WP(C) 7097/2008 Page No.1 of 31 THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 09.07.2010 + WP(C) 7097/2008 FINITE INFRATECH LTD ... Petitioner – versus – IFCI & ORS ... Respondents Advocates who appeared in this case:- For the Petitioner : Mr Amit Sibal with Mr Sachin Midha, Mr Jafar Alam, Mr Harsh Koushik, Ms Ring Choden Lepcha and Ms Kriti Kumar For the Respondent No.1 : Mr N. K. Kaul and Mr Parag Tripathi, Sr Advocates with Mr Suresh Dobhal, Mr Lokesh Bhola, Ms Ruchi Kohli and Ms Alpana For the Respondent No.2 : Mr Yashpal Rangi with Mr Manjit Singh For the Respondent No.3 : Mr A. S. Chandhiok, ASG with Mr Neeraj Chaudhari with Mr Khalid Arshad, Ms Vibha Dhawan, Ms Madhur Panjwani and Mr Gurpreet Singh CORAM:- HON’BLE MR JUSTICE BADAR DURREZ AHMED HON’BLE MS JUSTICE VEENA BIRBAL 1. Whether Reporters of local papers may be allowed to see the judgment ? YES 2. To be referred to the Reporter or not ? YES 3. Whether the judgment should be reported in Digest ? YES BADAR DURREZ AHMED, J 1. “….From the heart of all matter Comes the anguished cry – „Wake, Wake, great Shiva, Our body grows weary Of its law-fixed path, Give us new form Sing our destruction, That we gain new life.‟ ͂ Rabindranath Tagore. This is how the great Tagore saw the invocation of Lord Shiva‟s attribute of simultaneously being a destroyer and a creator. The destruction of the body WP(C) 7097/2008 Page No.2 of 31 to enable the heart or soul to gain a new life in a new form. Perhaps, this very principle of Hindu philosophy has been borrowed by western thinkers and, ultimately, by the economist Schumpeter in his concept of „creative destruction‟ (see: „creative destruction‟ in Economics: Nietzsche, Sombart, Schumpeter by Higo Reinert and Erik S. Reinert). 2. But, what has all this got to do with this case? This will become clear, shortly. This much is evident, conceptually speaking, that destruction need not be the end alone, it may also be the beginning of something new. Here we are concerned with the repeal of the Industrial Finance Corporation Act, 1948 and the consequential death of the Industrial Finance Corporation of India (hereinafter referred to as „the Corporation‟), which was established under it, as also the birth of the Industrial Finance Corporation of India Limited (hereinafter referred to as „IFCI Limited‟). The repeal was brought about by the Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993. But, did the repeal also, simultaneously, establish or constitute IFCI Limited as a new form, a new „life‟ of the dead Corporation? 3. This question arises in the backdrop of another question, as to whether IFCI Limited (respondent No. 1) is a “financial institution” within the meaning of Section 2(1)(m) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the „said Act‟)? And, this issue arises in view of the prayer sought by the petitioner for quashing the notification No. SO 98(E) dated 15.02.1995, which has been issued under Section 4A(2) of the WP(C) 7097/2008 Page No.3 of 31 Companies Act, 1956 notifying IFCI Limited as a public financial institution. If the plea taken by the petitioner that it is not a financial institution within the meaning of Section 2(1)(m) of the said Act is accepted, then the proceedings initiated by IFCI Limited under the said Act against the property of the petitioner in respect of which a mortgage has been created, would be set at naught. This would be so because, then, IFCI Limited would not fall within the meaning of the expression “financial institution” as defined in Section 2(1)(m) of the said Act and, therefore, it would not be entitled to avail the benefits available to a financial institution under the said Act. On the other hand, if the contention of the respondents is accepted that IFCI Limited is such a financial institution then IFCI would be entitled to take and continue proceedings under the said Act. 4. As pointed out above, the aforesaid issue arises in the backdrop of the repeal of the Industrial Finance Corporation Act, 1948 by virtue of the Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993. The Corporation was established under Section 3(1) of the Industrial Finance Corporation Act, 1948. Subsequent to the repeal of the Industrial Finance Corporation Act, 1948, the undertaking of the Corporation stood transferred to and vested in IFCI Limited which was formed and registered subsequently under the Companies Act, 1956. 5. The Corporation had sanctioned a term loan of an amount not exceeding Rs 400 lacs to the petitioner on 26.08.1991. The loan agreement between the parties was executed on 03.02.1992 and, in order to secure the WP(C) 7097/2008 Page No.4 of 31 said loan, an equitable mortgage was created on 20.02.1992 in respect of plot Nos. 15-17, HUDA Industrial Area, Rewari, Haryana together with all buildings and structures standing thereon. Thereafter, as pointed out above, the Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993 (hereinafter referred to as „the Repeal Act‟) was enacted. Subsequently, IFCI Limited was formed and registered under the Companies Act, 1956 and on and from 01.07.1993, which was the appointed date under the Repeal Act, the undertaking of the Corporation stood transferred and vested in IFCI Limited. Since the petitioner, for some reason, had defaulted in repayment of the loan, IFCI Limited, on 05.10.1998 recalled the loan and demanded a sum of Rs 2,16,93,294/-. Thereafter, IFCI Limited filed OA No.122/1999 before the Debts Recovery Tribunal invoking the provisions of the Recovery of Debts Due to Banks and Financial Institution Act, 1993 (hereinafter referred to as „the DRT Act‟) for recovery of Rs 2,46,72,428/-. Pursuant thereto, settlement talks were initiated by the petitioner with IFCI Limited. According to the petitioner, while the settlement talks were in progress, IFCI Limited also took action under Section 13(2) of the said Act in respect of the said mortgage by issuing a notice dated 13.02.2008 in which a demand of Rs 18,21,38,833/- plus future interest with effect from 15.01.2008, was made. The petitioner filed objections to the proposed action but those objections were rejected by IFCI Limited. Consequently, on 05.05.2008 IFCI Limited took physical possession of the said mortgaged property. WP(C) 7097/2008 Page No.5 of 31 6. Being aggrieved by the said action of IFCI Limited, the petitioner filed an application under Section 17 of the said Act before the Debts Recovery Tribunal. However, as the petitioner did not get any relief before the Debts Recovery Tribunal, it filed an appeal under Section 18 before the Debts Recovery Appellate Tribunal and, inter alia, took the plea that IFCI Limited was not a financial institution under Section 2(1)(m) of the said Act and, therefore, the proceedings under the said Act pursuant to the issuance of the notice under Section 13(2) thereof were wholly without jurisdiction. In the meanwhile, IFCI Limited had issued a public notice of sale of movable and immovable assets of the petitioner and the date of auction was set at 28.07.2008. However, that auction failed but, as there was imminent danger of a further auction being conducted, the petitioner approached this Court by way of this writ petition seeking, inter alia, the quashing of proceedings under the said Act as also the quashing of the notification dated 15.02.1995 whereby IFCI Limited was notified as a public financial institution. A declaration has also been sought in this writ petition that IFCI Limited is not a financial institution under Section 2(1)(m) of the said Act and consequently cannot be regarded as a secured creditor within the meaning of Section 2(1)(zd). We would also like to point out that during the course of proceedings before this Court, a Division Bench of this Court, by an order dated 15.01.2009 directed that the proceedings before the DRT and the DRAT may continue, subject to final orders of this Court. WP(C) 7097/2008 Page No.6 of 31 7. To appreciate the rival contentions of the parties, it would be necessary to first examine the statutory provisions. Section 13(1) of the said Act stipulates that notwithstanding anything contained in Section 69 or Section 69A of the Transfer of Property Act, 1882, any “security interest” created in favour of any “secured creditor” may be enforced, without the intervention of the court or tribunal, by such creditor in accordance with the provisions of the said Act and thus Section 13(1) gives the right to a secured creditor to enforce a security interest without the intervention of the court or tribunal but in accordance with the provisions of the said Act. The expression “security interest” is defined in Section 2(1)(zf) and means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in section 31 of the said Act. It is clear that the mortgage created by the petitioner in favour of IFCI Limited would be covered under the expression “security interest”, provided IFCI Limited is regarded as a “secured creditor”. The expression “secured creditor” has been defined in Section 2(1)(zd) in the following manner:- “2(1)(zd) “secured creditor” means any bank or financial institution or any consortium or group of banks or financial institutions and includes – (i) debenture trustee appointed by any bank or financial institution; or (ii) securitisation company or reconstruction company; or (iii) any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created for due repayment by any borrower of any financial assistance;” WP(C) 7097/2008 Page No.7 of 31 This requires us to explore the meaning of the expression “financial institution” which has been defined in Section 2(1)(m). In the present case we are only concerned with clause (i) of Section 2(1)(m) which defines “financial institution” to mean “a public financial institution within the meaning of section 4A of the Companies Act, 1956 (1 of 1956);”. 8. We now move on to Section 4A of the Companies Act which specifies “public financial institutions” in the following terms:- “4A. Public financial institutions. – (1) Each of the financial institutions specified in this sub-section shall be regarded, for the purposes of this Act, as a public financial institution, namely:- (i) the Industrial Credit and Investment Corporation of India Limited, a company formed and registered under the Indian Companies Act 1913 (7 of 1913); (ii) the Industrial Finance Corporation of India, established under section 3 of the Industrial Finance Corporation Act, 1948 (7 of 1948); (iii) the Industrial Development Bank of India, established under section 3 of the Industrial Development Bank of India Act, 1964 (18 of 1964); (iv) the Life Insurance Corporation of India, established under section 3 of the Life Insurance Corporation Act, 1956 (31 of 1956); (v) the Unit Trust of India, established under section 3 of the Unit Trust of India Act, 1963 (52 of 1963); (vi) the Infrastructure Development Finance Company Limited, a company formed and registered under this Act. (vii) the securitisation company or reconstruction company which has obtained a certificate of registration under sub-section (4) of section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. WP(C) 7097/2008 Page No.8 of 31 (2) Subject to the provisions of sub-section (1) the Central Government may, by notification in the Official Gazette, specify such other institution as it may think fit to be a public financial institution: Provided that no institution shall be so specified unless – (i) it has been established or constituted by or under any Central Act, or (ii) not less than fifty-one per cent of the paid-up share capital of such institution is held or controlled by the Central Government.” From a reading of Section 4A of the Companies Act, 1956, it is apparent that it is in two parts. The first part falls under sub-section (1) and the second, under sub-section (2). Under the first part, the public financial institutions are specified by name. Under the second part, a provision has been made for other institutions to be notified in the official gazette as public financial institutions if the Central Government so thinks fit. The proviso to sub-section (2) of Section 4A of the Companies Act, 1956 is of vital importance for a decision in this case. It lays down two conditions which have to be satisfied before the Central Government can notify an institution to be a public financial institution. The first condition is that the institution should have been established or constituted by or under any Central Act. The second condition is that not less than 51% of the paid up share capital of such an institution must be held or controlled by the Central Government. Another important feature of sub-section (2) of Section 4A of the Companies Act, 1956 is that it begins with the words – “subject to the provisions of sub-section (1)”. It is pertinent to note that in the specified public financial institutions mentioned under sub-section (1), the Industrial WP(C) 7097/2008 Page No.9 of 31 Finance Corporation of India established under Section 3 of the Industrial Finance Corporation Act, 1948 has been specifically mentioned in clause (ii) thereof. Thus, if the Repeal Act had not been enacted, the Corporation would have continued to exist and by virtue of Section 4-A (1) of the Companies Act, 1956 it would have to be regarded as a public financial institution. But, the Industrial Finance Corporation of India no longer exists because of the Repeal Act and its entire undertaking has been transferred to and vested in IFCI Limited, which is not a specified public financial institution under sub-section (1) of Section 4A of the Companies Act, 1956. Therefore, the entire controversy in this case centres on the interpretation to be given to the words and expressions used in sub-section (2) of Section 4A of the Companies Act, 1956. 7. By virtue of notification No. SO 98(E) file No. 3/33/94-CL.V dated 05.02.1995, the Central Government, in exercise of powers conferred under Section 4A(2) of the Companies Act, 1956 specified IFCI Limited, formed and registered under the Companies Act, 1956, to be a financial institution and amended the original notification of the Government of India, Ministry of Law, Justice and Company Affairs bearing No. S.O.1329 dated 8th May, 1978 by inserting the following entry after entry (15):- “(16) Industrial Finance Corporation of India Ltd., formed and registered under the Companies Act, 1956 (1 of 1956)”. 8. The submission of Mr Amit Sibal, the learned counsel appearing on behalf of the petitioner, was that this notification was bad in law and was beyond the powers given to the Central Government under Section 4A(2) of WP(C) 7097/2008 Page No.10 of 31 the Companies Act, 1956 because, according to him, IFCI Limited was neither established by nor constituted under any Central Act. He also contended that the stipulation as regards the Central Government holding or controlling not less than 51% of the paid up share capital of IFCI Limited is no longer satisfied and, therefore, the notification requires to be quashed. According to Mr Sibal once the notification goes, IFCI Limited cannot be regarded as a public financial institution and, consequently, it would not fall within the expression “financial institution” as appearing in Section 2(1)(m) of the said Act. The result of this would be that IFCI Limited would not be entitled in law to take recourse to the provisions of the said Act. 9. It was contended by Mr Sibal that the word “established” in Section 4A (2) of the Companies Act is used in the sense of bringing into existence or creating. An indication that this is the manner, in which it has been used, according to Mr Sibal, is given by the use of the very same word “established” in clauses (ii), (iii), (iv) and (v) of sub-section (1) of Section 4A of the Companies Act. He submitted that the manner in which the word “established” has been used in sub-section (1) clearly shows that the institution must be created by or brought into existence by the statute itself. He submitted that the word “established” does not have the same meaning as “formed and registered” under the Companies Act. This would be evident from the fact that the expressions “formed and registered” and the word “established” have been used differently in the very same sub-section (1) of Section 4A of the Companies Act. Thus, the Legislature consciously WP(C) 7097/2008 Page No.11 of 31 used the word “established” when it wanted to do so and consciously used the words “formed and registered” when it wanted to convey a different meaning. 10. Mr Sibal then referred to the provisions of the Industrial Finance Corporation Act, 1948 and in particular to the Preamble and Section 3 thereof where the intention of Parliament was clearly to “establish” the Industrial Finance Corporation of India. The expression used in Section 3(1) of the Industrial Finance Corporation Act, 1948 was to the following effect:- “a corporation to be called the Industrial Finance Corporation of India shall be established for the purposes of this Act.” He submitted that the Industrial Finance Corporation of India was clearly a corporation which was established under the Industrial Finance Corporation Act, 1948. It was governed by the said statute and not by the Companies Act. It had no separate Memorandum or Articles of Association and everything concerning the Corporation was incorporated and provided in the said Act itself. 11. Mr Sibal then referred to the Repeal Act of 1993. Reading the Statement of Objects and Reasons behind the introduction of the Repeal Act, Mr Sibal submitted that it was due to the continued decline in the availability of concessional funds from the Government and the Reserve Bank of India over the years as also the changes in the past several months (prior to the introduction of the Repeal Act) in the financial sector that it had become obligatory for the Industrial Finance Corporation of India to raise resources largely from the market. However, the Industrial Finance WP(C) 7097/2008 Page No.12 of 31 Corporation Act, 1948 permitted accessibility to the market only when it was backed by a Government guarantee. As a result, the Corporation was prevented from raising resources on competitive terms. It was also stated in the Statement of Objects and Reasons that the Industrial Finance Corporation Act, 1948 provided a very dominant role to its major shareholder, namely, the Industrial Development Bank of India in the functioning of the Corporation. This situation was considered to be anomalous as the two institutions, that is, the Industrial Finance Corporation of India and the Industrial Development Bank of India, were competitors. 12. The Statement of Objects and Reasons further indicates that to deal with these problems and in particular, to ensure greater flexibility and consequent ability of the Corporation to respond to the needs of the fast changing financial system, it was thought necessary “to establish a new company under the Companies Act, 1956, to which the entire undertaking, business and functions of IFCI as well as the assets and liabilities and the staff of IFCI will be transferred on such day as will be notified by the Central Government.” It was further provided in the said Statement of Objects and Reasons that the conversion of the Corporation (IFCI) into a company would also enable it to re-shape its business strategies, provide greater autonomy, recourse to the capital market for raising resources, facilitate expansion of its equity base in future, and create a more levelled playing field across broadly similar financial institutions. In sum and substance, it was submitted by Mr Sibal that the old corporation was extinguished and a new company (IFCI Limited) was to be formed and WP(C) 7097/2008 Page No.13 of 31 registered under the Companies Act, 1956. It is not as if by virtue of the Repeal Act, the new company – IFCI Limited, was brought into existence or created but it was yet to be formed and registered under the Companies Act, 1956 as would be clear from the definition of the word “company” given in Section 2(b) of the Repeal Act wherein the word “company” has been defined to mean the Industrial Finance Corporation of India Limited (IFCI Limited) “to be formed and registered under the Companies Act, 1956”. Mr Sibal sought to distinguish the manner in which the company has been defined in Section 2(b) with the manner in which the word “corporation” has been defined in Section 2(c) as meaning the Industrial Finance Corporation of India “established” under sub-section (1) of Section 3 of Industrial Finance Corporation Act, 1948. It is on the basis of this distinction, that Mr Sibal submitted that IFCI Limited was not established under the Repeal Act. 13. Continuing with his submission, Mr Sibal contended that Section 3 of the Repeal Act merely transferred the undertaking of the Corporation to the company. Section 4 of the Repeal Act dealt with the general effect of vesting of undertaking in the company. Referring to Section 5 of the Repeal Act, he submitted that by virtue thereof, with effect from the appointed day (01.07.1993), all fiscal and other concessions, licences, benefits, privileges and exemptions granted to the Corporation in connection with the affairs and business of the Corporation under any law for the time being in force, were deemed to have been granted to the company. He submitted that on that date, the said Act was not in force and, therefore, it could not even be WP(C) 7097/2008 Page No.14 of 31 contended that since IFCI was a public financial corporation specifically mentioned in Section 4A(1) of the Companies Act, by virtue of Section 5 of the Repeal Act, the benefits, privileges etc., which were available to it, would continue to be granted to IFCI Limited also. 14. He submitted that the manner in which the management and affairs of IFCI Limited was to be conducted was not provided in the Repeal Act and that would be the subject matter of the Memorandum and Articles of Association of IFCI Limited. He further submitted that by virtue of Section 8 of the Repeal Act, options were given to the officers or employees of the Corporation to continue or not to continue to be such officers/ employees of the company (IFCI Limited). According to Mr Sibal, this in itself indicated that the very nature of the Corporation was changed from government to private. Referring to Section 11 of the Repeal Act, Mr Sibal submitted that by virtue of that provision, the Industrial Finance Corporation Act, 1948 stood repealed with effect from the appointed day, that is, 01.07.1993, and from that day onwards, the Corporation ceased to exist and the new company, that is, IFCI Limited did not have the character of a public financial institution. 15. Mr Sibal also referred to a similar statute being the UTI (Transfer of Undertaking and Repeal) Act, 2002 whereby the Unit Trust of India Act, 1963 was repealed. However, according to Mr Sibal, the UTI Repeal Act did not contemplate a complete privatization and, therefore, a specific provision was made for substitution of the specified company or administrator in place of the Unit Trust of India wherever necessary in every WP(C) 7097/2008 Page No.15 of 31 Act, rule, regulation or notification. Section 18 of the UTI Repeal Act reads as under:- “18. In every Act, rule, regulation or notification in force on the appointed day, for the words “Unit Trust of India”, wherever they occur, the words, brackets and figures “specified company referred to in the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002” or “Administrator of ,the specified undertaking of the Unit Trust of India referred to in the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002”, as the case may be, shall be substituted.” He