TMI Blog2016 (1) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... the conditions stipulated in Section 2(zd)(iii) of the SARFAESI Act to become the secured creditor of the petitioner company. As the debenture trust deed itself stipulates that the security created by the petitioner in favour of the 1st respondent is to be held for the beneficial interest of LIC, CB and OBC, it matters little that the 1st respondent-debenture trustee has not, otherwise, stated that the security is held by it on behalf of banks/financial institutions. The object sought to be achieved by the SARFAESI Act is speedier recovery of NPAs of banks/financial institutions. Debenture holders, which are banks and financial institutions, constitute a class, distinct and apart from other debenture holders, and the speedier remedy, provided by the SARFAESI Act, for recovery of their mounting dues, is to reduce the fiscal burden of these banks/financial institutions created by its huge non- performing assets which is eroding its liquidity. The differentia, between debenture holders which are banks/financial institutions and those which are not, has a rational relation to the object sought to be achieved by the SARFAESI Act which is speedierrecovery of the amounts due to banks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondent is not entitled to invoke the provisions of the SARFAESI Act; to declare the action taken by the first respondent under the SARFAESI Act, with respect to the assets of the petitioner-Company, as null and void; and to consequently direct the first respondent to restore symbolic possession of the properties of the petitioner taken over by it under the SARFAESI Act. The petitioner publishes daily newspapers both in English and Telugu under the name and style of Deccan Chronicle English daily, and Andhra Bhoomi Telugu daily. The first respondent filed a petition before the Chief Metropolitan Magistrate, Hyderabad seeking assistance in taking physical possession of the properties situated at Hyderabad. Likewise, they filed a petition before the Chief Metropolitan Magistrate, Vijayawada seeking assistance in taking physical possession of the properties of the petitioner in Krishna District. Earlier the first respondent issued legal notice dated 09.04.2013 informing that they were acting as a debenture trustee for the debentures issued by the petitioner as referred to in the notice; they were acting as a debenture trustee for the benefit of the debenture holders/secured parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s within 15 days, failing which they would initiate appropriate legal proceedings. Thereafter the first respondent issued a notice, under Section 13(2) of the SARFAESI Act, on 15.07.2013 informing the petitioner that the amounts due to the debenture holders had not been paid, and was still outstanding; and if they failed to repay the debenture holders the outstanding amount, as stated in terms of the notice, action would be taken under Section 13(4) and other applicable provisions of the Act. The petitioner was informed that they were being put on notice, in terms of Section 13(13) of the SARFAESI Act, that they should not transfer, by way of sale, lease or otherwise, any of the secured assets, referred to in the notice, without obtaining their prior written consent. These notices were issued by the 1st respondent as the debenture trustee of the three debenture holders viz., LIC, CB and OBC. Another notice was issued by the 1st respondent, under Section 13(4) of the Act, on 08.11.2013 regarding taking possession of the secured assets. The petitioner was informed that possession of the secured assets would be taken; they should remain present and hand over possession of the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sri Vedula Venkataramana, Learned Senior Counsel appearing on behalf of the petitioner, has rightly chosen not to place reliance thereupon as the said judgment has been overruled by the Supreme Court in Keshavlal Khemchand and Sons Pvt. Ltd. v.Union of India (AIR 2015 SC 1168) . It is convenient to examine the rival submissions, urged by Learned Senior Counsel on either side, under different sub-heads. I. IS THE 1ST RESPONDENT A SECURED CREDITOR WITHIN THE MEANING OF SECTION 2(ZD) OF THE SARFAESI ACT? Sri Vedula Venkataramana, Learned Senior Counsel appearing on behalf of the petitioner-company, would submit that it is only a security interest, created in favour of a secured creditor, which can be enforced under the SARFAESI Act; the first respondent is neither a secured creditor within the meaning of Section 2(zd) of the SARFAESI Act nor has any security interest been created in favour of the banks and financial institutions who had subscribed to the debentures; clause (i) of Section 2(zd) is attracted only when a debenture trustee is appointed by the banks/financial institutions who had subscribed to the debentures of the petitioner; clause (iii) is attracted only when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expression secured creditor must be held to have been given an extended meaning. It not only brings within its ambit banks and financial institutions but also a trustee holding securities on behalf of banks and financial institutions, in whose favour security interest is created for due repayment by any borrower of any financial assistance. While the 1st respondent is neither a bank nor a financial institution, the question which necessitates examination is whether it qualifies to be called a secured creditor under the extended meaning given to the said expression under Section 2(zd)(iii) of the SARFAESI Act. Clause (iii) of Section 2(zd) requires security interest to be created in favour of a trustee. Section 2(zf) defines security interest to mean right, title and interest of any kind whatsoever upon property created in favour of any secured creditor, and includes any mortgage, charge, hypothecation or assignment. A debenture trust deed was executed between the petitioner company and the 1st respondent, (IL FS Trust Company Limited, acompany incorporated by IL FS Limited under the Companies Act, 1956). Clause 1(h) thereof defines mortgaged properties to mean the immovable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main subject to the security hereby created. Clause 7, which relates to Grant and Transfer, stipulates that (a) for the consideration aforesaid, and as security for the redemption and payment of the principal amount of the debentures, interest, default interest (where applicable), the Company does hereby (i) grant, convey and assure unto the Trustees the properties being the lands more particularly described in the first schedule, together with all buildings, erections, godowns and constructions, to have and to hold unto and to the use of the Trustees absolutely upon trust, and subject also to the provision for redemption hereinafter mentioned, provided that it has not given, nor has it agreed to give, possession of the mortgaged properties to the Trustees until enforcement of the security. Clause 8 stipulates that one of the terms of the issue of debentures was that the repayment/redemption of the principal amount of the debentures, payment of interest, additional interest in case of default (where applicable), remuneration of the trustees and all costs, charges, expenses and other monies payable by the Company, in respect of the debentures, would be secured by a mortgage and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter the Debentures or any of them have become repayable, and have not been repaid, the Trustees may at their discretion, and without further notice, institute such proceedings against the Company as they may think fit to enforce repayment thereof together with accrued interest and all other monies payable in respect thereof. The third schedule to the Trust deed are the financial covenants and conditions. Clause 3 thereunder prescribes the redemption period, and requires the long term debentures to be redeemed on equal instalments on the 8th, 9th and 10th year from the date of allotment. It is clear, from the above referred clauses of the debenture trust deed, that the immoveable properties of the petitioner- company were mortgaged in favour of the 1st respondent which, in terms of the debenture trust deed, holds securities (mortgaged properties) on behalf of the debenture holders i.e., LIC, OBC and CB which are financial institutions and banks. A charge (security interest) was created, over the immovable and moveable properties of the petitioner-company, in favour of the 1st respondent for the due repayment of the principal and interest due on redemption of the debentures, of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in its favour for the due repayment by the petitioner, of the financial assistance (subscription of debentures) extended by LIC, CB and OBC, and as it holds the security on behalf of banks or financial institutions (CB, OBC and LIC), the 1st respondent fulfils all the conditions stipulated in Section 2(zd)(iii) of the SARFAESI Act to become the secured creditor of the petitioner company. As the debenture trust deed itself stipulates that the security created by the petitioner in favour of the 1st respondent is to be held for the beneficial interest of LIC, CB and OBC, it matters little that the 1st respondent-debenture trustee has not, otherwise, stated that the security is held by it on behalf of banks/financial institutions. II. IS THE CLASSIFICATION OF DEBENTURE HOLDERS, BETWEEN THOSE WHICH ARE BANKS/FINANCIAL INSTITUTIONS AND THOSE WHICH ARE NOT, IN VIOLATION OF ARTICLE 14 OF THE CONSTITUTION? Sri Vedula Venkataramana, Learned Senior Counsel appearing on behalf of the petitioner, would submit that the SARFAESI Act should receive strict interpretation, and not a liberal construction, in view of its consequences; the securities held by the debenture trustee is for a cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titioner stated that the debenture trustees also hold security interest on behalf of debenture holders other than the aforesaid three entities; the first respondent holds debentures only on behalf of these three banks/financial institutions; the trust deed refers to the Board resolutions of the petitioner which clearly show that these debentures have been issued exclusively to these financial institutions/banks; the debenture trust deed creates a security interest, on the debentures trustee, on behalf of the debenture holders i.e. the three banks/financial institutions; from ground (e) of the Writ Petition, it is evident that the petitioner has understood that the first respondent is acting in the interest of the debenture holders; and the object of appointing debenture trustees, under the Companies Act, is to protect the interest of debenture holders which, in the present case, are only these three entities. The petitioner company, in its Board of Directors meeting held on 22.06.2005, noted that, pursuant to the applications made by them, L.I.C. had, by letter dated 27.05.2005, agreed to provide financial assistance by way of subscription to 8% secured redeemable non-convertibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd financial institutions and those which are not, is in violation of Article 14 of the Constitution of India. In the absence of a specific plea in the writ affidavit, that the debenture trustee represents the interest of not only these three entities (LIC, CB OBC), but also other debenture holders, these contentions cannot be examined in these writ proceedings. From the above referred clauses of the debenture trust deed, and the resolution of the Board of directors of petitioner company, it does appear that the 1st respondent was appointed as a debenture trustee for the debentures issued in favour of these three entities alone, and none else. The three entities, all of whom have subscribed to the debenture issued by the petitioner- company, have not even been arrayed as respondents in this Writ Petition. It would be wholly inappropriate, therefore, for us to presume that the 1st respondent is a debenture trustee representing not only the interests of these three entities, but other debenture-holders also. As the contention regarding the validity of classification of debenture-holders, all of whom are represented by the debenture trustee, is based on the premise that the ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioner cannot be said to have discharged the onus which lies heavily on them to establish that the classification is invalid. Even otherwise, the SARFAESI Act has been enacted to evolve means for faster recovery of non-performing assets of banks, financial institutions and Securitisation and Reconstruction Companies, and not any other class of creditors. The unrealized dues of banking companies and financial institutions, utilizing public money for advances, are mounting and it was considered imperative, in view of recommendations of Expert Committees, to have such a law which may provide speedier remedy before any major fiscal setback occurs, and for improvement of the general financial flow of money necessary for the economy of the country. Such legislation, i.e., the SARFAESI Act, is in public interest, and the individual interest shall be subservient to it. (Mardia Chemicals Ltd. v. Union of India (2004) 4 SCC 311, 2004 (4) ALT 4 (SC)). Financial liquidity is essential to ensure that effective financial assistance is extended to industries by banks/financial institutions, failing which large sums of money would be blocked creating circumstances which would not only retard ec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the group and such differential attributes must bear a just and rational relation to the object sought to be achieved. (State of Maharashtra v. Indian Hotel Restaurants Assn. (2013) 8 SCC 519); Triloki Nath Khosa7). To pass the test of permissible classification two conditions must be fulfilled, namely, (i) that the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group, and (ii) that differentia must have a rational relation to the object sought to be achieved by the statute in question. The classification may be founded on different basis. What is necessary is that there must be a nexus between the basis of the classification and the object of the provision under consideration. (Indian Hotel Restaurants Assn. (2013) 8 SCC 519); Budhan Choudhry v. State of Bihar (AIR 1955 SC 191). Classification, to be valid under Article 14, need not necessarily fall within an exact or a scientific formula for exclusion or inclusion of persons or things. There is no requirement of mathematical exactness or for doctrinaire tests to be applied for determining the validity, as long as it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n any person who has been granted financial assistance by any bank or financial institution; the three entities had only subscribed to the debentures issued by the petitioner company; the petitioner cannot, therefore, be said to be a borrower within the definition of Section 2(f) of the SARFAESI Act; the Section 13(2) notice refers only to the debenture holders, and not to the debenture trustee; in any event, no security interest is created in favour of the debenture holders; and, as such, the first respondent cannot invoke the provisions of the SARFAESI Act. On the other hand Sri D. Prakash Reddy, Learned Senior Counsel appearing on behalf of the 1st respondent, would submit that all these three institutions i.e., L.I.C, C.B and O.B.C, which are banks and financial institutions, have classified the debt of the petitioner as a non-performing asset; and the contention that the first respondent should avail the remedy of a Civil Suit for recovery of the amount due, and not invoke the provisions of the SARFAESI Act, is misplaced as Section 34 bars the remedy of a Suit. Section 13 of the SARFAESI Act relates to enforcement of security interest. Under sub-section (1) thereof, notwithsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ARFAESI Act; the NCDs were secured by hypothecation of all the movable properties, including plant and machinery, and rights under insurance contracts relating to such properties of the company, as described in the Schedule A, and by mortgage of immoveable property of the Company more particularly described in Schedule B; charges, by way of hypothecation and mortgage on the secured assets of the Company, had been created in favour of the debenture trustee for securing due repayment of the outstanding amounts under the NCDs to the debenture holders; the details of the secured assets were described in the first Schedule of the debenture trust deed, and were given in Schedules A and B; and the charges so created by the petitioner on the secured assets, in favour of the debenture trustee, were duly registered with the Registrar of Companies. Section 117B of the Companies Act, 1956 relates to appointment of debenture trustees and their duties. Under sub- section (1) thereof, no company shall issue a prospectus, or a letter of offer, to the public for subscription of its debentures, unless the company has, before such issue, appointed one or more debenture trustees for such debentures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers are mere beneficiaries of the charge, and not the charge holder. It is a practice well settled, and which has been recognised and followed for a long period, that debentures are issued under a trust deed by which they are constituted, and that the trust deed is a mortgage over the company's properties when they are conveyed or transferred to trustees to secure payment to the debenture holders of the principal sum and interest due from the company. (Commissioner of Income Tax, Bengal v. Messrs. ChowringheeProperties Ltd (AIR 1945 Calcutta 53); N. N. Sircar and S. C. Sen The Indian Companies Act; Palmers Company Law, 17th Edition; In reUruguay Central and Hygeuritus Railway Co. of Monte Video(1879) 11 Ch. D. 372). Where a company makes an issue of debentures which it secures by a debenture trust deed, and property is mortgaged to be registered in the names of the trustees of the deed, the trustees are entitled to exercise the powers of mortgagees. (Siemens Brothers Dynamo Works Limited v. Burns(1918) 2 Ch. 324). The trustees, and not the company, are the mortgagees, and the former can enforce the mortgage. They would do so as trustees for, and for the benefit of, the debentur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ault to mean non- payment of any principal debt or interest thereon or any other amount payable by a borrower to any secured creditor consequent upon which the account of such borrower is classified as a non- performing asset in the books of accounts of the secured creditor. On their failure to repay the principal and interest due on the redemption of debentures, the petitioner has committed default in terms of Section 2(j) of the Act consequent upon which the petitioners account with LIC, CB and OBC appears to have been classified as a non-performing asset in their books of accounts. The security interest for redemption of the debentures, and for repayment of the principal and interest to the debenture holders, is however created only in favour of the debenture trustee. As financial assistance to borrowers is extended only by banks/financial institutions, it is only they who can classify the account of the borrower as a non-performing asset. As no security interest is created in their favour, banks and financial institutions cannot issue the notice, under Section 13(2) of the SARFAESI Act, requiring the borrower to discharge, in full, his liability to the secured creditors (ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure trustee, to take possession of the secured assets of the petitioner company, is authorised by Section 13(4) of the SARFAESI Act. Under Section 14(1), where the possession of any secured assets is required to be taken by the secured creditor or if any of the secured asset is required to be sold or transferred by the secured creditor under the provisions of the SARFAESI Act, the secured creditor may, for the purpose of taking possession or control of any such secured asset, request, in writing, the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction any such secured asset or other documents relating thereto may be situated or found, to take possession thereof, and the Chief Metropolitan Magistrate or, as the case may be, the District Magistrate shall, on such request being made to him - (a) take possession of such asset and documents relating thereto; and (b) forward such assets and documents to the secured creditor. Section 14(1)(A) stipulates that the District Magistrate, or the Chief Metropolitan Magistrate, may authorize any officer subordinate to him, (i) to take possession of such assets and documents relating thereto; and (ii) to forward s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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