TMI Blog2010 (7) TMI 268X X X X Extracts X X X X X X X X Extracts X X X X ..... Madhur Panjwani and Gurpreet Singh for the Respondent. JUDGMENT Badar Durrez Ahmed, J. - "...From the heart of all matter Comes the anguished cry Wake, Wake, great Shiva, Our body grows weary Of its law-fixed path, Give us new form Sing our destruction, That we gain new life. " Rabindranath Tagore This is how the great Tagore saw the invocation of Lord Shiva s attribute of simultaneously being a destroyer and a creator. The destruction of the body to enable the heart or soul to gain a new life in a new form. Perhaps, this very principle of Hindu philosophy has been borrowed by western thinkers and, ultimately, by the economist Schumpeter in his concept of creative destruction ( see : creative destruction in Economics: Nietzsche, Sombart, Schumpeter by Higo Reinert and Erik S. Reinert). 2. But, what has all this got to do with this case? This will become clear, shortly. This much is evident, conceptually speaking, that destruction need not be the end alone, it may also be the beginning of something new. Here we are concerned with the repeal of the Industrial Finance Corporation Act, 1948 and the consequential death of the Industrial Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the Companies Act, 1956. 5. The Corporation had sanctioned a term loan of an amount not exceeding Rs. 400 lakhs to the petitioner on 26-8-1991. The loan agreement between the parties was executed on 3-2-1992 and, in order to secure the said loan, an equitable mortgage was created on 20-2-1992 in respect of plot Nos. 15-17, HUDA Industrial Area, Rewari, Haryana together with all buildings and structures standing thereon. Thereafter, as pointed out above, the Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993 (hereinafter referred to as the Repeal Act ) was enacted. Subsequently, IFCI Limited was formed and registered under the Companies Act, 1956 and on and from 1-7-1993, which was the appointed date under the Repeal Act, the undertaking of the Corporation stood transferred and vested in IFCI Limited. Since the petitioner, for some reason, had defaulted in repayment of the loan, IFCI Limited, on 5-10-1998 recalled the loan and demanded a sum of Rs. 2,16,93,294. Thereafter, IFCI Limited filed OA No. 122/1999 before the Debts Recovery Tribunal invoking the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (herein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the statutory provisions. Section 13(1) of the said Act stipulates that notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882, any "security interest" created in favour of any "secured creditor" may be enforced, without the intervention of the court or Tribunal, by such creditor in accordance with the provisions of the said Act and thus section 13(1) gives the right to a secured creditor to enforce a security interest without the intervention of the court or Tribunal but in accordance with the provisions of the said Act. The expression "security interest" is defined in section 2(1)( zf ) and means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in section 31 of the said Act. It is clear that the mortgage created by the petitioner in favour of IFCI Limited would be covered under the expression "security interest", provided IFCI Limited is regarded as a "secured creditor". The expression "secured creditor" has been defined in section 2(1)( zd ) in the following manner: "2(1)( zd ) "secure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a public financial institution: Provided that no institution shall be so specified unless ( i )it has been established or constituted by or under any Central Act, or ( ii )not less than fifty-one per cent of the paid-up share capital of such institution is held or controlled by the Central Government." From a reading of section 4A of the Companies Act, 1956, it is apparent that it is in two parts. The first part falls under sub-section (1) and the second, under sub-section (2). Under the first part, the public financial institutions are specified by name. Under the second part, a provision has been made for other institutions to be notified in the official gazette as public financial institutions if the Central Government so thinks fit. The proviso to sub-section (2) of section 4A of the Companies Act, 1956 is of vital importance for a decision in this case. It lays down two conditions which have to be satisfied before the Central Government can notify an institution to be a public financial institution. The first condition is that the institution should have been established or constituted by or under any Central Act. The second condition is that not less than 51 per c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfied and, therefore, the notification requires to be quashed. According to Mr. Sibal once the notification goes, IFCI Limited cannot be regarded as a public financial institution and, consequently, it would not fall within the expression "financial institution" as appearing in section 2(1)( m ) of the said Act. The result of this would be that IFCI Limited would not be entitled in law to take recourse to the provisions of the said Act. 11. It was contended by Mr. Sibal that the word "established" in section 4A(2) of the Companies Act is used in the sense of bringing into existence or creating. An indication that this is the manner, in which it has been used, according to Mr. Sibal, is given by the use of the very same word "established" in clauses ( ii ), ( iii ), ( iv ) and ( v ) of sub-section (1) of section 4A of the Companies Act. He submitted that the manner in which the word "established" has been used in sub-section (1) clearly shows that the institution must be created by or brought into existence by the statute itself. He submitted that the word "established" does not have the same meaning as "formed and registered" under the Companies Act. This would be evident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of India and the Industrial Development Bank of India, were competitors. 14. The Statement of Objects and Reasons further indicates that to deal with these problems and in particular, to ensure greater flexibility and consequent ability of the Corporation to respond to the needs of the fast changing financial system, it was thought necessary "to establish a new company under the Companies Act, 1956, to which the entire undertaking, business and functions of IFCI as well as the assets and liabilities and the staff of IFCI will be transferred on such day as will be notified by the Central Government". It was further provided in the said Statement of Objects and Reasons that the conversion of the Corporation (IFCI) into a company would also enable it to re-shape its business strategies, provide greater autonomy, recourse to the capital market for raising resources, facilitate expansion of its equity base in future, and create a more levelled playing field across broadly similar financial institutions. In sum and substance, it was submitted by Mr. Sibal that the old corporation was extinguished and a new company (IFCI Limited) was to be formed and registered under the Companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees of the company (IFCI Limited). According to Mr. Sibal, this in itself indicated that the very nature of the Corporation was changed from Government to private. Referring to section 11 of the Repeal Act, Mr. Sibal submitted that by virtue of that provision, the Industrial Finance Corporation Act, 1948 stood repealed with effect from the appointed day, that is, 1-7-1993, and from that day onwards, the Corporation ceased to exist and the new company, that is, IFCI Limited did not have the character of a public financial institution. 17. Mr. Sibal also referred to a similar statute being the UTI (Transfer of Undertaking and Repeal) Act, 2002 whereby the Unit Trust of India Act, 1963 was repealed. However, according to Mr. Sibal, the UTI Repeal Act did not contemplate a complete privatization and, therefore, a specific provision was made for substitution of the specified company or administrator in place of the Unit Trust of India wherever necessary in every Act, rule, regulation or notification. Section 18 of the UTI Repeal Act reads as under: "18. In every Act, rule, regulation or notification in force on the appointed day, for the words "Unit Trust of India", wherever they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the incorporators and subsequently of the members of the company. Consequently, the articles tend to be elaborate and relate to the internal affairs of the company. A reference was also made by Mr. Sibal to sections 33 to 36 of the Companies Act and it was contended that IFCI Limited was established not by the Repeal Act of 1993 but by the formation and registration of the company under the Companies Act. The company s constitution as it were, was governed by the Memorandum and Articles of Association and not by any statutory provision. 19. Lastly, Mr. Sibal submitted that the second condition specified in the proviso to section 4A(2) of the Companies Act is also not satisfied in the present case inasmuch as the Central Government does not now own or control at least 51 per cent of the paid-up share capital. It was submitted that as on 31-3-2008, the Central Government did not own or control any part of the paid-up share capital of IFCI Limited. Though, in 1995, when the notification dated 15-2-1995 was issued, the position was different. At that point of time, the Central Government did not own any shares in IFCI Limited but the combined shareholding of IDBI, LIC, GIC, UTI, SB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and was a mere rule of convenience. Even if section 18 had not been there, the result would have been the same. Mr. Kaul submitted that the creation of IFCI Limited was contemplated under the Repeal Act of 1993 and not under the Companies Act. Referring to the provisions of Repeal Act of 1993, he submitted that there was a vesting of the entire undertaking and a complete transfer thereof from the Corporation to IFCI Limited. He compared the provisions of UTI Repeal Act of 1993 and submitted that even in the former Act, there was a reference to the specified company to be formed and registered under the Companies Act, 1956 as would be apparent from the definition of specified company under section 2( h ) of the UTI Repeal Act. The Supreme Court construing similar provisions, held the specified company as also the administrator as defined under the UTI Repeal Act to fall within the scope and ambit of the expression "public financial institutions". According to Mr. Kaul, similar is the case in the present petition. Mr. Kaul placed reliance on Gammon India Ltd. v. Special Chief Secretary [2006] 3 SCC 354 to submit that the Repeal Act of 1993 was not just a repeal but also a simulta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies Act, 1956. The Act also provided for a complete transfer of rights, liabilities, privileges and concessions which had been granted earlier to the Corporation to IFCI Limited. Mr. Kaul, therefore, in view of the aforesaid submissions contended that IFCI Limited would have to be regarded as a public financial institution under section 4A(2) of the Companies Act and consequently as a financial institution within the meaning of section 2(1)( m ) of the said Act. Thus, IFCI Limited would be entitled to institute and continue any action under the provisions of the said Act. He submitted that the writ petition ought to be dismissed. 21. The resolution of this case, as would be apparent from the foregoing discussion, would depend entirely on the interpretation of the provisions of section 4A of the Companies Act, 1956 and particularly the construction to be given to the provisions of sub-section (2) thereof. In this context, it will have to be determined as to what is meant by the expression "established or constituted by or under any Central Act". It would also have to be determined as to whether the condition of the Central Government holding or controlling not less than 51 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , because of the provisions of section 18 of the UTI Repeal Act, the specified company and/or the administrator were incorporated in clause ( v ) of section 4A(1) of the Companies Act, as public financial institutions. It is clear that the Supreme Court decision in Southern Petrochemical Industries Corpn. Ltd. s case ( supra ) was not at all concerned with the provisions of sub-section (2) of section 4A. It was only concerned with the provisions of section 4A(1) which dealt with those public financial institutions which had been specifically named in section 4A(1) of the Companies Act, 1956 itself. Therefore, no assistance can be taken from the decision in Southern Petrochemical Industries Corpn. Ltd. s case ( supra ) insofar as the present controversy is concerned. We are concerned with the provisions of section 4A(2) thereof since there is no provision similar to section 18 of the UTI Repeal Act in the Repeal Act of 1993. The reference to Industrial Finance Corporation of India in clause ( ii ) of section 4A(1) of the Companies Act, 1956, has not been substituted to indicate a reference to IFCI Limited. 23. Let us now consider the second condition stipulated in the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent would then hold 55 per cent shares in the said institution. Such a fluctuation or flip-flop in the status of the institution is certainly not contemplated by the provisions of section 4A(2) apart from the fact that it would lead to a very chaotic situation. Therefore, we are in agreement with the submission made by the learned counsel for the respondents that the validity of the notification from the standpoint of shareholding would have to be examined as on the date on which the notification under section 4A(2) of the Companies Act is issued. The condition with regard to the Government owning or controlling not less than 51 per cent of the paid-up share capital of an institution is, in our view, merely a condition precedent for the purposes of examining the status of the institution as a public financial institution and for the purposes of determining the validity of the notification under section 4A(2) of the Companies Act, 1956. It is open to the Central Government, at any subsequent point of time to de-notify an institution as a public financial institution if it deems fit. 24. We can also take support from Southern Petrochemical Industries Co. Ltd. s case (II) ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words, as they stood in the section, were not capable of making sense and it would, thus, have been necessary to amend the wording of the section. The Supreme Court then examined the issue as to whether the words "constituted under an instrument of partnership" had some meaning which could be attributed to them harmoniously with the rest of the relevant provisions. In this context, the Supreme Court observed that a partnership could be created or set up by a contract in writing, setting out all the terms and conditions of the partnership, but there may also be many cases where a partnership has been brought into existence by an oral agreement between the parties on certain terms and conditions which may subsequently be reduced to writing which would answer the description of an instrument of partnership. Such an instrument, would, naturally, record all the terms and conditions of the contract between the parties which, at the initial stages, had not been reduced to writing. The Supreme Court observed as under: "In such a case, though the partnership had been brought into existence by an oral agreement amongst the partners, if the terms and conditions of the partnership have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence to a company which, though formed and registered subsequently under the Companies Act, was conceived and contemplated under a Central Act such as the Repeal Act of 1993. 26. A similar logic would apply to the word "established". For, even the word "establish" does not necessarily mean to "create". As pointed out in S. Azeez Basha v. Union of India AIR 1968 SC 662, after reference to several dictionaries, the word "establish" has a number of meanings and one of them includes creation also. The dictionary meanings of the word "establish" are as under: The word "establish" according to the Oxford English Dictionary means, amongst other things, to institute or ordain permanently by enactment or agreement, give legal form and recognition to, secure or settle, set up on a permanent or secure basis, bring into being, found, make stable or firm, strengthen, ratify, confirm, restore, place in a secure position, initiate, secure acceptance of, place beyond dispute, ascertain, prove . The word "establish" according to Black s Law Dictionary means, amongst other things, to settle, make or fix firmly, to enact permanently, to make or form, to bring about or into existenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two conditions are required to be fulfilled, though, it may happen that in some cases both conditions are satisfied. In other words, an institution which has been established or constituted by or under any Central Act need not also satisfy the other condition with regard to its paid-up share capital (and vice versa ) for it to qualify as an institution which the Central Government may specify to be a public financial institution. 29. In the present case, both the conditions stand satisfied. But, even if one of the conditions had been fulfilled, IFCI limited could still have been specified as a public financial institution under section 4A(2) of the Companies Act, 1956. Therefore, the validity of the said notification dated 15-2-1995 is beyond reproach. 30. The result of the foregoing discussion is that IFCI Limited would have to be regarded as a public financial institution under section 4A of the Companies Act. As a consequence, it would be a financial institution under section 2(1)( m ) and, therefore, IFCI Limited would be entitled to take recourse to the provisions of the said Act in order to enforce a "security interest" created in its favour. The writ petition is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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