IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No 10525 of 2003 WITH SPECIAL CIVIL APPLICATION NOS. 10524 and 10526 OF 2003. For Approval and Signature: HON'BLE MR.JUSTICE KUNDAN SINGH ============================================================ 1. Whether Reporters of Local Papers may be allowed : NO to see the judgements? 2. To be referred to the Reporter or not? : NO 3. Whether Their Lordships wish to see the fair copy : NO of the judgement? 4. Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the concerned : NO Magistrate/Magistrates,Judge/Judges,Tribunal/Tribunals? -------------------------------------------------------------- SHIKHAR YARNS PVT. LTD. Versus SURAT PEOPLE'S CO-OPERATIVE BANK LTD. -------------------------------------------------------------- Appearance: Mr. Mihir Joshi with MR ANSHIN H DESAI for Petitioner No. 1-2 Mr. Suresh N Shelat, Advocate General with MR NV ANJARIA for Respondent No. 1 -------------------------------------------------------------- CORAM : HON'BLE MR.JUSTICE KUNDAN SINGH Date of decision: 5/12/2003 CAV JUDGEMENT 1. The petitioner no.2 is a shareholder and Managing Director of petitioner no.1 company in all the three petitions and the common question of law is required to be determined in all the aforesaid three petitions. Therefore, they are being disposed of by this common judgment. 2. In all these petitions, notice dated 24th May, 2003 issued by the respondent bank in exercise of the powers under sub-section (1) of section 13 of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the Act) has been challenged by the petitioners, whereby the respondent bank has issued notice to the effect to take possession of secured assets of the petitioner company including right of transfer by way of lease, assign or sale for realising secured assets and (2) to take over the management of the secured assets of the petitioner company including right of transfer by way of lease, assign or sale for realisation of the secured assets. 3. The petitioner no.1 company set up its unit of manufacturing textile yarn by installing one texturising machine and eight twisting machines for which term loan facility to the tune of Rs. 70 lacs (approximately) and Rs.35 lacs (approximately) was availed from GIIC and GSFC respectively. The working capital facility for the said project to the tune of Rs. 1 crore was availed from Karnataka Bank Ltd. (KBL) in the year 1991 and NTIL extended its manufacturing facility by installing other texturising machines and five twisting machines for which loan of Rs. 86,10,000/- (approximately) was availed from IFCL. In the year 1993, two private limited companies were incorporated being Parshva Textiles Pvt. Ltd. an Shikhar Yarn Pvt. Ltd. Thee companies are subsidiaries of the petitioner company. The term loan of Rs. 1,45,60,00/- (Approximately) for these projects was also availed from GIIC and the working capital facility of Rs.1,00,00,000/- was availed from K.B.L. Due to financial crisis and financial assistance given very late by the respondent Bank, hence the position of the petitioner company became very imbalancing. The respondent bank gave a notice under section 13(2) of the Act to the petitioner company hence the petitioner filed a writ petition in this Court. In the proceedings of the earlier petition, the learned advocate appearing on behalf of the respondent bank filed an affidavit made by the General Manager of the Bank stating that the impugned notice in the petition issued under section 13(2) of the Act shall not be acted upon and in this view of the matter, the cause of action of the petitioner did not survive. Hence, the petition being Special Civil Application no. 10940 of 2002 was dismissed as not pressed on 10.4.2003. During the hearing before BIFR on 5.9.2002, the respondent bank submitted a Miscellaneous Application praying that the BIFR should first decide preliminary issue as to whether Reference pending before it would abate in view of 2nd proviso inserted in section 15(1) of SICA by section 41 of the Act. The petitioner submitted that the total amount claimed by the secured creditors being KBL, GIIC and the respondent bank was Rs. 20,55,67,767/constituting around 62% of the total amount claimed. The amount claimed by GIIC was Rs.1,50,09,715/constituting around 8% of the total amount claimed and the amount claimed by the respondent was Rs. 6,15,72,090/- constituting around 29.95% of the total amount. Therefore, the referred proviso could not be invoked at all. As such, the respondent bank had no authority in law to invoke the Act as it was not a secured creditor as contemplated under the Act. Thereafter, the petitioner received another notice dated 24th September, 2002 issued by the respondent purported to have been under sections 13(2) and 13(3) of the Act that secured assets being plant, machineries, equipments, land and building, residential flats and shares of joint stock companies as listed in the schedule thereto were intended to be enforced by the respondent in the event of non-payment of the secured debts by the petitioner within 60 days from the date of notice. It was also stated that there is an overlapping charge on the land, building, plant and machinery in favour of other secured creditors being GIIC and KBL. Hence, the notice under section 13(2) of the Act issued by the respondent bank in exercise of the powers under section 13(2) of the Act is otherwise without authority of law and no measures under section 13(2) can be taken by a secured creditor representing less than 3/4th in the value of the amount outstanding as on the record date. The BIFR has declared the petitioner company unit as a sick industry on 30th October, 2002 under section 3(1)(o) of SICA. The BIFR order reads as under: "The promoter/guarantors should not change their shareholding pattern nor alienate/encumber or dispose of their shares in the company in any manner and also the assets of the promoters and guarantors would not be disposed of/alienated/encumbered during this period as they would be enjoying the protection under section 22(1) of the Act." After the order dated 10.4.2003 passed in Special Civil Application no. 10940 of 2002, the respondent bank cannot issue a notice dated 24th May, 2003 under section 13(2) of the Act which was under challenge in Special Civil Application no. 10940 of 2002. It was also stated that there is an overlapping charges on the land, building, plant, machinery in favour of other secured creditors being GIIC and KBL and the respondent secured creditor is less than 3/4th of the value of the amount outstanding as on the record date as required under section 13(9) of the Act and asked the respondent bank to withdraw the notice. It is stated that the impugned notice deserves to be quashed and set aside on the ground that BIFR has declared the petitioner company a sick unit under section 3(1)(o) of SICA and in para-17 of the order of the BIFR in clause (i) protection under section 22(1) of the SICA has been granted. Once the respondent bank has made a statement before this Court that it will not act upon the notice under section 13(2) of the Act which was issued earlier in point of time, it is not open for the respondent bank to issued notice again which amounts to misuse of process of court. The respondent bank has made an attempt to stall the revival of the proceedings by raising undue objections before the BIFR and making allegations against the promoters which are incorrect to its knowledge. The respondent bank also made an application before BIFR for permission to initiate recovery proceedings and simultaneously invoke the provisions of the Act. The respondent bank does not have exclusive charge over the assets of the petitioner. The respondent has appropriated to itself an amount of Rs. 22,54,388/- received by the petitioner on account of loss caused due to the earthquake, from the New India Assurance Company. The respondent has not released original documents relating to one flat at Pratistha Awas to complete the transfer in favour of a third party though the flat was sold with the permission of the respondent and the entire proceeds thereof were also deposited with the respondent bank. The respondent bank powers for taking over possession with the help of Magistrate are taken which they cannot be called upon in question, an appeal against any illegality is contemplated only after the possession is taken over. Therefore, the petitioners have filed these petitions. 5. The respondent has filed affidavit-in-reply stating therein that no fundamental right or legal right of the petitioners has been abridged by any action of the respondent bank. Therefore, the petitioners are not entitled to invoke extraordinary jurisdiction of this Court under Article 226 of the Constitution. Under section 17 of the Act, remedy of appeal is available to the petitioner before Debt Recovery Tribunal. As statutory alternative remedy is available to the petitioners, this petition is not maintainable. It is also stated that the petitioner company has separately obtained financial assistance by way of term loan from the bank to the tune of Rs. 4,27,26,000/- on 12.2.1998 and has committed the default in payment of the said secured debt. Outstanding dues in respect of the said loan obtained is Rs. 7,15,62,418/which comprises the principal and interest amount of Rs. 3,74,49,488/- and Rs. 3,41,12,930/respectively. The respondent bank has issued notice dated 24th May, 2003 to the petitioner company. The petitioner company has committed default as a borrower of the bank. A statement showing the security details of the properties hypothecated, mortgaged to the bank in respect of the aforesaid debt is forming part of the petition at Annexure"A". On non-payment of the loan amount by the petitioner, the petitioner company is a defaulter within the meaning of section 2(1)(j) of the Act. The respondent bank has independently extended financial assistance by way of term loan to the petitioner company which is a financial asset in respect of which an amount of Rs. 7,15,62,418/is outstanding as per books of accounts of the respondent bank without involving any other bank or any consortium or group of banks or financial institutions. The provisions of section 13(9) of the Act, require the consent of other secured creditors or creditors representing3/4th in value of the amount outstanding are not attracted in the present case. No other secured creditor is representing in the value of the amount outstanding because the respondent bank is representing 100% in value of the amount outstanding. The ex parte interim order was obtained by the petitioner restraining the bank from taking over possession and/or management of the secured assets of the petitioner. Unless written consent of the creditors representing 75% or more interest in the secured assets is obtained by the respondent bank is not attracted in respect of the respondent bank. It is further stated that the said ad-interim order was obtained by misleading this Court on the facts inasmuch as the respondent has independently extended financial assistance by way of term loan to the petitioner company which is a financial asset in respect of which an amount of Rs. 7,15,62,418/- is outstanding as per the books of the respondent bank without involving any other bank or any consortium or group of banks or financial institution was deliberately suppressed. As the statutory period of sixty days has already expired, the right to take measures contemplated under section 13(4) of the Act have accrued and vested with the bank and the only recourse available to the petitioner company is to approach the Debt Recovery Tribunal under section 17 of the Act. The proceedings initiated by the petitioner company under SICA has lost its efficacy in view of the subsequent invocation of the powers under the Act by the respondent bank. Section 35 of the Act provides that the provision of the 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 of the Act provides that the provisions of the Act shall be in addition to and not in derogation of other laws. The proceedings before the BIFR no more remain germane after the invocation of section 13(2) of the Act. In respect of the subsidiary company of the petitioner company, while rejecting the reference under section 15(1) of the SICA, BIFR has made the following remarks. "It is very clear from the foregoing that the financial accounts of the company are totally unreliable and the promoters are not of clean hands. The co./promoters have deliberately manipulated the books of accounts and diverted funds. Hence, the reference made by the company under section 15(1) is rejected as non maintainable." The appeal before AAIFR by the said company was not allowed and the rejection of reference was confirmed. The petition being Special Civil Application no. 10940 of 2002 has been disposed of in view of the notification dated 28th January, 2003 covering co-operative banks for the purpose of the said Act. Hence, the respondent bank has issued the impugned notice afresh. In the order dated 30th October, 2002 of the BIFR, no direction has been given to the respondent bank as secured creditor. On the contrary, the direction is given to the promoters/guarantors and not to the respondent bank. Therefore, there is no need of obtaining any consent of BIFR. Such protection is no bar on the issue of impugned notice under the provisions of the Act. The insertion of proviso to section 15(1) of SICA by section 41 of the Act is in supplementation and in furtherance of the objects and reasons and intention of the Act. The provisions of the Act have an overriding effect over the provisions of SICA and all other law for the time being in force which may be inconsistent with the provisions of the Act. The words "secured creditors" used in section 13(9) of the Act as well as in section 41 of the Act read with second schedule of amendment in section 15 of SICA by insertion of the 2nd proviso to section 51 of SICA is with reference to the financial assistance by a financial asset when financing of a financial asset is given by more than one bank or financial institution as consortium or group of banks or financial institutions as stipulated in the definition of "secured creditor" in section 2(1)(zd) of the Act. 6. It is also stated that when the financing of a financial asset is done by the second category (by more than one financial institution), then only requirement of consent of secured creditors representing 75% or more in value of the amount outstanding is required and not otherwise. It is also stated that a financial asset is read as financial asset in section 13(9) of the Act in respect of different financial assistance by more than one different banks/financial institutions. Then in that case, there would be different amounts outstanding in the books of such respective banks/financial institution, secured by the same or different assets as is stated by the petitioner, then the scheme of the said Act would not remain workable because in all cases of such different financial institutions/banks of such secured creditors may not have classified their secured debts as non performing assets as stipulated under section 13(2) of the Act or such secured debts of such other secured creditors may not have classified their secured debts as non performing assets as stipulated under section 13(2) of the Act or such secured debts of such other secured creditors may notbe classifiable under the RBI directives and even if all of them have classified their secured debts as non performing assets, some of them may not consider worthwhile for their own reasons to take recourse to section 13(2) of the said Act . The provisions of the Act of 2002 have an overriding effect over SICA and all other laws for the time being in force which may be inconsistent with the provisions of the Act. The words "secured creditors" used in section 13(9) of the Act as well as in section 41 of the Act read with second schedule of amendments in section 15 of SICA by insertion of 2nd proviso to section 51 of SICA is with reference to financial institutions. A financial assistance, a financial asset when financing of a financial asset is done by more than one bank or financial institution as consortium or group of banks or financial institutions as stipulated in in the definition of "secured creditor in section 2(1)(zd) of the Act. 7. It is also stated that when the financing of a financial asset is done by the second category, then only requirement of consent of secured creditors representing 75% or more in value of the amount outstanding is required and not otherwise, but the respondent's case relates relates to 100% in the amount outstanding. A financial asset is read as financial assets in section 13(9) of the Act in respect of different financial assistance by more than one different banks/financial institutions, then in that case there would be different amounts outstanding in the books of such respective banks/financial institutions. Then in that case there would be different amounts outstanding in the books of such respective banks/financial institutions secured by the same or different assets as is stated by the petitioner company, then the scheme of the said Act would not remain workable because in all cases of such different banks/financial institutions, all such secured creditors may not have classified their secured debts as non performing assets as stipulated under section 13(2) of the Act or such debts of such other secured creditors may not be classifiable under RBI directives and even if all of them have classified their secured debts as non performing assets, some of them may not consider worthwhile for their own reasons to take recourse to section 13(2) of the Act or to give consent to other independent secured creditor who may have taken recourse to the provisions of the Act for recovery or security interest of some other secured creditors may be such like lien or pledge that to them provisions of Act may not be applicable as stipulated under section 31 of the Act so as to enable them to enforce their security interest. It is also stated that three different financial assistance were extended at different times to the borrower petitioner company including by the respondent bank by way of term loan against security of hypothecation of machineries and equitable mortgage of land (two by GIIC by way of term loan against security of hypothecation of the same machinery and equitable mortgage of the same land and by KBL by way of overdraft facilities against security of stock prime security and hypothecation of the same machinery and equitable mortgage of different lands as collateral securities. The contention that the amount outstanding in respect of three financial institutions which are three different assets in their respective books of accounts should be clubbed for the purpose of requirement of consent of secured creditors representing 3/4th in the value of the amount outstanding is not tenable in law. The security given to secured creditors in respect of a financial assistance given by it, which is a financial asset in its books of account in respect of which particular amount is outstanding are overlapping with the securities given by the same borrower to other banks/financial institutions in respect of different financial assistance at different times is irrelevant as far as secured creditor who has independently financed a financial asset is concerned. If the respondent bank takes possession of secured assets under section 13(4) of the said Act and after recovery of the amount holding the same in trust to be applied as stipulated under section 13(7) of the Act in accordance with the rights and interests of the respective persons. Notice under section 13(2) is competent and permissible in law for the bank to individually proceed under the Act against the petitioner company for the recovery of debt as secured creditor. The respondent bank is empowered and authorised to take recourse to the provisions of the Act independently in the facts and circusmtances of the case. It is also denied that the reference to the submission made in the petition that the impugned action is contrary to the provisions of SICA and particularly section 22 as alleged. The provisions of section 22 of SICA do not create any bar in the facts and circumstances in view of the clear over-riding provisions of the Act in their applicability over all other laws by the legislature. The Parliament has amended section 15 of SICA by inserting two provisions to sub-section (1) of section 15. The provisos inserted are as under: "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 Recosntruction, such reference shall abate if the secured creditors, representing not less than 3/4th 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." 8. The provision in the context of 3/4th in the value of the amount against financial assistance has to be read with sub-section (9) of section 13 which deals with the cases of financing of a financial asset (singular) by more than one secured creditors or joint financing by a consortium or groups of creditors. The bank has given loan to the petitioner company individually and there is no joint or consortium finance with any other creditor so as to attract the conditions in the second proviso to section 15(1) of SICA. By the insertion of the aforesaid two provisos, the Parliament has intended that no reference will be made to the BIFR after the commencement of the Act. The first proviso makes it clear. So far as the second proviso is concerned, it provides that if there is a reference pending before BIFR on or after the commencement of the Act, such reference shall abate if secured creditors representing not less than 3/4th value of the amount outstanding against financial institutions, asset (singular) is to the borrower. The secured creditors of 2nd category have taken any measures to recover their secured debt (against singular) under section 13(4) of the Act. Since the respondent bank has extended 100% financial assistance by wayof term loan to the petitioner company independently without involving any other bank or financial institution and since no other bank is representing 100% value of the amount outstanding, admittedly, the reference is pending before BIFR and the said reference automatically abates with the initiation of measures by the respondent bank under section 13 of the Act. It is also denied that the proceedings before BIFR and under the Act are simultaneously invoked by the bank. It is permissible in law for the respondent bank which has taken recourse under the provisions of the Act once it is brought in to force. The Act empowers the respondent bank to proceed to recover the dues from the petitioner company notwithstanding and irrespective of the pending proceedings before BIFR. The BIFR proceedings are devoid of any efficacy in law and in that respect, no contention can be raised with reference to such proceedings. The notice contains all requisite details of the amount payable by the petitioner borrower company. It is also denied that the impugned notice demands a lumpsum amount as alleged and that is obliviously