2016 (3) TMI 1476 - HC - Indian Laws

Delhi HC allows debt recovery proceedings against guarantors despite principal borrower being sick industrial company under 1993 Act

The Delhi HC dismissed writ petitions challenging debt recovery proceedings against guarantors under the Recovery of Debts Due to Banks and Financial ... Suit for recovery of money - recovery proceedings under Recovery of Debts Due to Banks and Financial Institutions Act, 1993 are to be treated as a suit or not - if the principal borrower is declared as a sick industrial company, proceedings under Recovery of Debts due to Banks and Financial Institutions Act, 1993 cannot lie or be continued against the guarantors? HELD THAT:- As held in the decision BHAVNAGAR UNIVERSITY VERSUS PALITANA SUGAR MILL PVT. LTD. & ORS. [2002 (12) TMI 563 - SUPREME COURT], a judgment is a precedent for what is decided and not what logically follows from it, therefore a Division Bench of this Court in Inderjeet Arya & Anr. Vs. ICICI Bank Ltd. [2012 (11) TMI 779 - DELHI HIGH COURT] held that the judgment of the Supreme Court in Paramjit Singh Patheja's case [2006 (10) TMI 419 - SUPREME COURT] cannot be interpreted to conclude that each and every kind of action is contemplated to be included in the term 'suit' because the Supreme Court was dealing with a specific issue i.e. whether an award was a decree or an order within the meaning of Section 9(2) of the Insolvency Act. In Inderjeet Arya's case, the Division Bench of this Court also considered the decision of the Supreme Court in Kailash Nath Agarwal & Ors. Vs. Pradeshiya Industrial & Investment Corporation of UP Ltd. & Anr. [2003 (2) TMI 338 - SUPREME COURT] wherein the enforcement of debt against the guarantors was initiated by Pradeshiya Industrial Investment Corporation of UP Limited (in short, PICUP) for loans granted to the principal debtor, one, Shaifali Papers Limited, by triggering the provisions of the UPPM Act. The Division Bench highlighted that the Supreme Court noted two significant aspects pertaining to SICA, 1985. The first being : the interpretation accorded by the Supreme Court to the expression 'proceedings' in the first part of Section 22(1) of SICA. The Division Bench highlighted that it was noticeable that the Supreme Court categorically observed that the observations in Patheja Brothers and Forging and Stamping's case do not suggest that the protection to guarantors of loan taken by a company which later on becomes a sick industrial company is the object of the amendment brought about in sub-Section (1) of Section 22 when the amendment was made in the year 1994. Thus, it was held that having regard to the law laid down in the various judgments, the word 'suit' cannot be understood in its broad and generic sense to include any action before a legal forum involving an adjudicatory process. If that were so, the legislature which is deemed to have knowledge of existing statute would have made the necessary provision, like it did, in inserting in the first limb of Section 22 of SICA, where the expression proceedings for winding up of an industrial company or execution, distress, etc. is followed by the expression or 'the like' against the properties of the industrial company. There is no such broad suffix placed alongside the term 'suit'. The two appellants are guarantors and notwithstanding the principal borrower company being a sick industrial company, the Debts Recovery Tribunal as also the Debts Recovery Appellate Tribunal have rightly opined that proceedings under Recovery of Debts due to Banks and Financial Institutions Act, 1993 can continue against the two. The writ petitions are dismissed. Issues Involved:1. Interpretation of Section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).2. Impact of the Supreme Court decision in KSL & Industries Ltd. vs. Arihant Threads Ltd. & Ors.3. Whether recovery proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB Act) can continue against guarantors when the principal borrower is declared a sick industrial company.Detailed Analysis:1. Interpretation of Section 22(1) of SICA:Section 22(1) of SICA provides for the suspension of legal proceedings against a sick industrial company. The provision states:'No proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority.'The court noted that the term 'proceedings' has been interpreted broadly to include actions such as those under Sections 29 and 31 of the State Financial Corporation Act, 1951, as seen in Maharashtra Tubes Ltd. vs. State Industrial and Investment Corpn. of Maharashtra Ltd. The 1994 amendment to Section 22(1) added the phrase 'and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company,' expanding the scope to include suits against guarantors.2. Impact of the Supreme Court Decision in KSL & Industries Ltd. vs. Arihant Threads Ltd. & Ors.:The Supreme Court in KSL & Industries Ltd. vs. Arihant Threads Ltd. & Ors. addressed whether the RDDB Act proceedings should be stayed under Section 22(1) of SICA. The Court held that SICA's provisions prevail over the RDDB Act, emphasizing the legislative intent to protect the properties of sick industrial companies from recovery proceedings. The decision underscored that allowing recovery proceedings to continue would undermine the rehabilitation efforts under SICA.The court in the present case clarified that the decision in KSL & Industries Ltd. did not change the legal position regarding the continuation of proceedings against guarantors. The Supreme Court's observations in paragraphs 26 and 27 of KSL & Industries Ltd. focused on the legislative scheme and the purpose of SICA to protect the properties of sick industrial companies.3. Whether Recovery Proceedings Under the RDDB Act Can Continue Against Guarantors:The court examined whether recovery proceedings under the RDDB Act could continue against guarantors when the principal borrower is declared a sick industrial company. The court referred to the Supreme Court's decision in Paramjit Singh Patheja vs. ICDS Ltd., which held that the term 'guarantee' in Section 22(1) of SICA extends to guarantors. However, the court also noted that the decision in Kailash Nath Agarwal & Ors. vs. Pradeshiya Industrial & Investment Corporation of UP Ltd. & Anr. clarified that the protection under SICA is not absolute and does not extend to guarantors in all circumstances.The court concluded that the term 'suit' in Section 22(1) of SICA should be confined to proceedings in a civil court and does not include recovery proceedings before the Debt Recovery Tribunal (DRT). The court held that proceedings under the RDDB Act could continue against guarantors, as the legislative intent was not to provide blanket protection to guarantors but to facilitate the rehabilitation or winding up of sick industrial companies.Conclusion:The court dismissed the writ petitions, holding that the proceedings under the RDDB Act could continue against the guarantors despite the principal borrower being declared a sick industrial company. The court emphasized that the term 'suit' in Section 22(1) of SICA does not encompass recovery proceedings before the DRT, and the legislative intent was to protect the properties of sick industrial companies, not to provide absolute protection to guarantors.