1 wp7489-09 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION COMPANY APPLICATION NO.1123 OF 2009 WITH COMPANY PETITION NO.29 OF 2001 Ashish Bhatia .. Applicant Versus The Official Liquidator, High Court Mr.Gaurav Joshi with U.M.Mahajan & Samita Karnik i/b. Divekar & Co. for applicant Mr.Harshad Bhadbhade i/b. Swati Sawant for Secured Creditor Bank Mr.Nitin Thakkar, Senior Advocate with Mr.Nitin Muley for objectors CORAM : S.C. DHARMADHIKARI,J. DATED : August 18, 2011 P.C. 1] This Application is filed by the Applicant to quash and set aside the sale dated 23rd October 2007 conducted by second respondent, Saraswat Bank, in respect of a immovable property of the company in liquidation viz., Continental Castings Ltd. 2] In the affidavit in support of this application, it is stated that the applicant is an ex-Director of the company in liquidation. He has 2 wp7489-09 been called upon by the Official Liquidator to attend meetings before the Liquidator and to give his statement regarding affairs of the company. It is stated that the company in liquidation was wound up on 2nd August 2005 by an order dated 2nd August 2005 passed by this Court in the above company petition. The Official Liquidator, High Court has been appointed as liquidator of this Company. 3] It is stated that the applicant attended several meetings and at one such meeting when he learnt that the second respondent is intending to sell the immovable proeprty viz., the factory premises at MIDC, Ambad, Dist. Nashik along with moveables i.e. Plant and machinery, he addressed a letter to OL requesting that necessary steps be taken to protect the assets and plant and machinery. Since, no reply was received and, therefore, apprehending that the second respondent would sell these assets and immovable property, the applicant made an application to this Court being Company Application No.270 of 2009 praying for a direction to the Liquidator to forthwith take possession of the factory premises. That application 3 wp7489-09 was placed before a learned Single Judge of this Court and the OL informed the learned Single Judge that the factory premises have been sold in the year 2007 itself. The Liquidator informed the Court that the sale was behind his back and without any intimation to him or the applicant. It is in such circumstances and on becoming aware of the same for the first time in April 2009 that the applicant sought relevant details with regard to the sale and by alleging that the sale of the assets, including the plant and machinery, was effected in the sum of Rs.5,00,25,000/- which is not the market price but the property has been grossly undervalued and that even otherwise the second respondent had no right to sell the property that this application has been filed. 4] There are affidavits filed in reply by the second respondent as also the purchaser – respondent No.3. What has been stated in the affidavit of the second respondent is that the sale has been conducted in terms of the rights conferred by the The Securitisation and Reconstruction of Financial Assets and Enforcement of Security 4 wp7489-09 Interest Act, 2002 (for short Securitisation Act) and all that the Act mandates is that the sale proceeds to the extent of the workers' claim in terms of section 529 and 529A of Companies Act, 1956 (for short Companies Act) have to be remitted by the second respondent bank to the Official Liquidator, if called upon by him. Beyond that no other provision of Companies Act applies to sale which has been conducted under the Securitisation Act. There is no apprehension because the claim of the workers to the extent of Rs.25 lakhs has also been settled and the amount has been paid to the workers. If the liquidator raises any further claims, respondent No.2 – bank would abide by such demands insofar as workers' dues are concerned and the mandate of section 529A of the Companies Act 1956. The second respondent has denied that the property was sold at grossly undervalued price. It is stated as to how the property was sold after due public notice. It is not, according to the bank, correct to say that the sale was not bonafide. It is also not pointed out that the sale is being challenged after a lapse of three years and more. While the purchaser has also filed an affidavit stating therein that after the sale 5 wp7489-09 has been effected and the entire purchase price has been paid, the possession also has been handed over. After the possession is handed over, the Company Application which even otherwise is not tenable, should not be entertained as that would cause grave loss and serious prejudice to the purchaser. 5] There are affidavits filed in rejoinder and some additional affidavits but it is not necessary to make any reference to the same to appreciate rival contentions. The first contention of Mr.Joshi in support of this application is that the secured creditor in this case viz., respondent No.2 could not have effected the sale and it was questionable and doubtful whether it can be termed as secured creditor at all. The sale is upon the basis that the company in liquidation had created a mortgage in favour of the second respondent bank by deposit of title deeds. Mr.Joshi invites my attention to the affidavit filed by the second respondent bank and submits that what has been stated therein is that the company in liquidation availed of various credit facilities from the second 6 wp7489-09 respondent bank. To secure the amount lent and advanced, the second respondent had mortgage of the company's property and a hypothecation of the stocks, plant and machinery of the company. The immovable property is the same which is the subject matter of sale. The date of mortgage is 18th June 1997 and the copy of recording letter evidencing deposit of title deeds is dated 29th September 1997. Mr.Joshi submits that the case of bank is that charge was created in its favour by virtue of these documents and that would entitle it to proceed under the Securitisation Act, it being a secured creditor and a secured interest having been created in its favour. Mr.Joshi submits that for the rights under the Securitisation Act to be exercised, the Act mandates that the entity like second respondent should be a secured creditor. The term secured creditor is defined in the Act and, according to him, the secured creditor is one in whose favour security interest is created for due repayment by any borrower of any financial assistance. The term security interest means right, title and interest of any manner whatsoever upon property, created in favour of any secured creditor and includes any 7 wp7489-09 mortgage, charge, hypothecation, assignment other than those specified in section 31. Inviting my attention to section 125 of Companies Act, Mr.Joshi submits that in terms of this statutory provision, a charge to be valid has to be filed with Registrar for registration in the manner required by the Companies Act. Mr.Joshi submits that if there is a security interest on the company's property or undertaking that would be void against liquidator and any creditor of the company, unless the prescribed particulars of the charge, together with the instrument, if any, by which the charge is created or evidenced, or a copy thereof verified in the prescribed manner, are filed with the Registrar for registration in the manner required by the Companies Act, within 30 days from the date of its creation. Mr.Joshi submits that what has been annexed to the company application is a letter dated 20th February 1997 addressed to the Registrar of Companies. If the charge itself is created and evidenced by the documents, dated 18th June 1997 and a copy of recording letter evidencing deposit of title deeds dated 29th September 1997, then, this letter cannot be said to be in compliance with section 125 of the 8 wp7489-09 Companies Act. Secondly, there is no valid charge or mortgage. Such a invalid mortgage or charge does not create any interest in favour of second respondent so as to enable it to exercise rights under the Securitisation Act. For all these reasons, he submits that company application be allowed and it should be allowed even otherwise, because the sale is at an undervalued price. He also submits that statutory provisions viz., section 125 of the Companies Act, 1956 would make it clear that the liquidator or any secured creditor is not to seek any declaration in relation to legality, validity of the charge because non compliance with sub-section 1 of section 125 without anything more and by itself renders the charge void as against the liquidator. Therefore, the sale is bad in law and should be set aside. 6] Reliance is placed by Mr.Joshi on a decision of a Division Bench of this Court reported in 88 (1986) BLR 147 (Official Liquidator Vs. Suryakant Surti & Ors). Mr.Joshi also made straneous efforts to distinguish the judgement of this Court rendered in 9 wp7489-09 Company Application No.624 of 2010 in Company Petition No.104 of 2001 decided on 7th March 2011. (Uniworth International Ltd. Vs. Official Liquidator, High Court, Bombay). 7] On the other hand Mr.Bhadbhade appearing for respondent No. 2 as also Mr.Thakkar, learned Senior Counsel appearing for auction purchaser submit that the relief as sought by this application cannot be granted. Firstly, there is inordinate and unexplained delay in approaching this Court seeking to set aside the sale. The applicant is ex-Director of the company. He was fully aware of the pending proceedings including the letters and the documents which allegedly evidence the mortgage and in favour of the second respondent under which the amounts were lent and advanced. He cannot now complain that he was unaware of the impending sale. Further as an ex-director of the company, he cannot question the sale on the ground that the mortgage does not meet the requirement of sub-section 1 of section 125 of the Companies Act. The company has not questioned the sale nor has taken any steps to declare it as null and void. The 10 wp7489-09 company has not taken any steps to move the tribunal which has been conferred with Appellate jurisdiction vide section 17 of the Securitisation Act to challenge the sale. In these circumstances, this Court should not countenance any of these pleas but hold that the controversy is covered by the decision in the case of Uniworth International Vs. Official Liquidator (Company Application No.624 of 2010). It is, therefore, prayed that the application be dismissed. 8] With the assistance of learned Counsel appearing for parties, I have perused the application and the annexures thereto so also the affidavits which have been placed on record. The applicant does not dispute that he is ex-Director of the company in liquidation and that the company petition for winding up was filed in this Court in the year 2001. He does not dispute that the Securitisation Act came into force in June 2002 and after the notification issued by the Central Government, permitting the Cooperative Banks to resort to the said Enactment, a notice of sale under section 13(2) of the Securitisation Act has been issued on 25th September 2003 and on 17th December 11 wp7489-09 2004. The possession was handed over of the assets and properties which are covered by this notice to the auction purchaser after sale certificate was issued. Thus, the sale stood confirmed and the possession came to be handed over as early as on 17th December 2004. The company was ordered to be wound up on 2nd August 2005. The Company has not made any grievance before this Court that the mortgage as claimed by the secured creditor – respondent No.2 is not valid or that it does not meet the requirements of section 125 of the Companies Act. The liquidator has also not moved this Court to have that document or deed cancelled or set aside nor has he questioned the same. It is the applicant, ex-director, who is raising the plea that there is no compliance with section 125 of the Companies Act. 9] In this behalf, it is pertinent to note that the second respondent has placed heavy reliance on its affidavit before this Court. In para 3 of the affidavit in reply filed by the second respondent, there is a reference to the mortgage deed and the copy of the recording letter dated 20th September 1997. The undertaking to mortgage, a copy of 12 wp7489-09 which is at Annexure A, states that it is made at Mumbai in the year 1996 by the company and at the request of the company, the second respondent bank sanctioned term loan, cash credit facility, bank guarantee facility, handloan, bill discounting facility etc. each against security of mortgage by deposit of title deeds in respect of subject immovable property. In consideration of the bank allowing the company the aforesaid facilities, the company agreed and undertook to complete mortgage formalities in favour of the bank within three months from the date of disbursement of the above facilities. 10] The recording letter is at page 34 and that also recites that title deeds have been deposited on 23rd September 1997 with an intent to create security by way of mortgage by deposit of title deeds. Schedule I to this letter is the list of documents in relation to the said immovable property evidencing the title of the company in liquidation. In these circumstances, the reliance placed by Mr.Bhadbhade on the definition of the terms “secured assets”, “secured creditor”, “security agreement” and “security interest” as 13 wp7489-09 appearing in the Securitisation Act is apposite and appropriate. The term security interest means right, title and interest of any kind whatsoever upon property created in favour of a secured creditor and includes any mortgage, charge, hypothecated assets etc. other than specified in section 31. Therefore, if both, the company in liquidation and second respondent proceed on the basis that the deposit of these documents evidence creation of security interest in favour of respondent No.2 and that the security interest is in terms of definition under the Securitisation Act and that is also in consonance with the arrangement under which the security interest is created in favour of secured creditor, then, I do not see how on the strength of all this the second respondent cannot proceed to sell the property. Mr.Joshi is not disputing that this legal position, as emerging from combined reading of this definition, would show that it is not necessary that there must be a mortgage and that mortgage itself is the security interest contemplated, because even if that could be an argument, it is squarely answered by the definition of the term security interest, which is partly exhaustive and partly inclusive. 14 wp7489-09 Once, the right, title and interest of any kind whatsoever upon the property means security interest, then, I do not see how the execution of the documents referred by me would not create any interest in favour of second respondent and that interest so created, does not relate to right, title and interest on the company's property. There is definite intention to create such interest and that is how the documents have been executed and reading thereof together would indicate that the security interest is created in favour of second respondent in consideration of it agreeing to extend the facilities and advancing the monies. Therefore, that could be enforced by the second respondent. The security arrangement is also clear from a reading of these documents. Once such is the legal position as emerging from the Securitisation Act, which is latter enactment and dealing with the rights of secured creditors like second respondent, then, no reliance can be placed on section 125 of the Companies Act, soas to enable the applicant to have the sale set aside. Applicant's argument that section 125(1) of the Companies Act has not been complied with and, therefore, the sale can be set aside in this case 15 wp7489-09 cannot be accepted for obvious reasons. That is an argument based on a reading essentially of a letter dated 20th February 1997. According to Mr.Joshi on that date there was no mortgage nor the title deeds were deposited and, therefore, the charge does not come into existence. 11] Equally, it is stated that assuming it comes into existence on account of documents that are executed, yet, there is no compliance with section 125(1) of the Companies Act. It is pertinent to note that it is not the company which is raising this objection but it is the applicant who is a ex-director, has raised this objection. The company in liquidation has no objection to the second respondent proceeding on the basis that the property was equitably mortgaged to it. That the documents evidencing title are deposited with an intention to create mortgage is something on which, both, the second respondent and company in liquidation, have proceeded; that all the monies and advances have been utilised and facilities have been availed of. In such circumstances, it is too late in the day now to 16 wp7489-09 argue that there is no compliance with section 125(1) of the Companies Act. While it is true that the legal position as enunciated by the Division Bench in Kamani's case (supra) would apply with full force, yet, as far as sub-section 1 to be attracted, there must be a charge to which section 125(1) applies. That must be sofar as any security on the company's property or undertaking, that charge is void against liquidator and any creditor of the company. Unless the prescribed particulars of the charge together with instruments, if any, by which the charge is created or evidenced or a copy thereof verified in prescribed manner are filed with the Registrar for registration, in the manner required by the Act within 30 days from its creation, sub- section 2 of section 125 of Companies Act, at once clarifies that nothing in sub-section 1 shall prejudice any contract or obligation for repayment of money secured by the charge. The charges to which the section applies are enlisted then in sub-section 4. Therefore, firstly it must be proved that charge created by a company to which the section applies, has been so created. That the instant arrangement with respondent No.2 is in the nature of a charge to which section 17 wp7489-09 125(1) applies has not been clarified at all. Further, it is the argument of the applicant that the charge is void as against the liquidator or creditor unless registered. Therefore, that is for the purpose of Companies Act and that it is clear that the same is qua the liquidator and the creditor of the company. In these circumstances, one cannot hold on the strength of this provision that the security interest in a later enactment is in any way affected because of non compliance with section 125(1) of the Companies Act. There is nothing in the Securitisation Act, which is a later Statute, which would in any way make section 125 or part V of the Companies Act applicable to any security interest created under the Securitisation Act or will have any effect on it. In such circumstances, if on the own force of the Securitisation Act in terms of the security interest created in favour of the second respondent, the second respondent can proceed to take steps to sell company's property, then, I do not see how that sale can be questioned or nullified at the instance of a person like the applicant and only because in his opinion section 125(1) of the Companies Act is not complied with. For the sale to be nullified, it 18 wp7489-09 must be demonstrated that there is something in the Securitisation Act which makes section 125 applicable to the security interest created in the said Act and as understood by the Securitisation Act. A perusal of the relevant provisions of both enactments leave me in no manner of doubt that Securitisation Act does not envisage any such compliance. In these circumstances, the argument that the sale is bad in law for non compliance with section 125(1) of the Companies Act cannot be accepted and must be rejected. 12] That being the only argument canvassed before me, I do not see how the faint attempt by Mr.Joshi to urge that the judgement of this Court in Company Application No.624 of 2010 (supra) is inapplicable, can be accepted. The judgement clearly proceeds on the basis that the rights in favour of secured creditor conferred by the Securitisation Act can be exercised and to a limited extent for the purpose of disbursement of proceeds of sale that section 529 to 529A of the Companies Act are made applicable. There is no scope for the argument that in that case winding up order was passed subsequently, 19 wp7489-09 that the sale was upheld. The legal position as pointed out in the judgement must been seen in its entirety. The judgement must be read as a whole and if so read, it cannot be said to be restricted in its operation only to such cases where winding up orders have been made after the date of sale. There is no question of limiting the operation of a Statute like Securitisation Act to only such cases. The Securitisation Act permits sale of assets which constitute the security interest of entities like the second respondent bank, even when winding up proceedings are pending or winding up order has been made. It is for a limited purpose that the provisions of Companies Act have been referred to in section 13 of the Securitisation Act. It is explained in the judgement, that the entire Companies Act must not be read into Securitisation Act. In such circumstances, the judgement in Uniworth (Company Application No.524 of 2010) (supra) is on all fours and is applicable, in this case as well. 13] The last attempt to show that the sale was conducted and the property has been sold at a grossly under valued price also cannot be 20 wp7489-09 accepted because no material of whatsoever nature has been pointed out in support of this plea. The plea is thus vague and unsubstantiated. In the absence of cogent and satisfactory material indicating that the sale price does not constitute market price as prevalent on the date of sale, the argument to that effect, even cannot be accepted. 14] As a result of the above discussion, Company Application fails and it is accordingly dismissed. (S.C. DHARMADHIKARI,J.)