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2016 (1) TMI 1 - ANDHRA PRADESH HIGH COURT

2016 (1) TMI 1 - ANDHRA PRADESH HIGH COURT - TMI - 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 .....

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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, othe .....

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tutions 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 and financial institutions consequent on the defaulters account being declared as a non- performing asset. The classification satisfies the requirement of a valid classificatio .....

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he 1st respondent under Section 13(2), the action taken by them under 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 deben .....

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.Prakash Reddy, Learned Senior Counsel, Sri B.Narayana Reddy, Asst. 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, a .....

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c 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 Magistr .....

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d 31.12.2008; the petitioner had executed various documents, with 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 .....

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ence of default, and if default was not rectified within three months 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 .....

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penal interest and liquidated damages, as may be applicable, as per 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 in .....

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ecured 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 t .....

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f the three debenture holders i.e., LIC, CB and OBC. As the petitioner 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 provi .....

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d arbitrary; LIC, CB and OBC are not secured creditors for the amounts 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 .....

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judgment has been overruled by the Supreme Court in Keshavlal Khemchand and Sons Pvt. Ltd. v.Union of India . 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 favou .....

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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 whose f .....

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oth 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 an .....

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y, 5th ed. Vol. 3, p. 1263; C.I.T. Andhra Pradesh v. M/s Taj Mahal Hotel, Secunderabad ; State of Bombay v. The Hospital Mazdoor Sabha ; Regl. Director, ESIC v. High Land Coffee Works of PFX Saldanha & Sons ; Tamil Nadu Kalyana Mandapam Assn. v. Union of India ). 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 meaning. It not only brings within its ambit banks and financial institutions but also a truste .....

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terest 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 .....

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ovisions 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 in respect ofthe debentures. Clause 4 of the debenture trust deed stipulates that the immova .....

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y 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 appears in the Register of Debenture holders on the Record Date; such payment will be a legal d .....

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o 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 u .....

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, 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 default) happen(s), the trustees may, in their discretion and by a notice in writing to the Compa .....

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or 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 Memorandum of Association. Upon the happening of any such event the Trustees may (but subje .....

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d, 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 payable for their principal amount together with accrued interest as provided in the Trust .....

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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 i .....

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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 would, in terms of Section 2(f), be a borrower both on account of its being granted financial .....

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s. 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 mortgage, charge, hypothecation or assignment. In terms of the security agreement (debenture .....

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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 stipulated in Section 2(zd)(iii) of the SARFAESI Act to become the secured creditor of the pet .....

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N 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 between those which are banks and financial institutions and those which are not; such a class .....

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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; this is evident from the notice issued by the first respondent under Section 13(2) of the S .....

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e 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 alone; the object of the SARFAESI Act is to protect the interests of banks/financial institut .....

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s 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 truste .....

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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 Trust Company Limited (the first respondent) as the debenture trustee, and to complete the fo .....

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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 of Directors of the petitioner- company resolved to allot 300 8% long term fully secured no .....

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. 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 of India. In the absence of a specific plea in the writ affidavit, that the debenture trust .....

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ve 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 .....

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en 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 nexus with its purported object. (State of J&K v. Triloki Nath Khosa ). The person assai .....

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t 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 into account in formulating the classification. Unless the classification is unjust on the face of it, the onus lies upon the party attacking the classification to show, by pleading and placing the .....

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ry 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 mone .....

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l 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-oriented economy. (Mardia Chemicals Ltd.13). The mere fact that the general class of debenture holders are required to invoke the contractual provisions, while debenture holders, which are banks and financial institutions, can invoke the provisions of th .....

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ieved. (K. Muthusamy v. Government of Tamilnadu ). A valid classification, based on a just objective, is truly a valid discrimination. The result to be achieved by the just objective presupposes the choice of some for differential consideration/treatment over others. Legalistically, the test for a valid classification may be summarized as a distinction based on a classification founded on an intelligible differentia, which has a rational relationship with the object sought to be achieved. (Kalla .....

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orporation Ltd ; The State of M.P. v. Narmada Bachao Andolan ; Madhu Kishwar v. State of Bihar ). Classification must be truly founded on substantial differences which distinguish persons grouped together from those left out of 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. ; Triloki Nath Khosa7). To pass the test of permissible classification two conditions must .....

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ideration. (Indian Hotel & Restaurants Assn.19; Budhan Choudhry v. State of Bihar ). 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 is not palpably arbitrary. (Indian Hotel & Restaurants Assn.19; Ram Krishna Dalmia10; Welfare Association, A.R.P. .....

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s, 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 and financial instit .....

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should classify the debt as a non-performing asset; Section 2(o) of the SARFAESI Act enables only a bank or a financial institution to classify an account as a non-performing asset; it is only in cases where the secured creditor is empowered to declare the assets as non-performing, would Section 13(2) be attracted; as the debenture holders do not have any security interest, they cannot be permitted to invoke the provisions of the Act through another i.e, the debenture trustee; the three entities .....

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n 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 .....

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ansfer of Property Act, 1882, any security interest created in favour of any secured creditor may be enforced, without the intervention of court or tribunal, by such creditor in accordance with the provisions of the Act. As the mortgaged properties of the petitioner-company constitutes security interest created, in favour of the 1st respondent (secured creditor), the security interest may be enforced, without the intervention of the Court or Tribunal, by such creditor (1st respondent) in accorda .....

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irrespective of the kind of mortgage, the security interest is liable to be enforced without the intervention of the Court in accordance with the provisions contained in Section 13 of the SARFAESI Act. (Mardia Chemicals Ltd.13). It is unnecessary, therefore, for the 1st respondent to file a civil suit to redeem the mortgage, and the provisions of the SARFAESI Act can be invoked for enforcement of the security interest. By their letter dated 21.06.2013, the LIC informed the debenture trustee (the .....

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iental Bank of Commerce on 20.06.2013. The Debenture Trustee issued notice dated 15.07.2013 informing the petitioner that they, in their capacity as a debenture trustee for the unlisted Secured Non Convertible Debentures issued by the petitioner aggregating to ₹ 1050 million, were issuing notice under Section 13(2) of the SARFAESI Act; the NCDs were secured by hypothecation of all the movable properties, including plant and machinery, and rights under insurance contracts relating to such p .....

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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 .....

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of debentures effectively. Section 117B(3) enables a debenture trustee to take such steps as he may deem fit to ensure that the assets of the company issuing the debentures, and each of the guarantors, are sufficient to discharge the principal amount at all times; to ensure that the company does not commit any breach of the covenants and provisions of the trust deed; and to take reasonable steps to remedy any breach of the covenants of the trust deed, or the terms of issue of the debentures. Sec .....

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security interest in their favour. These securities are held by the debenture trustee for the beneficial interest of the debenture holders. Debentures are very often secured by a trust deed by which property is mortgaged to the trustees, for debenture holders, upon trust if the company makes default, to sell and pay off the debentures. Debentures are frequently constituted and secured by a trust deed conveying property of the company to trustees in favour of the debenture holders, regulating th .....

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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 ; N. N. Sircar and S. C. Sen The Indian Co .....

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hey would do so as trustees for, and for the benefit of, the debenture holders. (Messrs. Chowringhee Properties Ltd24). Section 13(2) stipulates that where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of a secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as a non-performing asset, then the secured creditor may require the borrower, by notice in writing, .....

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on of the debentures issued by the borrower company, in view of Section 117-B of the Companies Act which requires the borrower-company to appoint a debenture trustee before it issues debentures, and to create a security interest in their favour for due repayment of the amount due on redemption of the debentures. In view of this statutory requirement, while banks/financial institutions can declare the account of a borrower, who commits default in repayment of a secured debt, as a non-performing a .....

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secured debt, to be classified by the secured creditor as a non-performing asset, before the secured creditor can require the borrower, by notice in writing, to discharge in full his liabilities to the secured creditor. The petitioner-company has been granted financial assistance, in the form of subscription of its debentures, by banks and financial institutions. As such it is a borrower within the meaning of Section 2(f) of the Act. Section 2(j) defines default to mean non- payment of any prin .....

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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 institut .....

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rustee, are secured creditors within the meaning of Section 2(zd) of the Act, reference to a secured creditor, in Section 13(2), is both to the banks/financial institutions and to the debenture trustee. In so far as Section 13(2) requires the account of a borrower, who makes default in repayment of a secured debt, to be classified as a non-performing asset, reference to the secured creditor is to the banks and financial institutions which have extended financial assistance to the borrower. On th .....

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eement (debenture trust deed), makes any default in repayment of the secured debt, and his account in respect of such debt is classified by the secured creditor (LIC, CB and OBC) as a non-performing asset, then the secured creditor (debenture trustee) may require the borrower (petitioner company), by notice in writing, to discharge in full his liabilities to the secured creditor (LIC, CB & OBC) within sixty days from the date of the notice, failing which the secured creditor (debenture trust .....

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e secured asset.Action taken by the 1st respondent as a debenture 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 posses .....

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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 such assets and documents to the secured creditor. Section 14(2) stipulates that, for the purpose of securing compliance with the provisions of Section 14(1), the Chief Metropolitan Magistrate or the District Magistrate may take or cause to b .....

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