TMI Blog2009 (12) TMI 511X X X X Extracts X X X X X X X X Extracts X X X X ..... vowed object of section 529A of the Act as echoed by unnumbered five provisos of section 13(9) of the SARFAESI Act because there is no provision in the SARFAESI Act giving any conflict with the claim of the workers due as contemplated by section 529A of the Act. Thus question (A) is answered against both the appellants and their appeals are liable to be dismissed. We have examined the record and have also put it to the learned counsel for the HSIIDC as to whether there was any hypothecation of plant and machinery with it. The record does not show any such hypothecation nor Mr. Kamal Sehgal, learned counsel for the HSIIDC has been able to support the aforesaid averments. Therefore, there is factual error and to that extent the impugned order deserves to be modified. It is, thus, clear that the HSIIDC would be simply a secured creditor with regard to the raw material and, in fact, an unsecured creditor qua plant and machinery. It cannot claim any right of association with the process of sale or participation at par with the Securitisation Company. Appeal dismissed. - CAPP NO. 23 OF 2009 - - - Dated:- 15-12-2009 - M.M. KUMAR AND JASWANT SINGH JJ. Kamal Sehgal for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as directed to take over the assets of the company in liquidation. 3. On 28-5-2004, this Court allowed the Official Liquidator to sell immo-vable 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 per cent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 movable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 to 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 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 proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nging 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 21-6-2002 to regulate securitisation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Asset Reconstruction Securitisation Company Ltd. D-54 (FF), Defence Colony, New Delhi-110 024. 6. International Asset Reconstruction Company (P.) 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-500 038 9. Phoenix ARC (P.) Ltd. 240, Navsari Building, 1st Floor, DN Road, Mumbai-400 001. Kotak Mahindra Bank 10. Invent Assets Securitisation Reconstruction Private Limited 7, Raheja Centre, Ground Floor 214, Free Press Journal Marg, Mumbai-400 021. Sr. No. Name of the Registered Company Address of the Company Promoters 11. JM Financial Asset Reconstruction Company Limited 141, Maker Chambers III, Nariman Point, Mumbai-400 021. 12. India SME Asset Reconstruction Company Limited (ISARC) SME Development Cen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - ment 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 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, charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ARFAESI Act. 18. On the basis of the aforesaid provisions of the SARFAESI Act, Mr. Sarin has concretised his argument that the provisions of the SARFAESI Act overrides those of the Companies Act because it is a special and specific legislation which enjoys a superior and overriding place. According to the learned counsel it is later in point of time and, therefore, learned Company Judge could not have imposed clogs on the rights of the Securitisation Company, which are alien to the letter and spirit of the SARFAESI Act. In support of his submission, learned counsel has placed reliance on paras 6 and 17 of the judgment of Hon ble the Supreme Court in the case of Rajasthan Financial Corpn. v. Official Liquidator AIR 2006 SC 755 1 and paras 11 to 13 of another judgment of Madras High Court in the case of Asset Reconstruction Co. India v. Official Liquidator [2006] 134 Comp. Cas. 267 2 . Reliance has also been placed on paras 39 and 40 of the judgment of Hon ble the Supreme Court in Bakemans Industries (P.) Ltd. v. New Cawnpore Flour Mills [2008] 144 Comp. Cas. 71 3 and para 47 of the judgment in the case of Central Bank of India v. State of Kerala [2009] 4 SCC 94 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28-10-1999 by this Court then all the assets of the Company are in the custody of the Official Liquidator. According to the learned counsel a duty is cast on the Company Court to keep in view the interest of the secured as well as unsecured creditors by supervising the sale of assets through the Official Liquidator. Thereafter the sale proceedings are required to be distributed in accordance with the provisions of sections 529A and 530 of the Act. According to the learned counsel, the sacred duty of sale of assets and its distribution cannot be delegated to either a secured creditor or any person outside the process of winding up. Therefore, the order dated 20-3-2009 is liable to be set aside, inasmuch as, it permits the Securitisation Company to sell the remaining piece of land and building. According to the learned counsel, the only course open to the learned Company Judge was to permit the Official Liquidator to sell the assets in association with HSIIDC and the Securitisation Company. Learned counsel has referred to the provisions of section 5(3) of the SARFAESI Act and argued that the only secured creditor i.e., Bank of India had given its consent to this Court for sale of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India v. Ketan Parek [2008] 143 Comp. Cas. 711 1 (para 16). 24. Ms. Punita Sethi, learned counsel appearing for the Official Liquidator has argued that the Securitisation Company by filing application bearing CA No. 705 of 2008 with a prayer for recalling order dated 20-3-2008 (A1), granting permission by the Company Court to sell the assets of the Company after setting aside the earlier sale, has itself surrendered to the jurisdiction of the Company Court. She has made a specific reference to the contents of para 11 of the application (A1), which seek permission of the Company Court to stay outside the process of winding up and enforce its security interest under the SARFAESI Act. According to the learned counsel section 13 of the SARFAESI Act uses the expression may which does not necessarily means that the secured creditor may invoke the SARFAESI Act or its secured interest could be recovered by the intervention of the Court. She has further argued that the proceedings of winding up in the instant case were at the final stage, when the sale notices have already been once issued and it was to be re-advertised after the express consent of the secured creditor i.e., Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 13 of the SARFAESI Act. It provide that a secured creditor may enforce any security interest without the intervention of the Court or Tribunal irrespective of section 69 or 69A of the Transfer of Property Act, 1882. Wherever a borrower is a defaulter in repayment of the security debt or any instalment of repayment or the debt pending against him has been classified as non-performing asset by the secured creditor [ See Reserve Bank of India s prudential norms on income recognition, asset classification and provisioning - pertaining to advances, vide Circular dated 30-8-2001. The aforesaid circular has been set out in detail in the case of Mardia Chemicals Ltd. ( supra ) then before taking any step to realise its dues, the secured creditor is obliged to serve a notice in writing to such a borrower to discharge the liabilities within a period of 60 days failing which the secured creditor would be entitled to take any of the measures provided by sub-section (4) of section 13 the SARFAESI Act. Sub-section (3) of section 13 further provides that a secured creditor is under an obligation to give details of the amount payable by such a borrower and the secured assets intended t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt outstanding as on a record date and such action shall be binding on all the secured creditors : Provided that in the case of a company in liquidation, the amount realised from the sale of secured assets shall be distributed in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of 1956) : Provided further that in the case of a company being wound up on or after the commencement of this Act, the secured creditor of such company, who opts to realise his security instead of relinquishing his security and proving his debt under proviso to sub-section (1) of section 529 of the Companies Act, 1956 (1 of 1956), may retain the sale proceeds of his secured assets after depositing the workmen s dues with the liquidator in accordance with the provisions of section 529A of that Act : Provided also that the liquidator referred to in the second proviso shall intimate the secured creditors the workmen s dues in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of 1956) and in case such workmen s dues cannot be ascertained, the liquidator shall intimate the estimated amount of workmen s dues under that section to the secured credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial Corporation only after obtaining appropriate permission from the Company Court and acting in terms of direction issued by the Company Court in respect of process of sale and distribution of sale proceeds in terms of sections 529 and 529A of the Act. The views of their Lordships are discernible from paras 17 and 18 of the judgment, which reads thus : "17. Thus, on the authorities what emerges is that once a winding up proceeding has commenced and the liquidator is put in charge of the assets of the company being wound up, the distribution of the proceeds of the sale of the assets held at the instance of the financial institutions coming under the Recovery of Debts Act or of financial corporations coming under the SFC Act, can only be with the association of the Official Liquidator and under the supervision of the Company Court. The right of a financial institution or of the Recovery Tribunal or that of a financial corporation or the Court which has been approached under section 31 of the SFC Act to sell the assets may not be taken away, but the same stands restricted by the requirement of the Official Liquidator being associated with it, giving the Company Court the right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e directions of the Company Court, that a proper price is fetched for the assets of the company-in-liquidation. It was in that context that the rights of the Official Liquidator were discussed in International Coach Builders Ltd. ( supra ). The Debt Recovery Tribunal and the District Court entertaining an application under section 31 of the SFC Act should issue notice to the liquidator and hear him before ordering a sale, as the representative of the creditors in general. 18. In the light of the discussion as above, we think it proper to sum up the legal position thus : ( i )A Debt Recovery Tribunal acting under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 would be entitled to order the sale and to sell the properties of the debtor, even if a company-in-liquidation, through its Recovery Officer but only after notice to the Official Liquidator or the liquidator appointed by the Company Court and after hearing him. ( ii )A District Court entertaining an application under section 31 of the SFC Act will have the power to order sale of the assets of a borrower company-in-liquidation, but only after notice to the Official Liquidator or the liquidator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Central Bank of India ( supra ), their Lordships of Hon ble the Supreme Court has analysed the interplay of various provisions of the SARFAESI Act vis- -vis the DRT Act. Referring to the unnumbered provisions to sub-section (9) of section 13 of the SARFAESI Act, it has been observed as under : "114. By enacting various provisos to sub-section (9), the Legislature has ensured that priority given to the claim of workers of a company-in-liquidation under section 529A of the Companies Act, 1956 vis- -vis secured creditors like banks is duly respected. This is the reason why first of the five unnumbered provisos to section 13(9) lays down that in the case of a company-in-liquidation, the amount realized from the sale of secured assets shall be distributed in accordance with the provisions of section 529A of the Companies Act, 1956. This and other provisos do not create first charge in favour of the worker of a company-in-liquidation for the first time but merely recognize the existing priority of their claim under the Companies Act. It is interesting to note that the provisos to sub-section (9) of section 13 do not deal with the companies which fall in the catego ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ressed by their Lordships of Hon ble the Supreme Court in various judgments, some of which have been referred above. 36. The ancillary issue which emerge for determination concerns the true import of sections 35 and 37 of the SARFAESI Act. Learned Company Judge has rightly taken the view that attempt must be made to adopt the golden rule of construction aimed at harmonising the provisions. He has observed as under : "9. K. Chidambara Manickam v. Shakeena AIR 2008 Madras 108 was dealt with by a Division Bench of the Madras High Court addressing the primacy of the claims of financial institutions under the SARFAESI Act. It also examined whether section 35 of the SARFAESI Act which contained a non obstante clause over-rode section 37 which stipulated that the provisions of the Act shall be in addition and not in derogation of the Companies Act. The Division Bench adopted the golden rule of construction that the attempt must always be harmonize the provisions and not to see any conflict between two sections under the same enactment. This decision did not actually address the issue of effect of any sale having already commenced after winding up of the Company which the poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -3-2009 rendered in the case of PEGASUS Asset Reconstructions Co. (P.) Ltd. v. Haryana Concast Ltd. in CA Nos. 704 and 705 of 2008 in CP No. 133 of 2003 along with other Company Applications. In that judgment, the learned Company Judge made an attempt to harmonize the SARFAESI Act and the Companies Act. . . ." (p. 209) 38. Noticing the aforesaid order the Division Bench rejected the hypothesis of absolute freedom claimed by the securitisation company in the said case and proceeded to observe as under : "6. . . . A perusal of the directions issued in para 8 of the order, extracted above, shows that it is left open to the Appellant Reconstruction Company to move the Company Court for appropriate directions if the petition for winding up is considered favourably. The winding up petition is still pending. The situation is fluid in the sense that at this stage it cannot be concluded as to whether there would be an order of winding up or not. If there is an order of winding up then the labour dues as contemplated by section 529A of the Companies Act would require to be paid by the Appellant Reconstruction Company as per the requirement of section 13(9) of the SARFAESI Act. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the instant appeals. The question debated therein was whether withdrawal of original application in terms of first proviso to section 19(1) of the DRT Act was a condition precedent to take recourse to the SARFAESI Act and the answer given was in the negative. Likewise, in the case of Mardia Chemicals Ltd. ( supra ) the constitutional validity of various provisions was debated and it has no bearing on the question raised in the instant appeals. Similar would be the position with regard to other judgments cited by the learned counsel. Therefore, no detailed survey would be necessary as the arguments have been noticed with regard to pivotal issue. 40. In view of the above, question (A) is answered against both the appellants and their appeals are liable to be dismissed. Re: Question (B) 41. It appears to us that while recording facts in para 3 of the impugned judgment, learned Company Judge has committed a factual error when it observed as under : "3. It is not in dispute that Bank of India was the only secured creditor in respect of the land where the Company factory premises was situate. The plant and machinery alone had been the subject of hypothecation to HSIIDC ..... X X X X Extracts X X X X X X X X Extracts X X X X
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