IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 06.01.2011 CORAM: THE HONOURABLE MR. JUSTICE D. MURUGESAN AND THE HONOURABLE MR.JUSTICE S. NAGAMUTHU W.P.NO. 18614 OF 2010 M/S.Salem Textiles Limited, rep. By its Managing Director, Having its Registered Office at Selliampalayam, Attur 636 108 Salem District. ... Petitioner -Vs.- 1. The Authorised Officer, Phoenix ARC Private Ltd in its capacity as Trustee For and on behalf of Phoenix Trust FY 09-7 7th floor, Dani Corporate Bank, 158 CST Road,Kalina Santacruz (E) Mumbai 400 098. 2. Industrial Development Bank of India Ltd., rep. By its Chairman & Managing Director, IDBI Towers,Cuffee Parade, Mumbai ... Respondents Prayer:- Writ Petition filed under Article 226 of the Constitution of India for issuance of a writ of Certiorarified mandamus calling for the records relating to the notice of the first respondent herein dated 3.06.2010 issued under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002, quash the same and forbear the first respondent herein from in any manner initiating any proceedings under any of the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002. For petitioner : Mr.AR.L.Sundaresan, S.C for AL.Ganthimathi For Respondents : Mr.J.M.:Prakaskh for M/S.Ramalinga and Associates. https://hcservices.ecourts.gov.in/hcservices/ O R D E R (ORDER of the Court was delivered by S.NAGAMUTHU, J) The challenge in this writ petition is to the notice issued under Section 13 (2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as ‘SARFAESI' Act) . 2. The petitioner is a Company incorporated under the Indian Companies Act of 1956. The said Company has secured loan from various creditors, Banks etc. including the first respondent herein. But unfortunately, the Company could not honour its commitments to the creditors. The Company became sick. Therefore, the petitioner- Company filed a reference before the Board for Industrial and Financial Reconstruction (hereinafter referred to as 'BIFR') under Section 15 of the Sick Industrial Companies (Special Provisions) Act 1985 (hereinafter referred to as 'SICA') for rehabilitation of the company. Admittedly, the reference was taken on file as a Case in Case No.252 of 1998. Initially, ICICI Bank was appointed as an Operating Agency under Section 16 (2) of the SICA and thereafter by an order dated 20.09.99, the BIFR declared the reference made by the petitioner as not maintainable. As against the said order of BIFR an appeal was filed by the petitioner before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) and by order dated 28.04.2000, the order of BIFR dated 20.09.99 was set aside and the case was remanded back to BIFR for fresh consideration. Again, the BIFR by order dated 29.12.2000 rejected the reference, as against which, the petitioner once again preferred an appeal before AAIFR. By order dated 10.05.2001, AAIFR set aside the order of BIFR dated 29.12.2000 and once again remanded the matter back to the BIFR for decision in accordance with law. Thereafter, on 31.01.2002, BIFR appointed ICICI Bank Ltd as Operating Agency under Section 16 (2) of the Act. Subsequently, on the ground that ICICI Bank was not co- operating with the proceedings, the BIFR issued a show cause notice to the said Bank and thereafter, by order dated 30.08.2005 BIFR declared the petitioner company as a Sick Industrial company under Section 3 (1) (o) of SICA and appointed the second respondent IDBI Ltd as the Operating Agency under Section 17(3) of the SARFAESI Act to carry out the techno Economic feasibility studies of the company and to prepare rehabilitation scheme for the company, if possible, by fixing the cut of date as 31.12.2005. The petitioner has thereafter filed a draft rehabilitation scheme with IDBI Ltd on 08.08.2009 as directed by BIFR and the same is pending. 3. When BIFR proceeding is so pending as narrated above, the first respondent has issued a notice under Section 13 (2) of the SARFAESI Act on 03.06.2010 claiming a sum of Rs.13,36,48,133.64 which is due as on 31.05.2010 with further interest thereon. It is against https://hcservices.ecourts.gov.in/hcservices/ the said notice, the petitioner has come up with this writ petition. 4. The petitioner mainly contends that the petitioner is protected under Section 22 of the SICA and therefore all the proceedings initiated under Section 13 (2) of the SARFAESI Act is wholly without jurisdiction. The proceeding before BIFR has been abated since the petitioner has not taken any measure to recover their secured debt under sub Section 4 of Section 13 of the SARFAESI Act as per second proviso to Section 15 (1) of the SICA as amended by Section 41 r/w Schedule of the SARFAESI Act. 5. In the counter filed by the first respondent, it is contended that the second proviso to Section 15 (1) of the SICA is not applicable to the facts of the present case because, mere issuance of notice under Section 13 (2) of the SARFAESI Act shall not amount to taking measures to recover the secured debt under Sub-Section 4 of Section 13 of the SARFAESI Act. Under Section 13 (9) of the SARFAESI Act, for exercising the right conferred under Sub-Section 4 of Section 13 of the SARFAESI Act, it would be suffice if the secured creditors representing not less than 3/4th in value of the amount outstanding as on a record date have agreed upon for the petitioner to exercise such power. In this case, according to the learned counsel for the first respondent, the petitioner can proceed to exercise its right under Section 13 (4) of the SARFAESI Act, if only the secured creditors representing not less than 3/4th in value of the amount outstanding have taken measures to recover the secured debt under sub-Section 4 of Section 13 of the SARFAESI Act, as enshrined in the second proviso to Section 15 (1) of the SICA. 6. We have considered the above submissions. 7. Indisputably, on 21.06.2002 when the SARFAESI Act came into force, the proceedings before BIFR at the instance of the petitioner was admittedly pending. Now, the question is whether the said proceeding has abated by operation of second proviso to Sub-Section 1 of Section 15 of SICA as amended by Section 41 r/w Schedule II of the SARFAESI Act. At this juncture, it would be worthwhile to extract the said proviso, which reads as follows: “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 the secured debt under sub-section (4) of https://hcservices.ecourts.gov.in/hcservices/ Section 13 of the Act.” 8. A perusal of the above proviso would make it abundantly clear that on coming into force of the SARFAESI Act, as per the second proviso to Section 15 (1) of the SICA, the said proceeding before BIFR shall stand abated unless the secured creditors representing not less than three-fourth in value of the amount outstanding have taken measures to recover the secured debt under Section 13 (4) of the SARFAESI Act. 9. The next question is as to whether mere issuance of notice under Section 13 (2) of the SARFAESI Act shall amount to taking measure as referred to in the second proviso to Section 15 (1) of SICA to recover the secured debt under Sub Section 4 of Section 13 of the SARFAESI Act. At this juncture, it is worthwhile to refer to Sub- Sections 2 and 9 of Section 13 of the SARFAESI Act which read as follows: “ 13(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4). "13(9) In the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuance to sub-section 4 unless exercise of such right is agreed upon by the secured creditors representing not less than three-fourth in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors. …….Omitted” 10. A combined reading of Section 13 (2) and 13 (9) of the SARFAESI Act would make it abundantly clear that mere issuance of notice under Section 13 (2) of the SARFAESI Act shall not amount to taking of measures to exercise the right of the Bank under Section 13 (4) of the SARFAESI Act. For instance, on receipt of the notice https://hcservices.ecourts.gov.in/hcservices/ under Section 13 (2) of the SARFAESI Act, if the debtor pays the amount demanded in the said notice within the time stipulated, there shall be no further action under Section 13 (4) of the SARFAESI Act. It is only the failure of the debtor to comply with the notice under Section 13 (2) of the SARFAESI Act, that gives rise to a cause of action for the Bank to further proceed and pass an order under Section 13 (4) of the SARFAESI Act. At the time when the Bank issues notice under Section 13 (2) of the SARFAESI Act, the Bank may not know as to who are all the other secured creditors of the debtor, so as to get the consent under Section 13 (9) of the SARFAESI Act, from out of the creditors representing not less than three-fourth in value of the amount outstanding. After the receipt of notice under Section 13 (2) of the SARFAESI Act Act, if the debtor informs the creditor Bank, about his secured liabilities, then only it would be possible for the secured creditor to get the consent of the required number of other secured creditors, so as to comply with Section 13 (9) of the SARFAESI Act. Similarly, before proceeding to pass an order under Section 13 (4) of the SARFAESI Act, the secured creditor may have to ascertain from the other creditors as to whether they have also issued notices under Section 13 (2) of the SARFAESI Act, so that the secured creditors representing not less than three-fourth in value of the amount outstanding, may take action under Section 13 (4) of the SARFAESI Act Act. From this, it is crystal clear that mere issuance of notice under Section 13 (2) of the SARFAESI Act shall not amount to taking measures to pass order under Section 13 (4) of the SARFAESI Act to take possession of the said secured assets. 11. In this case, indisputably, there are other secured creditors who have not even issued any notice under Section 13 (2) of the SARFAESI Act. Thus the creditors representing not less than three-fourth in value of the amount outstanding, have not taken measures to recover the said secured debt under Section 13 (4) of the SARFAESI Act and therefore, as per the second proviso to Section 15 (1) of the SICA, the proceeding pending before the BIFR has not abated and so, the bar under Section 22 of the SICA is applicable. Therefore, in the instant case, Section 22 of the SICA is a bar for any further proceedings to be initiated by the first respondent under Section 13 (4) of the SARFAESI Act. 12. As we have noticed, the prayer in this writ petition is for quashing the notice issued under Section 13 (2) of the SARFAESI Act. In our considered opinion, as we have held supra, since the notice under Section 13 (2) of the SARFAESI Act does not constitute a measure to exercise the power of the first respondent under Section 13(4) of the SARFAESI Act, the said notice cannot be quashed at all. It is for the petitioner either to comply with the demand or to send a proper reply for the said notice and thereafter, it is for the first respondent to act according to law by complying with Section 13 (9) of the SARFAESI Act as well as the second proviso to Section 15 (1) of the SICA. https://hcservices.ecourts.gov.in/hcservices/ 13. In the result, the writ petition is dismissed as devoid of merits, however with clarification as indicated above. No costs. Sd/- Asst. Registrar //true copy// Sub Asst.Registrar pal To 1. The Authorised Officer, Phoenix ARC Private Ltd 7th floor, Dani Corporate Bank, 158 CST Road,Kalina Santacruz (E) Mumbai 400 098. 2. Chairman & Managing Director, Industrial Development Bank of India Ltd., IDBI Towers, Cuffee Parade, Mumbai 2 cc to M/s.Ramalingam & Associates, Advocate, Sr.No.1401 W.P.NO. 18614 OF 2010 RV {CO} TP/1.2.2011. https://hcservices.ecourts.gov.in/hcservices/