AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2009 (12) TMI 511
X X X X Extracts X X X X
X X X X Extracts X X X X
....right to be associated with the process of sale from beginning to end. However, the Securitisation Company (appellant in CAPP No. 28 of 2009) has even attacked the supervisory directions issued by the learned Company Judge in his order dated 20-3-2009 by requiring it to submit all proposal for sale to the Official Liquidator and the details of valuation obtained from the conduct of the sale and that the sale notice should incorporate specifically a clause that winding up proceedings have been pending before the Company Court, with details of case number and the Court of adjudication. Further grievance of the Securitisation Company is that the learned Company Judge has required it to place before the Company Court the details of its claim and all expenses incurred prior to making any appropriation to itself and disbursing the amount. 2. It would be necessary to notice few facts to put the controversy in its proper prospective. The Haryana Concast Limited, Hissar-respondent No. 1 is a Company incorporated on 20-11-1973, which was promoted by the State of Haryana and its major shareholdings were held by the State Government and HSIIDC. The State Government acquired 40 acres of land....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dent No. 1 Company under the provisions of the Act. The consent was subsequently withdrawn on the ground that a long span of time had passed since giving of consent but the sale process was substantially delayed. It has been claimed that in the mean time value of the properties has also increased considerably. 5. The Bank of India had also approached the Debts Recovery Tribunal, Chandigarh (for brevity, 'the Tribunal'), under the Recovery of Debts Due to Banks and Financial Institution Act, 1993 (for brevity, 'the DRT Act'), for recovery of outstanding amount from respondent No. 1 Company. The Tribunal acknowledging the rights of Bank of India over the mortgaged property and outstanding amount, had passed an order dated 9-5-2002 and recovery certificates were issued against respondent No. 1 Company (Annexure A-2 attached with CAPP No. 28 of 2009). 6. The Securitisation Company has also informed the Official Liquidator for substituting it in place of Bank of India. They also showed their intention to realise the dues by sale of property and opted to remain outside the liquidation process and to enforce its security as per the provisions of SARFAESI Act subject to the rights of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng CA Nos. 704-705 of 2008 was also filed by the Securitisation Company for recalling order dated 20-3-2008 and directing the Official Liquidator not to proceed with sale of the property. It was further prayed that the Official Liquidator may be directed to hand over possession of the properties and to record the development including recovery certificate, notice under section 13(2) issued by the Securitisation Company. The HSIIDC also appeared at the time of motion hearing of said applications and it was allowed to be impleaded as necessary party. 10. After filing of replies by the respective parties, learned Company Judge allowed the applications filed by the Securitisation Company permitting it to stay outside the winding up proceedings and take action to bring to sale the secured assets under section 13 of the SARFAESI Act read with rules 8 and 9 of the Security Interest Enforcement Rules, 2002 (for brevity, 'the Rules'). The Securitisation Company in its appeal bearing CAPP No. 28 of 2009 has averred that substantial relief has been granted to it but it is still aggrieved by the control asserted by the learned Company Judge by issuing directions to report the proposals to t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... HSIIDC and the Securitisation Company. 12. Mr. M.L. Sarin, learned senior counsel for the Securitisation Company has argued that the directions issued by the learned Company Judge are patently against the object, letter and spirit of the SARFAESI Act and all such directions are liable to be set aside especially when the Securitisation Company has been kept out of the winding up being the sole secured creditor. Learned counsel has canvassed that the basic object of promulgating the SARFAESI Act was that there was huge non-performing assets and the pace of recovery of defaulting loans was pathetically slow. He has drawn our attention to the following statement of objects and reasons and clauses (h) and (i ) of the statement made while presenting the Bill preceding the passing of the SARFAESI Act :- "The financial sector has been one of the key drivers in India's efforts to achieve success in rapidly developing its economy. While the banking industry in India is progressively complying with international prudential norms and accounting practices there are certain areas in which the banking and financial sector do not have a level playing field as compared to other participants ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....de by the Central Government; (j ) to (m)****** 3. The Bill seeks to achieve the above objects." 13. On the basis of the aforesaid statement of objects and reasons, the basic hypothesis propounded by Mr. Sarin is that Securitisation Company like respondent No. 2 are free from any fetters & shackles which ordinarily bind a Company Court under various provisions of the Act. He has maintained that the Securitisation Company has been registered under section 3 with the Reserve Bank of India. According to the learned counsel there are very few Securitisation Companies, who could meet the strict financial control and thorough scrutiny of their antecedents, so as to be registered under section 3 of the SARFAESI Act. It has been pointed out that there are following 12 companies all over the country which have been registered under section 13 of the SARFAESI Act:- Sr. No. Name of the Registered Company Address of the Company Promoters 1. Asset Reconstruction Company (India) Ltd. (ARCIL) Shreepati Arcade, August Kranti Marg, Nana Chowk, Mumbai-400 003 SBI, ICICI, IDBI 2. Assets Care Enterprise Ltd., IFCI Tower, 61, Nehru Place, New Delhi-110 019. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....RFAESI Act. 15. Referring to the provisions of section 12 of the SARFAESI Act, learned counsel has submitted that it is only Reserve Bank of India who could determine policy and issue directions to a securitisation company in matter relating to income, recognition, accounting standards, making provisions for bad and doubtful debts. Even the directions can be issued with regard to the type of financial asset of a bank or financial institution, which could be acquired and the procedure for acquisition of such assets. The directions could also be issued in respect of the aggregate value of financial assets which may be acquired by a securitisation company. 16. Mr. Sarin has then referred to Chapter III from sections 13 to 19 of the SARFAESI Act and contended that under section 13(1) any security interest created in favour of any secured creditor could be enforced without the intervention of the Court in accordance with the provisions of the SARFAESI Act notwithstanding the provisions of Transfer of Property Act, 1882. Once a notice of 60 days is given for repayment of secured debt or instalment thereof to a defaulter and such a defaulter fails to pay the amount then the secured ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... creditor who opts to realise his security, is entitled to retain the sale proceeds of his secured assets after depositing the workmen's dues with the Official Liquidator as per the provisions of section 529A of the Act and the workmen's dues according to the third proviso are required to be intimated by the Official Liquidator to a secured creditor. If the workmen's dues could not be ascertained then the estimated amount of workmen's dues under section 529A of the Act are required to be intimated and such a secured creditor could retain the sale proceeds of the secured assets after depositing the amount of such estimated dues with the Official Liquidator. There is further obligation imposed by the fourth proviso that a secured creditor is under obligation to pay the balance of the workmen's dues or it would be entitled to refund of the excess amount deposited by the secured creditor with the Official Liquidator. 17. Mr. Sarin has then referred to the provisions of section 35 which provides for overriding effect of the SARFAESI Act despite anything inconsistent contained in any other law. According to the learned counsel section 37 which applies the provisions of other laws is n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rrently taking place under the supervision of the Company Court then such a company should have been kept out of the scrutiny and supervision of the Company Court by keeping in view the objects and intention of enforcing the SARFAESI Act. In that regard he has placed reliance on the observations made by Hon'ble the Supreme Court in the cases of Transcore v. Union of India [2007] 73 SCL 11 and Mardia Chemicals Ltd. v. Union of India [2004] 51 SCL 513 . He has concluded by submitting that neither in the pleadings nor in the admitted documents placed on the record in the form of charge/search report obtained from the Registrar of Companies or the minutes of the meeting of the Official Liquidator etc., it could be clearly established that the plant and machinery of respondent No. 1 Company were also under the sole secured charge of the Securitisation Company/secured creditor. Likewise, there is no averment made that the plant and machinery of respondent No. 1 Company were under secured charge of any other bank or creditor much less that of HSIIDC. Therefore, he has submitted that the error committed by the learned Company Judge is patent in his order dated 20-3-2009 and the same is lia....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y Judge has committed grave error in law by refusing to fix any price which earlier was fixed at Rs. 29.12 crores and a free hand has been given to the Securitisation Company to realise as much price as may be possible in respect of huge chunk of land without association of the Official Liquidator as well as HSIIDC. He has attacked the order of the Learned Company Judge on another ground also, inasmuch as, no reference to the movable assets over which HSIIDC has the charge has been made. 23. In support of the aforesaid submissions, Mr. Sehgal has placed reliance on para 33/44 of the judgment of Hon'ble the Supreme Court in the case of Allahabad Bank v. Canara Bank [2004] 4 SCC 406 and on various paras of the judgment in Bakemans Industries (P.) Ltd.'s case (supra). Reliance has also been placed on the observations made in paras 16 and 17 of the judgment in the case of Rajasthan Financial Corpn. (supra). He has also placed reliance on paras 9 to 14 of the judgment rendered in Unique Butile v. U.P. Financial Corpn. [2003] 41 SCL 418 (SC) and paras 4 and 5 of Asset Reconstruction Co. India's case (supra ). On the question of waiver, learned counsel has placed reliance on the judgme....
X X X X Extracts X X X X
X X X X Extracts X X X X
....herein the order of the Company Court imposing fetters on the Securitisation Company has been upheld in appeal. Learned counsel has then submitted that the second notice under section 13(2) of the SARFAESI Act was issued on 26-3-2009 purported to be in respect of the plant and machinery of respondent No. 1 Company and before expiry period of 60 days it has taken over the possession of the assets on 23-5-2009 and, therefore, there is no valid notice issued by the Securitisation Company as per the requirements of section 13 of the SARFAESI Act. 26. The aforesaid detailed arguments would lead us to the following two questions of law :- (A)Whether the Company Court enjoys jurisdiction to issue supervisory direction to a securitisation company/secured creditor in connection with a company in liquidation or under winding up in the face of section 13 of the SARFAESI Act or securitisation company opting to stand outside the winding up is absolutely free to utilise the sale proceeds of assets of the company in liquidation? (B)Whether the learned Company Judge committed a factual error by observing that the HSIIDC has hypothecation in respect of plant and machinery? Re: Question ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on of the secured assets which include the right to transfer the secured assets by way of lease, assignment or sale; (b) may take over the management of the secured assets including right to transfer; (c) may appoint a manager to manage the secured assets which have been taken possession of by the secured creditor; and (d) may also require any person who has acquired any of the secured assets from the borrower or from whom any money is due to the borrower to pay the same to him as it may be sufficient to pay the secured debt. Section 13(8) of the SARFAESI Act, however, provides that if all the dues of the secured creditor are tendered to him before the sale or transfer then no further steps are required to be taken in that direction. 29. The most significant provision to decide the issue raised before us is section 13(9) of the SARFAESI Act, which reads thus :- "(9) In the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-section (4) unless exercise of such right is agreed upo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the amount realised from the sale of secured assets must be distributed in accordance with the provisions of section 529A of the Act. The second proviso also postulates that in case of a company being wound up after the commencement of the SARFAESI Act, a secured creditor or a securitisation company may retain the sale proceeds of his secured assets after depositing workmen's dues with the liquidator as per the requirements of section 529A of the Act. Likewise, the Liquidator is required to intimate the estimated amount of workmen's dues to the secured creditor and in such a case the secured creditor may retain the sale proceeds of the secured assets after depositing the amount of such estimated workmen's dues with the Liquidator. 31. The aforesaid provision came up for consideration before Hon'ble the Supreme Court in the case of Rajasthan Financial Corpn. (supra). The issue which came up before their Lordships' was concerning the right of the State Financial Corporation under section 29 of the State Financial Corporations Act, 1951, against the debtor company to sell assets of the company and to realise security when the company is under winding up. It has been held that in su....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al Coach Builders Ltd. v. Karnataka State Financial Corporation [2003] 10 SCC 482 in respect of the applicability of sections 529 and 529A of the Companies Act in the matter of distribution among the creditors. The right to sell under the SFC Act or under the Recovery of Debts Act by a creditor coming within those Acts and standing outside the winding up, is different from the distribution of the proceeds of the sale of the security and the distribution in a case where the debtor is a company in the process of being wound up, can only be in terms of section 529A read with section 529 of the Companies Act. After all, the Liquidator represents the entire body of creditors and also holds a right on behalf of the workers to have a distribution pari passu with the secured creditors and the duty for further distribution of the proceeds on the basis of the preferences contained in section 530 of the Companies Act under the directions of the Company Court. In other words, the distribution of the sale proceeds under the direction of the Company Court is his responsibility. To ensure the proper working out of the scheme of distribution, it is necessary to associate the Official Liquidator wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vis-á-vis the State Financial Corporation and Debt Recovery Tribunal is clear then by virtue of the same logic if the securitisation company seeks to sell or transfer the assets of a borrower company-in-liquidation opting the course under section 13(4) of the SARFAESI Act then it follows that such a power could be exercised by a securitisation company only after obtaining permission from the Company Court and acting in terms of the directions issued by that Court. The aforesaid view has been followed and applied by Hon'ble the Supreme Court in para 40 of the judgment in the case of Bakemans Industries (P.) Ltd. (supra) by following the reasoning given in the case of Rajasthan Financial Corpn. (supra) which has already been extracted in the preceding para. 33. In Ram Kripal Singh v. State of Uttar Pradesh [2007] 79 SCL 78 (SC), it has been categorically held that the State Financial Corporation could exercise its power under section 29 unilaterally against a debtor as long as there is no order of winding up. After the order of winding up it cannot realise the mortgaged properties without the consent of the Official Liquidator, who cannot act without the directions from the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vention of Court or Tribunal and went on to hold on a point which it had earlier observed that was not a pointed controversy that "there was no apparent conflict between SARFAESI Act and the Companies Act and therefore does not appear to be any conflict between the sale of the security interest. The SARFAESI Act has to be harmonized in that the Act itself declares that is in addition and not in derogation of the Companies Act. It said at paragraph 41 that the objects of speedy recovery of loan from non-performing assets would be defeated if the O.L. would intervene to enforce the provisions of the Companies Act and to monitor each step of the securitization and enforcement of Security interest. The Company Court therefore must allow the provisions of SARFAESI Act to be put into motion even if the proceedings of the winding up have been recommended or are pending of that Company is under liquidation. The statutory duties of the Company Court for protecting the workmen's dues, and interest of the other stake holder including the public interest will however, oblige the Court to be informed with the process of sale"." 35. We are in complete agreement with the aforesaid observation ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cause there is no provision in the SARFAESI Act giving any conflict with the claim of the workers due as contemplated by section 529A of the Act. It is further pertinent to notice that a Division Bench of this Court has already upheld the order under challenge when its reasoning was adopted by the learned Company Judge in the case of Dhir & Dhir Asset Reconstruction & Securitisation Co. Ltd. (supra). The appeal against the order dated 26-3-2009 passed by the learned Company Judge in the aforesaid case has been dismissed by a Division Bench of this Court (of which one of us, M.M. Kumar, J. was a member). In para 2 of the judgment in Dhir & Dhir Asset Reconstruction & Securitisation Co. Ltd.'s case ( supra) a pointed reference has been made to the order under challenge and same reasoning adopted by the learned Company Judge, which reads as under :- "2. The Appellant Reconstruction Company moved an application being CA No. 151 of 2009 for modification of order dated 6-2-2009 passed by the learned Company Judge directing that assets of the company were not to be sold by any party without leave of the Court and had issued notice. The learned Company Judge adopted the reasoning given ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sel, that the appellant-reconstruction company is a completely 'free bird'. A perusal of section 13(9) of the SARFAESI Act would show that labour dues as contemplated by section 529A of the Companies Act have to be paid by the appellant reconstruction company. At this stage it would be the duty of the learned Company Judge to ensure that provisions of section 13(9) are complied with. It is worthwhile to notice that the appellant-reconstruction company is already kept outside the winding up and is required to give information to the Official Liquidator with regard to the proposal of sale etc. The sale notice to the public has to contain clause that winding up proceedings are pending before the Company Court. These directions are merely supervisory in character and do not put such fetters so as to conclude that the Appellant Reconstruction Company cannot conduct its function properly. The appeal does not warrant admission and the same is dismissed." [Emphasis supplied] (p. 211) 39. We are not inclined to take any detailed discussion casewise as cited by Mr. M.L. Sarin and Mr. Kamal Sehgal. The judgment of the Hon'ble Supreme Court in Transcore's case (supra) does not deal with the....