Ksl & Industries Ltd vs M/S. Arihant Threads Ltd. & Ors

3. To understand the controversy in its proper perspective, it is necessary to keep in mind the factual matrix of the case. Respondent No. 1 (M/s. Arihant Threads Ltd.) (`Company' for short) was incorporated as a joint venture with Punjab State Industrial Development Corporation. It set up an export oriented spinning unit for manufacturing cotton yarn in the industrial area of Amritsar District of the State of Punjab. In 1992, Goindwal Sahib Industrial & Investment 3 Corporation allotted Plot No. 454, Flocal Point of Goindwal Sahib Industrial Area by way of lease to the Company for a period of 99 years with a specific condition that the lessee will not transfer the interest in the property for first fifteen years without prior permission of the lessor. The lessee was to enjoy the right of possession so long as it continued paying instalments of the premium by due-date and abide by other terms and conditions of the lease. It was, however, stated that the lessee would be entitled to mortgage lease-hold rights to a Bank, Punjab Financial Corporation or Life Insurance Corporation of India as security for a loan to be raised for construction of factory building, purchase of raw materials, etc. The Industrial Development Bank of India (`IDBI' for short) which was the predecessor of the Stressed Assets Stabilisation Fund (`SASF' for short), financed the project undertaken by the Company by way of foreign currency loan and also working capital of Rs. 93.1 million. 4

4. It was the case of the Company that due to overall recession in Textile Industry, the Company suffered huge loss and could not repay the amount of loan. Since the Company failed to pay instalments, IDBI filed Original Application No. 1368 of 2001 on December 20, 2001 in Debt Recovery Tribunal, Chandigarh (`DRT' for short) for recovery of Rs.25,26,60,836/- under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hereinafter referred to as the `RDDB' Act). On June 10, 2002, M/s Roland Exports (successor of Goindwal Industrial & Investment Corporation) cancelled the lease agreement on account of non-payment of lease money amounting to Rs.3,19,94,149/-. The Company did not remain present before the DRT though duly served. On July 15, 2003, therefore, an ex-parte final order in favour of IDBI (SAFS) for recovery of Rs.25,26,60,836/- along with interest @ 7.8% p.a. was passed by DRT.

5. The Tribunal in operative part of the order stated;

6. A recovery certificate was issued against the Company. On September 9, 2003, the Recovery Officer issued a composite demand notice under Rule 2 of Second Schedule of the Income Tax Act, 1961 against the Company demanding payment of Rs.28,60,87,384/-. He also directed the Company to appear on October 23, 2003 for settling terms and conditions of the proclamation of sale and for disclosure of its movable and immovable assets. Harnek Singh, Security Guard who was present at the Company premises was served and he signed the summons in token of acceptance of notice on behalf of the Company. Service Report was filed by one Rajesh Mahajan, Advocate for certificate holder affirming Dasti service on the Company. Another service report was also filed along with affidavit by the same advocate on October 6, 2003. On January 3, 2004, Mr. Vivek Verma, Local Commissioner appointed by the Recovery Officer, visited the site and filed his report 7 wherein he stated that two machines were missing. He also recorded that the unit was in running condition. At the instance of SASF, North India Technical Consultancy Association Ltd. (`NITCO' for short) filed a valuation report in January, 2004 assessing the fixed assets at Rs.17.51 crores. It is alleged that on July 1, 2004, the Company created illegal tenancy in favour of M/s Roland Exports. On September 16, 2004, the Recovery Officer fixed the reserve price of the property at Rs.12.50 crores (Rs.4.50 crores for movables and Rs.8.00 crores for immovables). He also fixed the date for sale of immovable property as October 27, 2004 and for movable property as October 30, 2004. The auction was, however, adjourned. The Company on October 18, 2004, filed an appeal against the order dated September 16, 2004 fixing reserve price of Rs. 12.50 crores in the DRT being Appeal No. 52 of 2004 under Section 30 of the RDDB Act. On October 27, 2004, DRT allowed auction sale to proceed but ordered 8 that the sale should not be confirmed till further orders. On October 30, 2004, auction was concluded and the appellant herein was declared the highest and successful bidder at Rs.12.52 crores. It deposited 25% of the reserve price. On November 2, 2004, on an application by the appellant, DRT appointed representative of the appellant as a receiver to prepare inventory of auctioned property.

7. On November, 11, 2004, the appellant made an application to DRT praying for acceptance of the bank guarantee in lieu of payment of the remaining amount of 75% and also by refunding the amount deposited (25%). DRT dismissed the said application and the appellant-auction purchaser, on the same day, i.e. November 11, 2004 deposited the balance amount of 75% of the purchase money i.e. Rs.9,39,00,000/- by a Bank draft. On December 13, 2004, the receiver lodged a First Information Report (FIR) and filed an affidavit before DRT complaining that the agent of the 9 Company had forcibly dispossessed him by using criminal force. On December 15, 2004, the Company moved an application for setting aside ex-parte final order passed on July 15, 2003 by DRT, Chandigarh which was registered as M.A. No. 103 of 2004. The appellant filed an application objecting the prayer of the Company with an added prayer to implead it in Appeal No. 52 of 2004 as also in M.A. No. 103 of 2004. The DRT allowed the impleadment application of the appellant vide order dated December 17, 2004. On March 28, 2005, the appellant filed an application for hearing preliminary issue as to maintainability of appeal filed by the Company (Appeal No. 52 of 2004). On April 8, 2005, a suit for permanent injunction was filed by Roland Exports against the Company in the Civil Court at Tarantaran, District Amritsar. Status quo with regard to possession was ordered to be maintained by the Court. An appeal against the said order is said to have been pending in the High Court. Meanwhile, the 10 Company got the property valued by Himachal Consultancy Organisation Ltd. (`HIMCO' for short), according to which the realizable value of the property had been increased to Rs.20.22 crores. On July 26, 2005, DRT-I, Delhi allowed Appeal No. 52 of 2004, set aside the auction sale subject to the Company fulfilling terms and conditions with regard to payment of certain amount, interest, expenses etc.

9. The Company, objecting the conditions imposed by DRT, filed an appeal against the said order to the DRAT, Delhi being Appeal No. 167 of 2005. The appellant also filed an appeal being aggrieved by the setting aside the sale. DRAT stayed operation of the order dated July 26, 2005 which had set aside ex-parte order passed by DRT. It also directed refund of sale amount to the appellant. Appeals were then heard and the judgment was reserved.

10. Meanwhile, on December 21, 2005, the Company filed a Reference before the Board of Industrial Finance & Reconstruction (`BIFR' for short) under SICA which was registered as BIFR Case No. 4 of 2006. On February 10, 2006, DRAT dismissed the appeal filed by the Company and allowed the appeal of the appellant and confirmed auction-sale in favour of the 13 appellant on depositing the sale price. DRAT, in the operative part of the order stated;

11. By a separate order of even date, DRAT ordered the Recovery Officer, Chandigarh to act upon and execute the directions issued by it. The appellant deposited Rs.12.50 crores on the same day. But the sale could not be confirmed since the Presiding Officer was on leave. The appellant moved an application before DRAT for appointment of Recovery Officer, DRT, Delhi for confirmation of sale. Within three days, however, the Company filed two Writ Petitions being C.W. Nos. 2041 and 2042 of 2006 in the High Court of Delhi on February 13, 2006 against an order of DRAT dated February 10, 2006. The High Court of Delhi, as already mentioned earlier, allowed the writ petitions on February 23, 2006, set aside the order passed by DRAT on the ground that Section 22 of SICA operated as a complete bar to recovery proceedings and no order could have been passed by the Tribunal.

12. Being aggrieved by the order passed by the High Court, the appellant filed Special Leave Petition in this Court on March 6, 2006. Notice was issued on March 27, 2006 by this Court and the appellant was allowed to withdraw sale price without prejudice to its rights and contentions. The matter was, thereafter, adjourned from time to time. It was ordered to be heard finally. For completion of record, it may be stated that on April 3, 2006, the BIFR rejected the Reference of the Company. The Company preferred an appeal against the said order which is pending before the Appellate Authority for Industrial & Financial Reconstruction (AAIFR). On September 15, 2006, second Reference was filed by the Company which has been registered as BIFR Case No. 18 of 2006. On February 22, 2007, the BIFR declared the Company as a `sick Company' and appointed LSAS, respondent No. 5 as the Operating Agency to prepare Rehabilitation Scheme.

4. As it appears from the records, the respondent no.1- Company was unable to repay the loan and IDBI filed Original Application No.1368 of 2001 in the Debts Recovery Tribunal, Chandigarh, (hereinafter referred to as `DRT, Chandigarh') on 20.12.2001, for recovery of Rs.25,26,60,836/-, under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hereinafter referred to as the `RDDB Act'). Despite service of notice of the said proceedings, the respondent No.1 Company remained unrepresented before the DRT and on 15.7.2003 an ex-parte final order was passed in favour of IDBI for recovery of Rs.25,26,60,836/- together with interest at the rate of 7.8% per annum and a Recovery Certificate was also issued against the respondent No.1-Company.

6. A Valuation Report was also obtained from the Local Commissioner, appointed by the Recovery Officer, who in his report indicated that two machines were missing from the Company's factory. A further Valuation Report was obtained from the North-India Technical Consultancy Association Limited in January 2004, wherein the assets of the Respondent No.1-Company was valued at Rs.17.5 crores on 16.9.2004. The reserve price of the property was fixed at Rs.12.50 crores by the Recovery Officer and two separate dates 75 were fixed for sale of the immovable and movable properties of the Company. The respondent No.1 - Company filed an appeal, being Appeal No.52 of 2004, before the DRT on 18.10.2004 under Section 30 of the RDDB Act questioning the fixation of the reserve price by the Recovery Officer at Rs.12.50 crores. The proposed auction sale was, therefore, cancelled till the DRT by its order dated 27.10.2004 allowed the auction sale to proceed but restrained the Recovery Officer from confirming the same till further orders. Consequently, the auction was held and concluded on 30.10.2004 and the appellant herein was declared to be the successful bidder. Consequently, as per rules laid down, the appellant deposited 25% of the reserve price immediately. On 11.11.2004, the appellant made an application to the DRT for accepting bank guarantee for the remaining balance of 75% of the sale price. On the said application being dismissed the appellant-auction purchaser on the same day deposited the balance amount of 75% of the sale price by a bank draft. It is only after the sale had been conducted and concluded on 30.10.2004 that an application was made by the respondent-Company on 15.12.2004 in the pending appeal for setting aside the ex-parte final order passed by the DRT, Chandigarh, on 15.7.2003 and the same was registered as M.A.No.103/2004. The appellant herein filed an application for being added as a party in Appeal No.52 of 2004 and also in M.A. No.103 of 2004 to enable it to oppose the prayer of the Company for setting aside the final order passed by the DRT, Chandigarh, on 15.7.2003. Such prayer for impleadment was allowed by the DRT by its order dated 17.12.2004.

10. On 10.2.2006 the DRAT dismissed the appeal filed by the Company and allowed the appeal of the appellant and confirmed the auction sale in favour of the appellant, subject to its depositing the sale price. By a separate order passed on the same day the DRAT ordered the Recovery Officer, Chandigarh, to implement the directions issued by it. However, despite the appellant depositing the full purchase price on the very same day, the sale could not be confirmed as the Presiding Officer was on leave. The appellant moved the DRAT for appointment of a Recovery Officer for confirmation of the sale. While the said matters were pending, the respondent-Company filed two writ petitions being C.W. Nos.2041 and 2042 of 2006, in the High Court of Delhi, against the order dated 10.2.2006 passed by DRAT dismissing the Company's appeal. The Delhi High Court allowed the writ petitions filed by the respondent-Company and by its order dated 23.2.2006 set aside the order passed by the DRAT on the ground that Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 operated as a complete bar for taking recovery proceedings and no order could therefore have been passed by the Tribunal confirming the sale.

32. As will be seen from what has been indicated hereinabove, the final order was passed on 15.7.2003 by DRT, Chandigarh, at a point of time when no Reference had at all been made by the respondent-Company to the BIFR for being declared a "sick company". The auction was held and concluded on 30.10.2004, again before a Reference had been made by the respondent- Company to the BIFR. It is only on 21.12.2005 that the Company filed a Reference before the BIFR which was rejected on 3.4.2006. In between, the appeal preferred by the respondent-Company (No.52 of 2004) before the DRT under Section 30 of the RDDB Act was allowed and the auction sale was set aside, but the final order passed by DRT, Chandigarh, remained untouched. The appeal preferred by the appellant herein against the order of the DRT allowing Appeal No.52 of 2004 was subsequently decided in favour of the appellant on 10.2.2006 and the auction sale was confirmed in favour of the appellant with a direction upon the Recovery Officer and the other concerned authorities to complete the sale in favour of the appellant herein. It is only on 15.9.2006, after all the aforesaid orders had been passed that a second Reference was filed by the respondent-Company before the BIFR on 15.9.2006 and on 22.2.2007 the Company was declared to be a "sick company" by the BIFR.

Final Order

69. For the aforesaid reasons, I hold that the High Court has committed an error of law in invoking and applying provisions of Section 22 of SICA and in dropping proceedings against the Company. The order of the High Court, therefore, deserves to be set aside and I do accordingly. The matter is remitted to the High Court to decide it afresh on all points including the conduct of the Company after hearing the parties. All contentions of all parties are kept open.

70. Before parting with the matter, I may clarify that any observation on merits which might have been made in this judgment is only for the purpose of deciding the preliminary question as to maintainability of 72 proceedings against the Company since the High Court has allowed the petitions filed by the Company only on that ground. I make it clear that I may not be understood to have expressed any opinion on other issues and as and when the matter will come up before the High Court, the same will be decided on its own merits without being inhibited by such observations.

71. The appeal is accordingly allowed with costs.

1. I have had the benefit of going through the draft judgment prepared by my learned Brother and while I agree with the conclusion arrived at by His Lordship, that the High Court erred in applying the provisions of Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, and dropping the proceedings against the Company, with utmost respect I find myself unable to accept the legal reasoning on which His Lordship's conclusion is based. I would like to traverse a different route in arriving at the same conclusion as arrived at by my learned brother.

2. Since my learned Brother has set out the facts involved in detail, I shall only highlight some of the facts which compel me to pen my views in a separate judgment.

5. In keeping with Section 29 of the RDDB Act, the Recovery Officer issued a composite demand notice to the respondent No.1-Company on 9.9.2003 under Rule 2 of the Second Schedule to the Income Tax Act, 1961, demanding payment of Rs. 28,60,87,384/-. A separate direction was given to the Company to appear before the Recovery Officer on 23.10.2003 for settling terms and conditions relating to the proclamation of sale and for disclosure of its movable and immovable assets.

8. On 26.7.2005, DRT-I, Delhi, allowed Appeal No.52 of 2004 and set aside the auction sale subject to the Company fulfilling certain terms and conditions laid down in the order. One of the conditions imposed by the Tribunal was that the Company would have to pay 5% of the amount deposited by the auction purchaser within 10 days as penalty in terms of Rule 60 of the Second Schedule of the Income Tax Act, 1961. Objecting to the said terms and conditions imposed by the DRT the Company filed an appeal with DRAT, Delhi, being Appeal No.167 of 2005. The appellant herein also filed an appeal against the setting aside of the auction sale. The DRAT stayed the operation of the order dated 26.7.2005 by which the DRT-I, Delhi, had allowed Appeal No.52 of 2004 and had set aside the auction sale. The DRAT also directed refund of the sale amount to the appellant. 76

11. It is against the said order of the Delhi High Court that the Special Leave Petitions were filed on 26.3.2006 wherein leave has since been granted.

19. It is at this point that I am unable to travel the same path which my learned Brother has chosen to traverse.

25. It is significant to note that in the appeal, being Appeal No.52 of 2004 under Section 30 of the RDDB Act, an application was moved by the respondent- 80 Company on 15.12.2004 for setting aside the ex-parte final order passed on 15.7.2003 and the appellant also filed an application for impleadment to enable it to oppose the prayer for setting aside the final order.

26. The next date of significance is 26.7.2005 when Appeal No.52 of 2004 filed by the respondent-Company under Section 30 of the RDDB Act against the order of the Recovery Officer fixing the reserve price of the Company's assets was allowed by DRT-I, Delhi, subject to the Company fulfilling certain terms and conditions as indicated in the order.

28. In the meantime, the appeal preferred by the respondent-Company before the Debts Recovery Appellate Tribunal against the order of DRT-I, Delhi, allowing the Company's Appeal No.52 of 2004 was dismissed and the sale in favour of the appellant herein was confirmed, subject to deposit of the entire sale price.

29. It will be of interest to note that the proceedings taken by the respondent-

Company after the passing of the final order by DRT, Chandigarh, on 15.7.2003, were directed against fixation of the reserve price by the Recovery Officer though in Appeal No.52 an application was made by the Company for setting aside the final order passed by the DRT Chandigarh. The same was however, of no consequence as the appeal was preferred against the order of the Recovery Officer fixing the reserve price of the Company's assets and not the final order, which, in any event, could not have been challenged in the said proceedings. In effect, the final order passed by the DRT, Chandigarh, directing the respondent-Company to pay the dues of IDBI remained unchallenged and attained finality. The two courses available to the respondent No.1-Company for preferring an appeal under Section 20 of the RDDB Act or by way of an application for setting aside the sale under Rule 60 of the Second Schedule of the Income Tax Act, 1961, were not resorted to by the respondent-Company. Instead, it chose to adopt a path restricted to the setting aside of the auction sale on the ground that the reserve price of the Company's assets had not been correctly fixed by the Recovery Officer prior to the auction sale.

30. Consequently, the scope of the appeal preferred by the respondent-Company was confined only to the question as to whether the reserve price had been correctly fixed by the Recovery Officer. 81

38. Apart from the above, even on merits, the conduct of the respondent No.1- company leaves much to be desired. Without challenging the final order passed by the DRT, Chandigarh, allowing the Bank's claim of Rs.25,26,60,836/- together with interest @ 7.8% per annum, the said respondent questioned the order of the Recovery Officer, fixing the reserve price of the Company's assets for the purposes of the auction sale, under Section 30 of the RDDB Act, having full knowledge of the fact that the final order of the DRT, Chandigarh, could not be challenged in such appeal. The steps taken by the respondent No.1, Company were far from bona fide and were only aimed at stalling the auction sale. Even at the time of auction of the company's assets, no attempt was made by the Respondent No.1-Company to secure a bid higher than that of the appellant.

39. Having regard to the above, in my view nothing further remains to be decided by the High Court.

40. The appeal is accordingly allowed and the order of the High Court impugned in the appeal is set aside with costs assessed at Rs.50,000/-.

..........................................J. (ALTAMAS KABIR) Dated : 25.08.2008 IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.5225 OF 2008 (Arising out of SLP (Civil) No.5041 of 2006 KSL & Industries Ltd. Appellant(s) Versu s M/s Arihant Threads Ltd. & Respondent Ors. (s) O R D E R Although, both of us held that the appeal deserves to be allowed and the order of the High Court is to be set aside, in view of the difference of opinion on interpretation of Section 34 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the 84 Registry is directed to place the papers before the Hon'ble the Chief Justice of India for taking appropriate action in accordance with law.