2018 (7) TMI 2055 - HC - Indian Laws

Court upholds Tribunal's decision on secured creditor status. Banks criticized for delays, petitioner to pay.

The court upheld the Debt Recovery Appellate Tribunal's decision, dismissing the petitioner's substitution application. It found that the petitioner could ... Substitution of assignee in pending recovery proceeding - effect of assignment under Section 5(4) of SARFAESI Act - further assignment and enforceability of assigned financial assets - maintainability of application before Debt Recovery Tribunal upon further assignment - duty to disclose subsequent assignments in substitution proceedings - novation and rescission under Section 62 of the Indian Contract ActEffect of assignment under Section 5(4) of SARFAESI Act - substitution of assignee in pending recovery proceeding - Whether the petitioner, after acquiring rights under the Assignment Agreements from two banks, was entitled to be substituted as a party-applicant in the pending O.A. before the Debt Recovery Tribunal under Section 5(4) of the SARFAESI Act. - HELD THAT: - The Court examined the scope of Section 5 of the SARFAESI Act and the petitioner's affidavit supporting the substitution application. Section 5(1) permits acquisition of financial assets by a securitisation or reconstruction company and Section 5(2)-(4) deems the acquirer to be the lender with vesting of rights and continuation of pending proceedings. However, the Court observed that while acquisition vests the rights of the bank in the acquirer, the statute does not expressly authorise the acquirer to further assign those rights so as to preserve an unqualified right to be substituted in ongoing recovery proceedings. The petitioner's case was examined against the contemporaneous record, the Assignment Agreements and subsequent conduct. The Court found that at the time the substitution application was pending, there existed an intervening contractual arrangement affecting the rights the petitioner sought to enforce; therefore the Tribunal's scrutiny of maintainability and entitlement to substitution could legitimately take that intervening assignment into account. Applying these principles, the Court found no error in the Tribunal's conclusion denying substitution. [Paras 24, 25, 26, 31, 32]Petitioner was not entitled to substitution as applicant in the O.A.; the Tribunal and Appellate Tribunal did not err in refusing the substitution application.Further assignment and enforceability of assigned financial assets - maintainability of application before Debt Recovery Tribunal upon further assignment - duty to disclose subsequent assignments in substitution proceedings - novation and rescission under Section 62 of the Indian Contract Act - Whether the petitioner's failure to disclose the Agreement to Assign with M/s. PPL (and the fact that the assignment was in force during pendency) rendered the substitution application unsustainable. - HELD THAT: - The Court reviewed the Agreement to Assign dated 29.07.2009 and the Minutes of the consortium meeting, which indicated the petitioner had entered into an arrangement with M/s. PPL and the terms under which the intended assignment would operate. The petitioner's substitution application, filed later, did not disclose that arrangement; the existence of the agreement came to light only from the banks' counter. The Tribunal found, and this Court agreed, that where a proposed assignee has effected or agreed a further assignment to a third party and that arrangement is operative during the pendency of a substitution application, non-disclosure of that fact is material and affects maintainability. The Court also rejected the petitioner's attempt to recharacterise the arrangement as not being an assignment or to rely on revocation after default, noting that at the relevant time the assignment was in force and could not be suppressed. For these reasons the Tribunal's dismissal of the substitution application was affirmed. [Paras 27, 30, 31, 32]Non-disclosure of the operative Agreement to Assign to M/s. PPL rendered the substitution application untenable; dismissal of the application was affirmed.Final Conclusion: The writ petition challenging the Debt Recovery Appellate Tribunal's dismissal of the substitution application is dismissed. The Tribunal and Appellate Tribunal rightly refused substitution because an operative further assignment to a third party existed and was not disclosed; consequently the petitioner cannot be permitted to assume the banks' place in the recovery proceedings. The Debt Recovery Tribunal is directed to conclude the pending recovery proceedings within three months; petitioner ordered to deposit a nominal sum for delay in prosecution. Issues Involved:1. Legality of the Debt Recovery Appellate Tribunal's order dismissing the petitioner's appeal.2. Petitioner's right to be substituted as a creditor in place of the original banks.3. Validity and implications of the Assignment Agreement between the petitioner and M/s.PPL.4. Petitioner's claim to continue as a secured creditor after the termination of the agreement with M/s.PPL.5. The role and conduct of the consortium banks in the recovery process.Detailed Analysis:1. Legality of the Debt Recovery Appellate Tribunal's Order:The petitioner, an Asset Reconstruction Company (ARCIL), challenged the order of the Debt Recovery Appellate Tribunal (DRAT) dated 06.10.2017, which upheld the Debt Recovery Tribunal's (DRT) decision to dismiss the petitioner's substitution application. The petitioner argued that both tribunals failed to appreciate its right to be substituted by virtue of the Assignment Agreement with the original banks.2. Petitioner's Right to be Substituted as a Creditor:The petitioner claimed that it had entered into Assignment Agreements with Bank of India and Indian Overseas Bank, transferring the financial assets and underlying securities related to the sixth respondent (M/s. Boss Profiles Limited) to ARCIL. The petitioner argued that under Section 5(4) of the SARFAESI Act, it was entitled to continue and enforce all legal proceedings related to the assigned debts. However, the DRT dismissed the substitution application, and the DRAT upheld this decision.3. Validity and Implications of the Assignment Agreement with M/s.PPL:The petitioner entered into an agreement with M/s.Poddar Projects Limited (M/s.PPL) to assign the debts of the sixth respondent. M/s.PPL was to pay a total sum of Rs. 6.85 crores in installments. The petitioner claimed that M/s.PPL failed to fulfill the payment terms, leading to the termination of the agreement. The respondents argued that the petitioner, having assigned the debts to M/s.PPL, lost its right as a secured creditor and could not claim substitution in the original recovery proceedings.4. Petitioner's Claim to Continue as a Secured Creditor:The petitioner contended that since M/s.PPL failed to honor the agreement, ARCIL terminated the agreement and retained its rights as a secured creditor. The respondents countered that the petitioner could not have simultaneous recovery rights from both M/s.PPL and as a secured creditor. The court found that the petitioner had suppressed the fact of the agreement with M/s.PPL during the substitution application, which was crucial for the case.5. Role and Conduct of the Consortium Banks:The consortium of banks, including respondents 3, 4, and 5, initiated legal proceedings for the recovery of dues from the sixth respondent. The petitioner argued that it had informed the consortium about the agreement with M/s.PPL, and no objections were raised. However, the respondents claimed that the petitioner withdrew its consent for SARFAESI actions and acted contrary to the consortium's interests by entering into the agreement with M/s.PPL without their consent.Conclusion:The court upheld the DRAT's order, dismissing the petitioner's substitution application. The court found that the petitioner could not revert to its original position after the agreement with M/s.PPL failed. The court also criticized the banks for their delayed recovery efforts and directed the DRT to expedite the recovery proceedings. The petitioner was ordered to deposit Rs. 10,000 to the Juvenile Justice Fund for protracting the proceedings. The writ petition was dismissed with no costs, and connected miscellaneous petitions were closed.