COMA/245/2007 1/28 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY APPLICATION No. 245 of 2007 In COMPANY APPLICATION No. 89 of 2005 In COMPANY PETITION No. 220 of 2001 For Approval and Signature: HONOURABLE MR.JUSTICE K.A.PUJ ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================================= BANK OF BARODA - Applicant(s) Versus O.L. OF BENZO PETROCHEMICALS LTD & 3 - Respondent(s) ========================================================= Appearance : MR INDRAVADAN PARMAR for Applicant(s) : 1, OFFICIAL LIQUIDATOR for Respondent(s) : 1, MR.HIREN M MODI for Respondent(s) : 1, MR PR NANAVATI for Respondent(s) : 2, NOTICE SERVED for Respondent(s) : 3 - 4. ========================================================= CORAM : HONOURABLE MR.JUSTICE K.A.PUJ Date : 25/04/2008 ORAL JUDGMENT COMA/245/2007 2/28 JUDGMENT 1. The applicant / Bank of Baroda has taken out this Judges Summons praying for the direction to Asset Reconstruction Company (India) Ltd., respondent No.2 herein to release an amount of Rs.10.22 lacs (Rs.4.38 lacs + 5.84 lacs as 14.6% share of the applicant-bank in Rs.30 lacs and Rs.40 lacs that allowed for disbursement amongst the secured creditors as per orders dated 8.4.2005 and 8.8.2005 passed by this Court) in Company Application No.89 of 2005 with interest at the rate of 15% p.a. thereon. 2. An affidavit is filed by Mr.Nagesh Sambhaji Shetpalkar – the Senior Manager of the applicant Bank in support of the Judges Summons. 3. Mr.Indravadan Parmar, learned advocate appearing for the applicant has submitted that the applicant is one of the secured creditor amongst the others having first COMA/245/2007 3/28 JUDGMENT charge in its favour on the assets of the Company in liquidation. The applicant had submitted affidavit of proof of its debts, charge details, undertaking etc. Accordingly the applicant is eligible and entitled for its due share out of the consideration of the sale of assets of the Company in liquidation. He has further submitted that the respondent No.2 had appointed M/s.Usha Martin Finance Ltd., as its power of attorney and the said power of attorney preferred Company Application No.89 of 2005 before this Court for seeking adhoc disbursement among the secured creditors having their first charge on the assets of the Company in liquidation, out of an amount of Rs.82 lacs received by the Official Liquidator as consideration of sale of Lot No.II, i.e. all assets other than land except records, T.K.Office, compound wall, trees etc., of the Company which was confirmed by this Court for Rs.82 lacs in favour of M/s.H.K.Enterprise as per order COMA/245/2007 4/28 JUDGMENT dated 9.2.2005. 4. Mr.Parmar has further submitted that this Court had allowed adhoc disbursement of Rs.30 lacs to the secured creditors vide its order dated 8.4.2005 and the Official Liquidator was directed to hand over the cheque in the name of ARCIL being the lead secured institute which in turn was required to distribute the said amount in respective proportion amongst the secured creditors having first charge on the assets of the said company on filing of an undertaking to refund the amount with interest at prevailing bank rate if the amount so received by them is required to be refunded. Mr.Parmar has further submitted that as per another order dated 8.8.2005 subsequently passed in Company Application No.89 of 2005 further disbursement of Rs.40 lacs was allowed on the same terms for its further internal/inter-se disbursement in the same proportion at which COMA/245/2007 5/28 JUDGMENT earlier disbursement of Rs.30 lacs was made. He has further submitted that subsequent to the order dated 8.4.2005 passed by this Court for adhoc disbursement of Rs.30 lacs, the applicant had approached the respondent No.2 through its letter dated 4.6.2005 and demanded 14.6% share i.e. Rs.4.38 lacs out of the said adhoc disbursement of Rs.30 lacs. In response to the said letter of the applicant, the respondent No.2 had, vide its letter dated 11.6.2005 sought certain details, such as details of sanctioned loan amount, principal outstanding as on date of winding up, proof of submission of undertaking etc, which the applicant had suitably responded vide its letter dated 25.6.2005 complying the requirement of respondent No.2. The respondent No.2 thereafter had raised further issue and queries in piecemeal about the nature of charge, securities etc, vide its letter dated 27.7.2005 and 8.9.2005 which were responded COMA/245/2007 6/28 JUDGMENT suitably by the applicant and provided further details and supporting documents vide its letter dated 21.8.2005 and finally again on 14.12.2005, so as to demonstrate the status/position of the present applicant as first charge holder. 5. Mr.Parmar has further submitted that even thereafter the applicant has persistently followed up its request for receiving its eligible share of payment from respondent No.2. Inspite of considerable time was elapsed the respondent No.2 did not respond to it positively and hence the applicant has filed the present application seeking direction to the respondent No.2 to disburse the aforesaid amount. 6. On notice being issued, Mr.Premal Nanavati, learned advocate appearing on behalf of the respondent No.2 filed affidavit-in-reply of Mr.Anal J. Patel, Assistant Manager of Usha COMA/245/2007 7/28 JUDGMENT Martin Ltd. Mr.Nanavati has submitted that this Court has directed the respondent to disburse the amount coming to the share of Bank of Baroda provided the said bank will prove its first charge over the assets of the company, out of first installment of Rs.30 lacs and in the same ratio out of another installment of Rs.40 lacs. He has further submitted that till date the applicant bank has not produced any document before the respondent No.2 which can prove its claim as first charge holder over the assets of the company. He has further submitted that inspite of many letters written by the applicant bank to the respondent and respondent to the applicant Bank, the applicant has not submitted any document which can prove its first charge. The respondent vide its letter dated 27.7.2005 has informed the applicant to specify the nature of charge and whether it had any charge over the plant and machinery of the COMA/245/2007 8/28 JUDGMENT company from which the sale proceeds were received by the respondent till date the applicant has not provided any specific information or document which can prove its first charge over the assets. He has further submitted that as soon as the required documents proving its first charge as directed by this Court are submitted to the respondent, the share of the applicant Bank would be paid. 7. Mr.Nanavati has further submitted that during the pendency of this application, when the question arose and when this Court directed the applicant to produce some material to show its charge over the property in question for which disbursement is made, the applicant has submitted three documents being Certificate of Registration of Mortgage etc. issued by the Registrar of Companies, Gujarat State and has placed on record of this Court with a copy marked to the COMA/245/2007 9/28 JUDGMENT undersigned. He has submitted that in fact the Certificate of Registration of Mortgage placed on record of the case does not reveal that Bank of Baroda is having first charge or pari passu charge over the property in question. He has submitted that the assignor, namely, ICICI Bank has been the lead institution and in a consortium finance given to the Company in liquidation, the ICICI in consortium with IDBI and IFCI sanctioned term loan of Rs.140 lacs and Rs.70 lacs respectively, pursuant to which first charge was created of the immovable as well as movable properties of the Company in liquidation in favour of the assignor ICICI, IDBI and IFCI having pari passu charge over the said property of the Company in liquidation. The applicant Bank was having the second charge over the said property. He has submitted that the applicant Bank has deliberately suppressed this fact from this Court. The respondent No.2 got search COMA/245/2007 10/28 JUDGMENT carried out through the concerned Company Secretary in the office of Registrar of Companies and in Form No.8, it is clearly shown that the consortium of ICICI, IDBI and IFCI are the first charge holders of the immovable as well as movable properties of the Company in liquidation, whereas Bank of Baroda is holding second charge. He has further submitted that Bank of Baroda appears to have been sanctioned book debt to the tune of Rs.20 lacs and also sanctioned cash credit to the tune of Rs.55 lacs. There is another facility of foreign L.C. to the tune of Rs.22 lacs and Bank Guarantee of Rs.5 lacs was issued. Against all these facilities/amounts sanctioned in favour of the Company in liquidation the charge of the applicant is created on the book debts, against which goods, raw material, stock in process, finished goods, consumable stores, packing material lying at the stores of the factory etc. have been hypothecated in favour COMA/245/2007 11/28 JUDGMENT of the applicant. In the last modification carried out on 14.12.1993 for the working facility given by the applicant Bank to the tune of Rs.95 lacs the applicant Bank having second charge over the movable as well as immovable properties. He, therefore, submitted that Bank of Baroda is having no first charge over the movable and immovable properties in question. Whereas all the three financial institutions have pari-passu first charge over the movable as well as immovable properties in the ratio of 40:40:20. He has, therefore, submitted that the applicant Bank is not entitled to disbursement of any amount much less an amount of Rs.4.38 lacs from the first disbursement and Rs.5.94 lacs from the second disbursement made by this Court. He has further submitted that since for a considerable long time the applicant did not produce any document showing charge over the property entitling it to claim amount as COMA/245/2007 12/28 JUDGMENT claimed in the present application after the order dated 8.8.2005, the respondent has disbursed the entire amount amongst all the financial institutions including Rs.4.38 lacs pursuant to the order dated 8.4.2005 and Rs.5.94 lacs pursuant to the second disbursement in the ratio of 40:40:20, after obtaining necessary undertaking from the other two financial institutions, namely, IDBI and IFCI as directed by this Court. He has, therefore, submitted that the applicant having second charge over the movable properties, the amount realized by selling the same, the applicant is not entitled to claim any disbursement in its favour and even on the immovable property, the applicant has second charge, the amount realized from selling immovable properties to the tune of Rs.1.25 crores by sale of land and building of the Company in liquidation, the applicant will not be entitled to any disbursement in its favour from the amount realized and COMA/245/2007 13/28 JUDGMENT deposited with the Official Liquidator. 8. While considering the rival submissions of the parties, an issue arose before the Court as to whether the respondent No.2 itself is a secured creditor or not. As it is revealed from the submission made on behalf of the respondent No.2 that the respondent No.2 is a power of attorney of ARCIL and ARCIL is an assignee of debt. By virtue of deed of assignment, ICICI, IDBI and IFCI have assigned their debts in favour of ARCIL. This very issue has come up before the Court in Company Application No.489 of 2006 and other cognate matters and this Court has taken the view that by assigning the debt it cannot be said that the securities have been assigned. This Court has also raised the doubt about the genuineness of the deed of assignment. Against the order of the learned Single Judge, OJ Appeal was preferred before the Division Bench of this Court and while COMA/245/2007 14/28 JUDGMENT admitting the OJ Appeal, Division Bench of this Court has held that without accepting the applicants-appellants as secured creditors, some interim arrangement is required to be made to permit the applicant to participate in the proceedings of the Sale Committee and in the proceedings before the Company Court only in order to see that the secured debts do not go unrepresented. This, however, does not and shall not , amount to accepting the applicant-applicants as secured creditor/s nor shall this interim arrangement be treated as accepting the assignments (held by the learned Company Judge to be illegal) as legal and valid at this stage. The Division Bench has further modified its earlier order on 17.10.2007 and directed the Official Liquidator to disburse the amount payable, the amount which were otherwise payable to the assignor prior to the deed of assignment, only to the assignor subject to the conditions that the assignor shall file COMA/245/2007 15/28 JUDGMENT an undertaking in the following terms. (i) The assignor shall not act upon the deed of assignment, in respect of the amount being disbursed by the Official Liquidator, because the learned Company Judge has held that the security interest for the debt is not validly transferred to the assignee and the payment being made by the Official Liquidator is of the secured debt. (ii) That the assignor shall refund the amount to the Official Liquidator in case the Court gives such a direction at the final hearing of the appeals with interest at such rate as may be directed by this Court. The Court has also made it clear that disbursement shall be made after the undertaking is filed. 9. In the present case, disbursement is already made before the order of the Learned COMA/245/2007 16/28 JUDGMENT Company Judge as well as the Division Bench. The Court therefore, asked Mr.Nanavati as to why the respondent No.2 is not directed to refund the amount to the Official Liquidator. In this connection Mr.Nanavati has submitted that the case of the respondent No.2 is totally different as it is a securitization Company whereas the issue pending before the Division Bench is in respect of the Banks and Financial Institutions and even while passing the earlier order which is subject matter of the appeal before the Division Bench the learned Company Judge has made it clear that the position in case of securitization company is totally different as it is governed by the provisions of SARFACI Act. In this connection he relied on the decision of learned Company Judge in Company Application No.269 of 2007 wherein it is observed that after the introduction of the laws for enforcement of the security and the scheme providing for purchase and sale of COMA/245/2007 17/28 JUDGMENT transactions having security interest, such mode of acquiring interest is recognized under the Securitisation Act. Section 5 of the Act provides for giving effect to the transaction notwithstanding anything contained in an agreement in any law for the time being in force. This would be available to a Securitisation Company or a Reconstruction Company, who may acquire financial assets from any bank or financial institution. Securitisation Companies or Reconstruction Companies are only those companies, which are registered as Securitisation companies under the Companies Act and also registered as Securitisation Company with Reserve Bank of India and they are governed by the Regulations for such purpose as envisaged in Chapter II of the Securitisation Act. It is an admitted position that none of the applicants in the group of the applications are Securitisation Companies or Reconstruction Companies and are COMA/245/2007 18/28 JUDGMENT only the Banks or Banking Companies governed by the provisions of the Banking Regulations Act. Therefore, as per the Scheme of the Securitisation Act if the financial assets are acquired by a Securitisation Company or a Reconstruction Company registered as per the provisions of Securitisation Act, possibly it may be contended that the deed of assignment may have the force in law by over-riding contents of the agreement or any other law for the time being in force in view of the Section 5 of the Securitisation Act. As per the deeming fiction of Sub-section (2) of Section 5, such Securitisation Companies acquiring rights are to be treated as deemed lenders and by statutory fiction the rights are to vest in such Securitisation Company in relation to such financial assets. The Court, therefore, took the view that it is on account of the enforcement of the Securitisation Act and the Scheme for purchasing of the financial assets by the COMA/245/2007 19/28 JUDGMENT Securitisation Company or Reconstruction Company, the State Government has come out, with a view to give encouragement, with the notification of putting upper limits of the stamp duty of Rs.1 lac, though as per the normal conveyance the stamp duty may be more or if the conveyance is to take place in normal law as per the Transfer of Property Act, there is no upper limit provided. The Court, therefore, allowed ARCIL to be substituted in place of Dena Bank. 10. Mr.Nanavati has further relied on the decision of Division Bench of this Court in Civil Application No.5157 of 2007 in LPA No.15 of 2008 decided on 10.1.2008 wherein it is observed that State Bank of India has admitted this fact they have assigned loan assets to ARCIL and ARCIL has every right to recover the loan amount from the debtor which is due and payable to State Bank of India. The Court, therefore, took the view that the COMA/245/2007 20/28 JUDGMENT interest of ARCIL is adversely affected by the impugned order passed by the learned Single Judge, especially when the impugned order is passed without hearing ARCIL and ARCIL has every right to agitate this in the Appeal. 11. Mr.Nanavati has further relied on the decision of the Hon'ble Supreme Court in the case of Transcore Vs. Union of India and another, reported in (2008) 1 SCC 125, wherein the Hon'ble Supreme Court has observed that assets reconstruction means acquisition by asset reconstruction company or asset management company of any right or interest created in favour of any bank or financial institution in any loan or advance granted or created in any debentures or bonds subscribed or guarantee given or rights created in favour of the bank or financial institution under letter of credit. This shows that the NPA Act basically deals with a COMA/245/2007 21/28 JUDGMENT crystallized liability. The NPA Act proceeds on the basis that the asset is created in favour of the bank / financial institution which could be assigned to the asset management company or asset reconstruction company which, in turn, steps into the shoes of the secured creditor, namely, bank / financial institution. The Court further held that securitisation of credit exposures of banks and credit institutions involves a transfer of outstanding balances in loans/advances and packaging them into transferable and tradable securities. In cases where the borrower has bought an asset with the finance of the bank / financial institution, the latter is treated as a lender and on assignment the securitization company/asset reconstruction company steps into the shoes of the lender bank / financial institution and it can recover the lent amounts from the borrower. COMA/245/2007 22/28 JUDGMENT 12. Based on the aforesaid judgment of the Supreme Court, Mr.Nanavati has submitted that the respondent No.2 has every right to receive the amount from the Official Liquidator on sale of the assets of the Company in liquidation. 13. Mr. Mrugesh Jani, learned advocate appearing for the Official Liquidator has submitted that the Official Liquidator has received notice of demand to the certificate debtor dated 5.3.2008 from the Recovery Officer,, Debt Recovery Tribunal, Ahmedabad, directing the Official Liquidator to pay an amount of Rs.98,31,154/- with cost and interest as per Recovery Certificate. The Recovery Certificate was issued pursuant to the judgment and order under Section 19(4) of the Debts Due to Bank and Financial Institutions Act, 1993. He has, therefore, submitted that based on this Certificate, the applicant Bank man enforce recovery of the COMA/245/2007 23/28 JUDGMENT amount against the properties of the Company in liquidation. 14. Having heard learned advocate appearing for the respective parties and having gone through the memo of application, affidavit in reply and further affidavit alongwith documents placed on record, the Court is of the view that as per the report of the Official Liquidator, amount of Rs.82 lacs was realised by the Official Liquidator as consideration of sale of Lot No.II i.e. all assets other than land except record, T.K. Office, Compound Wall, trees etc. of the Company in liquidation. All assets include, raw materials, stocks in process, finished goods, consumable stores / spares packing materials etc. The applicant Bank is admittedly having first charge on book debt in respect of supplies made to any person, firm or the Company and the raw materials, stocks in process, finished goods, consumable COMA/245/2007 24/28 JUDGMENT stores / spares packing materials etc. and foreign letter of credit. It is also an admitted position that in respect of plant and machinery as well as lands, the applicant Bank is having second charge. However, at present the disbursement was made only out of the sale proceeds realised from Lot No.II i.e. all assets except land and hence the applicant Bank is entitled to receive its share from the sale realisation. The respondent No.2 is, therefore, not justified in denying the applicant's share. 15. It is unfortunate that though this Court has directed the respondent No.2 to disburse the amount amongst the secured creditors having first charge, the respondent No.2 has not brought to the notice of this Court and straightway appropriated the amount which was to be disbursed in favour of the applicant. This action of the respondent No.2 is highly deprecated. The Court has not empowered the COMA/245/2007 25/28 JUDGMENT respondent NO.2 nor conferred its authority on respondent No.2 to determine the status of the creditors. If the applicant is not secured creditor having first charge according to the respondent No.2 in that case the respondent No.2 should have obtained appropriate order from this Court or in the alternative the amount should have been returned to the Official Liquidator. In no case the respondent No.2 was entitled to appropriate the said amount amongst the secured creditors having first charge. The respondent No.2 is, therefore, directed to remit the amount of Rs.10.22 lacs to the applicant Bank with 10% interest thereon forthwith. 16. Though the Court has raised the issue with regard to the status of secured creditor and though the issue regarding the validity of deed of assignment is pending before the Division Bench in other similar matters, the COMA/245/2007 26/28 JUDGMENT Court is not issuing any direction at present to the respondent No.2 to return the amount to the Official Liquidator only on the ground that the amount has been earlier disbursed pursuant to the order of this Court and an undertaking is already filed by the respondent No.2 alongwith other secured creditors to the effect that in case the Court directs to return the amount with prevailing rate of interest they are duty bound to return the said amount to the Official Liquidator. In view of pendency of the proceedings in relation to the validity of deed of assignment before the Division Bench, in other similar matters and virtually deed of assignment in those matters and in the present matter are on the same line and the status of the respondent No.2 being securitisation Company does not make any difference while considering the validity and legality of deed of assignment. Even the issue regarding validity of deed of COMA/245/2007 27/28 JUDGMENT assignment was not before the Hon'ble Supreme Court in the case of Transcore v/s. Union of India and another (Supra) and hence based on the said decision, the respondent No.2 cannot straightway claim the status of secured creditor. Thus, as per the interim order of the Division Bench of this Court, the respondent No.2 shall have right to participate in sale committee's meetings, Court proceedings etc. but under no circumstances, any amount out