1 WP 1903.11.sxw JPP IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 1903 OF 2011 Canara Bank. ... Petitioner. V/s. M/s. Jai Electronic Industries Pvt. Ltd. & Ors. ... Respondents. Mr. Umesh Shetty with Ms. Sharila D’souza for the Petitioner. Mr. Yogesh Singh i/b. Global Law Offices for Respondents 1 to 3. CORAM : DR. D.Y. CHANDRACHUD & A.A. SAYED, JJ. 18 NOVEMBER 2011. P.C. :- Rule, by consent returnable forthwith. With the consent of Counsel and at their request the Petition is taken up for hearing and final disposal. 2. Counsel appearing on behalf of the the Petitioner states that service of the Petition has been effected on the Respondents and an affidavit of service has been filed. 3. This Petition under Article 226 of the Constitution of India 2 WP 1903.11.sxw has been instituted by Canara Bank in order to challenge an order of the Debt Recovery Appellate Tribunal (DRAT). The DRAT has allowed an application filed by the First Respondent (Exhibit 10) and stayed proceedings in an Original Application filed by the Petitioner until measures are taken under Section 13(4), in accordance with Section 13(9) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, by the Petitioner, or proceedings before the BIFR and AAIFR come to a logical conclusion. 4. A reference to the relevant facts would be necessary. On 17 October 1997, the First Respondent created an equitable mortgage in respect of its immovable property consisting of land and building situated in the Satpura Industrial Area of MIDC and the Registration District of Nasik in favour of the Petitioner. The mortgage was evidenced by a letter of confirmation regarding a deposit of title deeds. The Petitioner initially issued a notice to Respondents 1,2 and 3 being respectively the principal borrowers and the guarantors under Section 13(2) of the Securitization Act on 27 November 2006. The First Respondent filed a reference under Section 15(1) of 3 WP 1903.11.sxw the Sick Industrial Companies (Special Provisions) Act, 1985 on 21 December 2006. Since no steps were taken after 2006 in pursuance of the notice under Section 13(2), a fresh notice under that provision was issued on 15 July 2008. On 2 December 2008, the Petitioner issued a notice to the First Respondent intimating that possession of the mortgaged immovable property would be taken under Section 13(4) on 6 December 2008. Accordingly, on 6 December 2008, possession was taken. 5. The Petitioner had filed before the AAIFR an application (Miscellaneous Application No.67 of 2008) seeking dismissal of the Appeal or, in the alternative, a declaration that the reference under the SICA had abated. Initially, on 28 April 2009, the application was permitted to be withdrawn by the AAIFR. On 5 June 2009, the Petitioner filed an Original Application before the Debt Recovery Tribunal for recovery of its outstanding dues in the amount of Rs.18.79 crores. In 2009, the Petitioner filed an application (Miscellaneous Application No.2161 of 2009 in Appeal No.27 of 2008) in the Appeal which was pending before AAIFR seeking a dismissal of 4 WP 1903.11.sxw the reference on the ground that it had abated on the Petitioner’s taking possession of the secured asset. In January 2010, the First Respondent filed an application, Exhibit 10, before the Debt Recovery Tribunal, seeking an adjournment sine-die of the Original Application in view of the pendency of the reference filed before the BIFR. On 7 May 2010, an ex- parte order was passed by the DRT staying the hearing of the Application until final hearing of the Appeal before the AAIFR. This order was recalled on 20 May 2010 and the Application was directed to be taken up for hearing afresh. On 31 August 2010, the DRT rejected the Application for stay filed by the First Respondent holding that in so far as the mortgaged property consisting of the factory, land and building was concerned, the Petitioner was the exclusive creditor and had taken possession of the property. 6. The Petitioner issued a notice of sale on 1 September 2010 and it has been stated before the Court that the mortgaged property has been sold by a public auction at and for a sum of Rs.7.01 crores. The auction purchaser has deposited the entire sale proceeds with the Petitioner. The 5 WP 1903.11.sxw First, Second and Third Respondents had a remedy under Section 17 of the Securitization Act against the measures that were adopted by the Petitioner of taking over possession of the immovable property and of conducting an auction sale. Counsel appearing on behalf of the First Respondent states that though an application was filed under Section 17, it has been rejected by the Tribunal for want of payment of court fees. 7. The First, Second and Third Respondents filed an Appeal before the Debt Recovery Appellate Tribunal in order to challenge the order of the Tribunal dated 31 August 2010 rejecting their application at Exhibit 10 for adjournment of the proceedings sine-die. In the meantime, on 13 January 2011, the AAIFR passed an order to the effect that since the Petitioner had taken action under Section 13(4) and had taken symbolic possession of secured assets, the reference filed by the First Respondent stood abated. 8. On 25 May 2011, the DRAT passed its impugned order allowing the Appeal filed by the First, Second and Third Respondents. The DRAT noted the factual position, which was 6 WP 1903.11.sxw not in dispute that the financial assistance extended by the Petitioner, Canara Bank, to the First Respondent was secured by a mortgage of immovable property comprising of the land and factory building in favour of the Petitioner. Similarly, it was undisputed that SICOM, the Fourth Respondent to these proceedings (the Second Respondent before the DRAT) had financed the plant and machinery of the First Respondent and held an exclusive charge in respect thereof. The Tribunal noted that SICOM had already sold the plant and machinery in respect of which it held security. The First Respondent had not until date challenged that action of SICOM. The DRAT was however of the view that it was not open to the Petitioner to unilaterally take measures under Section 13(4) of the Securitization Act on the ground that since financial assistance had also been granted by SICOM, the consent of the latter was necessary because it was only then that secured creditors representing not less than three fourths in value of the amount outstanding would have granted consent within the meaning of Section 13(9) of the Act. On this foundation, the DRAT set aside the order of the Tribunal which upheld the measures adopted by the Petitioner under Section 13(4). 7 WP 1903.11.sxw 9. Counsel appearing on behalf of the Petitioner, while assailing the Judgment of the DRAT, submitted that (i) This is not a case either of joint financing of a secured asset or of financing of an asset by a consortium of financial institutions; (ii) Admittedly, the immovable property consisting of land and building was financed exclusively by the Petitioner and an equitable mortgage was created exclusively in favour of the Petitioner by the First Respondent on the land and building;(iii) SICOM had exclusively financed the plant and machinery in respect of which it held a charge and it is not in dispute that SICOM had already sold the plant and machinery which sale has not been challenged by the First Respondent; (iv) On these admitted facts, the provisions of Section 13(9) would have no application whatsoever since that provision applies only where there is a financing of a financial asset by more than one secured creditor or a joint financing of a financial asset by secured creditors; (v) The DRAT could not set aside in collateral proceedings measures adopted under Section 13(4) by the Petitioner. If the First, Second and Third Respondents were aggrieved by the measures adopted, they had to take recourse under Section 17. It was not open to the DRAT in 8 WP 1903.11.sxw proceedings arising out of the Original Application under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 to impugn and decide upon the validity of the measures adopted under the Securitization Act; (vi) SICOM has already realised its secured asset viz. the plant and machinery and has ceased to be in the fray. Once the Petitioner has taken recourse to a measure under Section 13(4), the reference must be regarded as having abated. 10. On the other hand, Counsel appearing on behalf of the First, Second and Third Respondents submitted that (i) The expression “financial assistance” is defined by Section 2(k) and the expression “financial asset” by Section 2(l); (ii) For the purposes of Section 13(9), the definition of “financial asset” in Section 2(l) must be construed. Hence, in the present case, where the First Respondent had been extended facilities by several borrowers, then, for the purposes of Section 13(9), it is the overall debt of all the borrowers which must be taken into consideration; (iii) In the alternative, Section 13(9) has no bearing on the abatement of the reference which is governed by the third proviso to Section 15 of the SICA introduced, as a result of the amendment brought out by Section 41 of the 9 WP 1903.11.sxw Securitization Act. Unless the requirements of the third proviso are fulfilled, there would be no abatement of the reference. 11. Section 13(9) of the Securitization Act provides, in so far as is material, as follows :- “ In the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-clause (4) unless exercise of such right is agreed upon by the secured creditors representing not less than three fourth in value of the amount as on a record date and such action shall be binding on all the secured creditors. “ 12. Section 13(9) provides for eventualities where the exercise of the right to take a measure under Section 13(4) is made conditional on an agreement between secured creditors representing not less than three fourth in value of the amount outstanding as on a record date. The provisions of Section 13(9) are however attracted in the case of a financing of a financial asset by more than one secured creditor or a joint 10 WP 1903.11.sxw financing of a financial asset by secured creditors. The expression “financial asset” is defined in Section 2(l) as follows :- “ Financial asset means debt or receivables and includes - (i) a claim to any debt or receivables or part thereof, whether secured or unsecured; or (ii) any debt or receivables secured by, mortgage of, or charge on, immovable property; or (iii) a mortgage, charge, hypothecation or pledge of movable property; or (iv) any right or interest in the security, whether full or part underlying such debt or receivables; or (v) any beneficial interest in property, whether movable or immovable, or in such debt, receivables, whether such interest is existing, future, accruing, conditional or contingent; or (vi) any financial assistance. “ 13. The expression “secured creditor” is defined in Section 2(zd) inter-alia to mean a bank or financial institutions or any consortium or group of banks or financial institutions in whose 11 WP 1903.11.sxw favour a security interest is created for due repayment by any borrower of any financial assistance. The expression “security interest” in Section 2(zf) means a right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge hypothecation or assignment other than those specified in Section 31. 14. For the purpose of Section 13(9), what is of significance is that the financial asset must be either financed by more than one secured creditor or there must be a joint financing of a financial asset by the secured creditors. Unless such is the case, the provisions of Section 13(9) requiring an agreement amongst secured creditors representing not less than three fourths in value of the amount outstanding, for a measure to be taken under Section 13(4) would not be attracted. 15. In the present case, it is an undisputed position that (i) The Petitioner had extended financial facilities to the First Respondent in respect of the factory, land and building exclusively and it was only the Petitioner which had an 12 WP 1903.11.sxw exclusive security interest in respect of these secured assets; (ii) SICOM, the Fourth Respondent, had extended finance and held an exclusive charge in respect of the plant and machinery. SICOM exercised its rights as a charge holder in respect of the plant and machinery and sold it as noted in the order of the DRAT. In that view of the matter, the DRAT was in error in coming to the conclusion, as it did by its impugned order, that since financial assistance was also granted by SICOM, its consent was necessary because it was only then that secured creditors representing not less than three fourth in value of the amount outstanding shall be entitled to exercise their right under Section 13(4) of the Securitization Act. 16. The issue before the Court, however, is as to whether the reference which was filed by the First Respondent stands abated. Section 41 of the Securitization Act brought about an amendment to Section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985. As a result of the amendment, two provisos have been inserted into Section 15(1) after the existing proviso which are as follows :- 13 WP 1903.11.sxw “ Provided further that no reference shall be made to the Board for Industrial and Financial Reconstruction after the commencement of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, where financial assets have been acquired by any securitisation company or reconstruction company under sub-Section (1) of Section 5 of that Act: Provided also that on or after the commencement of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, where a reference is pending before the Board for Industrial and Financial Reconstruction, such reference shall abate if the secured creditors, representing not less than three-fourth in value of the amount outstanding against financial assistance disbursed to the borrower of such secured creditors, have taken any measures to recover their secured debt under sub- Section (4) of Section 13 of that Act.” 17. For the purpose of the application that was filed by the First Respondent, the DRAT was essentially required to apply its mind to whether the provisions of the third proviso to Section 15(1) would come into operation and the reference, 14 WP 1903.11.sxw would stand abated. Evidently, the DRAT has not done so. From the record of the proceedings before the Court, the attention of the Court has been drawn to an affidavit that was filed by SICOM before the AAIFR on 17 September 2009 recording that it has a security interest in respect of the loan advanced in respect of four properties. The first property comprises of the plant and machinery which, as noted earlier, has been sold. SICOM also claims a mortgage in respect of certain office premises, a residential flat and a unit of an industrial estate. SICOM would also have to be heard by DRAT before it decides whether the third proviso to Section 15(1) is attracted. The issue as to whether the proceedings in the Original Application were liable to be stayed by virtue of the provisions of Section 22 of the SICA would have to be considered by the DRAT. That in turn would depend upon whether the reference has abated in view of the provisions of the third proviso to Section 15(1) of the SICA. We may note here that the AAIFR had following the order of the DRT dated 31 August 2010 passed an order on 13 January 2011 holding that the reference stands abated. Counsel appearing on behalf of the First Respondent states that an application has 15 WP 1903.11.sxw now been filed before the AAIFR for restoration of the reference, following the impugned order of the DRAT dated 25 May 2011. We clarify that we have not made any observations in that regard since that the application is pending before the AAIFR. The DRAT has not applied its mind to the third proviso to Section 15 nor has it considered whether its requirements have been fulfilled. Hence, an order of remand is warranted. 18. For the reasons indicated earlier, we accordingly set aside the impugned order of the DRAT dated 25 May 2011 and restore Misc. Application No.223 of 2010 with Misc. Appeal No. 951 of 2010 filed before the DRAT for fresh disposal in accordance with law. 19. Since the First, Second and Third Respondents had filed an Application under Section 17 to challenge the measures adopted by the Petitioner under Section 13(4) and that Application was admittedly rejected by the Registrar of the DRT for want of court fees, there would be no impediment as a result of this order in respect of the sale which has been 16 WP 1903.11.sxw conducted by the Petitioner. Nothing contained in this order shall prejudice the rights of SICOM in any manner whatsoever to urge all appropriate contentions and to take necessary steps to effectuate its own remedies in accordance with law. 20. The Petition is accordingly disposed of. There shall be no order as to costs. (Dr. D.Y. Chandrachud, J.) (A.A. Sayed, J.)