TMI Blog2009 (5) TMI 978X X X X Extracts X X X X X X X X Extracts X X X X ..... al Area, Sandila, district Hardoi. The Directors and promoters themselves mobilized a substantial amount of about ₹ 5 crores for the project and the Bank funding was restricted to ₹ 2.23 crores only which was repayable in 16 instalments commencing from 31.1.1998 till 31.10.2001. 4. The petitioner has further alleged that the land was secured; the buildings were erected; the world's best experts were consulted and brand new machinery was procured by the Company and even the customers for the products were identified and due to problems of minor nature, such as power curtailment etc. arose which in turn were overcome. The petitioner has also alleged that the Company made a request to the State Bank of India to restructure the repayment schedule and the Credit Appraisal Cell of the State Bank of India In its note to the General Manager, Commercial Banking had mentioned that the promoters are having satisfactory track record; the flag-ship company, M/s. Saf Yeast Company. Private Limited having one of its units at Sandila has fully repaid ₹ 100 lakhs term loan as per the repayment schedule and is presently enjoying ₹ 175 lakhs limit from the Napean sea Ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;No Lien Account'. Thus, the total deposit with the State Bank of India was ₹ 47.5 lakhs which is 25 per cent of the final settlement amount of ₹ 190 lakhs. The petitioner has also alleged that thereafter vide letter dated 22.3.2004 sent to State Bank of India the Helios Company had increased their offer from ₹ 190 lakhs to ₹ 195 lakhs and informed the State Bank of India that as soon as the acceptance is received with respect to the revised one time settlement proposal the Helios Company would deposit the balance amount in one single instalment but no effort was made by the State Bank of India to help in the revival of the Company and guidelines issued by the Reserve Bank of India were not followed. 8. The State Bank of India on 16.1.2006 executed a deed of assignment and assigned the assets of the Helios Company in favour of M/s. Kotak Mahtndra Bank Ltd. The petitioner has further alleged that in spite of holding on the deposit of 47.5 lakhs from the Helios Company since 2003. opposite parties 1 to 3 have sold the rights/assets of the Helios Company to the opposite party No. 4 for a meagre amount of ₹ 39.63 lakhs which is even less than the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e petitioner has further alleged that in a most arbitrary and illegal manner, the Debts Recovery Tribunal, Lucknow vide order dated 7.7.2006 allowed the application filed by Kotak Mahindra Bank Ltd. and permitted substitution of Kotak Mahindra Bank Ltd. in place of State Bank of India in T.A. Case No. 263 of 2002. The petitioner has also alleged that the Helios Company filed an application under Section 22(2)(e) of Recovery of Debts Due to Banks and Financial Institutions Act, 1993 for review/recall of the order dated 7.7.2006 and also moved an application under Section 22(2)(b) of Recovery of Debts Due to Banks and Financial Institutions Act, 1993 for production of documents by Kotak Mahindra Bank Ltd. By a composite order dated 12.12.2006, the Presiding Officer of the Debt Recovery Tribunal rejected the applications for production of documents and the application for review/recall was partly allowed and a direction was issued to Kotak Mahindra Bank Ltd. to incorporate the State Bank of India in the array of defendants and thereafter the Helios Company challenged the order dated 7.7.2006 and 12.12.2006, passed by the Debt Recovery Tribunal before this Hon'ble Court by way of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legal manner, in the year 2000, the State Bank of India filed a suit for recovery of dues before the Debt Recovery Tribunal, Jabalpur by raising a claim of ₹ 2.7 crores being the principal amount alongwith interest which was later on transferred to the Debt Recovery Tribunal, Lucknow and during the pendency of suit the Helios Company moved an application before the State Bank of India for one time settlement and on the direction of the State Bank of India, a sum of ₹ 40 lakhs was deposited by the Helios Company in a 'No Lien Account' through cheque dated 20.1.2003 and thereafter the Helios Company also submitted a revised proposal and offered to pay ₹ 190 lakhs as full and final settlement and further a sum of ₹ 7.5 lakhs was also deposited with the State Bank of India giving the total amount of deposit made against the one time settlement to ₹ 47.5 lakhs which is 25 per cent of the one time settlement offer but no effort was made by the State Bank of India although the offer for one time settlement was in accordance with the guidelines issued by the Reserve Bank of India. 17. He further submitted that the Helios Company by letter dated 22.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ignment registered as per the notification dated 6.5.2002. 20. He further submitted that under Section 5 of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 only a Securitisation and Asset Reconstruction Company may acquire financial assets of Banks and Financial Institutions and Kotak Mahindra Bank Ltd. does not have a licence under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. 21. He further submitted that the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 does not permit assignment and since the suit filed by the State Bank of India against the Helios Company and its Guarantors was pending before the Debt Recovery Tribunal and leave of the Debt Recovery Tribunal was not taken prior to the execution of assignment deed, as such, the assignment is not permissible under Section 52 of the Transfer of Property Act. He has relied upon the decision of Hon'ble the Supreme Court in Sanjay Verma v. Manik Roy and Ors. 2007 (25) LCD 313 : 2007 (1) AWC 462 (SC). 22. He further submitted that alongwith the deed of assignment, a not raised affidavit w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aware of Section 8 of the Transfer of Property Act, 1882 which permits transfer of only the principal amount and not the arrears of interest, the principal loan amount of 48 borrowers amounting to ₹ 167.49 crores was transferred by the deed of assignment dated 16.1.2006 in favour of opposite party No. 4 and the State Bank of India cannot be permitted to accept ₹ 39.77 lakhs from a private Bank when admittedly one time settlement offer of the customer of ₹ 195 lakhs was already there and 25 per cent of the said offer, i.e., 47.5 lakhs was already deposited by the Helios Company with the State Bank of India, which is the country's biggest public sector bank. 26. Learned Counsel for the petitioner relying upon Section 141 of the Indian Contract Act, 1872 submitted that position of a guarantor is co-extensive with that of the principal borrower subject to the operation of law and in case the initial agreement of loan in furtherance whereof the guarantee taken is amended, the surety is automatically discharged and in case the deed of assignment dated 16.1.2006 is allowed to subsist, the assignee would have no legal right to proceed against the guarantors inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has purchased the debts from the State Bank of India which are approximately ₹ 167.49 crores, the details of which are more fully described in Schedule B to the deed of assignment and in the deed of assignment, it is clearly mentioned that the opposite party No. 4 is a Bank and nowhere in the deed of assignment it is mentioned that the opposite party No. 4 is a Securitisation Company or Asset Reconstruction Company under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. He further submitted that the Bank as a secured creditor/mortgagee/hypothecatee is the owner of the debt which is payable by borrower to the Bank and the Bank is entitled to deal with such asset as an absolute owner; is entitled to assign such debt and such assignment will not affect the right and interest of the mortgagor in the property. Learned Counsel for the opposite party No. 4 has relied upon the decisions of Hon'ble the Supreme Court in Indu Kakkar v. Haryana State Industrial Development Corporation Limited AIR 1999 SC 296; Khardah Company Limited v. Raymond and Co. (India) Private Limited AIR 1962 SC 1810 and Salim Akbarali Nanji v. Union of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ires the absolute interest in the debt and the underlying security. He has relied upon the decision in Core Healthcare Limited v. Nirma Limited (2007) 138 Comp. Cos. 204. 34. He further submitted that no borrower has a right for one time settlement and it can be done only at the discretion of the bank as granting of one time settlement is nothing but varying the contract between the parties which cannot be done by the Court. He has relied upon the decisions in Maria Plasto Pack (P.) Ltd. v. Managing Director U.P. Financial Corporation. Kanpur and Ors. AIR 2004 All 310 and Haryana Steel and Alloy Ltd. v. I.F.C.I. Ltd. and Anr. AIR 2007 Del 65. 35. He further submitted that the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 does not restrain the Bank from assigning debts with underlying securities to another Bank and as such the argument of the learned Counsel for the petitioner that no permission was taken by the State Bank of India from the Debt Recovery Tribunal before transferring the debts with underlying securities to the opposite party No. 4 through a deed of assignment is devoid of any merit. Learned Counsel for the opposite party No. 4 has referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clearly mentioned that the opposite party No. 4 is a bank and nowhere it is mentioned that the opposite party No. 4 is a securitization company or asset reconstruction company under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and in the affidavit dated 2.5.2006 filed by the opposite party No. 4, it was inadvertently mentioned that the assignment has been taken place as per the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and as soon as the error was brought to the notice of the opposite party No. 4 the same was immediately corrected. He further submitted that by the affidavit dated 2.5.2006, no benefit has been taken by the opposite party No. 4 either in respect of stamp duty or registration in the State of Maharashtra as the stamp duty for a securitisation company or a bank for assignment of debt is the same in the State of Maharashtra. He further submitted that nowhere in the counter-affidavit dated 28.4.2009 it has been stated by the deponent that the opposite party No. 4 is a securitisation company or asset reconstruction company and one of the depa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of the parties that in the year 2000, the State Bank of India has filed a suit for recovery of its dues before the Debt Recovery Tribunal, Jabalpur which was later on transferred to Debt Recovery Tribunal Lucknow and is registered as T.A. Case No. 263 of 2002. It is also not disputed that the Valuers of the State Bank of India had visited the factory premises of the Helios Company as late as October, 2002 and as per their valuation report submitted with the State Bank of India the cost of the unit was about ₹ 3.5 crores and accordingly the petitioner on behalf of Helios Company moved an application before the State Bank of India on 23.12.2002 for one time settlement in accordance with the guidelines of Reserve Bank of India stating, inter alia, that in a final attempt to buy peace and fully conclude the litigation we are making this final offer to the Bank that we are prepared to surrender the unit in its entirety to the Bank alongwith the land, buildings and machinery as is where is and in addition to the above, Helios Company is willing to pay a further sum of ₹ 40 lakhs inclusive of all the legal expenses, stamp duties, registration charges etc. on the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores, which is merely 17.77% of the value of the principal loan amount of each non-performing asset. It is also relevant to mention here that against the one time settlement proposal submitted by the Helios Company a sum of ₹ 47.50 lakhs of the Helios Company was with the State Bank of India in 'No Lien Account' and the opposite parties 1 to 3 have sold the rights/assets/debts of the Helios Company to the opposite party No. 4 for a meagre amount of ₹ 39.63 lakhs which is even less than the company's deposit of ₹ 47.50 lakhs that was lying with the State Bank of India in 'No Lien Account'. 45. It is also not disputed that during the pendency of the instant writ petition, the Additional District Magistrate (Finance and Revenue), Lucknow in proceedings under Section 33 of the Stamp Act has passed an order by which the opposite party No. 4 is directed to pay ₹ 4,74,10,160 being the deficiency of stamp duty and also penalty of like amount, i.e., ₹ 4,74,10,160 plus interest at the rate of 1.5 per cent per month from 16.1.2006 till the date of actual payment. 46. During the course of the hearing, on 4.5.2009 learned Counsel for the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract. They cannot be free from it. Irrespective of the fact as to whatever may have been held in decisions of some American courts, in view of the facts and circumstances and the terms of the contract and other details relating to those matters, that may or may not strictly apply, nonetheless, even in absence of any such decisions or legislation, it is incumbent upon such financial institutions to act fairly and in good faith complying with their part of obligations under the contract. This is also the basic principle of the concept of lender's liability. It cannot be a one sided affair shutting out all possible and reasonable remedies to the other party, namely, borrowers and assume all drastic powers for speedier recovery of N.P.As. Possessing more drastic powers calls for exercise of higher degree of good faith and fair play. The borrowers cannot be left remediless in case they have been wronged against or subjected to unfair treatment violating the terms and conditions of the contract. They can always plead in defence deficiencies on the part of the banks and financial institutions. 49. When the deed of assignment was executed on 16.1.2006, admittedly, an offer of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T.A. Case No. 6 of 2006, which is pending before the Debts Recovery Tribunal, Lucknow. 51. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was enacted by Parliament to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected thereto. The Act enables the banks and financial institutions to realise long-term assets, manage problems of liquidity, asset liability mis-match and improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or reconstruction. The Act further provides for setting up of asset reconstruction companies which are empowered to take possession of secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured assets and take over the management of the business of the borrower. It is admitted case of the opposite parties that Kotak Mahindra Bank Ltd. is not an Asset Reconstruction Company or Securitisation Company. According to Securitisation and Reconstruction of Financial Assets and Enforcem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------- (b) Whether, while permitting Kotak As stated above Kotak Mahindra Bank Limited to carry on the Mahindra Bank Limited business of securitisation or asset has not been granted reconstruction, the Reserve Bank of Certificate of India has given approval in favour of Registration by Kotak Mahindra Bank Limited to carry Reserve Bank of on the business other than that of India. securitisation or asset reconstruction, as contemplated under Section 10(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002? ------------------------------- ... 55. During the pendency of the writ petition, Kotak Mahindra Bank Ltd. has filed an affidavit in the office of the Collector of Stamps, Alibaug, Maharashtra which is as under: Affidavit I, Mr. Chandrashekhar B. Chavan having my address at A-1/13, Sahyadri Nagar, Charkop, Kandivati (West), Mumbai-400067 do hereby state and declare as under: 1. That I have submitted an affidavit towards adjudication of the Deed of Assignment dated 16.1.2006 executed by Kotak Mahindra Bank Ltd. on one part and State Bank of India on the other part before the Office of the Collector ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nent 56. The affidavit which was filed by M/s. Kotak Mahindra Bank Ltd. on 2.5.2006 before the Collector of Stamps, Alibaug for adjudication of the assignment agreement is as follows: Affidavit We, M/s. Kotak Mahindra Bank Ltd., of Asset Reconstruction Company (India) Limited, having registered office at 36-38-A, Nariman Bhavan, 227, Nariman Point, Mumbai-400021, have submitted an Assignment Agreement for Adjudication and in that respect do hereby state and declare as under: That the agreement is executed for assigning the debt as per the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. That the agreement is executed on 16.1.2006. That the total Consideration as per agreement is ₹ 167.49 crores (rupees). That the agreement is stamped as per Article 25(a) read with Notification of Bombay Stamp Act, 1958, dated. 6.5.2002, Notification No. MUDRANK/2002/875/CR/173-M-1, dated 6.5.2002. I hereby state that the above facts are true and correct. Solemnly affirmed at Mumbai this 2.5.2006. Deponent 57. The contents of the above two affidavits establishes that the deed of assignment d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... superior or inferior. It can be challenged in any court even in collateral proceedings. 61. The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 are the two enactments under which the Parliament has permitted the Banks to recover their dues. The deed of assignment was executed by the State Bank of India in favour of M/s. Kotak Mahindra Bank Ltd. on the basis of the Circular issued by the Reserve Bank of India on 13.7.2005. Kotak Mahindra Bank Ltd. has not been granted the licence by the Reserve Bank of India to trade in debts or to run the business of asset reconstruction. Hon'ble the Supreme Court in Oriental Bank of Commerce v. Sunder Lal Jain and Anr. (2008) 2 SCC 280, in paragraph 10 has held as under: 10. It is important to note that the revised guidelines issued by Reserve Bank of India on 29.1.2003 are only in the nature of internal guidelines for the banks and financial institutions. They are purely executive instructions and have no statutory force. They do not create any right in favour of the borrowers. In order to avail relief under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral's submission that the directive of the Director General is aimed at further and better implementation of the Recruitment Rules. Clearly, it introduces an amendment to the Rules by prescribing one more test for determining whether U.D.Cs. drawn from the Audit offices are eligible for promotion the Selection Grade/Head Clerks Cadre. 64. The Reserve Bank of India cannot issue a guideline contrary to the two enactments under which the Parliament has permitted the Banks to recover their dues. Hon'ble the Supreme Court in Union of India and Ors. v. Arun Kumar Roy (1986) 1 SCC 675, has held that a notification cannot override rules statutorily made and as such the guidelines issued by the Reserve Bank of India cannot override the provisions of the two enactments, i.e., Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. 65. Kotak Mahindra Bank Ltd. is a private Bank and it cannot be permitted to earn profit at the cost of Government. The State Bank of India which is the premier bank of the country is a custodian of public funds. The deed of assignment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State or by any instrumentality of the State should be generally sold by public auction or by inviting tenders. This Court has been insisting upon that rule, not only to get the highest price for the property but also to ensure fairness in the activities of the State and public authorities. They should undoubtedly act fairly. Their actions should be legitimate. Their dealings should be aboveboard. Their transactions should be without aversion or affection. Nothing should be suggestive of discrimination. Nothing should be done by them which gives an impression of bias, favoritism or nepotism. Ordinarily these factors would be absent if the matter is brought to public auction or sale by tenders. 68. Learned Counsel for the opposite party No. 4 has relied upon the decision of this Court in Narain Food Products Limited v. Tikam Chand and Ors. (supra). In the said decision private parties had entered into an agreement whereas in the instant case it is the State Bank of India which is a public financial institution which has entered into an agreement with M/s. Kotak Mahindra Bank Ltd. during the pendency of suit filed before the Debt Recovery Tribunal without seeking permission of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5% (Rs. 47.5 lakhs) against the one time settlement offered was also deposited by the State Bank of India which was lying with them when the deed of assignment was executed. 73. None of the case law relied upon by the learned Counsel for the opposite parties pertain to deed of assignment having been executed by a nationalized bank and having the elements of public money. 74. Since during the course of the instant writ petition the deed of assignment dated 16.1.2006, which was insufficiently stamped, has been impounded by the Additional District Magistrate (Finance and Revenue), Lucknow by his order dated 26.3.2009, the said deed of assignment dated 16.1.2006, by which the debts of M/s. Helios Confectionery Private Ltd. were transferred in favour of Kotak Mahlndra Bank Ltd., is an invalid document. 75. The action of the opposite parties 1 to 3 in executing the deed of assignment in respect of the assets of the Helios Company of which the petitioner is the Director and Guarantor during the pendency of the suit in the Debt Recovery Tribunal is mala fide and illegal. The position of a guarantor is co-extensive with that of the principal borrower subject to operation of law, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom ₹ 190 lakhs to ₹ 195 lakhs and it was indicated that the balance amount shall be deposited by the Helios Company in one instalment. The State Bank of India did not take decision and instead kept the matter pending and suddenly a deed of assignment was executed on 16.1.2006 in favour of Kotak Mahindra Bank Ltd. during the pendency of the recovery suit pending in Debt Recovery Tribunal for ₹ 39.63 lakhs which is even less than the Helios Company's deposit of ₹ 47.50 lakhs with the State Bank of India which was returned to the company after execution of the assignment deed. The opposite parties 1 to 3 have admitted that the valuers of State Bank of India had assessed the value of the assets of Helios Company at ₹ 141 lakhs. 78. The State Bank of India is a custodian of public money and by the deed of assignment which is under challenge the debts amounting to ₹ 167.49 crores being the principal loan alongwith interest of 48 borrowers including the Helios Company were assigned in favour of Kotak Mahindra Bank Ltd. for ₹ 29.76 crores which is 17.77% of the value of principal loan amount of each Non-performing Asset. 79. In pursuance ..... X X X X Extracts X X X X X X X X Extracts X X X X
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