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M/s. Deccan Chronicle Holdings Ltd, Secunderabad Versus IL and FS Trust Co. Ltd.

2016 (1) TMI 1 - ANDHRA PRADESH HIGH COURT

Jurisdiction to invoke provisions of SARFAESI Act - Validity of possession notice - whether the first respondent 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? - Held that:- The words in whose favour security interest is created, in Section 2(zd)(iii), refers to the trustee, and not to the bank/financial institution. As the petitioner .....

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al 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 be .....

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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 and financial institutions consequent on the defaulters account being declared as a non- performing asset. The classification satisfies the requirement of a valid classification under Article 14 of the Constitution and the challenge .....

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der Section 13(4), and the request made by them to the Chief Metropolitan Magistrate, Hyderabad and Vijayawada under Section 14 of the Act, are strictly in accordance with the provisions of the SARFAESI Act and do not suffer from any illegality. It would be wholly inappropriate, therefore, for us to interdict the action taken by them to recover, from the petitioner-company, the principal and interest due on the redemption of debentures, including by seeking the assistance of the Chief Metropolit .....

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. Solicitor General, Sri Gandham Durga Bose M/s.Trio Advisory Services LLP. ORDER: (per Honble Sri Justice Ramesh Ranganathan) M/s. Deccan Chronicle Holdings Limited (the petitioner herein) has invoked the jurisdiction of this Court seeking a writ of mandamus to declare the action taken by IL&FS Trust Company Limited (the first respondent) in issuing notice dated 15.07.2013, the subsequent possession notice dated 08.11.2013, and in contemplating taking physical possession under the orders in .....

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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 o .....

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respect to these debenture issues, including debenture trust agreements, debenture trust deeds, and other security and transaction documents for securing these debentures; the petitioner had created a charge, in favour of the first respondent, by way of mortgage and hypothecation of its moveable and immovable properties as detailed in the notice; the petitioner had also executed security documents in favour of the first respondent; the charges, so created by the petitioner in favour of the first .....

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ths from such default; the first respondent had called upon the petitioner to furnish details/information/documents, and to give confirmation in respect of payment of interest and redemption amounts due from time to time to the debenture holders, and whether the petitioner would be servicing interest payments on the next due dates with respect to the NCD issues; there was no proper response from them; the petitioner was requested to make necessary arrangement and rectify the default; the amounts .....

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r the transaction documents; and the petitioner was called upon to make payment of the entire principal outstanding amounts, along with interest, further interest, penal interest and liquidated damages thereon, under all the four debenture issues 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 holde .....

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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 secured assets; and they should co-operate with the authorised .....

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oner did not hand over possession of the assets, the first respondent invoked the jurisdiction of the Chief Metropolitan Magistrates, Hyderabad and Vijayawada under Section 14 of the SARFAESI Act. The petitioner would contend that the first respondent is a company registered under the Companies Act, 1956; they are not registered under Section 3 of the SARFAESI Act to be called a Securitisation Company; they cannot invoke the provisions of the SARFAESI Act more so as they had issued a notice earl .....

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unts lent to the petitioner; when the principals themselves are not secured creditors, no security interest can be said to have been created in favour of the agent i.e. the first respondent; even if such a security interest has been created, it is illegal, null and void as the first respondent is only a trustee of the amounts due to the original lenders; and action taken by the first respondent, under the provisions of Sections 13 and 14 of the SARFAESI Act, is illegal as action can be taken the .....

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en 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 fa .....

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is attracted only when the debenture trustees hold securities (debentures) on behalf of banks or financial institutions; the security must be held by the entity i.e., the bank/financial institution, and not its proxy ie the debenture trustee; and it is only then that such a trustee would become a secured creditor for the purposes 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 the expression in whos .....

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, both OBC and CB are banks. All these three entities are, therefore, secured creditors within the meaning of Section 2(zd) of the SARFAESI Act. Section 2(zd) of the SARFAESIAct includes, under Clause (iii) thereof, any other trustee holding securities on behalf of a bank or financial institution in whose favour security interest is created for the due repayment by any borrower of any financial assistance. The word ''include'' is used to enlarge the meaning of the preceding words .....

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nary, 5th ed. Vol. 3, p. 1263; C.I.T. Andhra Pradesh v. M/s Taj Mahal Hotel(1971(3) SCC 550), Secunderabad ; State of Bombay v. The Hospital Mazdoor Sabha (AIR 1960 SC 610 = 1960(2) SCR 866) ; Regl. Director, ESIC v. High Land Coffee Works of PFX Saldanha & Sons (AIR 1992 SC 129) ; Tamil Nadu Kalyana Mandapam Assn. v. Union of India (AIR 2004 SC 3757). As the word include is used in Section 2(zd), the meaning of the expression secured creditor must be held to have been given an extended mean .....

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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 .....

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nveyed, transferred, assured and assigned by the Company to the Trustees in terms of the provisions of Clause 7. Clause 1(n) defines Security to mean the security, by way of an English mortgage or any other form acceptable to the trustee, to be created over the mortgaged properties of the Company in favour of the trustee as security for the due repayment of the principal amount, interest, remuneration of the trustee and all fees, costs, charges, expenses and other monies payable by the Company i .....

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st thereon, trustees remuneration and all other monies relating thereto, shall be secured by way of first charge on the companys properties as described in the first and second schedules to the debenture trust deed. Clause 6 of the debenture trust deed, which is the covenant for redemption, stipulates that the debentures, held in the dematerialised form, shall be taken as discharged on payment of the redemption amount by the Company on maturity to the registered debenture holders whose name appe .....

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rt thereof, as may remain 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, godo .....

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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 charge in favour of the trustees, on the Companys mortgaged properties more particularly described in the first and second schedules to said deed. Clause 10, which relates to events of default, stipulates that (i) If one or more of the events specified (called the event(s) of defaul .....

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, thereunder, the mortgaged properties shall be, and remain, the security to the trustees for the due repayment of the principal amount of the debentures, premium or redemption, interest, default interest (where applicable), trustees remuneration and all other monies payable under the debentures. The Trustees shall permit the Company, until the happening of one or more of the events, to hold and enjoy the mortgaged properties, and to carry on therein and therewith the business authorised by its .....

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account of a mortgage or charge for the balance. Clause 13 stipulates that the Trustees had, at the request of the Company, agreed to act as the trustees for the benefit of the holders of the debentures provided in the debenture trust deed. Clause 14 relates to enforcement of security and stipulates that, on the occurrence of any of the events of defaults as set out in the Trust Deed, the Trustees may give notice to the Company that the debentures are, and they shall immediately become, due and .....

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nts 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 hol .....

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ncial institution, or who has created any mortgage or pledge or security for the financial assistance granted by any bank or financial institution. Section 2(k) defines financial assistance to mean, among others, any debentures subscribed by any bank or financial institution. As the debentures of the petitioner company have been subscribed by CB, OBC andLIC, which are banks/financial institutions, these three entities must be held to have rendered financial assistance to the petitioner which wou .....

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the petitioner has created a charge, in favour of the 1st respondent, are the secured assets. Section 2(ze) defines secured debt to mean a debt, which is secured by any security interest, which, in the present context, refer to the amount payable on the redemption of the non-convertible debentures subscribed by the three entities. Section 2(zf) defines security interest to mean right, title, interest of any kind whatsoever upon property created in favour of any secured creditor and includes a mo .....

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s created in favour of the 1st respondent for due repayment of the amount payable, towards the principal and interest, on redemption of the debentures subscribed by LIC, CB. and OBC. As a security interest is created 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 sti .....

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, 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 class of debenture holders; there cannot be a further classification among debenture holders bet .....

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while debenture holders which are banks/financial institutions would be able to invoke the provisions of the SARFAESI Act; that is not what Parliament intended while enacting the SARFAESI Act; no elevated right is conferred on debenture holders which are banks/financial institutions; the first respondent does not hold securities of the petitioners on behalf of the debenture holders as a whole; the first respondent does not even hold all the securities on behalf of banks/financial institutions; .....

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trust deed does not refer to the name of any of the entities on whose behalf securities are held by the first respondent. On the other hand Sri D. Prakash Reddy, Learned Senior Counsel appearing on behalf of the first respondent, would submit that the petitioner has not even stated, in the writ affidavit, that the debenture trustee holds debentures not only on behalf of LIC, CB and OBC, but also on behalf of others; the subject debenture trust deeds exclusively deal with these three entities al .....

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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 act .....

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le debentures of the face value of ₹ 100/- each aggregating to ₹ 3000/- lakhs, on the terms and conditions detailed in the sanction letter, in the proposed issue of 8% secured redeemable non-convertible debentures of the face value of ₹ 100/- each aggregating to ₹ 30 crores proposed to be made by the company by way of Private Placement for meetingtheir long term working capital requirements. The Board of Directors of the petitioner-company resolved to appoint IL&FS Tr .....

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able NCDs of the face value of ₹ 100/- each aggregating to ₹ 30 crores for the purpose of issue of allotment on private placement basis. Thereafter, the petitioner informed the LIC, by its letter dated 29.06.2005, that, pursuant to their application for secured debentures, they were being allotted debentures; and the terms and conditions of the debentures would be as per the subscription agreement executed by the LIC and the petitioner. In their meeting held on 29.06.2005, the Board .....

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ebentures were proposed to be issued on private placement, and not by way of a public issue. The contention, urged for the first time across the bar, is that the 1st respondent holds securities on behalf of debenture holders as a whole, and not merely on behalf of debenture holders which are banks/financial institutions; and the classification of debenture holders, between those which are banks and financial institutions and those which are not, is in violation of Article 14 of the Constitution .....

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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-h .....

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ause has been denied to them, it is not enough for the petitioners to say that they have been treated differently from others, not even enough that a differential treatment has been accorded to them in comparison with others similarly circumstanced. Discrimination is the essence of classification and does violence to the constitutional guarantee of equality only if it rests on an unreasonable basis. It is for the petitioners to show that the classification is unreasonable and bears no rational n .....

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m Krishna Dalmia v. Justice S.R. Tendulkar (AIR 1958 SC 538); Gauri Shanker v. Union of India (1994) 6 SCC 349). Where a party seeks to impeach the validity of a classification on the ground that they offend Article 14, the burden is on him to plead and prove the infirmity, to set out facts necessary to sustain the plea of discrimination, and to adduce cogent and convincing evidence to prove those facts for there is a presumption that every factor which is relevant or material has been taken int .....

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etitioner 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 .....

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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 economic progress, but would also have consequential ill effects. The normal process, of recovery of debts through courts, is lengthy and ill-suited. It cannot be said that a step, taken to evolve means for faster recovery of NPAs, is not called for. Financial liquidity is essential for a growth-orien .....

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scrimination. Persons similarly situated must be similarly treated. Where, however, the persons are not similarly situated, there is no prohibition to treat them separately, provided of course there is a reasonable nexus between the basis of the classification and the object to be achieved. (K. Muthusamy v. Government of Tamilnadu (LAWS -TLMAD 2003-0-582). A valid classification, based on a just objective, is truly a valid discrimination. The result to be achieved by the just objective presuppos .....

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mination means an unjust, an unfair action in favour of one and against another. It involves an element of intentional and purposeful differentiation and further an element of unfavourable bias; an unfair classification. (Rajasthan State Industrial Development & Investment Corporation v. Diamond & Gem Development Corporation Ltd (2013) 5 SCC 470); The State of M.P. v. Narmada Bachao Andolan (2011) 7 SCC 639); Madhu Kishwar v. State of Bihar (1966) 5 SCC 125). Classification must be truly .....

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guishes 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 19 .....

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dia(1990) 4 SCC 366). So long as there is a nexus, between the basis of the classification and the object sought to be achieved, the classification is valid. (The State of Madhya Pradesh v. Gopal D. Tirthani(2003) 7 SCC 83). 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, pro .....

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ters account being declared as a non- performing asset. The classification satisfies the requirement of a valid classification under Article 14 of the Constitution and the challenge, to its validity, must fail. III. SECTIONS 13(2) & (4) AND SECTION 14 OF THE SARFAESI ACT: ITS SCOPE: Sri Vedula Venkataramana, Learned Senior Counsel appearing on behalf of the petitioner, would submit that, under Section 13(2) of the SARFAESI Act, it is the secured creditor which should classify the debt as a n .....

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ecured creditors as no security interest is held by them in the petitioner-company; the word borrower in Section 2(zd)(iii) refers to a borrower as defined in Section 2(f) wherein borrower is defined to mean 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 SARFAE .....

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e 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, notwithstanding anything contained in Section 69 or Section 69A of the Transfer of Property Act, 1882, a .....

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SARFAESI Act. In view of the non-obstante clause therein, Section 13(1) of the SARFAESI Act overrides the provisions of Section 69 of the Transfer of Property Act wherein it is said that in no cases, other than those enumerated in clauses (a), (b) and (c), a mortgage shall be enforced without the intervention of the Court. Once the said condition, in Section 69 of the Transfer of Property Act, has been overridden by the special enactment, namely, the SARFAESI Act, irrespective of the kind of mor .....

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re conveying their consent to initiate action under the SARFAESI Act, on their behalf, in respect of the 10% non-convertible debentures of ₹ 105 crores, wherein LICs holdings was ₹ 75 crores. They also requested the debenture trustee to initiate action in respect of the three NCDs, totalling to ₹ 100 crores, wherein LIC was the sole debenture holder.Similar letters were addressed by the Canara Bank to the debenture trustee on 07.03.2013, and by Oriental Bank of Commerce on 20.0 .....

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scribed 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 .....

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d the company has, on the face of the prospectus or the letter of offer, stated that the debenture trustee or trustees have given their consent to the company to be so appointed. Section 117B(2) stipulates that, subject to the provisions of the Act, the functions of the debenture trustees shall generally be to protect the interest of the holders of debentures (including creation of securities within the stipulated time) and to redress the grievances of the holders of debentures effectively. Sect .....

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he company shall pay interest, and redeem the debentures, in accordance with the terms and conditions of their issue. The aforesaid provisions of the Companies Act, 1956 requires the Company, which issues debentures, to appoint one or more debenture trustees before it issues debentures. It is because of the mandate of Section 117-B of the Companies Act are debenture trustees required to be appointed to protect the interests of debenture holders, and for creation of security interest in their fav .....

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any and the debenture holders and containing a covenant for the payment of a specified capital sum and for payment of interest, and gives the trustees security by way of a mortgage or charge. When debentures are issued under a trust deed, the debenture holders are the cestuis que trust of the trust created by the deed. In case a charge is created in favour of the trustees, the debenture-holders are mere beneficiaries of the charge, and not the charge holder. It is a practice well settled, and wh .....

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ct; 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 ca .....

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r, by notice in writing, to discharge in full his liabilities to the secured creditor within sixty days from the date of the notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4). As noted hereinabove banks, financial institutions and the debenture trustee are all secured creditors under Section 2(zd) of the Act. Security cannot be created in favour of the banks/financial institutions, for the financial assistance extended by them .....

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bt, as a non-performing asset, they cannot issue the notice under Section 13(2) as no security interest is created in their favour to be enforced in accordance with the provisions of the SARFAESI Act. It is the debenture trustee, in whose favour a security interest is created, which can issue the notice under Section 13(2) calling upon the borrower to discharge its liabilities to the bank/financial institution. It is no doubt true that Section 13(2) of the SARFAESI Act requires the account of a .....

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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 appear .....

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ks 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 (banks/financial institutions). It is only the debenture trustee, in whose favour a security interest is created by the borrower, who can issue the notice under Section 13(2) of the Act and it is for this reason that LIC, CB and OBC had requested the 1st respondent to issue the said notice. As banks/financial institut .....

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ce to the borrower. On the other hand 13(2), in the context of issuing a notice in writing requiring the borrower to discharge, in full, his liability, refers to the debenture trustee as a secured creditor. Reference to a secured creditor in Section 13(2), in the context of requiring the borrower to discharge in full his liability, is to banks/financial institutions. To para-phrase Section 13(2), if the borrower (petitioner company), who is under a liability to a secured creditor (LIC, CB & .....

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creditor (debenture trustee) shall be entitled to exercise all or any of the rights under sub- section (4). Section 13(4) stipulates that, in case the borrower fails to discharge his liability in full, within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the measures specified therein to recover the secured debt, including to take possession of the secured assets of the borrower, and to exercise the right to transfer by way of lease, assignment .....

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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 .....

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te may take or cause to be taken such steps and use, or cause to be used, such force as may, in his opinion, be necessary. If the defaulting borrower fails to hand over possession of the mortgaged properties, on a notice being issued to it under Section 13(4), it is open to the debenture transfer to invoke the provisions of Section 14(1) of the Act. In the present context, Section 14(1) enables the 1st respondent, as the debenture trustee and a secured creditor, to request the Chief Metropolitan .....

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