1 nmis72-09 IN THE HIGH COURT OF JUDICATURE AT BOMBAY IN INSOLVENCY NOTICE OF MOTION NO.72 OF 2009 IN NOTICE NO.N/42 OF 2009 Re. : V.T. Seth & Anr. ....Judgment Debtors Ex-parte : Videocon Industries Ltd. ....Petitioning Creditors Mr.Kishore Jain with Mr.Tushar Goradia, Ms.Nisha Parmar & Ms.Abha Gupta i/b Mr.P.V. Shah for the Judgment Creditor. Mr.M.M. Vashi with Ms.Prachi Khandge i/b M/s.M.P. Vashi & Associates in support of the Notice of Motion. CORAM : S.J. VAZIFDAR, J. DATE : 13TH AUGUST, 2010. ORAL JUDGMENT :- 1. This is the debtor's notice of motion to set aside the insolvency notice issued to them. 2. The petitioning creditor filed Suit No. 1891 of 2000 against M/s Akar Laminators and the two judgement debtors for the repossession of the equipment leased to them and for consequential reliefs including the recovery of arrears of lease rental. By an order dated 9th November 2001 the suit was disposed of in terms of consent terms entered into between the parties. As the submissions on behalf of both the parties require a consideration of the consent terms it is necessary to set them out in extenso. They read as under :- 2 nmis72-09 “1. The Defendants admit the claim of the Plaintiffs as mentioned in the above suit. 2. It is however agreed between the parties that upon the Defendants paying to the Plaintiffs an amount of Rs.3,00,00,000/- (Rupees Three Crores) on or before 31.12.2001 the claim in suit should be marked as fully satisfied and the Defendants he discharged from their liability in respect of the said claim. 3. It is expressly agreed between the parties that the time is the essence of this consent terms and that in the event of failure of the Defendants in payment of the aforesaid amount of Rs.3.00 Crores as mentioned in clause 2 above within the stipulated period i.e. on or before 31.12.2001. The Plaintiffs shall be entitled to recover the entire decretal amount as claimed in the suit and that there shall be a decree passed by the Hon’ble Court in accordance with the reliefs claimed in the suit. 4. In case the Defendants make payment in respect of the amount guaranteed by Defendant No.4 shall stands discharges as guarantor in respect of the aforesaid guarantee executed by them in favour of the Plaintiffs. 5. The Directors of the Defendants hereby personally undertake to this Hon’ble Court as regards compliance of this consent terms and further undertakes not to dispose of and/or alienate and/or create third party interest in respect of the assets and properties of the Defendant No.1 company and/or their personally assessts till the dues of the Plaintiffs claimed in the suit are duly said of, except in case of amalgamation of the Defendant No.1 – Company with some other company. 6. Suit disposed off in the aforesaid terms. Court fees refund as per rules. 7. Undertaking accepted. 8. There shall be order as to cost. Certified copy expedited.” 3. It is necessary to preface the further facts by noting the rival contentions. Mr. Vashi, the learned counsel appearing on behalf of the judgement debtors, submitted that the consent terms do not bring into 3 nmis72-09 existence a decree for the payment of the entire amount claimed in the suit in the event of the defendants failing to pay the amount mentioned in clause 2 thereof. In other words according to him though there was a failure on the part of the defendants in payment of the amounts as per clause 2 of the consent terms there is today no decree in existence entitling the judgement creditors to recover the entire decretal amount as claimed in the suit. Mr. Jain on the other hand submitted that there is today a decree in existence in favour of the judgement creditors for the entire amount as claimed in the suit in view of the judgement debtors having failed to make payment as per clause 2 of the consent terms. The submission on behalf of the judgement creditors is well founded both on a construction of the consent terms as well as in view of an order passed in this matter which I will refer to shortly. 4. The petitioner had filed Contempt Petition No. 66 of 2002 in the said suit inter-alia on the ground that the judgement debtors had failed to make payment under the consent terms despite the firm having failed to pay the said amounts. The contempt petition was disposed of by an order and judgement dated 13th June 2007. The learned judge did not go into the controversy as to whether a decree gets passed automatically on the failure of the defendants in the said suit to abide by the agreement contained in clause 2 of the consent terms. The learned judge, for the purpose of the Contempt Petition, presumed that a decree gets passed in favour of the plaintiff for the entire claim in the suit upon the defendant's failure to abide by the terms contained in the consent terms. The learned 4 nmis72-09 judge held that the undertakings contained in clause 5 of the consent terms cannot be read to mean that the defendants had undertaken to make payment of the said amount by 31st December 2001. This judgement is therefore of no assistance to either the judgement creditor or the judgement debtors. 5. The judgement creditors thereafter took out/applied for a judge's order being Judges Order No. 157 of 2009 in the said suit for a decree on admission under Order 12 rule 6 of the Code of Civil Procedure, 1908. The same was disposed off by an order and judgement dated 24th June 2009. It was submitted on behalf of the judgement creditor that the occasion for applying for a decree on admission under Order 12 rule 6 was that the judgement debtors had contended before the learned judge in the contempt petition that no decree could be said to have been passed by this court automatically on the failure of the defendants to abide by the agreement to pay the amount of Rs.3,00,00,000/- on or before 31st December 2001. The learned judge held that merely because such a defence was raised would be no reason for the court to entertain an application under Order 12 rule 6 when the suit had already been disposed of. It is important to note the following observations of the learned judge :- "3. Under Order 12, Rule 6 the Court is empowered to pass a decree on admission at any stage of the suit. The suit has already been disposed of. As Clauses 1 and 3 of the Consent Terms would show, there is a decree of the Court upon failure of the defendants to pay the amount of Rs. 3, 00, 000, 000/-or before 31 st December 2001. In the circumstances, there is no occasion for this Court to now pass a decree on admission under Order 12, Rule 6. The objection of the defendants to the Court exercising its jurisdiction under Order 12, Rule 6 on the ground that the suit has already been disposed of is, in these 5 nmis72-09 circumstances correct. The remedy of the plaintiffs must lie in adopting proceedings in accordance with the law for the execution of the decree dated 9 to November 2001." (emphasis supplied) The judgement clearly holds that as a result of the defendants having failed to pay the amount as required by the Consent Terms there is a decree of the court. The doubt if any in this regard is set at rest by the fact that the learned judge expressly held that the remedy of the judgement creditors must lie in adopting proceedings for the execution of the decree. This predicates the existence of a decree. The judgement is binding on me. I am in any event in respectful agreement with the learned judge. A plain reading of the consent terms establishes this. Clause 3 of the Consent Terms provided that in the event of the failure of the defendants to pay the amounts of Rs. 3 crores as mentioned in clause 2 the plaintiffs i.e. the judgement creditors "shall be entitled to recover the entire decretal amount as claimed in the suit and there shall be a decree passed by the court in accordance with the reliefs claimed in the suit." (Emphasis supplied). The decree operated against all the defendants therein including the judgement debtors. 6. The contention on behalf of the judgement debtors that there is no decree is therefore not only incorrect on principle but is, I am constrained to say, dishonest. When it suited them they contended before the learned judge hearing the contempt petition that there was no decree. Thereafter when the judgement creditors applied for a decree under Order 12 Rule 6 they contended that the application was not maintainable as by virtue of the Consent Terms a decree is there by virtue of the Consent 6 nmis72-09 Terms themselves. Having persuaded the learned judge to hold that there is a decree as prayed and thereby having had the application dismissed they now contend yet again that there is no decree. The judgement debtors conduct leaves a lot to be desired. 7. Mr. Vashi further submitted that the insolvency notice could not have been issued as the 1st defendant in the suit is and was at all material times registered with the BIFR. The judgement debtors were sued in their capacity as guarantors of the dues of the 1st defendant. Mr. Vashi submitted therefore that in view of the judgement of the Supreme Court in Paramjeet Singh Patheja versus ICDS Ltd. (2006) 13 SCC 322 the insolvency notice could not have been issued even against the judgement debtors. The submission is not well founded either on facts or in law. 8. It is necessary to note a few facts in this regard. The Insolvency Register issued the insolvency notice based on the said decree dated 9th November 2001. The insolvency notice stated that the amount due was Rs. 14,77,27,389=61 with further interest on Rs.2,59,20,000/- till payment. I will not burden this judgement with the various efforts the petitioning creditor had to make for a period of over one year to serve the insolvency notice on the judgement debtors. Suffice it to state that the judgement creditor was put through enormous difficulties in ensuring service of the insolvency notice upon the judgement debtors. Ultimately the service of the insolvency notice on the judgement debtors was complete on 12th October 2009. The act of insolvency was therefore complete on 14th November 2009. 9. I was invited to proceed on the basis that the reference was 7 nmis72-09 pending before the BIFR at all material times including when the insolvency notice was issued. Based on this premise it was contended that the insolvency notice could not have been issued, is void and therefore ought to be set aside. 10(A). This submission was based on the averments in paragraph 9 of the affidavit in support of the notice of motion wherein the judgement debtors stated that the 1st defendant: "is registered under BIFR Act." (B). By a letter dated 7th December 2009 the judgement creditors advocate requested the judgement debtor's advocate for inspection of documents including those in connection with the averments in paragraphs 9 and 10 of the affidavit in support. In paragraph 12 of the affidavit in reply the judgement creditor inter- alia stated that the judgement debtor had made a bald and vague statement regarding the registration of the reference with the BIFR; that the BIFR had rejected the company's reference and that what was pending as of 13th June 2007 was the appeal before the AAIFR and that the judgement debtors had avoided making available for inspection the documents and records in this regard despite being requested to do so. The judgement creditor averred that it was not aware of and therefore did not admit and put the judgement debtors to the strict proof that the 1st defendant company is registered under the SICA. (C). Despite the same the judgement debtors refused to furnish any information whatsoever. What is worse is that at the hearing before me the judgement debtors did not even point out that the reference had abated on 3rd February 2010. It is the judgement creditor that furnished this information at the hearing. Faced with this it was admitted by the 8 nmis72-09 judgement debtors that the reference had abated on 3rd February 2010 and that the appeal against the order was also dismissed. 11. I will presume that the reference before the BIFR having abated on 3rd February 2010 is of no relevance while considering whether or not the insolvency notice could have been issued on 5th September 2009. Even then it would make no difference. As noted above the judgement debtors have to date not furnish any information as to when the reference before the BIFR was made and as to whether or not it was pending at the material time. In the circumstances it is not even necessary so to consider the judgement cited by Mr. Vashi for the factual basis on which it is sought to be founded has not been established or for that matter even pleaded. I will however deal with same. 12. The submission is not well founded even as a question of law. It is in fact covered by two judgements of this Court, one of a learned single judge and the other of a Division Bench. (A). A learned single judge of this Court in Garden Finance Ltd. v Prakash Industries Ltd AIR 2002 Bombay 8 considered an identical situation. It was contended that a reference had been registered against the company before the BIFR and therefore in terms of the provisions of section 22 of the SICA the suit was not maintainable even against the guarantors. In that case also the suit had been filed for recovery of leased assets which belonged to the plaintiff and arrears of lease money. The learned judge held as under :- “10. Now, turning to the objection raised with reference to the provisions of Section 22 of the S.I.C.A. Act is concerned, the provisions of Section 22, which are 9 nmis72-09 relevant for the purpose of considering the objection, reads as under : "22. Suspension of legal proceedings, contract etc. - (1) Where in respect of an Industrial Company, an inquiry under Section 16 is pending or an scheme referred to under Section 1, is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under Section 25 relating to an Industrial Company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956) or any other law or the memorandum and articles of association of the Industrial Company or any other instrument having effect under the said Act or other law, no proceedings for the winding-up of the Industrial Company or for execution, distress or the like against any of the properties of the Industrial Company or for the appointment of a Receiver in respect thereof (an no suit for 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." 11. It is to be seen that the portion beginning with "And" and ending with "Industrial Company' was added by Sick Industrial Companies (Special Provisions) Amendment Act, 1993. Before that portion was inserted by amendment in Section 22, proceedings for winding up of the Industrial Company for execution, dispose of or like against any of the properties of the Industrial Company or for the appointment of the Receiver in respect of the property of the Industrial Company was barred. The judgment of the Supreme Court in the case of M/s. Shree Chamundi Mopeds Ltd., as also the judgment of the learned Single Judge of this Court in 20th Century Finance's case, referred to above considered the provisions of Section 22 before amendment in 1994. However, provisions of Section 22, on which the Defendant is relying are the provisions, which are incorporated by an amendment. It is true that the judgment of the learned Single Judge of this Court in Kotak Mahendra Finance's case referred to above considered the provisions of Section 22 as amended in 1994, as also the nature of the agreement as also the relief claimed in that suit. However, in that judgment the Court has not considered the provisions of Section 22 introduced by amendment separately and independently. Still, it can be said that the Court while deciding M/s. Kotak Mahendra's 10 nmis72-09 case was alive to the provisions of Section 22 as amended in 1994 and the learned Single Judge has held that the suit instituted for recovery of the property which is leased to the Industrial Company. which is before B.I.F.R. as also for recovery of the arrears of the lease money is maintainable and that the bar of Section 22 of S.I.C.A. Act does not operate. In my opinion, the provisions incorporated by amendment in the year 1994 will not apply to a suit which is a suit basically filed for recovery of the property of the Plaintiff itself, which is in possession of the Defendant/ Industrial Company, which is before B.I.F.R. The words that are used in Section 22 are "no suit for the recovery of money or for the enforcement of any security against the Industrial Company. In my opinion, unless the suit answers this description and can be said to be a suit for recovery of money, or for the enforcement of any security against the Industrial Company, the suit will not be barred. So far as the present suit is concerned, frame of the suit shows that it is basically a suit for recovery of the lease equipment of the Company, and incidentally a decree for the arrears of lease money has been claimed and therefore, in my opinion, such a suit which is composite suit and which is basically a suit for recovery of the lease equipment will not be barred by provisions of Section 22 of the S.I.C.A. Act. 12. Now, so far as the objection about the maintainability of the suit against the guarantor is concerned, in my opinion, the objection is misconceived, in as much as, what is barred by the provisions of Section 22 of the Act is a suit for enforcement of any guarantee in respect of any loan or advance granted to the Industrial Company. Therefore, a guarantee contemplated by section 22 is a guarantee in respect of any loan or advance granted to the Industrial Company. The present guarantee agreement is not in respect of any loan or advance granted to the Industrial Company and therefore, a bar of Section 22 would not operate in relation to a suit which is filed for enforcement of a guarantee, which is in relation to a payment of lease money, which becomes due from the Industrial Company to the Plaintiff, as a result of the lease agreement. The Supreme Court in its judgment in Patheja Bros. case has considered this aspect of matter and has held that a suit for enforcement of a guarantee in respect of loan or advance granted to the Industrial Company can not be proceeded with. The relevant observations of the Supreme Court are to be found in paragraphs 7 & 8 are read as under : 11 nmis72-09 "7. The words in the square brackets above were inserted into Section 22 by Act 12 of 1994 and it is these words which are relevant for our purposes. As we read them, they provide that no suit. (a) for the recovery of money, or (b) for the enforcement (i) of any security against the Industrial Company, or (ii) of any guarantee in respect of any loans or advance granted to the Industrial Company shall lie or be proceeded with except with the consent of the Board or the Appellate Authority under the said Act. For our purposes. therefore, the relevant words are: "no suit .... for the enforcement ... of any guarantee in respect of any loans or advance granted to the Industrial Company" shall lie without the consent of the Board or the Appellate Authority. The words are crystal clear. There is no ambiguity therein. It must, therefore, be held that no suit for the enforcement of a guarantee in respect of a loan or advance granted to the Industrial Company concerned will lie or can be proceeded with, without the sanction of the Board or the Appellate Authority under the said Act. 8. It is not possible to read the relevant words in Section 22 as meaning that only a suit against the Industrial Company will not lie without such consent. There is no requirement in section 22, as analysed above, that, to be covered thereby, a suit for the enforcement of a guarantee in respect of a loan or advance to the Industrial Company should be against the Industrial Company." 13. It is clear from the above observations that the Supreme Court has held that if a suit in relation to a loan or advance granted to the Industrial Company cannot be proceeded with against the Industrial Company, then, the same suit or any other action in relation to the same agreement cannot be proceeded with against the guarantor. The intention of the Legislature, it appears, was to extend the protection which is granted to the Company and to the guarantor also. But, if a suit against the Company is not barred, then, in my opinion, the suit only against the guarantor cannot be said to be barred. Thus, in my opinion, there is no substance in these objections.” (B). In Ved Praksh versus Rama Petrochemicals Ltd 2005 (1) Maharashtra Law Journal 599 a Division Bench of this court dealt with a 12 nmis72-09 similar question. It was an appeal challenging the order passed by a single Judge granting a summons for judgement. The claim in suit was for unpaid lease rentals in an agreement of lease finance for equipment. The payment thereof was guaranteed by the appellant. The Division Bench rejected the contention that the suit was not maintainable in view of section 22 of the SICA. The division bench held as under :- “12. The result of a survey of these four judgments is clear. As far as leasehold rights of a sick company in a leased premises are concerned, they are not a property protected under section 22 of SICA as decided in Chamundi Moped (supra). When it comes to the proceedings against the industrial company, the expression must be widely construed because the basic idea is to revive the sick industry as held in Maharashtra Tubes. If there is any loan or advance granted to an industrial company and it is guaranteed to be repaid by a guarantor, no suit for enforcement of such a guarantee will lie against the guarantor also. This was held in Patheja Brothers. And lastly, as held in PICUP, the protection under amended section 22(1) is not available to the guarantors, when it comes to execution proceedings. The effect of the amendment is to stall suits of the particular type but not the recovery proceedings against the guarantor. The upshot of the above discussion is that firstly execution or recovery proceedings on the basis of existing decrees is not at all covered by the Amendment of 1994. When it comes to guarantors, it is only the suits for enforcement of any guarantee which would be stayed as against them provided they are in respect of loans or advances granted to the industrial company. Thus it is not that merely because the industrial company has become sick that the suits against the guarantors thereof