IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. CAPP No. 23 of 2009 Date of Decision: December 15, 2009 Haryana State Industrial & Infrastructure Development Corporation …Appellant Versus Haryana Concast Limited, Hisar and another …Respondents CORAM: HON'BLE MR. JUSTICE M.M. KUMAR HON’BLE MR. JUSTICE JASWANT SINGH Present: Mr. Kamal Sehgal, Advocate, for the appellant-HSIIDC Ms. Punita Sethi, Advocate, for the Official Liquidator. Mr. M.L. Sarin, Senior Advocate, with Mr. Harpreet Singh Giani, Advocate, for respondent No. 2. 1. To be referred to the Reporters or not? Yes 2. Whether the judgment should be reported in the Digest? Yes M.M. KUMAR, J. This order shall dispose of two cross appeals bearing CAPP Nos. 23 and 28 of 2009, filed under Section 483 of the Companies Act, 1956 (for brevity, ‘the Act’) against the order dated 20.3.2009, passed by the learned Company Judge. The Haryana State Industrial and Infrastructure Development Corporation (appellant in CAPP No. 23 of 2009) [for brevity, ‘HSIIDC’] has principally CAPP No. 23 of 2009 claimed that the directions issued by the learned Company Judge by keeping Pegasus Asset Reconstruction Private Limited (for brevity, ‘the Securitisation Company’) without associating the HSIIDC, are wholly erroneous and it has right to be associated with the process of sale from beginning to end. However, the Securitisation Company (appellant in CAPP No. 28 of 2009) has even attacked the supervisory directions issued by the learned Company Judge in his order dated 20.3.2009 by requiring it to submit all proposal for sale to the Official Liquidator and the details of valuation obtained from the conduct of the sale and that the sale notice should incorporate specifically a clause that winding up proceedings have been pending before the Company Court, with details of case number and the Court of adjudication. Further grievance of the Securitisation Company is that the learned Company Judge has required it to place before the Company Court the details of its claim and all expenses incurred prior to making any appropriation to itself and disbursing the amount. 2. It would be necessary to notice few facts to put the controversy in its proper prospective. The Haryana Concast Limited, Hisar-respondent No. 1 is a Company incorporated on 20.11.1973, which was promoted by the State of Haryana and its major shareholdings were held by the State Government and HSIIDC. The State Government acquired 40 acres of land to promote this company on 23.1.1974. It had taken a loan of Rs. 30 lacs from Bank of India, which was secured by tangible plant, machinery and building. Respondent No. 1-Company became sick and it was recommended to be wound up by the Board for Industrial and Financial Reconstruction 2 CAPP No. 23 of 2009 (for brevity, ‘BIFR’). On 28.10.1999, this Court ordered winding up of respondent No. 1 Company and the Official Liquidator attached to this Court was directed to take over the assets of the company in liquidation. 3. On 28.5.2004, this Court allowed the Official Liquidator to sell immoveable assets of respondent No. 1 Company to satisfy claims of the creditors. The Official Liquidator sold the assets of respondent No. 1 Company accepting the highest bid of Rs. 21.10 crores and the sale was confirmed by this Court in favour of M/s Radha Raman Builders. The auction purchaser failed to deposit 15% of the bid amount, therefore, the earnest money deposited by it was forfeited. On 20.3.2008, the sale concluded by the Official Liquidator was set aside by this Court. The amount of earnest money paid by M/s Radha Raman Builders was ordered to be refunded. He was directed to undertake the sale afresh. The auction purchaser M/s Radha Raman Builders filed company appeal and was awarded interest vide order dated 22.1.1999. 4. It is pertinent to notice here that the Securitisation Company has claimed that the Bank of India was the sole secured creditor of respondent No. 1 Company. On 27.8.2008, the Securitisation Company entered into an Assignment Agreement with the Bank of India. It purchased all its advances together with all other attendant rights, titles and interests of Bank of India in the credit documents including underlying collateral, security interest, pledges and/or guarantee in respect of such advances, as per the terms and conditions contained in the Assignment Agreement (A-1 attached 3 CAPP No. 23 of 2009 with CAPP No. 28 of 2009) and as envisaged under Section 5(1)(b) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for brevity, ‘the SARFAESI Act’). In this manner, the Securitisation Company stepped into the shoes of Bank of India to recover the assigned dues from respondent No. 1 Company. It is also pertinent to mention that the Bank of India at one point of time gave its consent for sale of immovable assets of respondent No. 1 Company under the provisions of the Act. The consent was subsequently withdrawn on the ground that a long span of time had passed since giving of consent but the sale process was substantially delayed. It has been claimed that in the mean time value of the properties has also increased considerably. 5. The Bank of India had also approached the Debts Recovery Tribunal, Chandigarh (for brevity, ‘the Tribunal’), under the Recovery of Debts Due to Banks and Financial Institution Act, 1993 (for brevity, ‘the DRT Act’), for recovery of outstanding amount from respondent No. 1 Company. The Tribunal acknowledging the rights of Bank of India over the mortgaged property and outstanding amount, had passed an order dated 9.5.2002 and recovery certificates were issued against respondent No. 1 Company (Annexure A-2 attached with CAPP No. 28 of 2009). 6. The Securitisation Company has also informed the Official Liquidator for substituting it in place of Bank of India. They also showed their intention to realise the dues by sale of property and opted to remain outside the liquidation process and to enforce its security as per the provisions of SARFAESI Act subject to the rights 4 CAPP No. 23 of 2009 of the workers of respondent No. 1 Company as per Section 529A of the Act. In that regard, the Securitisation Company had sent a notice under Section 13(2) of the SARFAESI Act and a letter to the Official Liquidator on 8.9.2008 and 9.9.2008 respectively (Annexures A-3 & A-4 with CAPP No. 28 of 2009). 7. The HSIIDC appeared before the Company Court and prayed for re-advertising the unit of respondent No. 1 Company for sale in view of the fact that value of the property has increased manifold. It has been claimed that the HSIIDC settled the liabilities of different banks and a sum of Rs. 10,39,98,000/- was paid to three banks, namely, (i) Bank of Maharashtra; (ii) Punjab National Bank; and (iii) Bank of India. After clearance of the charge of above mentioned banks over the moveable assets of respondent No. 1 Company, this Court ordered substitution/subrogation of the HSIIDC in place of three banks, vide order dated 22.5.2006. 8. The Company Court has undertaken the bidding by itself. At the time of receipt of bid of Rs. 29.12 crores, there was a dispute regarding a part of the land measuring about 4 acres out of total land measuring 40 acres owned respondent No. 1 Company, which was under un-authorised possession of the DHBVN. During the proceedings before the Company Court, the secured creditor Bank of India as well as the HSIIDC agreed to sell the aforementioned disputed land measuring 4 acres to DHBVN at Collectorate rate. On 20.3.2008, learned Company Judge claims to have passed an order permitting the Official Liquidator to sell the assets of the company in liquidation after associating the Bank of India and the HSIIDC. It 5 CAPP No. 23 of 2009 was further directed that the reserve price of the property be fixed at Rs. 29.12 crores. 9. The Official Liquidator by associating the HSIIDC started demarcation work of the land in question through the revenue authorities. It was found that after excluding the area measuring 27 Kanals 10 Marlas, which was in possession of the DHBVN, and common road area measuring 12 Kanals 9 Marlas (total being 39 Kanals 19 Marlas) the net area available for sale was 42.78 acres i.e. 286 Kanals 17 Marlas. Since the Company Court vide order dated 20.3.2008 had ordered for sale of 40 acres of land, therefore, an application bearing CA No. 590-591 of 2008 was filed for modification of order dated 20.3.2008. Simultaneously, another application bearing CA No. 704-705 of 2008 was also filed by the Securitisation Company for recalling order dated 20.3.2008 and directing the Official Liquidator not to proceed with sale of the property. It was further prayed that the Official Liquidator may be directed to hand over possession of the properties and to record the development including recovery certificate, notice under Section 13 (2) issued by the Securitisation Company. The HSIIDC also appeared at the time of motion hearing of said applications and it was allowed to be impleaded as necessary party. 10. After filing of replies by the respective parties, learned Company Judge allowed the applications filed by the Securitisation Company permitting it to stay outside the winding up proceedings and take action to bring to sale the secured assets under Section 13 of the SARFAESI Act read with Rule 8 and 9 of the Security Interest 6 CAPP No. 23 of 2009 Enforcement Rules, 2002 (for brevity, ‘the Rules’). The Securitisation Company in its appeal bearing CAPP NO. 28 of 2009 has averred that substantial relief has been granted to it but it is still aggrieved by the control asserted by the learned Company Judge by issuing directions to report the proposals to the Official Liquidator. They also feel aggrieved by the direction that sale notice must mention about the pendency of winding up proceedings. The learned Company Judge vide his order dated 20.3.2009 further ordered the Securitisation Company to keep the Official Liquidator informed about the steps taken by them while conducting the sale and issued the following directions:- “19. If any attempt to harmonize the provisions of the SARFAESI Act and the Companies Act could be made, in the context of orders for sale having already been made by the Company Court and the participation of the assignor of the applicant at several steps for the conduct of sale through the Company Court, it will be inexpedient unyoke the proceeding that were put through the O.L. While upholding the claim that the procedure laid down under the SARFAESI Act would enable the provisions of the Security Enforcement Rules to be applied for conduct and confirmation of the sale, the dispensation in this case would be (a) to permit the applicant to stay outside the winding up proceedings and take action to bring to sale the secured assets under Section 13 of the SARFAESI 7 CAPP No. 23 of 2009 Act read with Rules 8 and 9 of Security Interest Enforcement Rules, 2002. (b) The applicant-Reconstruction Company shall keep all the steps taken under the SARFAESI Act and the relevant rules transparent and submit all the proposals for sale to the O.L. and the details of valuation obtained for the conduct of sale for the purpose of determining the used price. (c) Sale shall be advertised with a specific clause that the winding up proceedings are pending before the Company Court, with details of case number and the Court of adjudication. (d) The expenses already incurred for the conduct of the sale by O.L. shall be deducted from out of the sale proceeds before any appropriation or disbursement and deposited with O.L. (e) The Reconstruction Company shall place before the Company Court the details of its claim and all expenses incurred before the Company Court, before making any appropriation to itself and disbursed. (f) The surplus proceeds over what is lawfully due to it shall be deposited to the credit of the Company (in liquidation) before the O.L.” 11. The aforementioned order dated 20.3.2009 passed by the learned Company Judge is subject matter of challenge in these appeals by both the appellants HSIIDC and the Securitisation 8 CAPP No. 23 of 2009 Company. 12. Mr. M.L. Sarin, learned senior counsel for the Securitisation Company has argued that the directions issued by the learned Company Judge are patently against the object, letter and spirit of the SARFAESI Act and all such directions are liable to be set aside especially when the Securitisation Company has been kept out of the winding up being the sole secured creditor. Learned counsel has canvassed that the basic object of promulgating the SARFAESI Act was that there was huge non-performing assets and the pace of recovery of defaulting loans was pathetically slow. He has drawn our attention to the following statement of objects and reasons and clause (h) & (i) of the statement made while presenting the Bill preceding the passing of the SARFAESI Act:- “ The financial sector has been one of the key drivers in India’s efforts to achieve success in rapidly developing its economy. While the banking industry in India is progressively complying with international prudential norms and accounting practices there are certain areas in which the banking and financial sector do not have a level playing field as compared to other participants in the financial markets in the world. There is no legal provision for facilitating securitization of financial assets of banks and financial institutions. Further, unlike international banks, the banks and financial institutions in India do not have power to take possession of securities and sell them. Our existing legal 9 CAPP No. 23 of 2009 framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms. This has resulted in slow place of recovery of defaulting loans and mounting levels of non-performing assets of banks and financial institutions. Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms have considered the need for changes in the legal system in respect of these areas. These Committees, inter alia, have suggested enactment of a new legislation for securitization and empowering banks and financial institutions to take possession of the securities and to sell them without the intervention of the court. Acting on these suggestions, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002 was promulgated on the 21st June, 2002 to regulate securitization and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. The provisions of the Ordinance would enable banks and financial institutions to realise long-term assets, manage problem of liquidity, asset liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce non- 10 CAPP No. 23 of 2009 performing assets by adopting measures for recovery or reconstruction. 2. It is now proposed to replace the Ordinance by a Bill, which inter alia, contains provisions of the Ordinance to provide for – (a) to (g) xxx xxx xxx (h) empowering banks and financial institutions to take possession of securities given for financial assistance and sell or lease the same or take over management in the event of default, i.e. classification of the borrower’s account as non-performing asset in accordance with the directions given or guidelines issued by the Reserve Bank of India from time to time; (i) the rights of secured creditor to be exercised by one or more of its officers authorised in this behalf in accordance with the rule made by the Central Government; (j) to (m) xxx xxx xxx 3. The Bill seeks to achieve the above objects.” 13. On the basis of the aforesaid statement of objects and reasons, the basic hypothesis propounded by Mr. Sarin is that Securitisation Company like respondent No. 2 are free from any fetters & shackles which ordinarily bind a Company Court under various provisions of the Act. He has maintained that the 11 CAPP No. 23 of 2009 Securitisation Company has been registered under Section 3 with the Reserve Bank of India. According to the learned counsel there are very few Securitisation Companies, who could meet the strict financial control and thorough scrutiny of their antecedents, so as to be registered under Section 3 of the SARFAESI Act. It has been pointed out that there are following 12 companies all over the country which have been registered under Section 13 of the SARFAESI Act:- Sr. No. Name of the Registered Company Address of the Company Promoters 1 Asset Reconstruction Company (India) Ltd. (ARCIL) Shreepati Arcade, August Kranti Marg, Nana Chowk, Mumbai-40003 SBI, ICICI, IDBI 2 Assets Care Enterprise Ltd., IFCI Tower, 61, Nehru Place, New Delhi-110019. IFCI, PNB 3 ASREC (India) Ltd, UTI Tower, Gn Block, Bandra Kurla Complex, Bandra (East), Mumbai-400 051. UTI, BoI, Alld Bank, Indian Bank 4 Pegasus Assets Reconstruction Pvt. Ltd. 46, 4th floor, Free Press House Nariman Point, Mumbai- 400021 5 Dhir & Dhir Asset Reconstruction & Securitisation Company Ltd. D-54 (FF), Defence Colony, New Delhi- 110024. 6 International Asset Reconstruction Company Pvt. Ltd. 104, Ashoka Estate, Barakhamba Road, New Delhi-110 001. 7 Reliance Asset Reconstruction Company Ltd. Reliance Centre 19, Walchand Hirachand Marg, Ballard Estate Mumbai-400 038 8 Pridhvi Asset Reconstruction and Securitisation Company Ltd. 123/3 RT, First Floor, Sanjeeva Reddy Nagar, Hyderabad- 500038 12 CAPP No. 23 of 2009 9 Phoenix ARC Pvt. Ltd. 240, Navsari Building, 1st Floor, DN Road, Mumbai- 400001. Kotak Mahindra Bank 10 Invent Assets Securitisation & Reconstruction Private Limited 7, Raheja Centre, Ground Floor 214, Free Press Journal Marg Mumbai- 400021. 11 JM Financial Asset Reconstruction Company Limited 141, Maker Chambers III, Nariman Point, Mumbai-400021. 12 India SME Asset Reconstruction Company Limited (ISARC) SME Development Centre, Plot No. C-11, G-Block, Bandra Kurla Complex, Bandra (East), Mumbai-400051 SIDBI, United Bank of India, BoB 14. According to the learned counsel a non-obstante provision has been made under Section 5(1)(b) of the SARFAESI Act, contemplating that a Securitisation Company may acquire financial assets of any bank or financial institution by entering into an agreement with them for the transfer of such financial assets to the Securitisation Company on such terms and conditions as may be agreed between them. Such an arrangement is permitted to operate notwithstanding anything contained in any agreement or any other law. The Securitisation Company has been permitted to provide for various measures for the purposes of asset reconstruction by keeping in view the guidelines framed by the Reserve Bank of India in that behalf as per the provisions of Section 9. Such a company is also entitled to enforcement of security interest in accordance with the provisions of the SARFAESI Act. 13 CAPP No. 23 of 2009 15. Referring to the provisions of Section 12 of the SARFAESI Act, learned counsel has submitted that it is only Reserve Bank of India who could determine policy and issue directions to a securitisation company in matter relating to income, recognition, accounting standards, making provisions for bad and doubtful debts. Even the directions can be issued with regard to the type of financial asset of a bank or financial institution, which could be acquired and the procedure for acquisition of such assets. The directions could also be issued in respect of the aggregate value of financial assets which may be acquired by a securitisation company. 16. Mr. Sarin has then referred to Chapter III from Sections 13 to 19 of the SARFAESI Act and contended that under Section 13 (1) any security interest created in favour of any secured creditor could be enforced without the intervention of the Court in accordance with the provisions of the SARFAESI Act notwithstanding the provisions of Transfer of Property Act, 1882. Once a notice of 60 days is given for repayment of secured debt or instalment thereof to a defaulter and such a defaulter fails to pay the amount then the secured creditor is entitled to exercise its right under sub-section (4) of Section 13 of taking possession of the secured assets of the borrower including the right to jurisdiction by way of lease, assignment or sale for realising the secured assets. It has been pointed out that sub- section (3A) of Section 13 was added in the year 2004 and the representation in response to the notice issued under Section 13(2) by the borrower is required to be considered by the secured creditor and the reasons for not accepting the representation are required to be 14 CAPP No. 23 of 2009 communicated to such a borrower although reasons so communicated are not to confer any right upon the borrower to prefer an application before the Debt Recovery Tribunal under Section 17 or the Court of District Judge under Section 17A thereof. It has further been pointed out by referring to the provisions of Section 13(7) that any expenses properly incurred by a securitisation company/secured creditor or any expenses incidental thereto are liable to be recovered from the borrower in the process of initiating action under Section 13(4) involving taking of possession, the right to transfer by way of lease, assignment or sale for realising the secured assets etc. The money received by the secured creditor in the absence of any contract to the contrary is held by him in trust which is to be applied firstly in payment of such costs, charges and expenses. Secondly, in discharge of the duties of the secured creditor and the residue of the money so received is required to be paid to such persons who are entitled thereto in accordance with their rights and interests. He has then referred to the proviso of Section 13(9) and submitted that in the case of a company in liquidation, the sale of secured asset is required to be distributed as per the provisions of Section 529A of the Act. With regard to the company which is being wound up after the commencement of the SARFAESI Act, different provisions have been made by second proviso to Section 13(9). Mr. Sarin has further pointed out that the distribution of assets as per the first proviso of Section 13(9) would not result into imposition of any shackles on a secured creditor or a Securitisation Company, to be imposed by the 15 CAPP No. 23 of 2009 Company Judge because the 2nd, 3rd and 4th proviso clarifies that in case a company is being wound up after the commencement of the SARFAESI Act then a secured creditor who opts to realise his security, is entitled to retain the sale proceeds of his secured assets after depositing the workmen’s dues with the Official Liquidator as per the provisions of Section 529A of the Act and the workmen’s dues according to the third proviso are required to be intimated by the Official Liquidator to a secured creditor. If the workmen’s dues could not be ascertained then the estimated amount of workmen’s dues under Section 529A of the Act are required to be intimated and such a secured creditor could retain the sale proceeds of the secured assets after depositing the amount of such estimated dues with the Official Liquidator. There is further obligation imposed by the fourth proviso that a secured creditor is under obligation to pay the balance of the workmen’s dues or it would be entitled to refund of the excess amount deposited by the secured creditor with the Official Liquidator. 17. Mr. Sarin has then referred to the provisions of Section 35 which provides for overriding effect of the SARFAESI Act despite anything inconsistent contained in any other law. According to the learned counsel Section 37 which applies the provisions of other laws is not contradictory to Section 35, inasmuch as, the SARFAESI Act would have its effect to the extent it is in conflict with any other law and other laws would continue to operate in addition to the SARFAESI Act. 18. On the basis of the aforesaid provisions of the SARFAESI Act, Mr. Sarin has concretised his argument that the 16 CAPP