2010 (7) TMI 268 - HC - Companies Law

IFCI Limited qualifies as public financial institution under Companies Act & authorized to enforce security interests.

The court dismissed the writ petition, affirming that IFCI Limited qualifies as a public financial institution under the Companies Act, 1956, and is ... Whether IFCI Limited (respondent No. 1) is a 'financial institution' within the meaning of section 2(1)(m) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the ‘said Act’)? Held that:- IFCI Limited would have to be regarded as a public financial institution under section 4A of the Companies Act. As a consequence, it would be a financial institution under section 2(1)(m) and, therefore, IFCI Limited would be entitled to take recourse to the provisions of the said Act in order to enforce a 'security interest' created in its favour. Appeal dismissed. Issues Involved:1. Repeal of the Industrial Finance Corporation Act, 1948 and the establishment of IFCI Limited.2. Whether IFCI Limited is a 'financial institution' under section 2(1)(m) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.3. Validity of the notification dated 15-2-1995 under section 4A(2) of the Companies Act, 1956.4. Interpretation of the term 'established or constituted by or under any Central Act' in section 4A(2) of the Companies Act, 1956.5. The requirement of the Central Government holding or controlling at least 51% of the paid-up share capital.Detailed Analysis:1. Repeal of the Industrial Finance Corporation Act, 1948 and the establishment of IFCI Limited:The court examined the transition from the Industrial Finance Corporation of India (the Corporation) to IFCI Limited, established under the Companies Act, 1956, following the repeal of the Industrial Finance Corporation Act, 1948 by the Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993. The court noted that the repeal led to the transfer and vesting of the Corporation's undertaking in IFCI Limited.2. Whether IFCI Limited is a 'financial institution' under section 2(1)(m) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002:The petitioner sought to quash the notification declaring IFCI Limited as a public financial institution, arguing that it did not meet the definition of a 'financial institution' under section 2(1)(m) of the said Act. The court analyzed whether IFCI Limited fell within the meaning of 'financial institution' and concluded that if it did, it could proceed under the said Act to enforce security interests.3. Validity of the notification dated 15-2-1995 under section 4A(2) of the Companies Act, 1956:The court scrutinized the notification issued by the Central Government under section 4A(2) of the Companies Act, 1956, which specified IFCI Limited as a public financial institution. The petitioner contended that the notification was invalid as IFCI Limited was neither established by nor constituted under any Central Act, and the Central Government no longer held or controlled at least 51% of its paid-up share capital.4. Interpretation of the term 'established or constituted by or under any Central Act' in section 4A(2) of the Companies Act, 1956:The court interpreted the phrase 'established or constituted by or under any Central Act' in section 4A(2) of the Companies Act, 1956. It referenced the Supreme Court decision in R.C. Mitter & Sons v. CIT, which distinguished between 'by' and 'under,' and concluded that IFCI Limited, though formed and registered under the Companies Act, was conceived and contemplated under the Repeal Act of 1993, thus meeting the requirement of being 'constituted under' a Central Act.5. The requirement of the Central Government holding or controlling at least 51% of the paid-up share capital:The court examined whether the Central Government's shareholding was a condition precedent or a continuous requirement. It concluded that the shareholding condition was a trigger condition relevant at the time of the notification and not a subsisting requirement. The court held that the validity of the notification should be assessed based on the conditions at the time of issuance, not at future points.Conclusion:The court dismissed the writ petition, holding that IFCI Limited was a public financial institution under section 4A of the Companies Act, 1956, and thus a financial institution under section 2(1)(m) of the said Act. Consequently, IFCI Limited was entitled to enforce security interests under the said Act. The parties were left to bear their respective costs.