Ast 1 wp2079.10.sxw IN THE HIGH COURT OF JUDICATURE AT BOMBAY CIVIL APPELLATE JURISDICTION WRIT PETITION NO. 2079 OF 2010 Nouveaw Exports Private Limited. ...Petitioner vs 1. Appellate Authority For Industrial Industrial & Financial Reconstruction Co. & 7 ors. ...Respondents Mr. Janak Dwarkadas, senior counsel, S. Jagtiani, Shiraj Dhruv and Aditya Hegde i/b M/s. Dhru & Co. for the Petitioner. Ms. Jyoti Singh with Ms. Mrudula Khedekar i/b M/s. Dhir & Dhir Associates for the Respondent Nos.3 and 4. Mr. S.P. Thorat for the Respondent No.5. Mr. Aspi Chinoy with Z.A. Jariwala, Vikram Mehta i/b M/s. Thakore Jariwala & Associates for the Respondent Nos.6 & 7. CORAM : A.M. KHANWILKAR & R.M. SAVANT, JJ. JUDGMENT RESERVED ON : MAY 3 , 2010 JUDGMENT PRONOUNCED ON : MAY 19, 2010 JUDGMENT :(Per A.M.Khanwilkar,J) 1. Heard counsel for the parties. 2. This Petition, under Article 226 of the Constitution of India, takes Ast 2 wp2079.10.sxw exception to the order passed by the Appellate Authority for Industrial & Financial Reconstruction, New Delhi, dated 13th January, 2010, whereby the prayer for interim relief during the pendency of Appeal preferred by the Petitioner has been rejected. The Petitioner, by the said Appeal, had questioned the correctness of the order passed by the Board For Industrial And Financial Construction (BIFR) dated 7th January, 2009. 3. Briefly stated, the question that arises for our consideration is in the context of the fact that the Respondent No.5-bank claims to be the sole secured creditor of the Respondent No.3-borrower. The Reference was pending before the BIFR for revival of the Respondent No.3-company. During the pendency of the said proceedings, the Respondent No.5-bank invoked remedy under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short “Securitisation Act”) and proceeded with the sale of properties of Respondent No.3. Consequent thereto, the movable and immovable properties in Respondent No.3-company were sold in public auction as back as in July, 2008. That sale has been confirmed by the DRT and possession of the said property has also been made over to the Respondent No.7. These facts are not disputed. However, the Petitioner, claiming to have business conducting agreement executed by the Respondent Ast 3 wp2079.10.sxw No.3-company in its favour and also in the capacity of one of the unsecured creditor, moved the BIFR for a direction against the Respondent No.5-bank not to proceed with the further steps under the Securitisation Act; and stay the implementation of the proposed actions to be taken by the bank. Further, it was prayed that the Respondent No.5-bank and the Respondent No.3-company should allow the representatives of the Petitioner to enter the Vashi Plant and remove their stock, equipments and machinery etc. Further relief is claimed in the said application against Respondent No.3-company to disclose to BIFR and the Petitioner, the details and the status of the securitisation application that was filed by the Respondent No.3-company in the DRT, whereby the action initiated by the Respondent No.5-bank was subject matter of challenge. This application preferred by the Petitioner was rejected by the BIFR on 7th January, 2009. Even though this order is relevant, has not been annexed to the Petition. But, copy of the said order has been handed over to us across the bar. The BIFR has taken the view that since the sale has already been completed and action under Section 13(4) of the Act of 2002 has been taken to its logical end and also upheld by the DRT, the Board has lost its jurisdiction over the company’s case. It is this decision of the BIFR which has been challenged in Appeal before the AIFR. During the pendency of the said Appeal, interim relief was prayed to direct the Respondents to maintain status quo with regard to the company’s property till Ast 4 wp2079.10.sxw the disposal of the Appeal. This prayer has been considered by the Appellate Authority in the impugned judgment. The Appellate Authority has declined to grant any interim protection to the Petitioner for the reasons recorded in paragraphs 10 and 11 of the impugned decision. The substance of the reason is that the sale in favour of the Respondent No.7 has been concluded long back and because the action under section 13(4) has been taken to its logical end, it was not open to interdict that process and moreso because the BIFR proceedings have abated. 4. The argument canvassed before us is essentially founded on the mandate of Section 22 of The Sick Industrial Companies (Special Provisions) Act, 1985. It was argued that the proceeding resorted to by the Respondent No.5-bank were covered by the sweep of Section 22 of the Act of 1985 and, therefore, the same could not have proceeded further in absence of consent of the Board. The argument, though attractive, does not commend to us. 5. We make it clear that our observations in this order be treated as only, prima facie, to consider the question regarding grant of interim relief during the pendency of appeal before the Appellate Authority, to the Petitioner, as prayed. Ast 5 wp2079.10.sxw 6. On analysing the provisions of Section 22 of the Act of 1985 read with Section 15 of the same Act, we have no hesitation in taking the view that the case on hand would fall within the parameters of third proviso to Section 15 (1) of the Act of 1985. The third proviso reads thus: “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 th Board for determination of the measures which shall be adopted with respect to the company - .......... .......... 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 or such secured creditors, have taken any measures to recover their secured debt under sub-section (4) of section 13 of that Act.” [Emphasis supplied] It would be apposite to reproduce section 22(1) of the Act of 1985 which reads thus: 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, the, 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 properties of the industrial company or for the appointment of Ast 6 wp2079.10.sxw 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.” 7. Significantly, the third proviso has been introduced in the year 2002 by Act 54 of 2002 which corresponded with the coming into force of the Securitisation Act of 2002. The same has been inserted as per section 41 of the Securitisation Act. The third proviso to Section 15(1) of the Act of 1985 postulates two requirements so that the reference before the BIFR would abate, namely:- (i) The secured creditors must represent not less than three-fourth in value of the amount outstanding against the financial assistance disbursed to the borrower; and (ii) Such secured creditors have taken any measures to recover this secured debt under Section 13(4) of the Act of 2002. This proviso is an enabling provision which permits the specified number of secured creditors to take measures to recover their secured debt under Section 13(4) of the Act of 2002 and if action is so taken by them, then it would automatically entail in abatement of the reference proceedings before the BIFR. Ast 7 wp2079.10.sxw This proviso is in the nature of exception to the bar under Section 22 of the Act of 1985. The bar under Section 22 of the Act of 1985 is automatically lifted on fulfillment of the conditions specified in the third proviso to Section 15(1) of the same Act. 8. Besides, counsel for the Respondents have relied on Section 35 of the Act of 2002 which reads thus: “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 or any instrument having effect by virtue of any such law.” 9. According to the Respondents, in view of the non obstante clause in the Act of 2002, the question of taking consent of the Board in terms of Section 22 of the Act of 1985, irrespective of the strength of the secured creditors, does not arise. We are not inclined to accept this extreme argument made before us by the Respondents - that even a single secured creditor or even secured creditors representing less than three-fourth in value of the amount outstanding against the financial assistance disbursed to the borrower could invoke the provisions of the Act of 2002, without taking consent of the Board under Section 22 of the Act of 1985. Ast 8 wp2079.10.sxw 10. On conjoint reading of Section 22 of the Act of 1985 along with the third proviso to Section 15(1) of that Act as also Section 35 of the Securitisation Act of 2002, the position, in our opinion, which emerges is that if the secured creditor(s), whose strength is “less than” three-fourth in value of the amount outstanding against financial assistance disbursed to the borrower, intends to invoke the regime under the Act of 2002, would be obliged to take consent of the Board under Section 22 of the Act of 1985. Whereas, if the secured creditor(s) representing “not less than” three-fourth in value of the amount outstanding against financial assistance disbursed to the borrower, by virtue of third proviso to Section 15(1) of the Act of 1985, are entitled to proceed against the borrower and the secured debt of the borrower by invoking provisions of the Act of 2002, without taking consent of the Board as per Section 22 of the Act of 1985. This appears to be the scheme of the enactment of Securitisation Act of 2002 and in particular considering the corresponding amendment introduced in Section 15 of the Act of 1985 in the year 2002. 11. In the present case, the Respondent No.5-bank claims to be the only secured creditor who has had provided financial assistance to the Respondent No.3-company, at the relevant point of time. This factual position has not been challenged in the application filed by the Petitioner before the Board. This is a Ast 9 wp2079.10.sxw crucial matter which ought to have been asserted by the Petitioner only when it could have succeeded in persuading the Board that the proceeding before the BIFR has not abated in law. On the other hand, if the Respondent No.5 qualified the requirement of the secured creditors representing not less than three-fourth in value of the amount outstanding against financial assistance disbursed to the borrower, the question of taking consent of the Board would not arise and, at the same time, by operation of law, the proceeding before the BIFR would abate without requiring to do anything further. 12. That, however, does not mean that the BIFR would have no jurisdiction to examine the factual position as to whether the secured creditors who intend to or have invoked the provisions of the Act of 2002 would constitute the requisite strength of not less than three-fourth in value of the amount outstanding against financial assistance disbursed to the borrower of such secured creditors at the relevant point of time. That is a matter which ought to be examined by the Board, if called upon to do so. If the Board were to hold that the secured creditors who have invoked provisions of the Act of 2002 do not qualify the said requirement, in that situation, the provisions of Section 22 of the Act of 1985 would operate and any steps taken by such secured creditors albeit under the provision of Act of 2002, would be of no avail and will have to be treated as Ast 10 wp2079.10.sxw non-est in the eyes of law, considering the purport of Section 22 of the Act of 1985. Only this interpretation would sub-serve the legislative intent behind the two enactments. 13. In our opinion, since the Petitioner has nowhere asserted that the strength of Respondent No.5-bank was less than three-fourth in value of the amount outstanding against financial assistance disbursed to the borrower or such secured creditor at the relevant point of time, therefore, the question of the Petitioner succeeding in their application does not arise. 14. The contention that the scheme to be formulated by the BIFR would bind all the secured creditors by virtue of Section 18 of the Act of 1985 does not take the matter further, having regard to the sweep of third proviso to Section 15(1) of the Act of 1985 r/w Section 35 of the Act of 2002. 15. The criticism of the Petitioner before this court is that the authority has, instead of examining the question in the context of the effect of Section 22 of the Act, straight away opined that since action under Section 13(4) of the Act of 2002 has been taken to its logical end, nothing survives for consideration before the Board. This argument does not commend to us for the reasons already Ast 11 wp2079.10.sxw recorded in the earlier part of this order. 16. Counsel appearing for the Petitioner, relying on the decision of the Orissa High Court in the case of Noble Aqua Pvt.Ltd. & Ors. V/s. State Bank of India & Ors. reported in (2009) 148 Com.Cases 817, contended that the crucial words in the third proviso to Section 15(1) of the Act of the 1985 are “..... where a reference is pending........ such reference shall abate .....” According to the Petitioner, a reference under section 15(1) of the Act of 1985 is made to BIFR “.... for determination of the measures which shall be adopted with respect to the company.” Once the measures have been determined, the reference is exhausted and it can no longer be said that the Reference is pending. In that situation, the third proviso to Section 15(1) of the Act of 1985 will have no application. It was argued that in the present case, the BIFR has not only declared the Respondent No.3 as a sick company, as back as on 25th August, 1999, within the meaning of Section 3(1)(o) of the Act of 1985, but has also framed and sanctioned the scheme for revival of the Respondent No.3 Company to which the Respondent No.5 Bank was party-being the Secured Creditor. In such a situation, the third proviso to Section 15(1) of the Act of 1985 cannot be invoked by the Secured Creditor such as Respondent No.5 Bank. To buttress this submission, emphasis is placed on the opinion of the Orissa High Court in Ast 12 wp2079.10.sxw the above decision, which reads thus: “This Court is unable to appreciate the aforesaid contention. The proviso makes it very clear that same will come into force where a reference is pending before the BIFR. Such reference will abate if the secured creditors representing not less than three-fourths in value of the amount outstanding against financial assistance disbursed to the borrower, have taken any measures to recover their secured debt under Sub-section (4) of Section 13 of the Securitisation Act. In the instant case, admittedly the notice under Sub-section (4) of Section 15 of the Securitisation Act has been issued on 7.4.2007. But long before that, the company has been declared a sick industrial company by an order o the BIFR dated 14.11.2006. Therefore, the proceeding under the SICA was not at the stage of reference. The proceeding has gone far ahead of that and culminated in an order by which the company was declared sick on 14.11.2006. The said order was passed by the BIFR after hearing the bank and by the said order the bank was appointed an operating agency with a direction to prepare the revival scheme. Therefore, in the facts of this case, the reference cannot abate since the matter under SICA is not pending in reference before the BIFR. Even though the bank is a party to the said order, it has neither filed any appeal therefrom nor has it asked for consent under Section 22 to proceed against the petitioner company. Therefore, this argument raised by the learned Counsel for the Bank cannot be accepted.” 17. It was vehementally argued that the opinion so recorded by the Orissa High Court applies on all fours to the case on hand. Our attention was invited to the fact that the Orissa High Court had occasion to consider Section 37 of the Securities Act which clarifies that the provisions of that Act are not in derogation of laws referred to therein. Besides, since the scheme has been prepared by virtue of Section 18(8) of the Act, 1985, the same will be binding on the Respondent No.5 being the secured creditor and the Respondent No.5 in Ast 13 wp2079.10.sxw turn, would be bound to provide financial assistance to the Respondent No.3 sick company, as per section 19 of the Act of 1985. 18. We shall now analyse the decision of the Orissa High Court in some detail. In that case, BIFR proceedings were pending against the Company. In the said proceedings, the opposite party Bank opposed the plea of the Company for declaring it a sick company. Nevertheless, the company was declared as a sick company as on 31st March, 2005. Thereafter, the BIFR appointed the Bank as operating agency with direction to prepare revival scheme for it, if feasible. Further, the opposite party-bank had applied for permission under Section 22(1) of the Act of 1985, which was opposed for and on behalf of the Company on the ground that such permission would delay the revival of the company. The permission asked by the opposite party-bank under section 22(1) was refused by order dated 14th November, 2006. That order had become final. In the mean time, the Company had filed Petition before the DRT on 10th July, 2006 for suspension of further proceedings before DRT. What is relevant to notice is that the opposite party-Bank vide letter dated 26th December, 2006 emphasised about the DRT proceedings and stated that the DRT will take measures for seizure of the factory premises and other fixed assets of the company for sale through public auction for recovery of the decreetal dues of the bank. Thereafter, notice Ast 14 wp2079.10.sxw under section 13(4) of the Securitisation Act was issued to the Company. In this background, the Company rushed to the High Court by way of Writ Petition challenging the said notice under section 13(4) of the Securitisation Act received by it being in contravention of provisions of section 22 of the Act of 1985. The bank, on the other hand, asserted that on invocation of action under Section 13 of the Securitisation Act, the proceedings before the BIFR abates and the protection which the Company claims under Section 22 of the Act of 1985 is no longer available. The Orissa High Court, after considering the provisions contained in proviso to Section 15(1) of the Act of 1985 read with Section 22 of the Act of 1985, negatived the stand of the Bank. Instead, held that the third proviso will come into force where reference is pending before BIFR. It held that the notice under section 13(4) of the Securitisation Act was issued on 7th April, 2007. But long before that the Company was already declared sick company by order dated 14th November, 2006, therefore, the proceedings before the BIFR were not at the stage of reference, as such. But the same had proceeded far ahead and culminated with the order of company being declared sick on 14th November, 2006. Moreover, the said order was passed by the BIFR after hearing the Bank and the Bank was appointed as operating agency with direction to prepare the revival scheme. Ast 15 wp2079.10.sxw 19. In substance, the Orissa High Court proceeded on the finding that no reference was pending before the BIFR at the relevant time, when the bank invoked action under section 13 of the Securitisation Act. It however, held that the Bank can still take recourse to remedy under section 13 of the Securitisation Act after taking consent of the BIFR under Section 22 (1) of the Act of 1985. For taking this view, the Court has relied upon the reported decisions which essentially deal with the purport of section 22 of the Act of 1985. It has relied on the decisions of the Apex Court in Real Value Appliances Ltd. Vs. Canara Bank (1998) 93 Com. Cases 26 (SC); NGEF Ltd. Vs. Chandra Developers P.Ltd.(2005) 127 Com. Cases 822(SC); Jay Engineering Works Ltd. Vs. Industry Facilitation Council (2006) 133 Com. Cases 670; Morgan Securities and Credit P.Ltd. Vs. Modi Rubber Ltd.(2007) 136 Com. Cases 113; and lastly, decision of the Division Bench of its own Court in the case of Bireswar Das Mohapatra vs. State Bank of India(2006) 2 OLR 423. 20. Insofar as the decision of the Apex Court in the case of Real Value Appliances(Supra), it will be of no avail to examine the purport of third proviso to section 15(1) of the Act of 1985, which was inserted in the year 2002. Insofar as the decision in the case of NGEF Ltd.(Supra), the principal question considered by the Apex Court was whether the Company Judge had jurisdiction Ast 16 wp2079.10.sxw to issue any direction to the Company to execute a deed of sale, which amounted to grant of a decree for specific performance of a contract. That issue was considered essentially keeping in mind the efficacy of section 22 of the Act of 1985. Even this decision will be of no avail to examine the purport of third proviso to section 15(1) of the Act of 1985, which, in our view, is an exception to carve out or remove the special cases from the general proceedings or actions covered under section 22 of the Act of 1985. 21. Similarly in the case of Jay Engineering Works Ltd.(supra), the Apex Court was called upon to consider the sweep of section 22 of the Act of 1985 and whether the same would be applicable in respect of action initiated by the Respondent therein in terms of provisions of Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993. The Supreme Court interpreted section 6(2) of the Act of 1993, which is non-obstante clause and postulates that any party to dispute may make a reference to the Industry Facilitation Council for acting as an arbitrator or conciliator in respect of matters referred to in that subsection (1) and the provisions of Arbitration and Conciliation Act, 1996 shall apply to such disputes, as the arbitration or conciliation were pursuant to an arbitration agreement referred to in sub-section (1) of Section 7