2016 (9) TMI 266 - HC - Companies Law

Court dismisses appeal, denies secured creditor status, deems transaction against public interest

The court dismissed the appeal, ruling that the appellant's request for substitution as a secured creditor was rightly denied. The court found the Deed of ... Application for substitution of secured creditor preferred by the applicant bank - Held that:- The learned Company Judge has considered the aspect with regard to registration of charge under Section 125 of the Companies Act, 1956 and also paras 44, 45, 46, 51 and 52 of the judgment of the Apex Court in the case of ICICI Bank Ltd. [2010 (9) TMI 236 - SUPREME COURT OF INDIA ] and definition of banking company, financial institution, reconstruction company, Securitisation company under SARFAESI Act and also that the applicant company was not a bank or a banking company or a financial institution or a securitization company or reconstruction company and, therefore, the appellant was not to be permitted to be substituted in place of IFCI as secured creditor for the purpose of SARFAESI Act. The above clear findings were in the context of submissions made and pleadings in the application and reply and considered by the learned Company Judge to which we are in agreement and in addition to other factual aspects noted and discussed by us hereinabove. That somersault was made in application filed under Rule 9 of the Rules, 1959 that no such status as a secured creditor under SARFAESI Act claimed by the appellant, was rightly rejected by the learned Company Judge. Even applicability of Section 130 of the Transfer of Properties Act in the facts of the case was considered by learned Company Judge is also based on submissions made by learned counsel for the appellant in the context of its claim as a secured creditor under SARFAESI Act. Therefore, prayer of the appellant company for substitution as a secured creditor in place of IFCI Ltd. assignor on the strength of deed of assignment of debts, is rightly rejected by learned Company Judge. In the context of Section 62 of Contract Act, 1872, a novation of contract, in the above case answered the contention raised on behalf of borrower that an assignment of a debt can never carry with it the assignment of the obligations of the assignor unless there is a novation of contract by all parties, the Apex Court [supra] held that an outstanding in the account of borrowers [customers] is debt due and payable by the borrowers to the bank. Further, the bank is the owner of such debt and such debt is an asset in the hands of the bank as a secured creditor or mortgagee or hypothecatee and, therefore, the bank can always transfer its assets. Such transfer in no manner affects the rights and interest of the borrowers [customers] and there is no prohibition in the Banking Regulation Act, 1949 in the bank transferring such assets inter se. According to the Apex Court, the obligations referred in the impugned deed of assignment are obligations, if any, of the assignor bank towards assignee bank in the matter of transfer of NPAs. In the above context, reasons assigned by learned Company Judge for arriving at a finding that no case was made out by the appellant on the strength of decision of the Apex Court in the above case of ICICI Bank Ltd. [supra] cannot be said to be incorrect and application for substitution preferred by the applicant bank is rightly rejected. Issues Involved:1. Validity of the Deed of Assignment executed by IFCI Ltd. in favor of the appellant.2. Applicability of SARFAESI Act to the appellant.3. Rights of the appellant to be substituted as a secured creditor.4. Allegations of fraud and defrauding secured creditors.5. Powers of the Company Court under Rule 9 of the Companies (Court) Rules, 1959.6. Public interest and the role of the Official Liquidator.Detailed Analysis:1. Validity of the Deed of Assignment:The appellant argued that they were assigned the debts due from the company in liquidation by IFCI Ltd. through a Deed of Assignment dated 28.07.2010. The Deed of Assignment was duly registered, and the appellant sought substitution before the Official Liquidator. The court noted that the assignment of debts was made after the company was ordered to be wound up, which raised concerns about the timing and the legitimacy of the transaction.2. Applicability of SARFAESI Act:The appellant contended that they did not seek any benefits under the SARFAESI Act but merely sought substitution based on the Deed of Assignment. The Company Court dismissed the application on the grounds that the appellant was not entitled to benefits under the SARFAESI Act and could not be termed a secured creditor. The court highlighted that the appellant was neither a banking company nor a financial institution, and thus, the provisions of the SARFAESI Act were not applicable.3. Rights of the Appellant to be Substituted as a Secured Creditor:The appellant argued that the substitution was sought under the provisions of the Contract Act and the Transfer of Property Act, not the SARFAESI Act. The court noted that the appellant's status as a secured creditor was not established, and the Deed of Assignment did not confer such status. The court also emphasized that the assignment of debts for a paltry sum of Rs. 58 lakhs against outstanding dues of more than Rs. 160 crores was unconscionable and against public interest.4. Allegations of Fraud and Defrauding Secured Creditors:The respondent, Bank of Baroda, argued that the agreement between the appellant and IFCI Ltd. was intended to defraud the rights of secured creditors and violated Sections 531 and 536 of the Companies Act, 1956. The court noted that the appellant had not produced the Deed of Assignment in earlier proceedings and that the transaction appeared to be an attempt to defeat the measures undertaken by respondent banks under the SARFAESI Act and the winding-up proceedings.5. Powers of the Company Court under Rule 9 of the Companies (Court) Rules, 1959:The appellant filed an application under Rule 9 of the Companies (Court) Rules, 1959, seeking to recall the CAV judgment. The court rejected the application, stating that the inherent powers under Rule 9 did not extend to granting substitution based on an invalid Deed of Assignment. The court emphasized that the Company Court must protect the interests of all stakeholders, including secured creditors and workers.6. Public Interest and the Role of the Official Liquidator:The court highlighted the role of the Official Liquidator as a watchdog of the Company Court, ensuring that the affairs of the company in liquidation are not carried out in a manner prejudicial to public interest. The court noted that the assignment of debts for a nominal consideration raised doubts about the bona fides of the transaction and was not in public interest. The court also referred to the judgment in Sesa Industries Ltd. v. Krishna H. Bajaj, emphasizing the importance of the Official Liquidator's report in protecting public interest.Conclusion:The court dismissed the appeal, stating that the appellant's application for substitution as a secured creditor was rightly rejected by the Company Court. The court found that the Deed of Assignment was not valid, the appellant was not entitled to benefits under the SARFAESI Act, and the transaction was not in public interest. The court also dismissed the civil application related to the appeal.