CWP No.6356 of 2007 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH CWP No.6356 of 2007 Date of decision: 15.1.2008 M/s Triveni Yarns Limited ......Petitioner Versus Punjab Financial Corporation & others ......Respondents CORAM:- HON'BLE MR.JUSTICE SATISH KUMAR MITTAL HON'BLE MR. JUSTICE RAKESH KUMAR GARG * * * Present: Mr. I.S. Ratta, Advocate for the petitioner. Mr. H.S. Lalli, Advocate for respondent No.1. Mr. V.M. Gupta, Advocate for respondent No.2. Rakesh Kumar Garg, J . The petitioner, herein is a body corporate, having been incorporated under the Companies Act as per the certificate of Incorporation No.16-10719 of 1990 issued by the Registrar of Companies, Jalandhar. During the year 1993, the promoters of the petitioner-Company had set up a unit for the manufacture of woollen yarn at its works situated at village Jugiana, Distt. Ludhiana. Both the respondents i.e Punjab Financial Corporation (for short 'PFC') and Punjab State Industrial Development Corporation (for short 'PSIDC') granted term loan viz. PFC had sanctioned loan of Rs.67 lacs on 5.3.1993 and PSIDC had sanctioned term loan of Rs.33 lacs on 19.3.1993. The said loans were disbursed to the petitioner and further vide deed of mortgage/memorandum of entry, petitioner had created the security of the loan as mentioned hereinafter:- “Factory Building built on Land measuring 0B-18B-4B(2723- 1/3 Sq. Yards) comprised in Khata No.175/330, Khasra No.397, Khata No.254/478, 479, Khasra No.396, Khata CWP No.6356 of 2007 2 No.251/473, Khasra No.109, situated in village Jugiana, Tehsil and District Ludhiana together with building constructed thereon and machinery installed thereon.” The petitioner defaulted in repayment of the above said loans of the respondents and approximately a sum of Rs.71.20 lacs was due towards both the respondents. As per the case of the petitioner, with the intention to pay the above said dues to respondent-Corporation, the petitioner-company vide separate letters dated 20.6.2003 and 25.6.2003 had approached both the respondents for one time settlement for a sum of Rs.65 lacs which constitutes 91% of the aggregate outstanding principal sum of Rs.71.20 lacs towards both the respondents. Further, it is the case of the petitioner that respondent No.2 vide its letter dated 1.7.2003 insisted upon the proposal for 100% of the said outstanding amount instead of the proposal of petitioner-Company to the extent of 91% and that the petitioner had enhanced the offer to cover 100% of the outstanding amount and deposited a sum of Rs.25,000/- as token money. However, the respondents had shown no genuine desire to settle the matter. The petitioner has further referred to a letter dated 7.10.2004 written by respondent No.2 whereby he was again asked to submit a suitable proposal mutually acceptable to all concerned and in pursuance of this letter, the petitioner vide letter dated 19.10.2004 (Annexure P-4) offered to pay a sum of Rs.1,00,000/- as token money and also offered to pay a sum of Rs.4.20 lacs by way of three monthly instalments of Rs.1,40,000/- after receipt of sanction of one time settlement. Thereafter, the petitioner-Company was called for a meeting on 31.1.2005 by respondent No.2 and after that petitioner vide its letter dated 23.2.2005 deposited a sum of Rs.1,00,000/- by way of two cheques and also deposited another sum of Rs.50,000/- on that very date to cover up the sum of 5% of the OTS amount and vide its letter dated 12.4.2005 informed respondent No.2 that condition of deposit of 5% of OTS sum stood fulfilled. However, the respondents delayed the matter of sanction of OTS. The petitioner, further alleged that instead of sanctioning the OTS scheme, the respondents vide their letter dated 12/13.12.2006, without assigning any CWP No.6356 of 2007 3 reasons, intimated that the OTS proposal was not acceptable. It is further the case of the petitioner that the unit set up by the petitioner had suffered losses and had become sick and, therefore, a reference was filed by the petitioner- company with BIFR under Section 15(1) of the Sick Industrial Companies Act, 1985 (hereinafter referred to as “SICA Act” ) which was registered with Board for Industrial and Financial Reconstruction (hereinafter referred to as “BIFR”), New Delhi vide case No.25/2003 M/s Triveni Yarns Ltd., and, thereafter, vide order dated 28.11.2005 (Annexure P-10) the petitioner-Company was declared as Sick Industrial Company and, therefore, in order to explore the viability of its rehabilitation BIFR had appointed respondent No.1-PFC as the operating agency and the matter before the BIFR is still pending. The petitioner has also placed on record a copy of letter dated 12.9.2006 Annexure P-7, whereby it had requested respondent No.1 for rehabilitation of the unit. Vide Annexure P-9 dated 27.12.2006, the petitioner also requested respondent No.1 to accept the OTS proposal. The petitioner has further stated that respondent No.1 issued a demand notice dated 9.1.2007 under Section 13(2) of The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (hereinafter referred to as “Securitization Act”), requiring him to discharge his liabilities towards the respondents and advised him to pay the entire outstanding dues to respondent No.1 amounting to Rs.257.33 lacs with further interest from 31.7.2006 and Rs.146.25 lacs with further interest from 31.7.2006 to PSIDC within 60 days from the date of the notice. Through this notice, it was also stated that in case the petitioner failed to repay the entire outstanding dues, the Corporation shall be entitled to exercise its rights as provided under Section 13(4) of the Securitization Act. The petitioner vide Annexure P-13 dated 2.3.2007 filed objections to the notice dated 9.1.2007 issued by the respondent- Corporation under Section 13(2) of the Act. These objections were disposed of by respondent No.1 vide its reply dated 7.3.2007 (Annexure P-14) and the petitioner was advised to repay the loan of the Corporation. On the basis of the above stated facts, the petitioner has filed the present writ petition challenging the action of respondent No.1 for initiating CWP No.6356 of 2007 4 proceedings under Section 13(2) of the Act for quashing (Annexure P-11) i.e. notice dated 9.1.2007 and further restraining the respondents from proceeding under Section 13(4) of the Act. At the time of motion hearing, learned counsel for the petitioner referred to the order passed by the BIFR (Annexure P-10) dated 28.11.2005 and contended that no notice under Section 13(4) of the Securitization Act has been issued and matter is pending before BIFR, therefore, all the recoveries of dues are to remain stayed in pursuance of Section 22(1) of the SICA Act. Upon issuance of notice of motion, the respondents appeared and contested the claim of the petitioner by filing separate replies, stating therein that the writ petition for quashing notice under Section 13(2) of the Act is not maintainable and the respondents who are secured creditors, who have granted financial assistance to the borrower and has created such interest, has the right to enforce such security for repayment of the loan amount without the intervention of the Court subject to the provisions contained in the Act and since the petitioner had defaulted in the repayment of the loan amount, therefore, notice under Section 13(2) of the Act was issued to the petitioner to secure its dues. Counsel for the petitioner has argued that in view of the unit of the petitioner having been declared sick by the BIFR and that the proceedings are pending before the BIFR therefore, no action can be taken by the respondent- Corporation under the provisions of Securitization Act. All the recoveries or dues are to remain stayed in pursuance of Section 22 of the SICA Act. Learned counsel has further argued that the permission of BIFR before proceedings against the petitioner would be necessary once the reference is pending before it. He has further stated that the respondents have failed to communicate the reasons for non-acceptance of the objections filed by the petitioner within a period of one week on the receipt of objection and, therefore, the respondents are further precluded from taking any action against the petitioner under Section 13(4) of the Securitization Act. In support of his contention, learned counsel for the petitioner has CWP No.6356 of 2007 5 relied upon the judgement cited as Rishab Agro Industries Ltd. v. PNB Capital Services Ltd. 2001 (Banking) J 81 and Harminder Singh and another vs. State Bank of India, Amritsar 2007(4) PLR 746. On the other hand, counsel for the respondents has argued that Section 35 of Securitization Act has an overriding effect over all the other laws if such other laws are inconsistent with the provisions of this Act and moreover in view of the proviso to Section 15(1) of the SICA Act, the proceedings before the BIFR would abate as the total amount of loan due to the secured creditors represents 100% of the value of the amount outstanding against the financial assets disbursed to the petitioner. It has been further argued that the writ petition for quashing the notice under Section 13(2) of the Securitization Act is not maintainable as the same does not give any right to the petitioner to file the present writ petition. Moreover, the respondent-Corporation cannot be injuncted from resorting to genuine recourse to the provisions of Section 13(4) of the Securitization Act for further proceedings against the petitioner as the objections filed by the petitioner under Section 13(3) of the Act stands replied/disposed vide Annexure P-14 dated 7.3.2007. It has also been argued that no further step has been taken till date by the respondent-Corporation as envisaged under Section 13(4) of the Securitization Act against which an effective and alternative remedy of appeal is provided under the provisions of Section 17 of the Securitization Act. It has been prayed that in view of the above stated submissions, the writ petition has no merit and the same be dismissed. The respondents have also relied upon the judgement of the Hon'ble Supreme Court cited as Transcore vs. Union of India and other 2007 (1) ISJ (Banking) 1. We have heard learned counsel for the parties and have also perused the record. It is useful to reproduce provisions of Sections 15 and 22 of the SICA Act: CWP No.6356 of 2007 6 “15. Reference to Board- (1)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 Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, where financial assets have been acquired by any securitization company or reconstruction company under sub-section (1) of section 5 of that Act: Provided also that on or after the commencement of the Securitization 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 CWP No.6356 of 2007 7 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.] (2) Without prejudice to the provisions of sub-section (1), the Central Government or the Reserve Bank or a State Government or a public financial institution of a State level institution or a scheduled bank may, if it has sufficient reasons to believe that any industrial company has become, for the purposes of this Act, a sick industrial company, make a reference in respect of such company to the Board for determination of the measures which may be adopted with respect to such company: Provided that a reference shall not be made under this sub- section in respect of any industrial company by- (a) the Government of any State unless all or any of the industrial undertakings belonging to such company are situated in such State; (b) a public financial institution or a State level institution or a scheduled bank unless it has, by reason of any financial assistance or obligation rendered by it, or undertaken by it, with respect to, such company, an interest in such company. 22.Suspension of legal proceedings, contracts, etc.- (1)Where in respect of an industrial company, an inquiry under Section 16 is pending or any scheme referred to under Section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under Section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association CWP No.6356 of 2007 8 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 CWP No.6356 of 2007 9 any of the contracts, assurances of property, agreements, settlements, awards, standing orders or other instruments in force, to which such sick industrial company is a party or which may be applicable to such sick industrial company immediately before the date of such order, shall remain suspended or that all or any of the rights, privileges, obligations and liabilities accruing or arising thereunder before the said date, shall remain suspended or shall be enforceable with such 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 CWP No.6356 of 2007 10 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. No doubt Section 22(1) of SICA Act provides a bar for the enforcement of any security against the Industrial Company or of any guarantee in respect of any loans or advanced granted to the Industrial Company when the proceedings for rehabilitation of such units are pending before the BIFR. However, it may be seen that in view of Section 41 of the Securitization Act an amendment has been carried out in Section 15 of the SICA Act and a proviso has been added to the effect that any reference pending before the BIFR shall abate if the secured creditors representing not less than ¾th in value of the amount outstanding against the financial assistance disbursed to the borrower of such secured creditors have taken any measure to recover their secured debt. Moreover, Section 35 of the Securitization Act has an overriding effect over other laws. Sections 35 and 41 of the Securitization Act are reproduced hereinafter below for the ready reference: 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 CWP No.6356 of 2007 11 or any instrument having effect by virtue of any such law. 41. Amendments of certain enactments- The enactments specified in the Schedule shall be amended in the manner specified therein. In view of the amendment carried out in Section 15 of the SICA Act and the overriding effect of the provisions of Securitization Act, the contention of the counsel for the petitioner to the effect that all the proceedings of recovery of dues are to remain stayed in pursuance of provisions of Section 22(1) of the SICA Act is liable to the rejected. It is also relevant to note that the total amount of loan of the secured creditors represents 100% of the value of the amount outstanding against the financial assets disbursed to the petitioner by the respondent-Corporations and once the respondents have initiated action under the provisions of Securitization Act, the proceedings before the BIFR are deemed to have abated. The reliance of Sh.I.S. Ratta, counsel for the petitioner in Rishab Agro Industries Ltd. vs. PNB Capital Services Ltd.2001 (Banking) J 81 is misplaced. The said judgement is not applicable to the facts of the present case as in the said case the Hon’ble Supreme Court has interpreted the provisions of Section 22(1) of SICA Act vis-à-vis the provisions of companies Act and the proviso to Section 15 of the SICA Act was added later on and the amended provisions of Section 15 of the SICA Act in pursuance of Section 41 of the Securitization Act were not before the Hon’ble Supreme Court. The second contention raised by the counsel for the petitioner to the effect that provisions of Section 13(3)(A) of the Securitization Act have not been complied with by the respondents and therefore, they are estopped from taking any action against the petitioner under Section 13(4) of the Securitization Act, has no force. The judgement in Harminder Singh's case (supra) relied upon by counsel for the petitioner does not help him in any way as the respondent- Corporation has disposed of the objections raised by the petitioner and the same have also been communicated to him. The Hon'ble Supreme Court in Mardia CWP No.6356 of 2007 12 Chemicals Ltd and others v. Union of India and others 2004(4) SCC 311, has authoritatively laid down that the reasons communicated to the petitioner after considering the reply of the borrower do not give any right to him to approach the DRT under Section 17 of the Act at that stage. It would be open to the borrower to file an appeal under Section 17 of the Act before the DRT on measures having been taken under sub-section (4) of Section 13 and before the auction of the property by the secured creditors. From the facts, it is crystal clear that the said objections filed by the petitioner vide Annexure P-13 dated 2.3.2007 stand disposed of by the respondents vide their reply dated 7.3.2007 (Annexure P-14) meaning thereby that there is substantial compliance of Section 13(3)(a) of the Securitization Act enabling the respondent-Corporation to take further steps as provided under Section 13(4) of the Securitization Act. Even otherwise to our mind, the writ petition on this account is premature as no steps under Section 13(4) of the Securitization Act have been taken by the respondents which can be further challenged and which is also appealable under Section 17 of the Securitization Act before the Debt Recovery Tribunal having jurisdiction in the matter. Thus, the present writ petition is devoid of any merit and the same is hereby dismissed. (RAKESH KUMAR GARG) JUDGE January 15, 2008 (SATISH KUMAR MITTAL) ps JUDGE