast Limited & Anr. ...Respondents
With
Civil Appeal No. 14736 of 2015
(Arising out of SLP(C) No. 7074 of 2010)
Civil Appeal Nos.14737-14738 of 2015
(Arising out of SLP(C) Nos. 117-118 of 2011) and
Civil Appeal Nos. 9293-94 of 2014
J U D G M E N T
SHIVA KIRTI SINGH, J.
A common issue of law: Whether a Company Court, directly or through an
Official Liquidator, can wield any control in respect of sale of a secured
asset by a secured creditor in exercise of powers available to such
creditor under the Securitization and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 (for brevity ‘the SARFAESI
Act’), arises in all these matters which have been heard together and shall
be governed by this common judgment.
In order to understand the central issue involved in each of the matters,
it may be useful to notice that Civil Appeal No. 3646 of 2011 preferred by
Pegasus Assets Reconstruction Private Limited (for brevity, ‘Pegasus’),
which has been heard as the lead matter, arises out of a Division Bench
judgment of Punjab and Haryana High Court dated 15.12.2009 whereby the
Division Bench upheld the judgment of Company Court and approved of certain
fetters placed upon M/s. Pegasus Assets Reconstruction Pvt. Ltd., while
allowing it to exercise its powers as a secured creditor under the SARFAESI
Act and proceed with the sale of the secured assets. Since the judgment of
Division Bench disallowed the appeal of Haryana State Infrastructure and
Industrial Development Corporation (for brevity ‘HSIIDC’) against the order
of Company Judge allowing Pegasus to stay outside the winding up proceeding
of the respondent Haryana Concast Limited, HSIIDC is also before this Court
through SLP (C) No. 7074 of 2010.
The secured asset in the form of approximately 36 acres of land of Haryana
Concast Ltd. was subjected to auction by Pegasus in association and
collaboration with the Official Liquidator as per order of the company
judge and was ultimately sold for Rs.32 crores in favour of M/s. Venus
Realcon Pvt. Ltd. One Vinod Rajaliwala challenged the orders of the company
judge confirming sale in favour of M/s. Venus Realcon Pvt. Ltd. by
preferring a company appeal and also through a public interest litigation
(a writ petition). Both were dismissed by the Division Bench. Those orders
have been challenged by Mr. Vinod Rajaliwala through Special Leave Petition
(C) Nos.117-118 of 2011. The three matters indicated above thus relate to
secured assets of the same company under Liquidation, M/s. Haryana Concast
Limited.
The fourth matter, C.A. No. 9293-94 of 2014 preferred by Megnostar
Telecommunications Private Limited (for brevity, ‘Megnostar’) arises out of
a Division Bench Judgment of Delhi High Court dated 17.9.2012. By this
order the Delhi High Court has differed with the views taken by the Punjab
and Haryana High Court in the judgment assailed by Pegasus in Civil Appeal
No.3646 of 2011. According to Delhi High Court, the company judge or the
official liquidator cannot have any say in the sale of secured assets by
the secured creditors under the SARFAESI Act. The Companies Act cannot be
used to put any fetters on the sale by secured creditors because a secured
creditor under Section 13 of the SARFAESI Act has been granted a right to
enforce the security interest “without the intervention of the court or
tribunal” in accordance with the provisions of the SARFAESI Act. It goes
without saying that if the view taken by the Punjab and Haryana High Court
in the matter of Pegasus is approved and the Civil Appeal No. 3646 of 2011
is dismissed, then the Delhi High Court’s view will stand disapproved and
Civil Appeal No. 9293-94 of 2014 will have to be allowed.
In order to decide the issue indicated above, it is not necessary to go
into factual details relating to either the case of Pegasus or to that of
Megnostar. Only the broad features necessary for appreciation of rival
submissions in respect of these matters have been taken note of.
C.A.No.3646 of 2011
M/s. Haryana Concast Ltd., respondent no.1 suffered a winding up order of
the Company Judge of Punjab & Haryana High Court in 1999. The only secured
creditor, the Bank of India obtained a recovery certificate against
respondent no.1 from the Debt Recovery Tribunal, Chandigarh in 2002 for a
sum of Rs.5.84 crores approx. with pendente lite and future interest @ 18%
p.a. from the date of filing of the suit till realization. Although the
High Court allowed the Official Liquidator to sell the assets of the
company in May 2004 and the bank also submitted its claim before the
Official Liquidator in July 2004 for Rs.10.58 crores approx. as dues upto
30th June 2004, the sale could not be effected for one reason or the other.
Being a guarantor, the HSIIDC settled the liabilities of three banks by
paying Rs.10.39 crores approx. and as a result acquired a charge only over
the moveable assets, that is, raw materials of the company. Accordingly it
was substituted/ subrogated in place of the three banks. As a registered
securitization company, Pegasus entered into an assignment agreement with
the sole secured creditor, Bank of India on 27.8.2008 and soon informed the
Official Liquidator that it intends to remain outside the winding up
process, to enforce its security as per the provisions of SARFAESI Act,
subject to the rights of the erstwhile workmen of the company, respondent
no.1 as per Section 529A of the Companies Act. Pegasus pursued its
aforesaid stand by filing an application before the Company Judge for
recalling an order dated March 20, 2008 wherein it had directed the
Official Liquidator to undertake a fresh sale of the assets of the company.
In this petition dated 22.09.2008, Pegasus also sought directions to the
Official Liquidator to hand over the secured assets of the company in its
favour. The Company Judge allowed Pegasus to proceed under the SARFAESI
Act for enforcing its security by an order passed on March 20, 2009 but in
view of orders passed earlier in the winding up proceedings the Company
Judge laid down certain terms and conditions for permitting Pegasus to stay
outside the winding up proceedings and bring about sale of secured assets
under Section 13 of the SARFAESI Act read with Rules 8 and 9 of Security
Interest Enforcement Rules, 2002 (hereinafter referred to as ‘the Rules’).
These conditions forming part of paragraph 19 of the judgment of the
learned Company Judge are extracted hereinbelow because these have been
objected to by Pegasus as fetters which the Company Judge could not have
obtained and therefore Pegasus preferred Company Appeal No.28 of 2009 which
has been dismissed by the order under appeal dated 15.12.2009. Para 19 is
as follows :
“19. If any attempt to harmonize the provisions of the SARFAESI Act and
the Companies Act could be made, in the context of orders for sale having
already been made by the Company Court and the participation of the
assignor of the applicant at several steps for the conduct of sale through
the Company Court, it will be inexpedient unyoke the proceeding that were
put through the O.L. While upholding the claim that the procedure laid
down under the SARFAESI Act would enable the provisions of the Security
Enforcement Rules to be applied for conduct and confirmation of the sale,
the dispensation in this case would be
(a) to permit the applicant to stay outside the winding up
proceedings and take action to bring to sale the secured assets under
Section 13 of the SARFAESI Act read with Rules 8 and 9 of Security Interest
Enforcement Rules, 2002.
(b) The applicant-Reconstruction Company shall keep all the steps
taken under the SARFAESI Act and the relevant rules transparent and submit
all the proposals for sale to the O.L. and the details of valuation
obtained for the conduct of the sale for the purpose of determining the
used price.
(c) Sale shall be advertised with a specific clause that the
winding up proceedings are pending before the Company Court, with details
of case number and the Court of adjudication.
(d) The expenses already incurred for the conduct of the sale by
O.L. shall be deducted from out of the sale proceeds before any
appropriation or disbursement and deposited with O.L.
(e) The Reconstruction Company shall place before the Company Court
the details of its claim and all expenses incurred before the Company Court
before making any appropriation to himself and disbursed.
(f) The surplus proceeds over what is lawfully due to it shall be
deposited to the credit of the Company (in liquidation) before the O.L.”
The stand of the appellant, Pegasus is that the Division Bench erred in law
in not appreciating that rights and liabilities of the appellant as an
asset reconstruction company had to be governed by and within the four
corners of the SARFAESI Act and not by or under the Companies Act. On a
pointed query that it had accepted the order including the terms and
conditions and finalized the sale of the secured asset in collaboration
with the Official Liquidator, learned counsel for Pegasus fairly accepted
that Pegasus was not against the sale of secured asset already concluded
but the appeal is being pursued for getting the legal issue settled as a
precedent for future, otherwise as an assets reconstruction company the
appellant shall be facing similar fetters in case the secured assets happen
to be of a company under winding up.
Learned counsels representing the company respondent no.1 which is
represented by the Official Liquidator and learned counsel for respondent
no.2 HSIIDC have advanced submissions to the contrary. According to them a
winding up proceeding has to be supervised by the Official Liquidator as
per orders of the Company Judge and the provisions of the Companies Act.
The counsel for the company, respondent no.1 asserted that once the assets
have come into the hands of the Official Liquidator, these have to be
protected and governed by provisions of the Companies Act which are meant
not only to serve the interest of secured creditor like Pegasus but also to
take care of interest of the workmen and by ascertaining their dues which
have highest priority and require protection as per Section 529A of the
Companies Act as well as interest of the unsecured creditors. The stand of
respondent no.2 is that once the bank had opted to participate in the
winding up proceedings before the Company Judge, Pegasus should not have
been permitted to take a contrary stand as it could have only stepped into
the shoes of the bank. HSIIDC had also preferred a cross appeal bearing
No. 23 of 2009 before the Division Bench against order of the Company Judge
dated March 20, 2009. Before the Division Bench, it claimed a right to be
associated with Pegasus in the process of sale of the secured assets of the
company, from beginning to end. However, it is clear as a crystal that
HSIIDC is neither a secured creditor of the company under winding up nor it
has stepped into shoes of any secured creditor.
C.A.Nos.9293-9294 of 2014
Megnostar is the company, now under liquidation, which mortgaged its
property bearing Plot No.1297 admeasuring 502.33 Sq. Yds. situated at MIE,
Bahadurgarh, Haryana along with structures, present and future, with
respondent-bank through Memo of Deposit of Title Deeds dated 29.04.2008 for
securing loans obtained from the bank. In December 2008 respondent-bank
issued a notice under Section 13(2) of the SARFAESI Act upon Megnostar on
account of persistent defaults in making timely payment of amounts due to
the bank. On 05.02.2009 Megnostar requested for release of the secured
assets to enable it to sell the same for making part payment of dues of the
bank. A Company Petition No.359 of 2009 was filed by an unsecured creditor
M/s. Magicon Impex Pvt. Ltd. for winding up of Megnostar but the bank was
not made aware of this proceeding till visit of some officials from the
office of the Official Liquidator on 28.08.2011. The bank obtained
directions from the District Magistrate concerned under Section 14(1) of
the SARFAESI Act, took over possession of the secured asset on 16.06.2010
and a notice to that effect was published in various newspapers on
18.06.2010. O.A. No.38 of 2009 filed by the bank against Megnostar was
allowed by DRT-II, Delhi on 13.07.2010 holding the company liable to pay to
the bank Rs.12.95 crores approx. with pendente lite and future interest @
15.5.% p.a. with quarterly interests from date of filing of O.A. till date
of realization. To realize its dues, the respondent-bank published auction-
cum-sale notice of the secured assets on 23.07.2011 in exercise of its
rights under Section 13(4) of the SARFAESI Act. In the public auction held
on 24.08.2011 respondent, M/s. Mohan Tractors (P) Ltd. offered the highest
bid of Rs.80 lacs. As a successful auction purchaser, it was handed over
the possession and title deed of the mortgaged property. On 28.08.2011
this property at Bahadurgarh was visited by 4-5 persons claiming to be from
the office of the Official Liquidator. They had come to take possession of
the property on the basis of an order dated 03.08.2011 in Company Petition
No.359 of 2009 whereby the Company Judge had appointed the Official
Liquidator as a provisional liquidator with direction to take charge of all
assets of the company Megnostar. The personnel from the office of the
Official Liquidator were apprised of developments and sale under the
SARFAESI Act but with the aid of police personnel they took forcible
possession of the mortgaged property on August 30, 2011. In September 2011
the bank filed C.A.No.1948 of 2011 in C.P. No.359 of 2009 for a direction
upon the Official Liquidator to unseal the property and hand over its
possession to M/s. Mohan Tractors. To similar effect was C.A.No.1947 of
2011 filed by M/s. Mohan Tractors. The Company Judge appointed a valuer
who submitted a Valuation Report on 14.01.2012. As per the report the land
was valued at Rs.77.44 lacs approx. and the construction existing on the
land was valued at Rs.40.65 lacs, the total value thus amounted to Rs.1.18
crores approx. The learned Company Judge dismissed C.A. Nos.1947 and 1948
of 2011 by order dated 26.4.2012. Against that, the bank respondent no.2
preferred Company Appeal No.58 of 2012 before the Division Bench of High
Court of Delhi. A separate appeal bearing no.62 of 2012 was filed by M/s.
Mohan Tractors. Those appeals were allowed by the Division Bench as per
order under appeal dated 17.09.2012.
The case of Mr. Vinod Rajaliwala requires separate consideration but only
after an adjudication on the main issue indicated earlier and after
deciding which of the two views is in accordance with law, of Delhi High
Court in the case of Megnostar or of Punjab & Haryana High Court in the
case of Pegasus. As the case of Pegasus has been argued as a lead matter,
we propose to first consider the views of Punjab & Haryana High Court.
After noticing the Statement of Objects & Reasons for enactment of the
SARFAESI Act as discussed by the Company Judge, the Division Bench took
note of detailed arguments advanced on behalf of Pegasus which is to the
following effect. Section 5 of the SARFAESI Act provides for acquisition
of rights or interest in financial assets of any bank or financial
institution by any securitization company or reconstruction company, inter
alia, by entering into an agreement and this Section begins with a non
obstante clause. Section 9 enumerates various measures which can be
adopted by a securitization company or reconstruction company, including
the sale or lease of a part or whole of the business of the borrower and
this Section also begins with a non obstante clause. Chapter III consists
of 7 sections providing for enforcement of security interest created in
favour of any secured creditor. Section 13, which also begins with a non
obstante clause of a limited nature for overcoming the hurdles of Section
69 or Section 69A of the Transfer of Property Act, 1882, creates a right in
the secured creditor to enforce any security interest in its favour without
the intervention of a court or tribunal, in accordance with the provisions
of this Act. The detailed scheme for enforcement of the secured assets
under various sub-sections and provisos in Section 13 were pointed out
along with Section 35 and 37 in support of a submission that the provisions
are not only a complete code for enforcement of secured asset by a secured
creditor but in case of conflict with any other statute, the provisions of
the SARFAESI Act would prevail. Some other statutes enumerated in Section
37 can play a supplemental role along with any other law for the time being
in force including the Companies Act but obviously only till they are
consistent with provisions of the SARFAESI Act. The relevant case laws
were also cited and considered. The rival contention and case laws were
noted for framing the main question of law in the following words : -
“Whether the Company Court enjoys jurisdiction to issue supervisory
direction to a securitization company/ secured creditor in connection with
a company in liquidation or under winding up in the face of Section 13 of
the SARFAESI Act or securitization company opting to stand outside the
winding up is absolutely free to utilise the sale proceeds of assets of the
company in liquidation?”
The Division Bench of Punjab & Haryana High Court considered the case of
Mardia Chemicals v. Union of India (2004) 4 SCC 311; Rajasthan State
Financial Corporation v. Official Liquidator AIR 2006 SC 755 = (2005) 8 SCC
190; Bakemans Industries v. New Cawnpore (2008) 144 Company Cases 71 (SC);
Ram Kripal Singh v. State of Uttar Pradesh (2007) 11 SCC 22; and Central
Bank of India v. State of Kerala (2009) 4 SCC 94 for coming to a conclusion
in paragraph 34 that the Company Court enjoys the jurisdiction to issue
directions to a securitization company or a secured creditor who has opted
to stay outside the winding up and invoke its power under Section 13 of the
SARFAESI Act.
We are unable to subscribe to the aforesaid views. On the other hand,
after going through the judgment of Delhi High Court in the case of
Megnostar we are persuaded to approve its views because of various reasons
some of which we shall enumerate and explain hereinafter.
The relevant case laws discussed in the two conflicting judgments are
virtually the same but the error committed by the Division Bench in the
case of Pegasus lies mainly in coming to a conclusion that there is no
inconsistency between the Companies Act and the SARFAESI Act if the Company
Judge issues supervisory directions to achieve the object of Section 529A
which finds a clear mention in one of the provisos of Section 13(9) of the
SARFAESI Act. This view is unacceptable for the reasons detailed by Delhi
High Court in the case of Megnostar. Those reasons commend themselves to
us also. We are particularly in agreement with the view in paragraph 26 of
the judgment which is as follows :
“26. If it were to be held that the Official Liquidator (who acts under
the dictates of the Company Court) is to be also associated with the sale,
it will naturally open up the fora of the Company Court also for
entertaining matters relating to such sale and which as aforesaid is not
only likely to lead to conflicts but is also contrary to the spirit of the
SARFAESI Act of sale being without the intervention of the Court.”
However, there are certain areas covered by the Delhi High Court which need
further elucidation and clarification. For that it will be relevant and
necessary to first go through the ambit, scope and peculiarities of
Statutes like the State Financial Corporations Act, 1951 (for brevity the
‘SFC Act’) and The Recovery of Debts due to Banks and Financial
Institutions Act, 1993 (for brevity the ‘RDB Act’) in contrast with the
SARFAESI Act and some case laws which, in our view, are of special
significance for better understanding of the issues.
All the aforesaid Acts are Central legislations enacted for specific
purposes. The SFC Act enables the State Governments to establish a
Financial Corporation for a State on the lines of Central Industrial
Finance Corporation set up under Act XV of 1948 to provide medium and long
term credit to industrial undertakings, somewhat outside the normal lending
activities of Commercial Banks. This Act, inter-alia, vests special
privileges in the State Financial Corporations in the matter of enforcement
of its claims against borrowers, through sections such as 29, 30, 31 and
32. Coercive steps including sale of secured property is, vide Section 31
required to be taken by moving appropriate application before the concerned
District Judge as per procedure prescribed under Section 32. Section 46B
does bestow overriding status on this Act over the then existing law but
not over the Companies Act of 1956 which is a later law. Hence, in several
judgments it has rightly been held that if the defaulter is a company under
winding up, a State Financial Corporation can at best be a secured creditor
who may opt to remain out of winding up but nonetheless it will be subject
to orders passed in accordance with law under the Companies Act.
The RDB Act is of 1993, i.e. later to the Companies Act. Its avowed object
is to provide for the establishment of Tribunals for expeditious
adjudication and recovery of debts due to banks and financial institutions
and for matters connected therewith or incidental thereto. This Act
creates a special machinery for speedy recovery of dues of banks and
financial institutions which, by an amendment of 2004 now include a
registered securitization company or reconstruction company envisaged under
the SARFAESI Act. Section 18 bars the jurisdiction of ordinary courts or
authority in respect of matters falling within the jurisdiction of Tribunal
as specified in Section 17. An Appellate Tribunal is provided under
Section 20. The power of the tribunal extends to determining the debt due
as well as its realization. Section 34 confers over-riding effect upon
this Act over any other law in force.
In contrast, the SARFAESI Act was enacted in 2002 to regulate
securitization and reconstruction of financial assets and enforcement of
security interest and for matters connected therewith or incidental
thereto. Inter-alia, one of the main objects of this Act is to clothe the
banks and financial institutions in India with power to take possession of
securities and sell them. All its significant provisions have been noted in
detail in Mardia Chemicals in which vires of this Act was examined and
upheld. A reading of Sections 9 and 13 of the SARFAESI Act leaves no
manner of doubt that for enforcement of its security interest, a secured
creditor has been not only vested with powers to do so without the
intervention of the court or tribunal but detailed procedure has also been
prescribed to take care of various eventualities such as when the borrower
company is under liquidation for which proviso to sub-section (9) of
Section 13 contains clear mandate keeping in view the provisions of Section
529 and 529A of the Companies Act, 1956. Since significant amendments were
introduced in Section 529 while inserting Section 529A through Amendment
Act 35 of 1985, effective from 24.5.1985 and with the aid of a non obstante
clause in sub-section (1) of Section 529A workmen’s dues were given
preference over other dues and made to stand pari passu with dues of the
secured creditors, in case of apparent conflict, this Court through various
judgments has upheld the proceedings under the RDB Act as it happens to be
a later Act with overriding effect over other laws. The interest of the
workmen in respect of dues payable to them as per Section 529 and 529A of
the Companies Act has been protected by permitting, wherever necessary,
association of the Official Liquidator with the proceedings before the
Debts Recovery Tribunal under the RDB Act. In our considered judgment, the
same view is required to be taken in context of SARFAESI Act also, for the
additional reason that Section 13 requires notice to the borrower at
various stages which in the case of a company under winding up being a
borrower would mean requirement of notice to the Official Liquidator. The
Security Interest (Enforcement) Rules, 2002 (for brevity, ‘the Rules’)
framed under the provisions of SARFAESI Act also require notice upon the
borrower or his agent at different stages. For sale of immovable secured
assets, as per Rule 8, the authorized officer can take possession by
delivering a Possession Notice to the borrower and by affixing Possession
Notice on the outer door or at some conspicuous place of the property.
Before the sale also, the authorized officer is required to serve to the
borrower a notice of 30 days. Thus the Rules also ensure that the Official
Liquidator is in knowledge of the proceedings under the SARFAESI Act in
case the borrower happens to be a company under winding up. As a borrower,
the Official Liquidator has ample opportunity to get the details of the
workers dues as ascertained under the Companies Act, placed before the
authorized officer and seek proper distribution of the amount realised from
the sale of secured assets in accordance with various provisos under sub-
section (9) of Section 13 of the SARFAESI Act.
The above discussion supports the view taken by Delhi High Court that no
order is required by the Company Judge for association of the Official
Liquidator in order to protect the interest of workers and to realize their
dues. Sufficient provisions have been made for this purpose under the
SARFAESI Act and the Rules framed thereunder.
In the event, in the capacity of a borrower the Official Liquidator is not
satisfied with the decisions or steps taken by the secured creditor or the
authorized officer, at appropriate stage it has sufficient opportunity to
avail right of appeal under Section 17 of the SARFAESI Act before the Debts
Recovery Tribunal. There is a right of further appeal under Section 18
before the Appellate Tribunal. On the other hand, if the view taken by
Punjab & Haryana High Court in Pegasus is accepted, there shall be a
conflict of rights and interest of the secured creditor who have the right
and liberty to realize their secured interest in accordance with the
provisions of the SARFAESI Act on one hand, and the statutory rights and
liability of the Official Liquidator acting under the orders of the Company
Judge as per provisions of the Companies Act, on the other. The appellate
fora shall also differ, leading to a situation of uncertainty and conflict
between the two Acts. In such a scenario, we respectfully agree with the
Delhi view and disapprove that of the Punjab & Haryana High Court.
Coming to the case laws, on behalf of Megnostar, Delhi view was assailed by
placing reliance upon Rajasthan State Financial Corporation. In this case
decided by three Judges, this Court examined the grievance of Rajasthan
State Financial Corporation in the context of conflict between the SFC Act
and the Companies Act. After taking note of various earlier judgments of
this Court in the case of Allahabad Bank v. Canara Bank (2000) 4 SCC 406;
International Coach Builders Ltd. v. Karnataka State Financial Corporation
(2003) 10 SCC 482; Industrial Credit and Investment Corporation of India
Ltd. v. Srinivas Agencies (1996) 4 SCC 165; and A.P. State Financial
Corporation v. Official Liquidator (2000) 7 SCC 291, it was held in para 16
that a financial corporation has the right to proceed under Section 29 of
the SFC Act against a debtor, if it is a company, only so long as there is
no order of winding up. When the debtor is a company in winding up, the
provisions of Sections 529 and 529A of the Companies Act would affect the
rights of financial corporations because of a “pari passu” charge in favour
of the workmen. In respect of such dues of the workmen the Official
Liquidator has to be accepted as their representative.
In the context of RDB Act, reliance was placed upon another judgment of
this Court by three Judges in the case of Bank of Maharashtra v. Pandurang
Keshav Gorwardkar (2013) 7 SCC 754 wherein this Court held that the Debts
Recovery Tribunal is not empowered to adjudicate/ determine dues of workmen
of debtor-company. Once the company is in winding up workmen’s dues can be
determined only by the liquidator under supervision of Company Court and by
no other authority. In para 53, while considering Rajasthan State
Financial Corporation decided by three Judges’ Bench it was noticed that
once a winding up proceeding has commenced, the distribution of the
proceeds of the sale of the assets at the instance of the banks or
financial institutions coming under the RDB Act or SFC Act can only be with
the association of the Official Liquidator and under the supervision of the
Company Court. The reason for such a view was recognized to lie in Section
529A of the Companies Act which governs the distribution of assets as
provided therein. But it was also noted that since there was a conflict as
to who would be competent to sell the assets, it was held that for this
purpose the DRT would be competent because the RDB Act of 1993 being a
later and special law shall prevail over the Companies Act which is a
general law.
Reliance was also placed upon this Court’s judgment in Employees Provident
Fund Commissioner v. Official Liquidator (2011) 10 SCC 727. This case had
arisen in the context of dues payable by an employer under Section 11 of
the Employees Provident Fund and Miscellaneous Provisions Act, 1952 and the
question was whether in granting priority, such dues would be subject to
Section 529A of the Companies Act. The answer was in the affirmative, i.e.,
the Companies Act would, in this matter hold its field as there is no
situation of conflict.
On behalf of respondent Bank, Kotak Mahindra as well as Respondent No. 2,
auction purchaser, the judgment in the case of Rajasthan State Financial
Corporation (supra) was distinguished by placing reliance upon factual and
legal situation prevailing in that case as noted in Paragraph 2 of the
judgment. It was pointed out that Section 32 (10) of the SFC Act contains
ample clarification that if liquidation proceedings have commenced in
respect of the borrower before an application is made under sub-section (1)
of Section 31, the financial corporation will not get any preference over
the other creditors unless it is conferred on it by any other law. In that
case no proceeding had been initiated under the SFC Act and all
developments had taken place in the liquidation proceeding. Rajasthan
State Financial Corporation was therefore unable to take any advantage of
provisions under SFC Act. At the end of paragraph 2, this Court rightly
held that “a mere right to take advantage of any enactment without any act
done towards availing of that right cannot be deemed a right accrued.”
Since we have held earlier in favour of views of Delhi High Court, it is
not necessary to burden this judgment with the case laws which support that
view and have been noted by the High Court. We are in agreement with the
submissions advanced on behalf of respondent Kotak Mahindra Bank as well as
respondent No.2 that there is no lacuna or ambiguity in the SARFAESI Act to
warrant reading something more into it. For the purpose it has been
enacted, it is a complete code and the earlier judgments rendered in the
context of SFC Act or RDB Act vis-à-vis the Companies Act, cannot be held
applicable on all force to the SARFAESI Act. There is nothing lacking in
the Act so as to borrow anything from the Companies Act till the stage the
secured assets are sold by the secured creditors in accordance with the
provisions in the SARFAESI Act and the Rules. At the post sale stage, the
rights of the persons or parties having any stake in the sale proceeds are
also taken care of by sub-section (9) of Section 13 and its five provisos
(not numbered). It is significant that as per sub-section (9) a sort of
consensus is required amongst the secured creditors, if they are more than
one, for the exercise of rights available under sub-section (4). If
borrower is a company in liquidation, the sale proceeds have to be
distributed in accordance with the provisions of Section 529A of the
Companies Act even where the company is being wound up after coming into
force of the SARFAESI Act, if the secured creditor of such company opts to
stand out of the winding up proceedings, it is entitled to retain the sale
proceeds of its secured assets after depositing the workmen’s dues with the
liquidator in accordance with the provisions of Section 529A of the Company
Act. The third proviso is also meant to work out the provisions of Section
529A of the Companies Act, in case the workmen’s dues cannot be
ascertained, by relying upon communication of estimate of such dues by the
liquidator to the secured creditor, who has to deposit the amount of such
estimated dues with the liquidator and then it can retain the sale proceeds
of the secured assets. The other two provisos also are in aid of the
liquidator to discharge his duties and obligations arising under Section
529A of the Companies Act. Thus, it is evident that the required
provisions of the Companies Act have been incorporated in the SARFAESI Act
for harmonizing this Act with the Companies Act in respect of dues of
workmen and their protection under Section 529A of the Companies Act. In
view of such exercise already done by the legislature, there is no
plausible reason as to take recourse to any provisions of the Companies Act
and permit interference in the proceedings under the SARFAESI Act either by
the Company Judge or the liquidator. As noted earlier, the Official
Liquidator as a representative of the borrower company under winding up has
to be associated, not for supplying any omission in the SARFAESI Act but
because of express provisions therein as well as in the Rules. Hence the
exercise of harmonizing that this Court had to undertake in the context of
SFC Act or the RDB Act is no longer warranted in respect of SARFAESI Act
vis-à-vis the Companies Act.
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.
On account of the above discussions, the Division Bench judgment of the
Punjab and Haryana High Court under challenge by Pegasus fails to meet our
approval and is therefore, set aside only for the purpose of clarifying the
law. Since the sale already made has not been assailed by Pegasus,
therefore that issue will abide by the views that we shall indicate
hereinafter in respect of SLP(C) Nos. 117-118 of 2011 preferred by Mr.
Vinod Rajaliwala.
We grant leave in SLP(C) No.7074 of 2010 preferred by HSIIDC but only to
dismiss this case as we have found the grievance of Pegasus to be
justified; it was entitled not only to stay outside the winding up
proceeding in view of provisions of SARFAESI Act which is a special and
later Act but was also entitled to exercise its rights without any fetters
that were erroneously placed upon it by the company Judge and were approved
also by the Division Bench. Hence, the grievance of the HSIIDC that
Pegasus should not have been permitted to stay outside the winding up
proceeding is found meritless. Consequently its appeal has to be
dismissed.
As we have approved the judgment of the Division Bench of Delhi High Court
in the case of Megnostar, the appeals preferred against the judgment in
Civil Appeal Nos. 9293-94 of 2014 are hereby dismissed. In the facts of
the case there shall be no order as to costs.
With respect to the case of Vinod Rajaliwala, it has been indicated earlier
that approximately 36 acres of land of Haryana Concast Limited was put to
auction and sale by Pegasus in association with official liquidator and was
ultimately sold for Rs.32 crores in favour of M/s. Venus Realcon Private
Limited. Vinod Rajaliwala challenged the orders of the company Judge
confirming the sale by preferring a company appeal and also through a
public interest litigation (a writ petition). Both were dismissed by the
Division Bench of Punjab and Haryana High Court by orders passed on
23.9.2010. These orders in company appeal No. 10/2010 and PIL being CWP
No.8422 of 2010 are under challenge at the instance of Mr. Rajaliwala
through special leave petition (C) Nos. 117-118 of 2011.
Since the larger issue arising out of the conflicting judgments of Punjab
and Haryana High Court and Delhi High Court has already been addressed by
us, the case of Mr. Rajaliwala requires adjudication, mostly on facts as to
whether the sale confirmed by the Company Judge and approved by the
Division Bench in favour of M/s. Venus Realcon requires any interference.
It is not at all necessary to go into the facts which preceded the sale in
favour of M/s Venus Realcon for Rs.32 crores which till date stands
confirmed. It is against confirmation of sale that Mr. Rajaliwala has
preferred appeal as well as a PIL on the ground that the consideration
money does not reflect the correct value of the secured assets, i.e., the
land sold to M/s. Venus Realcon. In order to substantiate this claim, Mr.
Rajaliwala was granted an opportunity by the Division Bench to find out a
higher bid. One M/s. ACHASTES Promoters Private Limited through an
application in Company Appeal No. 10/2010 claimed to offer a bid of Rs.33
crores but later withdrew the same. Thereafter, another buyer made an
offer of Rs.37 crores but tendered a meagre amount of Rs.1 crore only
before the Division Bench. On these facts the Division Bench dismissed
company appeal on 23.9.2010. As a consequence, the PIL was also dismissed
on the same date. In this Court, the petitioner claimed that the property
was worth hundred of crores but ultimately petitioner persuaded another
entity M/s. Himalayan Infra Projects Private Limited to offer a higher bid.
This company was allowed to intervene and be impleaded, and it deposited
10 crores in January, 2011 and Rs. 40 crores in April, 2011. That money is
lying in deposit in this Court.
The argument on behalf of Mr. Rajaliwala and the intervener Himalayan Infra
Projects Private Limited is that this Court should take a practical view
and allow the offer of Rs.50 crores in comparison to Rs.32 crores deposited
by the auction purchaser. In reply, on behalf of Venus Realcon- respondent
No. 3, it was pointed out that Mr. Rajaliwala is himself a property dealer
and a PIL at his instance, in this matter, does not deserve any
consideration for lack of good faith, in view of Judgment in the case of
Arun Kumar Agrawal vs. Union of India, 2014 (2) SCC 609. It was pointed
out from materials on record that the valuation of property has been
changing from 2002 when it was estimated to be Rs.10.13 crores. In January
2010 its market value was around Rs.24-25 crores and the distress value
was Rs.18-20 crores approximately as per two different valuation reports.
The valuation of Rs.75 crores approximately in 2008 was unrealistic, solely
on the basis of oral communication from the Collector said to be based upon
valuation for commercial plot and not for an industrial plot. It is
pointed out that one bid in 2005 by M/s. Radha Raman Builders and
Developers Private Limited for Rs.29 crores approximately for a larger plot
than the actual land, could not materialize. The first offer by M/s. Venus
Realcon on 9.4.2010 was Rs.26 crores which on negotiation was raised to
Rs.26.50 crores. Subsequently on allegations made by Mr. Rajaliwala the
Company Judge on 13.5.2010 held an open bid in Court, wherein M/s. Venus
Realcon raised its bid to Rs.32 crores. The Court then ordered for fresh
advertisement pursuant to which no bidder, including Mr. Rajaliwala offered
more than Rs.32 crores. Hence the Company Court confirmed the sale in
favour of M/s. Venus Realcon for Rs.32 crores but it was made subject to
Special Leave Petitions filed by Pegasus and HSIIDC.
On considering the submissions of parties, we find that the sale confirmed
in favour of M/s. Venus Realcon for Rs.32 crores does not require any
interference particularly at the instance of Petitioner-Vinod Rajaliwala.
There was no illegality or irregularity established against the conduct of
auction and once it is found that the offer of Rs.32 crores was a fair
offer in a competitive bid conducted fairly and the offer has been
accepted and the sale confirmed, it would not be proper for this court to
undermine the value of such auction sale conducted not only by the
secured creditor but also by the Official Liquidator who was permitted to
be associated with the whole process of finding out of valuation as well as
the conduct of sale. M/s. Venus Realcon has rightly placed reliance upon
the judgments of this court in the case of Valji Khimji & Co. vs. Official
Liquidator of Hindustan Nitro Product (Gujarat) Ltd. 2008(9) SCC 299 and
Vedica Procon Private Limited vs. Balleshwar Greens P. Ltd., 2015(8)
SCALE 713. In Valji Khimji, the law was enunciated in Paragraph 28 in
the following words:
“If it is held that every confirmed sale can be set aside the result
would be that no auction-sale will ever be complete because always somebody
can come after the auction or its confirmation offering a higher amount.
It could have been a different matter if the auction had been held without
adequate publicity in well-known newspapers having wide circulation, but
where the auction-sale was done after wide publicity, then setting aside
the sale after its confirmation will create huge problems. When an auction-
sale is advertised in well-known newspapers having wide circulation, all
eligible persons can come and bid for the same, and they are themselves to
be blamed if they do not come forward to bid at the time of the auction.
They cannot ordinarily later on be allowed after the bidding (or
confirmation) is over to offer a higher price. Of course, the situation
may be different if an auction-sale is finalized, say for Rs.1 crore, and
subsequently somebody turns up offering Rs.10 crores. In this situation it
is possible to infer that there was some fraud because if somebody
subsequently offers Rs.10 crores, then an inference can be drawn that an
attempt had been made to acquire that property/asset at a grossly
inadequate price. This situation itself may indicate fraud or some
collusion. However, if the price offered after the auction is over which
is only a little over the auction price, that cannot by itself suggest that
any fraud has been done.”
In Vedica Procon’s case (supra) the aforesaid view was noticed and after
considering many judgments in Paragraph 39, the Court approved the view
taken in Navalkha and Sons vs. Sri Ramanya Das & Ors., 1969 (3) SCC 537
that there is a discretion in the Company Court either to accept or reject
the highest bid before an order of confirmation of sale is made. However,
once the Company Court is satisfied that the price is adequate, the
subsequent higher offer cannot be a ground for refusing confirmation. The
price of immoveable property keeps on varying depending upon the market
conditions and availability of a buyer. Such fluctuations may attract
fresh higher offers but normally such offers cannot be made the basis for
reopening the confirmed sale which was otherwise valid. In the present
case, we are satisfied that the sale made in favour of M/s. Venus Realcon
does not require any interference. There is no good reason why the full
price paid by Venus Realcon should be ordered to be refunded with interest
etc. and possession which was delivered to Venus Realcon at the time of
sale should be disturbed after passage of so much time. In such
circumstances, while granting leave in SLP(C) Nos.117-118, the consequent
Civil Appeals are hereby dismissed but without any order as to costs. The
money deposited in this case by the intervener M/s. Himalayan Infra
Projects Private Limited should be refunded to it forthwith along with
interest accrued thereupon.
The views expressed and the orders passed hereinabove may once again be
recapitulated as follows :- (1) Civil Appeal No. 3646 of 2011 is allowed
only for declaration of law without interfering with the sale of the
secured assets which has not been challenged by Pegasus. (2) Civil Appeal
No.---------/2015 (Arising out of SLP(C) No. 7074 of 2010) is dismissed.
(3) Civil Appeal Nos. ------------/2015 (Arising out of SLP(C) Nos. 117-118
of 2011) are dismissed. The amount of Rs.50 crores deposited by the
intervener M/s. Himalayan Infra Projects Private Limited shall be refunded
to it forthwith alongwith interest accrued thereupon. (4) Civil Appeal Nos.
9293-94 of 2014 are dismissed. The judgment and order of the Delhi High
Court is affirmed by holding that powers under the Companies Act cannot be
wielded by the Company Judge to interfere with proceedings by a secured
creditor to realize its secured interests as per provisions of the SARFAESI
Act.
There shall be no order as to costs.
………………………………..…….J.
[VIKRAMAJIT SEN]
………………………………….…..J.
[SHIVA KIRTI SINGH]
New Delhi.
December 29, 2015.
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