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2016 (3) TMI 601 - BOMBAY HIGH COURT

2016 (3) TMI 601 - BOMBAY HIGH COURT - TMI - Debenture-trustee initiation proceedings before the Debt Recovery Tribunal - Whether a debenture trustee suing on behalf of the debentureholder for recovery of sums payable to the debentureholder can file a suit on the original side of this Court since suit is for recovery of the debt? - Held that:- On plain reading of clause (g) of section 2 it appears that the word `Debt' has been given a very wide meaning. It means any liability which is claimed as .....

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onfers jurisdiction on the DRT to deal with the applications made by the banks and financial institutions for recovery of debts “due to such banks and financial institutions”. Thus, DRT can entertain an application for recovery provided the application is made by a bank or a financial institution for the recovery of debt due to such bank or financial institution. If recovery is sought of a debt which is not due to a bank or a financial institution, the DRT will not get jurisdiction under section .....

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of Regulation 2 defines a debenture by giving the same meaning to it which is provided in subsection 12 of section 2 of the Companies Act,1956.

It is the obligation of the debenture trustee to enforce the security in the interest of the debenture holders. Moreover, it is the obligation of the debenture trustee to carry out such acts as are necessary for the protection of the debenture holders and to do all the things necessary in order to resolve the grievances of the debenture holde .....

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f section 17. Such proceedings will not be the one to recover the debt due and payable to the bank itself. In such a case, the jurisdiction of a Civil Court is not excluded. After the decision of the Division Bench in the case of Krishna Filaments, section 17 has not undergone any amendments. The definition of financial institution was amended for including therein a securitisation company or a reconstruction company which has obtained a certificate under section 3(4) of the Securitisation Act - .....

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2015 expressed an opinion that the following questions should be decided by a larger Bench of this Court. The said three questions read thus: (i) Whether a debenture trustee suing on behalf of the debentureholder for recovery of sums payable to the debentureholder can file a suit on the original side of this Court since suit is for recovery of the debt? (ii) Whether such proceedings can be initiated by the debenturetrustee before the Debt Recovery Tribunal? (iii) Whether the judgment in the case .....

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e will be necessary. 4 The appellant is a banking company incorporated under the provisions of the Companies Act,1956. It is a scheduled bank within the meaning of the Reserve Bank of India Act,1934. The appellant is the original plaintiff. For the sake of convenience, the parties are hereafter referred by their status before the learned Single Judge. The first defendant is a company carrying on business of manufacturing, producing, distributing, importing, exporting, buying, selling and dealing .....

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ntures aggregating ₹ 997 lacs) issued by the first defendant. A suit was filed on 7th February 2002 by the plaintiff in its capacity as a debenture trustee for the recovery of the amounts payable by the first defendant under 12.5% secured, redeemable and nonconvertible debentures aggregating ₹ 997 lacs together with interest, costs and charges as well as other monies payable at the contractual rates in accordance with the terms of the issue of debentures. A Notice of Motion was taken .....

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r dated 6th January 2015, the learned Single Judge upheld the contentions of the first defendant and held that this Court will not have jurisdiction to entertain and try the suits. Accordingly, the suits before him were ordered to be returned for presentation to the appropriate Debt Recovery Tribunal. The plaintiff has taken an exception to the said Judgment and Order dated 6th January 2015 by preferring the present Appeal. 6 Before the learned Single Judge, the plaintiff relied upon a decision .....

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ecovery of Debts Due to Banks and Financial Institutions Act, 1993 (for short RDB Act ), the suit before the Civil Court was barred and only the DRT shall have exclusive jurisdiction to entertain and try the suit. The first defendant before the learned Single Judge relied upon another decision of a Division Bench of this Court in the case of Alpha and Omega Diagnostics India Limited Vs. Asset Reconstruction Company (P) Limited 2010 (5) All M.R. 553 by contending that in paragraphs 28 to 30 of th .....

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d out that in paragraph 6, a specific point for determination was framed on the issue of jurisdiction. He pointed out that the appeal before the Division Bench arose out of suit a filed by the Industrial Development Bank of India (for short IDBI') as a debenture trustee. There was an agreement between Krishna Filaments Limited and IDBI. The suit was filed by the IDBI for recovery of the amounts due and payable under the debentures which were subject matter of the agreement between Krishna Fi .....

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section 2 of the RDB Act. He pointed out that the Division Bench held that a suit will lie before the DRT provided it was filed by a bank or a financial institution for recovery of the amount payable to itself. He urged that the suit filed by a bank or a financial institution as a debenture trustee will be a suit to recover the amount payable to the debenture holders. He urged that such a suit is not a suit filed by a bank for recovery of the amount payable to itself. 9 He invited our attention .....

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ead in the context of the facts of the case before it and the issues framed which are reflected from paragraphs 15 and 16 of the Judgment. Inviting our attention to the facts of the case before the Division Bench in the said decision, he urged that the decision and in particular what is observed in paragraphs 28 and 30 will have to be understood in the light of the peculiar facts of the case. The learned senior counsel submitted that the decision of Krishna Filaments Limited was noted by the Ape .....

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nt case, the plaintiff is acting as a debenture trustee in relation to the debentures issued by a limited company (the first defendant). He urged that the plaintiffbank is not suing to recover its own dues. 10 The learned counsel for the first defendant invited our attention to the averments made in the plaint in the present case. His basic submission is that the averments made in the plaint are completely contrary to the stand taken by the plaintiff before this Court. His submission is that the .....

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int to show that the plaintiff is not trying to recover the debt due to itself. His submission is that it cannot be inferred that the suit is filed by the plaintiff in its capacity as a debenture trustee to recover the dues of the debenture holders. He fairly pointed out the prima facie observations in the decision of this Court in the case of Industrial Credit and Investment Corporation of India Limited vs. Veena Textiles Ltd. And others 2001 (vol 104) Company Cases Bombay 503. He relied upon t .....

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ebts Recovery Tribunal and others (1999) 4 SCC 69. He submitted that the Apex Court has held that the expression debt in the RDB Act has to be given widest meaning so as to include any liability which is allegedly due from any person by a bank during the course of any business activity undertaken by the bank. 11 The learned counsel for the intervenor relied upon the decision of the Apex Court in the case of ICDS Ltd. vs. Beena Shabber & another (2002) 6 SCC 426. 4 2001 (vol 104) Company Case .....

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of RDB Act sues as a debenture trustee for the recovery of sums payable to the debenture holders. Whether a particular suit will fall in the said category is a matter to be decided in each individual case. The question is whether such a suit can be filed on the Original Side of this Court or whether only the DRT will have exclusive jurisdiction to entertain such a suit. 13 It is, therefore, necessary to consider the material provisions of the RDB Act. The preamble of the Act provides that the Ac .....

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ing not less than one lakh rupees, as the Central Government may, by notification, specify. (emphasis added) 14 The debt is defined in clause (g) of section 2 which reads thus: (g) debt means any liability (inclusive of interest) which is claimed as due from any person by a bank or a financial institution or by a consortium of banks or financial institutions during the course of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time .....

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ity to entertain and decide applications from the banks and financial institutions for recovery of debts due to such banks and financial institutions. (2) An Appellate Tribunal shall exercise, on and from the appointed day, the jurisdiction, powers and authority to entertain appeals against any order made, or deemed to have been made, by a Tribunal under this Act. (emphasis added) 16 Section 18 excludes the jurisdiction of other Courts and Authorities to deal with the matters specified in sectio .....

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ement of the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012 under the MultiState Cooperative Societies Act,2002 (39 of 2002) shall be continued and nothing contained in this section shall, after such commencement, apply to such proceedings. 17 On plain reading of clause (g) of section 2 it appears that the word Debt' has been given a very wide meaning. It means any liability which is claimed as due from any person by a bank or a financial institution or by .....

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e by the banks and financial institutions for recovery of debts due to such banks and financial institutions . Thus, DRT can entertain an application for recovery provided the application is made by a bank or a financial institution for the recovery of debt due to such bank or financial institution. If recovery is sought of a debt which is not due to a bank or a financial institution, the DRT will not get jurisdiction under section 17. 18 It will be necessary to make a reference to the Regulatio .....

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h is provided in subsection 12 of section 2 of the Companies Act,1956. Regulation 15 of the said Regulations provides for the duties of the debenture trustees which reads thus: Duties of the debenture trustees. 15. (1) It shall be the duty of every debenture trustee to- (a) call for periodical reports from the body corporate; (b) [25] [***] (c) take possession of trust property in accordance with the provisions of the trust deed; [26][(ca) supervise the implementation of the conditions regarding .....

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ment letter has been issued and debenture certificate is to be issued after registration of charge, the debenture certificates have been dispatched by the body corporate to the debenture holders within 30 days of the registration of the charge with the Registrar of Companies;] (ii) debenture certificates have been dispatched to the debenture holders in accordance with the provisions of the Companies Act; (iii) interest warrants for interest due on the debentures have been dispatched to the deben .....

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solve the grievances of the debenture holders. 20 Now we turn to the decision of the Division Bench in the case of Krishna Filaments Limited. The said decision is in an appeal arising out of the order passed by the learned Single Judge of this Court on a Notice of Motion filed by the first defendant in a suit in which IDBI was the plaintiff for raising an issue of jurisdiction. The Notice of Motion was dismissed. Against the said order, an appeal was preferred. A specific contention was raised b .....

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aragraph 6 of the decision which reads thus: 6. Thus the main point for determination arising in this appeal is whether the suit claim is for recovery of a debt due to a bank or a financial institution. An answer on this point will decide whether this Court has jurisdiction to try and entertain this suit. (emphasis added) 21 The Division Bench considered the statements of objects and reasons of the RDB Act. Paragraph 24 and 25 of the said decision read thus: 24. On the other hand, it was pointed .....

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institutions and giving them the power, impliedly coupled therewith a duty to act in the interest of the debenture holders. In the present case, the predominant debenture holders were either banks or financial institutions of mutual funds or insurance companies. The respondent No. 1 was acting on their behalf. Having considered the kind of arrangement that is created, it is very clear that though certain rights and responsibilities are given to the debenture trustees, that does not mean that th .....

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cial institution. It was also emphasised that the transaction has arisen during the course of a business activity which is undertaken under a law for the time being in force. As far as this aspect is concerned, there can be no dispute about this. However, if the phrase any liability claimed by a bank or a financial institution is read to mean any claim by such a body even for others, then in that case all sorts of claim by such bodies would get covered under this definition. It was therefore rig .....

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fore, it would become relevant to examine as to what was the intention in creating the Tribunal. Was it created as a forum for all sorts of claims by banks and financial institutions or whether it was meant for claims where the recovery was due to the bank or financial institution or whether it was meant for claims where the recovery was due to the bank or financial institutions? The reference to Maxwell on interpretation in the judgment of the Apex Court in the case of Workmen of Dimakuchi Tea .....

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it is enacted to establish the Tribunals for expeditious adjudication and recovery of debts due to the banks and financial institutions. The phrase debts due to banks and financial institutions also occurs in section 17 of the RDB Act. Therefore, when section 2(g) uses the phrase any liability claimed by a bank or a financial institution , it will have to be read as a liability claimed by the bank on its own behalf and for itself. Otherwise, as stated above, all other types of suits filed by ban .....

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r of bank suits pending wherein ₹ 5622 crores of the public sector banks and ₹ 391 crores of the financial institutions were blocked as on 30th September 1990. The Reports of the Committees and the statement of objects and reasons emphasise that a separate Tribunal to recover these amounts was required to be set up so that these funds are realised for productive purposes. These documents do not in any way emphasise the role of the banks in discharge of their other activities. Besides .....

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mal Civil Courts. Legislature has not enacted that it wanted to treat suits by banks and financial institutions for such purpose differently only because the claims were by banks and financial institutions. The intention as seen from all the aforesaid documents in setting up of the Tribunals was only to release the blocked assets of the banks. From this point of view, the phrase any liability claimed by a bank or a financial institution occurring under the definition of a debt under section 2(g) .....

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to banks and financial institutions. Therefore, the Division Bench came to the conclusion that the suit filed by the IDBI cannot be said to be a suit for recovery of debt due to itself, and therefore, section 17 of the RDB Act was not attracted. On plain reading of section 17, the view of the Division Bench seems to be correct. The DRT will get exclusive jurisdiction only when a bank/financial institution claims recovery of a debt due to it. The law is well settled. The exclusion of jurisdictio .....

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ment of the Original Application was filed by the first respondentAsset Reconstruction Company (I) Ltd. The first respondent claimed that Oriental Bank of Commerce by an assignment agreement dated 27th June 2008 assigned all the financial assistance granted by the said bank to the petitioners together with all underlying security, interest and all its title to the first respondent. Based on the said document dated 27th June 2008, the first respondent company claimed impleadment in the Original A .....

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ion for amendment, even the said contentions raised by the petitioners was taken up for consideration and the said contentions were rejected while allowing the amendment as prayed for. An appeal was preferred by the petitioners against the said order of the DRT before the DRAT which was dismissed. The challenge in the writ petition before the Division Bench was to the said orders of the DRT and DRAT. It will be necessary to consider what were the submissions made by the petitioners before the Di .....

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ecover, then, the application for amendment, could not have been allowed in law. In other words, when the jurisdiction of the Tribunal could not have been exercised nor had the Tribunal any power or authority in this case, then, allowing the application for amendment would mean conferring jurisdiction on a Tribunal which it does not possess in law. Mr. Samdani submits that jurisdiction cannot be conferred by consent of parties. (emphasis added) 25 The issue which arose before the Division Bench .....

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Bench thereafter considered the amendment made to the definition of financial institution in clause (h) of section 2 the RDB Act by adding clause (ia) to it. The clause (ia) provided that even a securitisation company or a reconstruction company which had obtained a certificate of registration under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short the Securitisation Act ) will be included in the definition of a financial institu .....

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his insertion appears to be the enactment of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Act 54 of 2002). This latter Act came to be enacted on 17th December, 2002 and it is to regulate Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest and for matters connected therewith or incidental thereto. Incidentally the word debt defined in the Securitisation Act reads thus:- 2(ha) debt shall have the meanin .....

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) and reads thus:- 2(za). Securitisation company means any company formed and registered under the Companies Act, 1956 (1 of 1945) for the purpose of securitisation. 19. Further, the word reconstruction company is defined in section 2(v). The other definition that is relevant for our purpose is definition of the term secured creditor appearing in section 2(zd). 2(zd). Secured Creditor means any bank or financial institution or any consortium or group of banks or financial institutions and includ .....

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. 27 Thereafter, the Division Bench considered the provisions of Securitisation Act. In paragraph 27, the the Division Bench dealt with an argument of the petitioners based on the decision in the case of Krishna Filaments Limited. Paragraph 27 and 28 of the decision reads thus : 27 If these provisions, bearing in mind the object of the RDB Act are perused together with the relevant provisions of the Securitisation Act, then, it will not be possible to agree with Mr. Samdani that the restricted v .....

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there was any doubt about a debt which is assigned by a bank or financial institution, being recovered by filing an application before DRT established under section 3 of the RDB Act, that is cleared by insertion of subsection (ia) in section 2(h) of the RDB Act. That insertion together with the wide wording of the term debt is enough to reach the conclusion that the securitisation company or reconstruction company contemplated by the Securitisation Act can step in and proceed with the matter/ a .....

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he Securitisation Act has been reproduced by us precisely with this intent. Subsection (1) thereof opens with a non obstante clause and, therefore, any agreement or law notwithstanding, the securitisation company or reconstruction company may acquire financial assets of any bank or financial institutions in the manner set out therein. It is then provided that if bank is a lender in any financial assets acquired by the securitisation company or reconstruction company, then, such company shall, on .....

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cial assets, if pending by or against the bank or financial institution, the same does not abate nor is discontinued. It is in no way prejudicially affected, by reason of acquisition of financial assets by securitisation or reconstruction company, as the case may be, but it shall continue and can be prosecuted and enforced by or against securitisation company or reconstruction company as the case may be. Therefore, the acquisition of rights or interest in financial assets with their legal effect .....

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eproduced above. It is not as if the provisions are one sided. While it is permissible for the Securitisation or Reconstruction Company to acquire rights or interest in financial assets, the Legislature has taken care that the suits or proceedings instituted by the Bank or Financial institutions would not abate. At the same time, proceedings against the bank or financial institutions will not abate and can be continued against the securitisation or reconstruction company, as the case may be. If .....

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that they are enacted in public interest and for expeditious recovery of public dues, we cannot ignore the said statutory Mandate, and are, therefore, unable to accept the narrow and restricted interpretation placed by the petitioners herein. For this very reason, we reject the contentions of Mr.Samdaini.... (emphasis added) 28 In paragraph 29, the Division Bench considered the conclusion in the case of Krishna Filaments Limited which reads thus: 29 Reliance placed by the petitioners on the deci .....

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Bench concluded that the debt is not that of IDBI but was due and payable to the subscribers of the debentures. It is only in the light of this factual position that the Division Bench concluded that the debt is not that of IDBI but it has recovered it in Trust for the debenture holders. Therefore, the suit is maintainable on the original side of this Court. In other words, the Civil Court's jurisdiction is not ousted by the RDB Act, is the conclusion based on this unassailable and undispute .....

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rrectness of the conclusions recorded by Division Bench in paras 25 and 26 and the interpretation placed on the definition of the word debt , need not be considered. Now, the bank or financial institution as an assignee can proceed under the Securitisation Act, so also under the RDB Act. The term debt as appearing in section 2(g) would have to be considered in the light of the broad interpretation that we have placed on the provisions of the Securitisation Act. The distinction that is drawn by M .....

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onstruction company for securitisation or reconstruction company as the case may be or any other trustee as contemplated by section 2(zd) (iii). The term security interest is defined in section 2(zf) of the Securitisation Act and it means right, title and interest of any kind whatsoever of property created in favour of any secured creditor and includes any mortgage, charge, hypothecation and assignment. Therefore, when the bank or financial institution as in the case of Krishna Filaments is acti .....

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the relevant provisions of Securitisation Act so also to give full effect to the same, it will have to be held that it was permissible for parties such as Arcil to apply for amendments to the Original Application No. 89 of 2005. (emphasis added) 30 We have already considered section 17 of the RDB Act. On plain and simple reading thereof a bank or a financial institution can file applications before the DRT for recovery of debts due to such bank or financial institution . If a bank files an appli .....

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h in the case of Krishna Filaments, section 17 has not undergone any amendments. The definition of financial institution was amended for including therein a securitisation company or a reconstruction company which has obtained a certificate under section 3(4) of the Securitisation Act. It will be necessary to note section 5 of the Securitisation Act which read thus: 5. Acquisition of rights or interest in financial assets.-(1) Notwithstanding anything contained in any agreement or any other law .....

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er of such financial assets to such company on such terms and conditions as may be agreed upon between them. (2) If the bank or financial institution is a lender in relation to any financial assets acquired under subsection (1) by the securitisation company or the reconstruction company, such securitisation company or reconstruction company shall, on such acquisition, be deemed to be the lender and all the rights of such bank or financial institution shall vest in such company in relation to suc .....

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a party or which are in favour of such bank or financial institution shall, after the acquisition of the financial assets, be of as full force and effect against or in favour of the securitisation company or reconstruction company, as the case may be, and may be enforced or acted upon as fully and effectually as if, in the place of the said bank or financial institution, securitisation company or reconstruction company, as the case may be, had been a party thereto or as if they had been issued .....

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ed or be, in any way, prejudicially affected by reason of the acquisition of financial asset by the securitisation company or reconstruction company, as the case may be, but the suit, appeal or other proceeding may be continued, prosecuted and enforced by or against the securitisation company or reconstruction company, as the case may be. 1[(5) On acquisition of financial assets under subsection (1), the securitisation company or reconstruction company, may with the consent of the originator, fi .....

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a reconstruction company acquires financial assets of a bank or a financial institution, by virtue of subsection 2 of section 5, it steps into the shoes of the bank or the financial institution,as the case may be and becomes a lender for all purposes. Therefore, when such securitisation company or reconstruction company files an application for recovery of an amount advanced by a bank or a financial institution whose assets have been acquired by it by assignment or otherwise in a manner provided .....

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Alpha and Omega, the Division Bench rejected the argument of the borrower which is noted in paragraph 10 of the said decision. It is in this context that the following observations in paragraph 27 have been made. In our view, the amendment to the definition of the term Financial Institution as appearing in section 2(h) of the RDB Act and bringing into force of the Securitisation Act is a development post judgment of this Court in Krishna Filaments (supra). In fact, it is precisely to get over th .....

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securitisation company or reconstruction company contemplated by the Securitisation Act can step in and proceed with the matter/application which has been instituted by its predecessorintitle/ assignee/ financial institution. If this interpretation is not placed, then, the very purpose and object of amending the definition of the word financial institution would be defeated. This coupled with the rights that are acquired by securitisation company or reconstruction company by virtue of section 5 .....

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and by holding that the Assets Reconstruction Company (I) Limited the first respondent steps into the shoes of Oriental Bank of Commerce (the applicant before the DRT) which can continue to prosecute the application for recovery before the DRT by virtue of assignment by the said bank. The reason is that the said reconstruction company becomes a financial institution due to inclusion of clause (ia) in clause (h) of section 2 of the RDB Act. In the facts of the case before it, the Division Bench .....

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ng as such or managing a trust set up by such securitisation company or reconstruction company for the securitisation or reconstruction, as the case may be; or (iii) any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created for due repayment by any borrower of any financial assistance. 33 With greatest respect to the Division Bench, we must mention that the definition of the secured creditor does not include a debenture truste .....

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ted by a bank or financial institution. The debenture trustee in the said case was not covered by the definition of secured creditor under section 5(zd) of the Securitisation Act. Therefore, we do not agree with the observations made in paragraph 27 and 30 that the decision in the case Krishna Filaments is no longer a good law. Though the definition of debt in the RDB Act may have been expanded, the section 17 thereof is not amended. Therefore, when a debenture trustee of the kind referred in th .....

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on behalf of or for the benefit of the debenture holders, the DRT will have no jurisdiction to entertain an application for recovery. Hence, the law laid down in the case of Krishna Filament continues to be a good law and to that extent , the observations made as regards the said decision in the case of Alpha and Omega are not correct. 35 The decisions of the Apex Court in the case of United Bank of India and Eureka Forbes Limited lay down that the expression debt has to be given a very wide mea .....

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erable on the date of the application. In ascertaining the question whether any particular claim of any bank or financial institution would come within the purview of the tribunal created under the Act, it is imperative that the entire averments made by the plaintiff in the plaint be looked into and then find out whether notwithstanding the speciallycreated tribunal having been constituted, the averments are such that it is possible to hold that the jurisdiction of such a tribunal is ousted. Wit .....

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