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J.M. Financial Asset Reconstruction Company Versus Indus Finance Ltd. And Quantum Ltd.

2017 (11) TMI 780 - NATIONAL COMPANY LAW TRIBUNAL, MUMBAI

Insolvency procedure - whether the word “may” employed in Section 7(5)(a) of Insolvency & Bankruptcy Code, 2016 can be stretched to invalidate the purpose and object of the Section 7 of the Code or not? - SARFAESI proceeding - Held that:- Generally, the word “may” or the word “shall” cannot be used to go against the mandate of the Section - mandate is if debt and default is ascertained, if other conditions are fulfilled, then the petition has to be admitted. If that is so, the Adjudicating Autho .....

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t. - Normally the word “shall” and “may” are construed imperatively Lord Brougham in Queen v. Allooparao [1847] 3MLA 488 P 492, it has been held “if the words are it “shall and may” be so and so done, by such and such officer and body then the word “may” is held in all soundness of construction to confer, a power but the word “shall” is held to make that power, or the exercise of that power compulsory.” - Insolvency & Bankruptcy Code operates in the following manner: - 1. Notwithstan .....

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its property including any action under SARFAESI Act, 2002, it can’t be said that sale in progress will not remain under suspension during the moratorium period. - As already said sale is not concluded because full payment is not made till date and confirmation has not been given as prescribed under sub Rule 6 of Rule 9 of Enforcement Rules, which are notified taking power from Section 13 of SARFAESI Act which is meant for enforcement of security interest. - IVN.P. NO. 02 OF 2017 & M. A. 222 .....

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orporation Bank assigned the debt availed by the Corporate Debtor herein) for recall of the order of Moratorium declared in CP 1043/I&B/NCLT/MB/MAH/2017 filed against the corporate debtor seeking clarification: - that the admission order dated 29.5.2017 declaring moratorium against the Corporate Debtor does not operate and/or does not in any manner effect the rights of the applicant to enforce its security and/or the rights of the third party to enjoy the property purchased by it in public a .....

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pplicant/secured creditor in MAas JM , the purchaser of the property in SARFAESI proceedings, namely Omni Active Health Technologies Ltd. as Omni , Learned Debt Recovery Tribunal, Mumbai as DRT . 3. JM is an asset reconstruction company incorporated under Companies Act, 1956 and thereafter registered u/s 3 of SARFAESI Act. For the Corporate debtor defaulted in making repayment of the loan facility availed on mortgage of its assets situated at Village Maan, Taluka Mulshi, District Pune from Corpo .....

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the DRT on 5.5.2014 ordered this Corporate Debtor to pay to JM a sum of ₹ 14,58,46,527 with further interest @12% per annum from 9.5.2013 till the date of realisation. In addition to the aforesaid original application, JM has also taken measures under the provisions of SARFAESI Act by issuing notice u/s 13(2) and obtained an order u/s 14 for getting necessary assistance from the District Magistrate for taking physical possession of the immovable property mentioned above. Since the Corporat .....

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sale price on the same day i.e., 28.2.2017 and the balance sale price payable on or before 14.3.2017. Again when this Corporate Debtor filed stay application on 21.3.2017 on issuance of sale certificate to Omni DRT Mumbai. 4. Since the Corporate Debtor expressed its readiness to redeem the mortgaged security by repaying the debt amount of ₹ 19.02 crores within a period of six months, the DRT by an order dated 21.3.2017 stayed the proceedings subject to the Corporate Debtor depositing a su .....

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nt of ₹ 5 crores as directed by the Ld. DRT. Surprisingly, Indus who moved this Company petition filed an Intervening Application on 18.4.2017 before the Ld. DRT that it was willing to deposit ₹ 5 crores on behalf of the Corporate Debtor and also deposit the remaining balance of ₹ 14.26 crores within a period of six months, but the Ld. DRT did not entertain that application from by treating ₹ 5 crores deposited by Indus as paid by the Corporate Debtor. Though ₹ 5 cr .....

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f Insolvency & Bankruptcy Code, 2016 before this Bench. JM further submits that this Bench admitted the CP u/s 7 of Insolvency & Bankruptcy Code on 29.5.2017 declaring moratorium over the Corporate Debtor. 5. Now JM submits that this Corporate Debtor threadbare litigated with JM at all stages, above this, Indus, sailed along with the Corporate Debtor before DRT until before initiating Insolvency proceedings before this Bench. JM says since Indus filed this CP colluding with the corporate .....

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transaction, JM says that the impugned order dated 29.5.2017 shall have no effect on the concluded sale, therefore this sale transaction cannot be read down as hit by the moratorium declared on 29.5.2017. The Applicant further submits that the sale of the impugned asset by JM in enforcement of its security in view of the default committed by the Corporate Debtor would not in any manner prejudice the rights of Indus; therefore, JM has sought the reliefs as mentioned above. 6. On this MA, the argu .....

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recalled in the name of fraud. 7. Indus submits that this Miscellaneous Application is a futile attempt to try and circumvent the moratorium declared by the order dated 29.5.2017 on a false and dishonest assumption that sale in respect of the only fixed asset owned by the Corporate Debtor situated at Rajiv Gandhi 1T-BT Park, Phase II, Hinjewadi, Pune is a concluded sale in favour of Omni. Indus further submits, in case, the purchase amounted to concluded sale, the DRT, subsequent to such purcha .....

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ontrary to the averments of the Affidavit. The Indus Counsel further submits that the asset was sold for low price, though rate of the asset is higher, if it fetches right value Indus could also get something from the corporate debtor company. In this situation, as no other option available to protect its interest, Indus approached this Authority with bonafide intention either to redeem the Corporate Debtor for impending insolvency and safeguard its claim or in the alternative to liquidate the C .....

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Indus filed the CP u/s 7 of the Insolvency & Bankruptcy Code, 2016, but not to frustrate the claim of JM. It can t be said that Indus manoeuvred the proceedings to frustrate the rights of JM. Assuming Indus had not initiated these proceedings, could it become an impediment to the Corporate Debtor to initiate proceedings u/s 10 of Insolvency & Bankruptcy Code, 2016? Definitely not, therefore, it could not be said that Indus moved this petition by colluding with the Corporate Debtor. Indu .....

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ncy & Bankruptcy Code for recall of the order unless it is vitiated by fraud. The Counsel says that this Bench having elaborately dealt with in the order dated 29.5.2017 in respect to SARFAESI proceeding effect upon section 7 petition, no merit being found on that score, this Bench declared moratorium by admitting the Petition. 9. The counsel of Omni also vehemently argued by filing separate MA saying that Omni interest has been stuck for it has already paid 25% of the sale price and in purs .....

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as grievance u/s 65 of IB Code or not? Point 1 for consideration: Whether the sale allegedly confirmed is hit by declaration of moratorium u/s 14 or not? Before going into the legal preposition on this point, let us see what the factual situation in this case is. It is a fact that SARFAESI proceedings were initiated against the immovable asset of the company, in pursuance thereof, the sale of the said asset was also initiated u/s 13 of SARFAESI Act. In furtherance of it, Omni paid 25% of sale p .....

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ed ₹ 5 crores before the DRT expressing their willingness to pay remaining balance of ₹ 14.06 crores within six months while the said application was pending before DRT, since Indus coming forward for making payment has not been agreed by the Ld DRT, Indus moved this Company petition u/s 7 of Insolvency & Bankruptcy Code on which this Bench declared moratorium on 29.5.2017 by admitting this Company Petition after having dealt with the issue of pendency of SARFAESI proceedings bef .....

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Enforcement of Security Interest wherein a section has been culled out to deal with enforcement of security interest, i.e. Section 13 under which sub- section 6 deals with transfer of secured interest by the secured creditor. In respect to Enforcement of Security Interest, the right of transfer of title to third party is set out in the section 13(6), how it has to be accomplished is set out in The Security Interest (Enforcement) Rules, 2002 . These Rules have been drawn out in exercise of power .....

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notice of sale is published in newspapers as referred to in the proviso to sub-rule (6) or notice of sale has been sered to the borrower. (2) The sale shall be confirmed in favour of the purchaser who has offered the highest sale price in his bid or tender or quotation or offer to the authorised officer and shall be subject to confirmation by the secured creditor: Provided that no sale under this rule shall be confirmed, if the amount offered by sale price is less than the reserve price, specif .....

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(4) The balance amount of purchase price payable shall be paid by the purchaser to the authorised officer on or before the fifteenth day of confirmation of sale of the immovable property or such extended period as may be agreed upon in writing between the parties. (5) In default of payment within the period mentioned in sub-rule (4), the deposit shall be forfeited and the property shall be resold and the defaulting purchaser shall forfeit all claims to the property or to any part of the sum for .....

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ed to discharge the encumbrances and any interest due thereon together with such additional amount that may be sufficient to meet the contingencies or further cost, expenses and interest as may be determined by him. (8) On such deposit of money for discharge of the encumbrances, the authorised officer may issue or cause the purchaser to issue notices to the persons interested in or entitled to the money deposited with him and take steps to make the payment accordingly. (9) The authorised officer .....

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n conducting sale, under Sub Rule 2, the said sale shall be confirmed in favour of the purchaser who has offered the highest sale price in the bid to the authorised officer (authorised officer - an officer as specified under the Act) subjecting to confirmation by the secured creditor. The balance of the purchase price payable shall be paid by purchaser on or before 15th day of confirmation of sale of the immovable property (determination that particular purchaser is the highest bidder) or such e .....

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has been made, after compliance of sub rule 2 to 4, on confirmation of sale by the secured creditor, the authorised officer, for the first time exercising the power of sale will issue certificate of sale of the immovable property in favour of the purchaser in the form given in Appendix V to these Rules. By giving a combined reading to sub rules 2 to 6, we will find two confirmations, one confirmation appears in sub-rule 2 - here in this sub-rule, authorised officer who is conducting auction will .....

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is process of auction is given to authorised officer, he will confirm the same, therefore it can t be said confirmation given by authorised officer in Sub Rule -2 cannot be equated to making sale absolute. That apart, in sub rule - 2 itself, it is made clear that such confirmation by authorised officer is subject to confirmation by the secured creditor. Thereafter, we will not find word confirmation anywhere except in sub- rule 6. Sub-rule 3 speaks of payment of 25% of sale price on the same day .....

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s of payment have been complied with on such confirmation, the authorised officer, exercising the power of sale will issue the certificate of sale of the immovable asset in favour of the purchaser in the form given under these Rules. By this incisive reading, it is evident that the word confirmation employed in sub rule -2 is different from the word confirmation employed in sub rule- 6, the context, object and purpose of employment of the word confirmation at these two places is different. The p .....

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y in para materia to the procedure laid under Order 21 of CPC. In Order 21 of CPC also, when immovable property has been sold in auction, the purchaser, under Order 21 Rule 84, the purchaser, just as mentioned in Rule 9 (3) of Security Interest (Enforcement) Rules 2002, shall pay immediately after such declaration(the word used in Sub-Rule 2 is confirmation) a deposit of 25% on the amount of his purchase to the officer conducting the sale (in SARFAESI it is an authorised officer) and in default .....

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ty Interest (Enforcement) Rules, 2002. Striking difference is, conspicuous absence of provisions similar to Order 21 Rules 89-91 of CPC in Security Interest (Enforcement) Rules, 2002, such as any person claiming interest in the property, in between, can file application under Rule 89 of Order 21 of CPC likewise, application on the ground of irregularity or fraud under Rule 91 of the Order 21 or entitlement of purchaser to seeking set-aside of sale on the no saleable interest to Judgement Debtor .....

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rmation to be given by Secured Creditor under Sub-Rule 6 of Rule 9 in SARFAESI is equivalent to confirmation by court under Rule 92 of Order 21 of CPC. It is contextual if I say here itself that Courts have laid ratio that issuing sale certificate to purchaser under Rule 94 of Order 21 as administrative in nature, it is right, here in the case of SARFAESI also, if Sub Rule 4 and first part of Sub-Rule 6, i.e., confirmation of sale by the secured creditor after full payment is made complete, then .....

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and the purchaser cannot say that since only sale certificate is to be issued, it has to be treated as sale process is complete under section 13 of SARFAESI Act. In effect, transfer has not been effected, leave of issuing sale certificate. On the top of it, Enforcement Rules have come into existence by exercising power under Section 13 which is earmarked for enforcement of security interest therefore, as long as full payment has not been made, as long as sale has not been confirmed by the secur .....

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e confirmed but whereas, the sale will be confirmed only after entire payment has been made, in the case of sale under CPC it will be confirmed by the Court whereas under SARFAESI Act, sale will be confirmed by the purchaser under sub-rule 6 of Rule 9 of The Security Interest (Enforcement) Rules, 2002, therefore, confirmation of sale price under sub-rule 2 cannot be construed as confirmation of sale by the secured creditor as envisaged under sub-rule 6 of Rule 9 of the Enforcement Rules. It is t .....

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sition, the sale cannot be called as concluded sale, the only difference in CPC and Enforcement Rules is, in CPC, Civil Court will confirm and will make the sale absolute, whereas as here secured creditor will confirm sale, but the common denominator in both the situations as above stated is payment in full by the purchaser thereafter confirmation by the secured creditor in the case of Enforcement Rules and in the case of civil case, it is before Civil Court. Now let us look into Section 14 of I .....

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recourse for enforcement of any security interest created by the Corporate Debtor is in progress, it has to be suspended. By seeing this provision, we are in no doubt that whenever any issue to enforcement of security interest created by the Corporate Debtor is pending that has to be suspended in the moratorium period. Since sale has already been construed as not a concluded sale as prescribed under Enforcement Rules, the sale proceedings in progress under SARFAESI proceedings are covered under .....

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e status of the petitioner in that case, it is also not disputed by JM that Indus is not a Financial Creditor, since Insolvency & Bankruptcy Code entitles a Financial Creditor to initiate proceedings u/s 7 against the Corporate Debtor regardless of SARFAESI proceedings pending, how can it is attributed to the petitioner or corporate debtor that company petition was filed with a fraudulent intention to frustrate the sale in progress under SARFAESI Act? In respect to SARFAESI proceedings JM ta .....

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we have not seen that Indus fraudulently curtailing the legitimate rights of JM or Omni. When this Financial Creditor (JM) has a right to initiate proceedings in accordance with law, this Bench obviously to decide lis come before this Adjudicating Authority, and pass a valid order declaring moratorium on admitting the Petition filed by the Petitioner. When law permits to pass an order notwithstanding the proceedings pending before some other forum, this applicant is not expected to jump to a co .....

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ution of insolvency therefore, the situation does not warrant this Bench to invoke jurisdiction u/s 65 of the Insolvency & Bankruptcy Code, 2016, or to recall the order validly passed. Accordingly, this point is also decided against the applicant herein. 11. JM Counsel has relied upon Indian Bank v. Satyam Fibres (India) Pvt. Ltd. [1996] 5 SCC 550; S.P. Chengalvaraya Naidu v. Jagannath AIR 1994 SC 853 to say that when fraud is committed, the Court is empowered to recall its judgement when fr .....

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n to this applicant at the time of passing impugned order, to which our answer is there is no obligation or a mandate upon this Bench to give a notice to another Financial Creditor at the time of hearing insolvency petition therefore, passing an order before hearing JM would not become a ground to say that hearing has not been given to JM because law says that notice is only to be given to the Corporate Debtor therefore, unless mandate is prescribed to hear a particular party before passing an o .....

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In Re (Company petitio IB-39 (PB)/2017 order dated 4.5.2017) to say that if it is a collusive petition between the creditor and the corporate debtor with a fraudulent intention to frustrate the interest of other financial creditors, it amounts to an attempt to defraud the other creditors, in view of the same, the counsel submits to this Bench to consider this case in the line it was considered by the Principal Bench, NCLT New Delhi. On perusal of the order passed by honourable Principal Bench, N .....

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inancial institution. Here, this Bench having not seen a situation as apparent in the case aforementioned therefore, it is not applicable to say that Petitioner has filed this case with fraudulent intention to frustrate the interest of JM. Moreover, as I already stated the petitioner has brought the pendency of SARFAESI proceedings to the notice of the Adjudicating Authority, basing on those facts, the Adjudicating Authority, i.e. Ld. Member Shri Mukul Shrawat declared moratorium by admitting th .....

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absolute. 15. As to this point is concerned, it has already been decided that sale will become absolute and confirmation of sale will happen only after purchase price is fully paid and the same has thereafter been confirmed by the secured creditor, Since full payment has not yet been paid, sale according to the Enforcement Rules is to be construed as not been confirmed because full payment as envisaged under sub Rule 6 of Rule 9 of Enforcement Rules has not been made and confirmed by secured cr .....

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cordingly the objections to the sale have been dealt with and disposed of in accordance with law and the competent authority has confirmed sale vesting absolute right in the auction purchaser, therefore, the auction purchaser is entitled to sale certificate. 17. On reading this citation, it is apparent that one - it is a case decided under Recovery of Debts due to Banks and Financial Institution Act, 1993, two - the auction purchaser deposited entire sale consideration and three - sale has been .....

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he case supra made an attempt to challenge the orders of DRT and DRAT with an allegation that the Financial institution has not complied Rule 54 of the Rules as well as non-service of Form 17 upon the judgement-debtor. 18. The facts of the present case are contrary to the facts of the case supra, there being an explicit rider under section 14 over all other proceedings covered under Section 14, once this Authority holds that the proceeding pending under SARFAESI falls within the ambit of Section .....

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uisition Act is not to be treated as mandatory in the cases where Government exercised urgent provision (Section 17(4)) to acquire land on urgent basis to cater the needs of the public. 20. The points looking important in the case Supra are as follows: 1. No universal principal of law could be laid as to whether a particular provision on enactment shall be considered as mandatory or directory. It is the duty of the court to try to get at the real intention of the legislature by carefully analysi .....

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id, now the point for determination is whether the word may employed in Section 7(5)(a) of Insolvency & Bankruptcy Code, 2016 can be stretched to invalidate the purpose and object of the Section 7 of the Code or not. Generally, the word may or the word shall cannot be used to go against the mandate of the Section - mandate is if debt and default is ascertained, if other conditions are fulfilled, then the petition has to be admitted. If that is so, the Adjudicating Authority is limited to see .....

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tive enactment, here, shall is read as directory. The guiding force for holding so, is to uphold the scope of the respective enactment. 23. In the analogy taken into consideration in the case Supra, if the point involved in the case is looked into, as to whether SARFAESI proceeding or a provision of SARFAESI Act can be worked into Section 7 of the Code to say that admission of Section 7 petition will amount to public mischief. I fear, not. 24. Normally the word shall and may are construed impera .....

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nconsistent with the provisions of the Code, SARFAESI Act also being an Act dealing with creditor and debtor relation and operation of law in both the enactments being on the same field, Insolvency & Bankruptcy Code will prevail over SARFAESI Act. 2. Section 14 having categorically mentioned that declaration of moratorium will prohibit enforcement of security interest created by the Corporate Debtor in respect of its property including any action under SARFAESI Act, 2002, it can t be said th .....

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