IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE S.SIRI JAGAN THURSDAY, THE 9TH JULY 2009 / 18TH ASHADHA 1931 WP(C).No. 27033 of 2008(R) --------------------------------------- PETITIONER: ------------------- STATE BANK OF INDIA, COMMERCIAL BRANCH, ERNAKULAM, IST FLOOR, VANKARATH TOWERS, BYE-PASS JUNCTION, PADIVATTOM, KOCHI -682 024,REPRESENTED BY THE ASSISTANT GENERAL MANAGER, STATE BANK OF INDIA, COMMERCIAL BRANCH, ERNAKULAM. BY ADVS. MR.K.JAYAKUMAR, MR. P.B. KRISHNAN. RESPONDENT: ---------------------- 1. M/S. PRIMA AGRO LIMITED, 31/536, PRIMA HOUSE, SOUTH KALAMASSERY, KOCHI – 682 033, REPRESENTED BY ITS MANAGING DIRECTOR. 2. BANK OF INDIA, ZONAL OFFICE, KERALA ZONE, KALOOR TOWNERS, KALOOR-KADAVANTHARA ROAD, KOCHI – 682 017, REPRESENTED BY ITS ZONAL MANAGER. R1 BY ADV. MR.SATHISH NINAN, R2 BY ADV. MR. DEVAN RAMACHANDRAN. THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 09/07/2009, ALONG WITH W.P.(C). NO. 27104/2008,THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: W.P.(C). NO.27033/2008-R: APPENDIX PETITIONERS' EXHIBITS: EXT.P.1: COPY OF THE CONSENT LETTER GIVEN BY R.2. TO THE PETITIONER DTD. 17/12/2004. EXT.P.2: COPY OF THE NOTICE ISSUED BY THE PETITIONER TO R.2. DTD. 05/12/2005. EXT.P.3: COPY OF THE OBJECTION SENT BY R.1. TO THE PETITIONER DTD. 04/02/2006. EXT.P.4: COPY OF THE COMMUNICATION SENT BY THE PETITIONER TO R.1. DTD. 19/03/2006. EXT.P.5: COPY OF THE POSSESSION NOTICE DTD. 13/09/2006. EXT.P.6: COPY OF THE SUMMARY RECORD OF PROCEEDINGS OF BIFR DTD. 02/01/2007. EXT.P.7: COPY OF THE ORDER OF THE AAIFR DTD. 20/12/2007. EXT.P.8: COPY OF THE PROCEEDINGS OF THE AAIFR DTD. 07/09/2007. RESPONDENTS' EXHIBITS: EXT.R1.1: COPY OF THE ORDER OF AAIFR DTD. 25/05/2007. EXT.R1.2: COPY OF THE AFFIDAVIT OF SERVICE FILED BY THE RESPONDENT DTD. 28/06/2007. EXT.R1.3: COPY OF THE ORDER OF AAFIR DTD. 17/07/2007. EXT.R1.4: COPY OF THE AFFIDAVIT OF SERVICE FILED BY THE RESPONDENT DTD. 28/07/2007. EXT.R1.5: COPY OF THE ORDER AAFIR DTD. 07/09/2007. EXT.R1.6: COPY OF THE ORDER OF BIFR DTD. 11/03/2008. EXT.R1.7: COPY OF THE ORDER OF BIFR DTD. 07/05/2008. EXT.R1.8: COPY OF THE ORDER OF BIFR DTD. 07/07/2008. EXT.R1.9: COPY OF THE LETTER DTD. 17/06/2005 ISSUED BY RESPONDENT WHEREBY THE OTS STATEMENT WAS SUBMITTED. EXT.R1.10: COPY OF THE LETTER ISSUED BY STATE BANK OF INDIA DTD. 18/06/05 TO THE RESPONDENT REQUESTING TO DEPOSIT A SUM OF RS.10 LACS. W.P.(C). NO.27033/2008-R: EXT.R1.11: COPY OF THE LETTER DTD. 06/07/2005 ISSUED BY RESPONDENT INFORMING THE PETITIONER OF DEPOSIT OF MONEY. EXT.R1.12: LEGAL NOTICE ISSUED BY STATE BANK OF INDIA DTD. 17/06/05 TO THE RESPONDENT. EXT.R1.13: REPLY DTD. 04/07/2008 BY THE RESPONDENT TO THE LEGAL NOTICE. EXT.R1.14: COPY OF THE SARFAESI NOTICE DTD. 05/12/2005 ISSUED BY THE STATE BANK OF INDIA. EXT.R1.15: COPY OF THE REPLY DTD. 04/02/2006 BY THE RESPONDENT TO THE PETITIONER'S NOTICE. EXT.R1.16: COPY OF THE BANK'S RESPONSE DTD. 19/03/2006 TO THE REPLY OF THE PETITIONER. EXT.R1.17: COPY OF THE LETTER DTD. 06/09/2006 ISSUED BY RESPONDENT. EXT.R1.18: COPY OF THE ORDER OF BIFR DTD. 13/09/2006. EXT.R1.19: COPY OF THE LETTER DTD. 19/01/2007 ISSUED BY RESPONDENT TO STATE BANK OF INDIA. EXT.R1.20: COPY OF THE APPROVAL LETTER DTD. 12/02/2007 ISSUED BY BANK OF INDIA. EXT.R1.21: COPY OF THE APPROVAL LETTER DTD. 20/02/2007 ISSUED BY STATE BANK OF INDIA. EXT.R1.22: COPY OF THE LETTER DTD. 27/03/2007 SENT BY THE RESPONDENT TO STATE BANK OF INDIA. EXT.R1.23: COPY OF THE LETTER DTD. 12/06/2009 ISSUED BY RESPONDENT TO STATE BANK OF INDIA. //TRUE COPY// P.A. TO JUDGE. Prv. S. SIRI JAGAN, J. ----------------------------- WP(C) NO. 27033 OF 2008 & WP(C) NO. 27104 OF 2008 -------------------------------- DATED THIS THE 9TH DAY OF JULY 2009 JUDGMENT Since the very same issue arises in both these writ petitions, the same are heard and disposed of by this common judgment. 2. The petitioner bank is a member of two consortia of Banks, who advanced loan amounts to the respective 1 st respondent in these two writ petitions. The other respondents in the two writ petitions are the other members of the consortia. The 1 st respondent in both the writ petitions, who are sister companies, defaulted repayment of the loan amounts. The petitioner bank filed applications before the Debt Recovery Tribunal, Ernakulam for recovery of the loan amounts. Simultaneously they also initiated proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest, Act 2002 (the Securitisation Act). Both the 1 st respondent companies in the two writ petitions WP(C)27033/2008 & WPC(C) 27104/2008 2 filed references before the Board of Industrial Finance and Reconstruction (BIFR), under Section 15 of the Sick Industrial Companies (Special provisions) Act, 1985 (SICA). While those references were pending, the consortia, in both of which the petitioner bank was member, initiated measures under Sec.13(4)of the Securitisation Act. Thereafter they represented before the BIFR in the references pending before the BIFR that, since the consortia, which represent 75% or more of the value of the amounts outstanding against the financial assistance disbursed to the 1 st respondent companies, have taken measures to recover their secured debt under Sub Section 4 of Section 13 of the Securitisation Act, by virtue of the 3 rd proviso to Sec.15(1) of the SICA, the references stand abated. This representation was considered by the BIFR, in their sitting held on 22-1-2007. By Ext.P6 in WP(C) No. 27033/08 and Ext.P2 in the other case, the BIFR, in view of the submission made by the 1 st respondent company that they have no objection in the references being declared as abated the BIFR WP(C)27033/2008 & WPC(C) 27104/2008 3 declared that the references have abated, under the 3 rd proviso to Sec.15(1) of the SICA. Both the 1 st respondent companies filed appeals before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR), contending that in view of the subsequent developments, by which the consortia have extended to them one time settlement facilities to pay off the loans by virtue of Sec.13(8) of the Securitisation Act, there is no subsisting cause for abatement of the references. Accepting the contentions of the 1 st respondent companies, by Ext.P7 order in WP(C) No.27033/08 and Ext.P3 in the other writ petition, the AAIFR set aside the orders of the BIFR and remanded the matter to the BIFR for further proceedings under the SICA on the references. The petitioner Bank is challenging the said Exts.P7 and P3 orders respectively, of the AAIFR in these two writ petitions. 3. The contention raised by the bank is that abatement of the references does not depend upon any order of the BIFR, but the same is automatic by WP(C)27033/2008 & WPC(C) 27104/2008 4 operation of the 3 rd proviso to Sec.15(1) of the SICA and therefore there are no orders as such of the BIFR, as contemplated under the SICA, against which the AAIFR could have entertained appeals and therefore the Exts.P7 and P3 orders are without jurisdiction. 4. The petitioner would further contend that even assuming that the AAIFR had jurisdiction to deal with the appeals, the conclusion reached in the impugned orders are perverse, for two reasons. First is that Sec.13(8) does not contemplate restitution of the measures taken under Sec.13(4). Secondly, it is contended that mere offers of one time settlement facilities to the first respondent companies do not take away the cause for abatement of the reference and that S.13(8) would apply only if, as provided therein, the borrower actually tenders the dues to the secured creditor together with all cost/charge incurred by the secured creditor. The petitioner bank points out that, that eventuality has not happened in these cases in so far as the 1 st respondent companies in the two writ petitions never bothered to avail of the WP(C)27033/2008 & WPC(C) 27104/2008 5 one time settlement facilities offered to them, by paying off the dues of the consortia within the time stipulated in the offers. It is pointed out that even in the subsequent communications of the 1 st respondent companies viz. Ext.R1(23) in WP(C) No. 27033/08 and R1(21) in the other writ petition, they still speak of repayment of the amounts within a maximum period of 14 years, which would go to show that the 1 st respondent companies never had any intention whatsoever to repay the amount even belatedly, as per the one time settlement facilities offered to them, the period of validity of which had also expired long back. 5. Very detailed counter affidavits have been filed by the 1 st respondent in both the writ petitions taking several contentions to resist the writ petitions. But I don't think that I should consider all those contentions in view of the specific admission made by the respondent companies before the BIFR to the effect that they have no objection to the abatement of the references. That being so all what I need to WP(C)27033/2008 & WPC(C) 27104/2008 6 consider in these two writ petitions is as to whether the AAIFR had jurisdiction to entertain the appeals filed by the 1 st respondent companies and whether even if they had the jurisdiction to consider the same the decisions of the AAIFR to the effect that in view of the one time settlement facilities offered to the 1 st respondent companies, by virtue of Sec.13(8), measures under Sec.13(4) is to be reversed and that there is no subsisting cause for abatement of the reference. 6. In respect of the first contention the counsel for the petitioner pointed out that even without considering the 3 rd proviso to Sec.15(1) of the SICA, in view of Sec.35 of the Securitisation Act, the provisions of the Securitisation Act overrides the SICA and therefore once the consortia initiated proceedings under the Securitisation Act, the BIFR could not have validly taken any further proceedings under the SICA. Sec.35 of the Securitisation Act reads thus:- “The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the WP(C)27033/2008 & WPC(C) 27104/2008 7 time being in force or any instrument having effect by virtue of any such law.” 3 rd proviso to Sec.15(1) of the SICA reads thus:- “ 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 of such secured creditors, have taken any measures to recover their secured debt under sub-section (4) of section 13 of that Act. If, as contended by the learned counsel for the petitioner, by virtue of Sec. 35 of the Securitisation Act, the Securitisation Act overrides SICA, then it was not necessary for the Parliament to amend Sec.15 of the SICA to introduce the 3 rd proviso, that too after Sec.35 of the Securitisation Act was enacted, as per which the reference before the BIFR would abate only when a measure under Sec.13(4)of the Securitisation WP(C)27033/2008 & WPC(C) 27104/2008 8 Act is taken by the secured creditor. Therefore I have considerable doubt about the sustainability of the proposition that by virtue of Sec.35 of the Securitisation Act, that Act overrides the SICA. Further the abatement arises only when measures under Sec. 13(4) is taken, which have to be preceded by a notice and a representation from the borrower as contemplated under Sec. 13(2), which is not sufficient for abatement. But I am not inclined to pronounce on that question finally in these writ petitions in so far as even without going into that question the petitioner is entitled to succeed in these writ petition. 7. As is clear from the 3 rd proviso to Sec.15(1) of the SICA, when secured creditors, representing not less than ¾ th of the value of the amount outstanding against the financial assistance disbursed to the borrower of the secured creditors, have taken any measures to recover the secured assets under Sub Section 4 of Section 13, the reference to the BIFR shall abate. Therefore, without any positive action either from the parties to the reference or from the WP(C)27033/2008 & WPC(C) 27104/2008 9 BIFR for that matter, by virtue of the operation of the statute itself the reference automatically abates. All what the BIFR has to do is to recognize the same and formally close the reference as abated on the parties bringing to the attention of the BIFR that the secured creditors have taken measures under Sec.13(4) of the Securitisation Act. That order, if at all it is an order under the SICA made by the BIFR, is not an order of the BIFR appealable under Sec.25 thereof. Therefore I am of the opinion that AAIFR did not have jurisdiction to entertain an appeal against Exts.P6 and P2 in the two writ petitions respectively, which are formal closure of the reference as abated in view of the 3 rd proviso to Sec.15(1) of the SICA, on being notified of the fact that the secured creditors have taken measures under Sec. 13(4) of the Securitisation Act. 8. The 1 st respondent companies in their counter affidavits have taken a contention based on the decision of the Division Bench of the Orissa High Court in the case of 'Noble Aqua Pvt.Ltd. & Ors. Vs. State Bank of India & Ors. reported in AIR 2008 WP(C)27033/2008 & WPC(C) 27104/2008 10 Orissa 103. In that decision the Orissa High Court took the view that once the BIFR declares a company as a sick industrial company, thereafter there is no reference pending to abate and that the protection given to sick industrial companies under the SICA is not taken away by the Securitisation Act. I respectfully disagree with the said view. I am of the opinion that under the SICA there is no procedure stipulated of declaring a company as a sick company on a reference and thereafter initiating a separate proceedings in respect of taking measures prescribed in the SICA. Once the Board of Directors of the company makes a reference to the BIFR, firstly that reference has to be registered under Sec.15 and the BIFR has to make an inquiry as to whether the industrial company has become a sick industrial company. Thereafter based on the such inquiry if the Board is satisfied that the company has become a sick industrial company, the Board has to consider whether it is practicable for the company to make it's net worth exceed its accumulated loss within a reasonable time. No WP(C)27033/2008 & WPC(C) 27104/2008 11 procedure of formally declaring the company as a sick industrial company is contemplated by the Act. But further proceedings on the reference is to be taken only on the BIFR being satisfied that the Company has become a sick industrial company. Thereafter if the BIFR decides that it is practicable for the company to make it's net worth exceed the accumulated loss within a reasonable time they shall by order in writing, give such company as it may deem fit, an opportunity to make it's net worth exceed the accumulated loss. If the Board is of the opinion that it is not practicable for the company to make it's net worth exceed the accumulated loss, then it will have to take measures under Section 18 of the Act like sanction of a scheme for revival of the company. Ultimately the proceedings before the BIFR has to either result in rehabilitation of the sick industrial company or a recommendation to the Company Court to wind up the Company. That being the procedure prescribed under the SICA, all throughout, the entire proceedings of the BIFR is on the reference made to it WP(C)27033/2008 & WPC(C) 27104/2008 12 by the Board of Directors of the Company. Therefore unless and until either the company is rehabilitated or the BIFR recommends to the Company Court to wind up the company, and perhaps in view of Sec. 20(4) of the SICA, even till the company judge orders winding up of the company, the reference would continue to be pending and the entire proceedings are in the reference itself. Hence the reference never ceases to exist until all the procedures contemplated in the SICA are completed either by rehabilitation or by recommending winding up. Therefore I am of the opinion that the 3 rd proviso to Sec.15(1) would apply whichever be the stage of the proceedings pending before the BIFR, since all the proceedings of the BIFR are in that reference itself and no other separate proceedings are contemplated under the SICA, other than in the reference. I am also of the opinion that the findings to the contrary, in the decision of the Orissa High Court, are clearly without appreciating the scheme of SICA. 9. Even otherwise as far as this case is concerned, WP(C)27033/2008 & WPC(C) 27104/2008 13 that also may not be relevant in so far as the 1 st respondent companies do not have a case that the reference before the BIFR had resulted in the declaration of the company as a sick industrial company in order to apply the ratio of the Orissa High Court decision. Therefore by virtue of the 3 rd proviso of Section 15(1) of the SICA, the reference before the BIFR had abated and BIFR could not have validly taken any further steps as contemplated under the Act on the reference which has abated. Consequently the AAIFR also had no jurisdiction to entertain an appeal against the formal recording of the factum of abatement, by virtue of the operation of the 3 rd proviso of Section 15(1) of the SICA by the BIFR. 10. Apart from that, on merits also the findings of the AAIFR are clearly vitiated. The findings are to effect that in view of the one time settlement facility offered by the consortium, by virtue of Sec.13(8), the consortia are bound to reverse the measures initiated under Section 13(4). Section 13(4) reads thus:- “ In case the borrower fails to WP(C)27033/2008 & WPC(C) 27104/2008 14 discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debit, namely:- (a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realisation the secured asset; (b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset: Provided that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt: Provided further that where the management of whole, of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security or the debit; (c) appoint any person(hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor; (d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower WP(C)27033/2008 & WPC(C) 27104/2008 15 and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt. Sec.13(8) reads thus:- “If the dues of the Secured Creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the Secured Creditor, and no further steps shall be taken by him for transfer or sale of that secured asset.” First of all, for attracting Section 13(8), it is not merely sufficient that the borrower and the secured creditor have come to an agreement for settling the dues. What Sub Section 8 of Section 13 stipulates is that if the dues of the secured creditor are tendered to the secured creditor, no further steps shall be taken by the secured creditor for transferring and sale of the secured asset. Therefore unless and until the borrower tenders the dues to the secured creditor there is no question of application of Sec.13(8). Here WP(C)27033/2008 & WPC(C) 27104/2008 16 admittedly the 1 st respondent companies have not chosen to tender the dues to the consortium banks. In fact even today, after two years of the offer of one time settlement facility, the period of which has already expired, the 1 st respondent companies have not chosen to avail of the same by tendering the dues so as to attract the provisions of S.13(8). Going by the correspondence produced by the 1 st respondent companies themselves, they still want further concessions in the matter of payment. In fact they requested for 14 years' time to pay off the dues, which cannot, by any stretch of imagination, be considered as compliance with the provisions of Sec.13(8). As such, AAIFR went wrong in holding that in view of the agreement arrived at between the parties by virtue of operation of Sec.13(8), the measures taken by the consortium banks under Sec.13(4) have to be reversed and there is no subsisting cause for abatement of the references. 11. Even otherwise, the fulfilment of the conditions of Sec.13(8) does not mean that automatically the WP(C)27033/2008 & WPC(C) 27104/2008 17 consortium banks have to reverse the measures taken by them under Section 13(4). Sec.13(8) does not say so, it only says that no further steps shall be taken by the secured creditor for transfer or sale of the secured asset. That means that there is no reversal of the abatement also. According to me even in such an event, what the first respondent companies could do or seek is another reference under the SICA after closing the loan accounts with the consortium banks. 12. For all the above reasons Exts.P7 and P3 orders of the AAIFR, produced in the two writ petitions, respectively, are unsustainable and are liable to be quashed. I do so. Writ petitions are allowed as above. S. SIRI JAGAN (JUDGE) pkk