2010 (9) TMI 1304 - HC - Companies Law

Bank's Petition Dismissed; Costs Imposed for Misconduct; Equitable Creditor Treatment Affirmed under SICA and BIFR Authority.

The writ petition was dismissed, affirming BIFR and AAIFR orders, and costs were imposed on the petitioner bank for improper conduct. The court held that ... - Issues Involved:1. Exclusive right of the petitioner bank to appropriate the insurance amount without BIFR's permission.2. Validity of the One-Time Settlement (OTS) agreement and its withdrawal by the petitioner bank.3. Jurisdiction of BIFR and AAIFR in the matter of appropriation of insurance claims.4. Applicability of Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) to the appropriation of insurance claims.5. Equitable treatment of secured creditors in the context of a sick company under SICA.Issue-wise Detailed Analysis:1. Exclusive Right to Appropriate Insurance Amount:The petitioner bank claimed an exclusive right to appropriate the insurance amount received for hypothecated stocks without the BIFR's permission. The court found that the goods were owned by the respondent company, and the insurance amount, though payable directly to the bank, was actually the property of the company. The bank could not unilaterally appropriate this amount without BIFR's consent, as the proceedings under SICA were pending, which required the preservation of the company's assets for potential rehabilitation.2. Validity of the OTS Agreement:The OTS agreement was initially accepted by the petitioner bank, with a waiver of penal interest. However, after receiving the insurance amount, the bank withdrew the OTS, citing non-disclosure of the Supreme Court's dismissal of the insurance company's appeal. The court noted that the petitioner bank was aware of the proceedings and had acted on the OTS by appropriating Rs. 40 lakhs. The withdrawal of the OTS was not justified, as the bank had already begun acting on it before the insurance amount was received.3. Jurisdiction of BIFR and AAIFR:The BIFR directed the petitioner bank to deposit the appropriated insurance amount in a No Lien Account (NLA), which was upheld by the AAIFR. The BIFR's jurisdiction was affirmed, as it was responsible for overseeing the rehabilitation process and ensuring equitable treatment of all creditors. The court emphasized that the BIFR was the 'master of ceremonies' in matters involving sick companies, and its orders were in accordance with law.4. Applicability of Section 22 of SICA:Section 22(1) of SICA was applicable, preventing the bank from unilaterally appropriating the insurance amount without BIFR's permission. The court distinguished between subsections (1) and (3) of Section 22, noting that the latter required specific orders for suspension of contracts, which was not the issue here. The automatic suspension under Section 22(1) applied to the bank's actions, as the proceedings before the BIFR were pending.5. Equitable Treatment of Secured Creditors:The court highlighted the need for equitable treatment of secured creditors under SICA. The petitioner bank's unilateral appropriation of the insurance amount would have left the other secured creditor, KSIIDC, uncompensated. The BIFR's role was to ensure that all secured creditors were treated equally in any rehabilitation scheme. The court disapproved of the bank's attempt to prioritize its claims over those of KSIIDC, which was contrary to the objectives of SICA.In conclusion, the court dismissed the writ petition, affirming the orders of the BIFR and AAIFR, and imposed costs on the petitioner bank for its improper conduct. The judgment reinforced the principles of equitable treatment of creditors and the primacy of BIFR in matters involving sick companies.