WP 1268-10 1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO.1268 OF 2010 Alpha and Omega Diagnostics India Ltd. .. Petitioner Versus Asset Reconstruction Company (I) Ltd. And Ors. .. Respondents Mr.P.K.Samdani, Senior Advocate with Mr.Umesh Shetty, Mr.Sharan Jagtiani and Ms.Sheetal Shah i/b. M/s.Mehta & Girdharilal for petitioners Mr.Birendra Saraf with Vinod Kothari and Mr.Saiyed i/b. Apex Law Partners for respondents. CORAM : MOHIT S. SHAH, C.J. & S.C.DHARMADHIKARI, J. Reserved : 16th July 2010 Pronounced: 9th August 2010 ORAL JUDGEMENT (Per Dharmadhikari, J) 1] Rule. Since a short point is involved, with the consent of the parties rule is made returnable forthwith. The learned advocate for respondents waive service. WP 1268-10 2 2] By this writ petition under Article 226 of the Constitution of India the petitioners are challenging the common order passed by the learned Chairperson of the Debt Recovery Appellate Tribunal (DRAT), Mumbai in Misc. Appeal No.127 of 2010 and Misc.Appeal No.128 of 2010. The petitioners before us are the original appellants in this appeal whereas the respondents to this petition are the original respondents-applicants. 3] These appeals impugn the common order dated 19th May 2010 passed by the Presiding Officer of Debt Recovery Tribunal – II, for short (DRT-II), Mumbai. By this order the DRT allowed the respondents application (Exhibit 188) for amendment in the cause title of the original Application No.89 of 2005 whereas the petitioners’ application for dismissal of this original application was rejected. 4] The respondents preferred the application Exhibit 188 for amendment to the title of the said OA on the ground that Oriental Bank of Commerce filed the above OA against the petitioners-original WP 1268-10 3 defendants, in the DRT at Mumbai for recovery of certain money together with further interest and for enforcement of the mortgaged/ hypothecated securities as more particularly set out in the original application. The respondents contended that the said Oriental Bank of Commerce, pursuant to assignment agreement dated 27th June 2008 assigned all the financial assistance granted by the said bank to the petitioners/ original defendants together with all underlying security, interest and all its right title in favour of the first respondent – Asset Reconstruction Company (India) Ltd. (for short Arcil). It was stated in the application for amendment that pursuant to this assignment agreement, Arcil is deemed to have acquired all rights, privileges, powers of the original applicant bank under existing contracts, arrangements, security documents etc. Such being the nature of the assignment, pending proceedings initiated by Oriental bank can be continued by Arcil. Relying upon the said agreement, the first respondent sought its impleadment and permission to amend the original application as per the schedule annexed to the Misc. Application (Exh. WP 1268-10 4 188). This application was made on 28th November 2008. 5] From the record it appears that this application for amendment was allowed by an order dated 12th August 2009 passed by the DRT. However, the first respondent made another request for amendment on 22nd April 2010 and this time it contended that, that assignment in favour of Arcil is also as a sole Trustee. Therefore, leave be granted to mention that Arcil is acting in its capacity as sole Trustee of Arcil -SBPS-024-I Trust (for short Arcil Trust). It was prayed that no prejudice will be caused if Arcil is allowed to be added in the proceedings as sole Trustee in terms aforestated. 6] The record further indicates that to the earlier application for amendment on 28th November 2008, no reply was filed on behalf of petitioners but to this further application, a reply came to be filed and it was contended that interim application is for the purpose of deleting the name of M/s.Oriental Bank and substituting the same by Arcil as sole WP 1268-10 5 concerned Trustee of Arcil Trust. Further it was contended that Arcil is not assignee of the alleged debts of the petitioners – defendants due to the Oriental Bank. Therefore, the application is liable to be dismissed. It was contended that the alleged agreement dated 27th June 2008 referred to as the Assignment Agreement cannot be looked into as it is not registered as required under section 17 of the Registration Act. Further, it was contended that M/s.Arcil has deliberately made the application for purpose of substituting its name for and on behalf of Oriental Bank. It was contended that in the application it was urged that Arcil has taken assignment of debt of Oriental bank. However, now it is contended that the applicant Arcil is not an assignee but acting in its capacity as sole Trustee of the Trust. Thus, two different and inconsistent statements on oath are made and in such circumstances the application be dismissed. 7] Treating this as a substantive request for dismissal of the original application, the DRT numbered petitioner’s application as Exh.185 and the request for amendment of the original application by the respondents WP 1268-10 6 and the application seeking its dismissal were taken up together. The learned Presiding Officer, DRT by a common order dated 19th December 2009 allowed Arcil’s application for amendment to the cause title of the original application by adding it as sole Trustee at the end of its name and dismissed the application requesting dismissal of the original application. 8] Aggrieved by the said order, petitioners filed the above miscellaneous appeals. The learned Chairperson, DRAT heard the appeals and by the impugned order was pleased to dismiss them. While dismissing these appeals, the learned Chairperson held that the respondents are acting both as Trustees and Managers of the Trust. It is as a Trustee, the legal owner of the financial assets and qualified institutional buyers are beneficial owners of the same. The learned Chairperson relied upon an order dated 14th May 2009 passed in Misc.Appeals No.34 of 2009 and 41 of 2009 (M/s.Pathare Trading Pvt.Ltd and Anr. Vs. Bank of Baroda and Ors.). The learned Chairperson WP 1268-10 7 distinguished the judgement of this Court in the case of Krishna Filaments Ltd. Vs. Industrial Development Bank of India reported in 2004 (2) Mh.L.J., 823 and other decisions on the grounds that when these judgements were delivered, section 2(h) of the Recovery of Debts due to Banks and Financial Institutions Act, 2004 (for short RDB Act) was not amended. The amendments came into effect from 11th November 2004. The amendments to RDB Act clearly state that the Securitisation Company or Re-construction Company is included in the definition of the term “Financial Institution”, defined in section 2(h) of the RDB Act. Further, the learned Chairperson held that the reliance placed by the petitioners on a judgement of the Gujrat High Court in the case of Kotak Mahindra Bank Vs. Official Liquidator is misplaced because a special leave petition is pending before the Supreme Court against that judgement and the Supreme Court has passed an interim order on 16th February 2009 in terms staying the judgement of the Gujarat High Court. Therefore, according to the learned Chairperson, there is no substance in the appeals and they are liable to be dismissed. WP 1268-10 8 9] It is this conclusion of the learned Chairperson which is challenged before us by the petitioners, who are original debtors/ borrowers/ defendants in the O.A.89 of 2005. 10] Mr.Samdani, learned Senior Counsel appearing for petitioners submitted that the DRT as also the DRAT were in error in allowing the amendments to the OA. Inviting our attention to the deed of assignment dated 27th June 2008, Mr.Samdani submits that the said assignment clearly states that the first respondent is acting in its capacity as Trustee of the Arcil – SBPS – 024 – I Trust, (hereinafter referred to as the Arcil Trust) for the benefit of the holders of security receipts issued by the Trustee thereunder. Further inviting our attention to the clause 2.1.1 of the deed of assignment, Mr.Samdani submits that the impleadment was as Trustee and not as a Lender or a Financial Institution intending to recover monies lent and advanced by it. Mr.Samdani relies upon the definition of the term “debt” appearing in section 2(g) of the RDB Act. WP 1268-10 9 He relies upon section 17 of the Act and submits that the DRT exercises jurisdiction, powers and authority to entertain and decide the applications from the banks and financial institutions for recovery of debts due to such banks and financial institutions. Therefore, in the submission of Mr.Samdani, it is only when the banks and financial institutions are recovering debts due to them, that, they can approach the DRT and not otherwise. In the instant case, when the first respondent is substituting itself as a Trustee of a Trust, then, it could not have invoked the jurisdiction of the DRT. It is managing and administering the affairs as a Trustee and there being no debt due to it, which it could recover, then, the application for amendment, could not have been allowed in law. In other words, when the jurisdiction of the Tribunal could not have been exercised nor had the Tribunal any power or authority in this case, then, allowing the application for amendment would mean conferring jurisdiction on a Tribunal which it does not possess in law. Mr.Samdani submits that jurisdiction cannot be conferred by consent of parties. The court or tribunal must possess such jurisdiction in law. In the present WP 1268-10 10 circumstances, the jurisdiction could not have been exercised. Therefore, the impugned orders suffer from an error apparent on the face of record and are wholly illegal and erroneous. They should be quashed and set aside. 11] Mr.Samdani submits that no reliance could be placed upon the Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions 2003. Mr.Samdani submits that the guidelines do not confer any jurisdiction or power on the DRT. These are mere instructions and guidelines for the purpose of guiding the securitisation or re-construction companies registered with RBI. That is for regulating the financial system. For such regulation, it was thought necessary to issue guidelines and directions relating to registration measures of asset reconstruction function of the company, prudential norms, acquisition of financial matters and assets related thereto. These guidelines may have been issued vide powers conferred under section 3, 9, 10 and 12 of the Securitisation and Re-construction of Financial WP 1268-10 11 Assets and Enforcement of Security Act 2002 (for short Securitisation Act), but the DRT cannot assume jurisdiction by taking recourse to the Securitisation Act. Mr.Samdani submits that even the Securitisation act makes it clear that the term “debt” shall have the same meaning as is assigned to it in section 2(g) of the RDB Act, 1993. [See Section 2(ha)]. Further, the DRT is also defined as a Tribunal established under section 3(1) of the RDB Act. Therefore, merely because the respondent No.1 claims to be a reconstruction company and a secured creditor does not mean that it is entitled to invoke the jurisdiction of the DRT even if it is suing the petitioners in its capacity as a Trustee. The remedy of the first respondent lies not in pursuing the original application instituted by the Oriental Bank but elsewhere. Mr.Samdani places strong reliance upon a division bench judgement of this Court reported in 2004 (2) Mh.L.J. 823 (Krishna Filaments) (supra). 12] On the other hand Mr.Saraf learned Counsel appearing for respondents supported the impugned orders. He submitted that if the WP 1268-10 12 contentions of Mr.Samdani are accepted, the very object and purpose of enacting the Securitisation Act and at the same time amending the RDB Act would be frustrated and defeated. It is only with a view to over- come such technical objections that the Legislature intended that RDB Act and the remedies available thereunder should be permitted to be invoked even by a reconstruction company which is formed and registered under the Companies Act for the purpose of assets reconstruction. Inviting our attention to the term “debt” as defined in Section 2(g) of the RDB Act, the definition of the term “Securitisation” appearing in section 2(z) and to the definition of the term “Creditor” defined in section 2(zd) so also sections 3, 5, 5A, 9 and 13 of the Securitisation Act, as well as the definition of the term “financial institution” as defined in section 2(h) of the RDB Act, Mr.Saraf submits that the division bench judgement and the law laid down therein cannot be said to be holding the field any longer. In other words, after the amendment to RDB Act and enacting of the securitisation Act, the Division Bench judgement cannot be said to be a good law. For these WP 1268-10 13 reasons, he submits that the view taken by the DRT and DRAT deserves to be upheld. Consequently, the petition be dismissed. 13] With the assistance of the learned Counsel appearing for parties, we have perused the impugned orders, the relevant statutory provisions and the decisions brought to our notice. 14] At the outset it is clarified that we are not dealing with the merits of the claim against the petitioner. All that we are required to decide is whether an amendment to the original application sought by the first respondent has been granted by applying correct legal principles. In other words, whether the amendment sought is permissible in law and whether the order granting it is not vitiated as alleged by the petitioners. Therefore, we should not be taken to have expressed any opinion on the merits and liability of the parties. Ultimately, it is for the DRT to decide after oral and documentary evidence is led as to whether the OA can be allowed or not. Further, whether the respondents are entitled to recover WP 1268-10 14 the sums claimed therein by enforcing the securities or not is also an issue which must be answered by the Tribunal at the trial. 15] We are concerned only with the legal issue as to whether a “Reconstruction company” as contemplated by section 2(v) of the Securitisation Act can apply for substitution as applicant in place of the original lender bank by amending the pending Original Application No. 89 of 2005. Further, whether the substitution or impleadment of the reconstruction company in its capacity as a trustee is permissible under the RDB Act or not? 16] We are concerned only with these two aspects and have, therefore, dealt with them alone. To appreciate the rival submissions, it would be necessary to refer to the relevant statutory provisions. The RDB Act enacted on 27th August 1993 is an Act to provide for establishment of Tribunals for expeditious adjudication and recovery of debts due to the banks and financial institutions and for matters connected therewith or WP 1268-10 15 incidental thereto. The word “debt” is defined in section 2(g) and reads thus:- “2(g) “Debt” means any liability (inclusive of interest) which is claimed as due from any person by a bank or a financial institution or by a consortium of banks or financial institutions during the ccourse of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or order of any civil court or any arbitration award or otherwise or under a mortgage and subsisting on, and legally recoverable on, the date of the application.” 17] The word “Bank” is defined in section 2(d) and the word “Banking Company” is defined in section 2(e). What we are concerned in this petition is with the definition of the term “Financial Institution” appearing in section 2(h) of the RDB Act, which prior to its amendment read thus:- “2(h):- “Financial institution” means:- (i) a public financial institution within the meaning of section 4A of the Companies Act, 1956 (1 of 1956) WP 1268-10 16 (ii) such other institution as the Central Government may, having regard to its business activity and the area of its operation in India by notification, specify; After amendment, however, section 2(h)(ia) came to be inserted by the Act 30 of 2004, which reads thus:- “(ia) 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 (54 of 2002)” 18] The sub-clause (ia) came to be inserted by the Act 30 of 2004 with effect from 11th November 2004. The purpose for this insertion appears to be the enactment of Securitisation and Re-construction of Financial Assets and Enforcement of Security Interest and reconstruction of Financial Assets and Enforcement of Security Interest 2002 (Act 54 of 2002). This latter Act came to be enacted on 17th December 2002 and it is to regulate Securitisation and reconstruction of Financial Assets and WP 1268-10 17 Enforcement of Security Interest and for matters connected therewith or incidental thereto. Incidentally the word “debt” defined in the Securitisation Act reads thus:- “2(ha) “debt” shall have the meaning assigned to it in clause (g) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993( 51 of 1993).” Therefore, a bare perusal of this provision would indicate that the word “debt” carries the same meaning as is assigned to it in clause 2(g) of the RDB Act, 1993. The word “Asset Reconstruction” has been defined in section 2(b) of the Securitisation Act. The word “Financial Institution” is defined in section 2(m). The word “Securitisation Company” is defined in section 2(za) and reads thus:- 2(za):- “Securitisation company” means any company formed and registered under the Companies Act, 1956 (1 of 1945) for the purpose of securitisation.” 19] Further, the word “reconstruction company” is defined in section WP 1268-10 18 2(v). The other definition that is relevant for our purpose is definition of the term “secured creditor” appearing in section 2(zd). “2(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, whether acting as such or mortgaging a trust set up by such securitisation company or reconstruction company for the securitisation, reconstruction, as the case may be; 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.” 20] Chapter II of the Securitisation Act is entitled as Regularisation of Securitisation and Re-construction of Financial Assets of Banks and Financial Institutions. Therein, section 5 appears which reads as under:- “5. Acquisition of rights or interest in Financial assets:- (1) Notwithstanding anything contained in any agreement or any other law for the time being in force, any WP 1268-10 19 securitisation company or reconstruction company may acquire financial assets of any bank or financial institution:- (a) by issuing a debenture or bond or any other security in the nature of debenture, for consideration agreed upon between such company and the bank or financial institution, incorporating herein such terms and conditions as may be agreed upon between them; or (b) by entering into an agreement with such bank or financial institution for the transfer of such financial assets to such company on such terms and conditions as may be agreed upon between them. (2)If the bank or financial institution is a lender in relation to any financial assets acquired under sub- section (1) by the securitisation company or the reconstruction company, such securitisation company, such securitisation company or reconstruction company shall, on such acquisition, be deemed to be the lender and all the rights of such bank or financial institution shall vest in such company in relation to such financial assets. (3)Unless otherwise expressly provided by this Act, all contracts, deeds, bonds, agreements, powers-of- attorney, grants of legal representation, permissions, approvals, consents or no-objections under any law or otherwise and other instruments of whatever nature which rrelate to the said financial asset and which are subsisting or having effect immediately before the acquisition of financial asset under sub-section (1) and WP 1268-10 20 to which the concerned bank or financial institution is a party or which are in favour of such bank or financial institution shall, after the acquisition of the financial assets, be of as full force and effect against or in favour of the securitisation company or reconstruction company, as the case may be, and may be enforced or acted upon as fully and effectually as if, in the place of the said bank or financial institution, securitisation company or reconstruction company, as the case may be, had been a party thereto or as if they had been issued in favour of securitisation company or reconstruction company as the case may be. (4)If, on the date of acquisition of financial asset under sub-section (1) any suit, appeal, or other proceeding of whatever nature relating to the said financial asset is pending by or against the bank or financial institution, save as provided in the third proviso to sub-section (1) of section 15 of the Sick Industrial Companies (Speial Provisions) Act, 1985 (1 of 196) the same shall not abate, or be discontinued or be, in any way, prejudicially affected by reason of the acquisition of financial asset by the securitisation company or reconstruction company, as the case may be, but the suit, appeal or other proceeding may be continued, prosecuted and enforced by or against the securitisation company or reconstruction company, as the case may be.” 21] The measures of assets reconstruction are set out in section 9 of Securitisation Act. The other functions of the Securitisation Company or WP 1268-10 21 Re-construction company are set out in section 10 which reads as under:- “10. Other functions of securitisation company or reconstruction company – (1) Any securitisation company or reconstruction company registered under section 3 may - (a) act as an agent for any bank or financial institution for the purpose of recovering their dues from the borrower on payment of such fees or charges as may be mutually agreed upon between the parties; (b) act as a manager referred to in clause (c) of sub- section (4) of section 13 on such fee as may be mutually agreed upon between the parties; (c) act as receiver if appointed by any court or tribunal; Provided that no securitisation company or reconstruction company shall act as a manager if acting as such gives rise to any pecuniary liability. (2) Save as otherwise provided in sub-section (1), no securitisation company or reconstruction company which has been granted a certificate of registration under sub- section (4) of section 3, shall commence or carry on, without prior approval of the Reserve Bank, any business other than that of securitisation or asset reconstruction” Provided that a securitisation company or reconstruction company which is carrying on, on or before the WP 1268-10 22 commencement of this Act, any business other than the business of securitisation or asset reconstruction or business referred to in sub-section (1), shall cease to carry on any such business within one year from the date of commencement of this Act.” Explanation:- For the purposes of this section, “securitisation company” or “reconstruction company” does not include its subsidiary.” Section 13 falling in Chapter III of the Securitisation Act deals with “Enforcement of Security Interest”. 22] It would not be out of place, if reference is made to a decision of the Supreme Court in the case of Merdia Chemicals Ltd. Vs. Union of India, reported in 2004 AIR SCW 2541 wherein constitutional validity of Securitisation Act was considered. While referring to the object and purpose of the Act and analysing its various provisions, this is what the Supreme Court has observed in paras 34, 35, 66 and 67 as under:- “34. Some facts which need be taken note of are that the banks and the financial institutions