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2015 (12) TMI 1472 - SUPREME COURT

2015 (12) TMI 1472 - SUPREME COURT - TMI - SARFAESI Act - Whether a Company Court, directly or through an Official Liquidator, can wield any control in respect of sale of a secured asset by a secured creditor in exercise of powers available to such creditor under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for brevity ‘the SARFAESI Act’)? - Held that:- There is a discretion in the Company Court either to accept or reject the highest b .....

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re satisfied that the sale made in favour of M/s. Venus Realcon does not require any interference.

There is no good reason why the full price paid by Venus Realcon should be ordered to be refunded with interest etc. and possession which was delivered to Venus Realcon at the time of sale should be disturbed after passage of so much time. The money deposited in this case by the intervener M/s. Himalayan Infra Projects Private Limited should be refunded to it forthwith along with intere .....

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9293-94 of 2014 - Dated:- 29-12-2015 - Vikramajit Sen And Shiva Kirti Singh, JJ. JUDGMENT Shiva Kirti Singh, J. 1. A common issue of law: Whether a Company Court, directly or through an Official Liquidator, can wield any control in respect of sale of a secured asset by a secured creditor in exercise of powers available to such creditor under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for brevity the SARFAESI Act ), arises in all the .....

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Court and approved of certain fetters placed upon M/s. Pegasus Assets Reconstruction Pvt. Ltd., while allowing it to exercise its powers as a secured creditor under the SARFAESI Act and proceed with the sale of the secured assets. Since the judgment of Division Bench disallowed the appeal of Haryana State Infrastructure and Industrial Development Corporation (for brevity HSIIDC ) against the order of Company Judge allowing Pegasus to stay outside the winding up proceeding of the respondent Hary .....

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us Realcon Pvt. Ltd. by preferring a company appeal and also through a public interest litigation (a writ petition). Both were dismissed by the Division Bench. Those orders have been challenged by Mr. Vinod Rajaliwala through Special Leave Petition (C) Nos.117-118 of 2011. The three matters indicated above thus relate to secured assets of the same company under Liquidation, M/s. Haryana Concast Limited. 4. The fourth matter, C.A. No. 9293-94 of 2014 preferred by Megnostar Telecommunications Priv .....

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put any fetters on the sale by secured creditors because a secured creditor under Section 13 of the SARFAESI Act has been granted a right to enforce the security interest without the intervention of the court or tribunal in accordance with the provisions of the SARFAESI Act. It goes without saying that if the view taken by the Punjab and Haryana High Court in the matter of Pegasus is approved and the Civil Appeal No. 3646 of 2011 is dismissed, then the Delhi High Court s view will stand disappr .....

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t in 1999. The only secured creditor, the Bank of India obtained a recovery certificate against respondent no.1 from the Debt Recovery Tribunal, Chandigarh in 2002 for a sum of ₹ 5.84 crores approx. with pendente lite and future interest @ 18% p.a. from the date of filing of the suit till realization. Although the High Court allowed the Official Liquidator to sell the assets of the company in May 2004 and the bank also submitted its claim before the Official Liquidator in July 2004 for  .....

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cured creditor, Bank of India on 27.8.2008 and soon informed the Official Liquidator that it intends to remain outside the winding up process, to enforce its security as per the provisions of SARFAESI Act, subject to the rights of the erstwhile workmen of the company, respondent no.1 as per Section 529A of the Companies Act. Pegasus pursued its aforesaid stand by filing an application before the Company Judge for recalling an order dated March 20, 2008 wherein it had directed the Official Liquid .....

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ay outside the winding up proceedings and bring about sale of secured assets under Section 13 of the SARFAESI Act read with Rules 8 and 9 of Security Interest Enforcement Rules, 2002 (hereinafter referred to as the Rules ). These conditions forming part of paragraph 19 of the judgment of the learned Company Judge are extracted hereinbelow because these have been objected to by Pegasus as fetters which the Company Judge could not have obtained and therefore Pegasus preferred Company Appeal No.28 .....

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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 .....

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e deducted from out of the sale proceeds before any appropriation or disbursement and deposited with O.L. (e) The Reconstruction Company shall place before the Company Court the details of its claim and all expenses incurred before the Company Court before making any appropriation to himself and disbursed. (f) The surplus proceeds over what is lawfully due to it shall be deposited to the credit of the Company (in liquidation) before the O.L. 7. The stand of the appellant, Pegasus is that the Div .....

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ed asset already concluded but the appeal is being pursued for getting the legal issue settled as a precedent for future, otherwise as an assets reconstruction company the appellant shall be facing similar fetters in case the secured assets happen to be of a company under winding up. 8. Learned counsels representing the company respondent no.1 which is represented by the Official Liquidator and learned counsel for respondent no.2 HSIIDC have advanced submissions to the contrary. According to the .....

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g their dues which have highest priority and require protection as per Section 529A of the Companies Act as well as interest of the unsecured creditors. The stand of respondent no.2 is that once the bank had opted to participate in the winding up proceedings before the Company Judge, Pegasus should not have been permitted to take a contrary stand as it could have only stepped into the shoes of the bank. HSIIDC had also preferred a cross appeal bearing No. 23 of 2009 before the Division Bench aga .....

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1297 admeasuring 502.33 Sq. Yds. situated at MIE, Bahadurgarh, Haryana along with structures, present and future, with respondent-bank through Memo of Deposit of Title Deeds dated 29.04.2008 for securing loans obtained from the bank. In December 2008 respondent-bank issued a notice under Section 13(2) of the SARFAESI Act upon Megnostar on account of persistent defaults in making timely payment of amounts due to the bank. On 05.02.2009 Megnostar requested for release of the secured assets to enab .....

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a notice to that effect was published in various newspapers on 18.06.2010. O.A. No.38 of 2009 filed by the bank against Megnostar was allowed by DRT-II, Delhi on 13.07.2010 holding the company liable to pay to the bank ₹ 12.95 crores approx. with pendente lite and future interest @ 15.5.% p.a. with quarterly interests from date of filing of O.A. till date of realization. To realize its dues, the respondent-bank published auction-cum-sale notice of the secured assets on 23.07.2011 in exerc .....

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ated 03.08.2011 in Company Petition No.359 of 2009 whereby the Company Judge had appointed the Official Liquidator as a provisional liquidator with direction to take charge of all assets of the company Megnostar. The personnel from the office of the Official Liquidator were apprised of developments and sale under the SARFAESI Act but with the aid of police personnel they took forcible possession of the mortgaged property on August 30, 2011. In September 2011 the bank filed C.A.No.1948 of 2011 in .....

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ox. The learned Company Judge dismissed C.A. Nos.1947 and 1948 of 2011 by order dated 26.4.2012. Against that, the bank respondent no.2 preferred Company Appeal No.58 of 2012 before the Division Bench of High Court of Delhi. A separate appeal bearing no.62 of 2012 was filed by M/s. Mohan Tractors. Those appeals were allowed by the Division Bench as per order under appeal dated 17.09.2012. 10. The case of Mr. Vinod Rajaliwala requires separate consideration but only after an adjudication on the m .....

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arguments advanced on behalf of Pegasus which is to the following effect. Section 5 of the SARFAESI Act provides for acquisition of rights or interest in financial assets of any bank or financial institution by any securitization company or reconstruction company, inter alia, by entering into an agreement and this Section begins with a non obstante clause. Section 9 enumerates various measures which can be adopted by a securitization company or reconstruction company, including the sale or lease .....

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the intervention of a court or tribunal, in accordance with the provisions of this Act. The detailed scheme for enforcement of the secured assets under various sub-sections and provisos in Section 13 were pointed out along with Section 35 and 37 in support of a submission that the provisions are not only a complete code for enforcement of secured asset by a secured creditor but in case of conflict with any other statute, the provisions of the SARFAESI Act would prevail. Some other statutes enum .....

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in connection with a company in liquidation or under winding up in the face of Section 13 of the SARFAESI Act or securitization company opting to stand outside the winding up is absolutely free to utilise the sale proceeds of assets of the company in liquidation? 11. The Division Bench of Punjab & Haryana High Court considered the case of Mardia Chemicals v. Union of India (2004) 4 SCC 311; Rajasthan State Financial Corporation v. Official Liquidator AIR 2006 SC 755 = (2005) 8 SCC 190; Bakem .....

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iews. On the other hand, after going through the judgment of Delhi High Court in the case of Megnostar we are persuaded to approve its views because of various reasons some of which we shall enumerate and explain hereinafter. 13. The relevant case laws discussed in the two conflicting judgments are virtually the same but the error committed by the Division Bench in the case of Pegasus lies mainly in coming to a conclusion that there is no inconsistency between the Companies Act and the SARFAESI .....

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dictates of the Company Court) is to be also associated with the sale, it will naturally open up the fora of the Company Court also for entertaining matters relating to such sale and which as aforesaid is not only likely to lead to conflicts but is also contrary to the spirit of the SARFAESI Act of sale being without the intervention of the Court. 14. However, there are certain areas covered by the Delhi High Court which need further elucidation and clarification. For that it will be relevant an .....

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the State Governments to establish a Financial Corporation for a State on the lines of Central Industrial Finance Corporation set up under Act XV of 1948 to provide medium and long term credit to industrial undertakings, somewhat outside the normal lending activities of Commercial Banks. This Act, inter-alia, vests special privileges in the State Financial Corporations in the matter of enforcement of its claims against borrowers, through sections such as 29, 30, 31 and 32. Coercive steps includ .....

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o may opt to remain out of winding up but nonetheless it will be subject to orders passed in accordance with law under the Companies Act. 16. The RDB Act is of 1993, i.e. later to the Companies Act. Its avowed object is to provide for the establishment of Tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions and for matters connected therewith or incidental thereto. This Act creates a special machinery for speedy recovery of dues of banks and financ .....

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this Act over any other law in force. 17. In contrast, the SARFAESI Act was enacted in 2002 to regulate securitization and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. Inter-alia, one of the main objects of this Act is to clothe the banks and financial institutions in India with power to take possession of securities and sell them. All its significant provisions have been noted in detail in Mardia Chemicals in .....

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te keeping in view the provisions of Section 529 and 529A of the Companies Act, 1956. Since significant amendments were introduced in Section 529 while inserting Section 529A through Amendment Act 35 of 1985, effective from 24.5.1985 and with the aid of a non obstante clause in sub-section (1) of Section 529A workmen s dues were given preference over other dues and made to stand pari passu with dues of the secured creditors, in case of apparent conflict, this Court through various judgments has .....

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additional reason that Section 13 requires notice to the borrower at various stages which in the case of a company under winding up being a borrower would mean requirement of notice to the Official Liquidator. The Security Interest (Enforcement) Rules, 2002 (for brevity, the Rules ) framed under the provisions of SARFAESI Act also require notice upon the borrower or his agent at different stages. For sale of immovable secured assets, as per Rule 8, the authorized officer can take possession by d .....

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ils of the workers dues as ascertained under the Companies Act, placed before the authorized officer and seek proper distribution of the amount realised from the sale of secured assets in accordance with various provisos under sub-section (9) of Section 13 of the SARFAESI Act. 18. The above discussion supports the view taken by Delhi High Court that no order is required by the Company Judge for association of the Official Liquidator in order to protect the interest of workers and to realize thei .....

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the Appellate Tribunal. On the other hand, if the view taken by Punjab & Haryana High Court in Pegasus is accepted, there shall be a conflict of rights and interest of the secured creditor who have the right and liberty to realize their secured interest in accordance with the provisions of the SARFAESI Act on one hand, and the statutory rights and liability of the Official Liquidator acting under the orders of the Company Judge as per provisions of the Companies Act, on the other. The appell .....

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ict between the SFC Act and the Companies Act. After taking note of various earlier judgments of this Court in the case of Allahabad Bank v. Canara Bank (2000) 4 SCC 406; International Coach Builders Ltd. v. Karnataka State Financial Corporation (2003) 10 SCC 482; Industrial Credit and Investment Corporation of India Ltd. v. Srinivas Agencies (1996) 4 SCC 165; and A.P. State Financial Corporation v. Official Liquidator (2000) 7 SCC 291, it was held in para 16 that a financial corporation has the .....

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placed upon another judgment of this Court by three Judges in the case of Bank of Maharashtra v. Pandurang Keshav Gorwardkar (2013) 7 SCC 754 wherein this Court held that the Debts Recovery Tribunal is not empowered to adjudicate/ determine dues of workmen of debtor-company. Once the company is in winding up workmen s dues can be determined only by the liquidator under supervision of Company Court and by no other authority. In para 53, while considering Rajasthan State Financial Corporation deci .....

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it was also noted that since there was a conflict as to who would be competent to sell the assets, it was held that for this purpose the DRT would be competent because the RDB Act of 1993 being a later and special law shall prevail over the Companies Act which is a general law. 22. Reliance was also placed upon this Court s judgment in Employees Provident Fund Commissioner v. Official Liquidator (2011) 10 SCC 727. This case had arisen in the context of dues payable by an employer under Section 1 .....

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stinguished by placing reliance upon factual and legal situation prevailing in that case as noted in Paragraph 2 of the judgment. It was pointed out that Section 32 (10) of the SFC Act contains ample clarification that if liquidation proceedings have commenced in respect of the borrower before an application is made under sub-section (1) of Section 31, the financial corporation will not get any preference over the other creditors unless it is conferred on it by any other law. In that case no pro .....

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ary to burden this judgment with the case laws which support that view and have been noted by the High Court. We are in agreement with the submissions advanced on behalf of respondent Kotak Mahindra Bank as well as respondent No.2 that there is no lacuna or ambiguity in the SARFAESI Act to warrant reading something more into it. For the purpose it has been enacted, it is a complete code and the earlier judgments rendered in the context of SFC Act or RDB Act vis-à-vis the Companies Act, ca .....

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r sub-section (9) a sort of consensus is required amongst the secured creditors, if they are more than one, for the exercise of rights available under sub-section (4). If borrower is a company in liquidation, the sale proceeds have to be distributed in accordance with the provisions of Section 529A of the Companies Act even where the company is being wound up after coming into force of the SARFAESI Act, if the secured creditor of such company opts to stand out of the winding up proceedings, it i .....

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ator and then it can retain the sale proceeds of the secured assets. The other two provisos also are in aid of the liquidator to discharge his duties and obligations arising under Section 529A of the Companies Act. Thus, it is evident that the required provisions of the Companies Act have been incorporated in the SARFAESI Act for harmonizing this Act with the Companies Act in respect of dues of workmen and their protection under Section 529A of the Companies Act. In view of such exercise already .....

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ing that this Court had to undertake in the context of SFC Act or the RDB Act is no longer warranted in respect of SARFAESI Act vis-à-vis the Companies Act. 25. The aforesaid view commends itself to us also because of clear intention of the Parliament expressed in Section 13 of the SARFAESI Act that a secured creditor has the right to enforce its security interest without the intervention of the court or tribunal. At the same time, this Act takes care that in case of grievance, the borrow .....

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views that we shall indicate hereinafter in respect of SLP(C) Nos. 117-118 of 2011 preferred by Mr. Vinod Rajaliwala. 27. We grant leave in SLP(C) No.7074 of 2010 preferred by HSIIDC but only to dismiss this case as we have found the grievance of Pegasus to be justified; it was entitled not only to stay outside the winding up proceeding in view of provisions of SARFAESI Act which is a special and later Act but was also entitled to exercise its rights without any fetters that were erroneously pla .....

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re shall be no order as to costs. 29. With respect to the case of Vinod Rajaliwala, it has been indicated earlier that approximately 36 acres of land of Haryana Concast Limited was put to auction and sale by Pegasus in association with official liquidator and was ultimately sold for ₹ 32 crores in favour of M/s. Venus Realcon Private Limited. Vinod Rajaliwala challenged the orders of the company Judge confirming the sale by preferring a company appeal and also through a public interest lit .....

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ala requires adjudication, mostly on facts as to whether the sale confirmed by the Company Judge and approved by the Division Bench in favour of M/s. Venus Realcon requires any interference. It is not at all necessary to go into the facts which preceded the sale in favour of M/s Venus Realcon for ₹ 32 crores which till date stands confirmed. It is against confirmation of sale that Mr. Rajaliwala has preferred appeal as well as a PIL on the ground that the consideration money does not refle .....

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fore the Division Bench. On these facts the Division Bench dismissed company appeal on 23.9.2010. As a consequence, the PIL was also dismissed on the same date. In this Court, the petitioner claimed that the property was worth hundred of crores but ultimately petitioner persuaded another entity M/s. Himalayan Infra Projects Private Limited to offer a higher bid. This company was allowed to intervene and be impleaded, and it deposited 10 crores in January, 2011 and ₹ 40 crores in April, 201 .....

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y consideration for lack of good faith, in view of Judgment in the case of Arun Kumar Agrawal vs. Union of India, 2014 (2) SCC 609. It was pointed out from materials on record that the valuation of property has been changing from 2002 when it was estimated to be ₹ 10.13 crores. In January 2010 its market value was around ₹ 24-25 crores and the distress value was ₹ 18-20 crores approximately as per two different valuation reports. The valuation of ₹ 75 crores approximately .....

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bsequently on allegations made by Mr. Rajaliwala the Company Judge on 13.5.2010 held an open bid in Court, wherein M/s. Venus Realcon raised its bid to ₹ 32 crores. The Court then ordered for fresh advertisement pursuant to which no bidder, including Mr. Rajaliwala offered more than ₹ 32 crores. Hence the Company Court confirmed the sale in favour of M/s. Venus Realcon for ₹ 32 crores but it was made subject to Special Leave Petitions filed by Pegasus and HSIIDC. 32. On conside .....

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rt to undermine the value of such auction sale conducted not only by the secured creditor but also by the Official Liquidator who was permitted to be associated with the whole process of finding out of valuation as well as the conduct of sale. M/s. Venus Realcon has rightly placed reliance upon the judgments of this court in the case of Valji Khimji & Co. vs. Official Liquidator of Hindustan Nitro Product (Gujarat) Ltd. 2008(9) SCC 299 and Vedica Procon Private Limited vs. Balleshwar Greens .....

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done after wide publicity, then setting aside the sale after its confirmation will create huge problems. When an auction-sale is advertised in well-known newspapers having wide circulation, all eligible persons can come and bid for the same, and they are themselves to be blamed if they do not come forward to bid at the time of the auction. They cannot ordinarily later on be allowed after the bidding (or confirmation) is over to offer a higher price. Of course, the situation may be different if a .....

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ittle over the auction price, that cannot by itself suggest that any fraud has been done. 33. In Vedica Procon s case (supra) the aforesaid view was noticed and after considering many judgments in Paragraph 39, the Court approved the view taken in Navalkha and Sons vs. Sri Ramanya Das & Ors., 1969 (3) SCC 537 that there is a discretion in the Company Court either to accept or reject the highest bid before an order of confirmation of sale is made. However, once the Company Court is satisfied .....

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