2006 (5) TMI 194 - HC - Companies Law

Court upholds bank's actions under Act of 2002, dismisses petitions, considers objections under section 13(3A)

The court dismissed the petitions, ruling that the bank's actions were lawful under the Act of 2002 despite ongoing BIFR proceedings. The bank must ... Suspension of legal proceedings, etc. Issues Involved:1. Legality of the bank's recovery action under the Act of 2002 during BIFR proceedings.2. Bank's obligation to consider objections under section 13(3A) of the Act of 2002.3. Whether the bank can proceed under both the Act of 1993 and the Act of 2002 simultaneously.Detailed Analysis:1. Legality of the Bank's Recovery Action under the Act of 2002 During BIFR Proceedings:The petitioners argued that the bank's action was barred by law due to ongoing proceedings before the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies (Special Provisions) Act, 1985 ('the Act of 1985'). They relied on section 22 of the Act of 1985, which suspends recovery proceedings against the company during BIFR inquiry. However, the court noted that the protection under section 22 is confined to the properties of the sick industrial company and does not extend to guarantors or their collateral securities. This view aligns with the Supreme Court's decision in Kailash Nath Agarwal v. Pradeshiya Industrial and Investment Corporation of U.P. Furthermore, section 41 of the Act of 2002 amends section 15 of the Act of 1985, stating that BIFR proceedings abate if secured creditors initiate recovery under the Act of 2002. Thus, the petitioners' claim for protection under section 22 was not maintainable.2. Bank's Obligation to Consider Objections under Section 13(3A) of the Act of 2002:The petitioners contended that the bank must consider and decide on their objections lodged against the notice under section 13(2) before proceeding with recovery under section 13(4) of the Act of 2002. The court agreed that section 13(3A) mandates the bank to consider, decide, and communicate its decision on objections before proceeding further. The bank's representative assured the court that the bank would not proceed further without complying with this statutory obligation. The court found the petitioners' challenge premature since the bank had not yet considered the objections due to the pending petitions.3. Whether the Bank Can Proceed under Both the Act of 1993 and the Act of 2002 Simultaneously:The petitioners argued that the bank, having initiated proceedings under the Act of 1993, could not simultaneously proceed under the Act of 2002. They cited the Punjab and Haryana High Court's judgment in Kalyani Sales Co. v. Union of India, which held that banks must elect one remedy and cannot pursue both simultaneously. However, the court noted divergent views from other High Courts. The Bombay and Kerala High Courts held that it is not mandatory for banks to withdraw proceedings under the Act of 1993 before invoking the Act of 2002. The court agreed with the Bombay High Court's interpretation that the proviso to section 19(1) of the Act of 1993, which allows withdrawal of applications with Tribunal permission, is directory and not mandatory. This interpretation avoids multiplicity of proceedings and aligns with the legislative intent. Therefore, the court held that banks could proceed under the Act of 2002 without first withdrawing applications pending before the Tribunal.Conclusion:The court dismissed the petitions in limine, concluding that the bank's actions were lawful under the Act of 2002 despite ongoing BIFR proceedings, the bank must consider objections under section 13(3A) before proceeding further, and banks are not required to withdraw proceedings under the Act of 1993 before invoking the Act of 2002. The notices issued were discharged, and ad interim orders were vacated.