TaxTMI 
TaxTMI 
2014 (11) TMI 1199
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....put hereunder: "The said company availed itself of various credit facilities from the appellant Bank and in consideration thereof it hypothecated its plant and machinery and other movables as securities therefor. Apart from the above securities, one Smt. P. Latha and one Sri P. Vara Prasada Raju, who are the Directors of the said company, stood guarantors for repayment of dues of the appellant. They mortgaged their immovable properties viz., large plot non-agricultural land situated in the State of Karnataka and two flats in Hyderabad. As there has been default in repayment of the loan amount by the said company to the appellant, the loan accounts were classified as Non Performing Asset (NPA). Accordingly, the appellant Bank under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as SARFAESI Act) took possession of the said securities followed by notification for sale of both mortgaged and hypothecated properties issued by the Authorized Officer of the appellant bank on 28th August, 2011. One M/s. United Steel Allied Industries Private Limited (hereinafter referred to as aucti....
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....tion purchaser complained that the possession of the said properties was not given and further there were dues claimed by several authorities and that the property is not free from encumbrance. As such, the auction purchaser avoided the sale and more so the appellant Bank threatened the auction purchaser to treat the loan account as Non Performing Asset. In this background, auction purchaser filed W.P. No. 19297 of 2012 on 26.6.2012 for the relief claimed therein. Thereafter, the auction purchaser also filed company application being C.A. No. 421 of 2013 for setting aside the sale alleging several irregularities, suppression of facts and violation of Sections 531, 531A and 537 of the Companies Act. It was further alleged that the properties are not properly valued and the encumbrances were not disclosed and possession was not delivered effectively. It was also asserted that there were several claims of taxes etc., of a large sum of more than One crore and as such the sale is liable to be set aside." 3. Thus, the aforesaid proceedings were brought in connection with the aforesaid sale and the same were heard by the Hon'ble trial Judge analogously. 4. In these proceedings, ....
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.... purchaser and if so it is liable to be set aside? 5. The Hon'ble trial Judge held that the sale conducted by the authorized officer is hit by the provisions of Sections 531, 531A & 537 of the Companies Act. It was held that since no leave of the Court was obtained, as required under sub-section (b) of Section 537 of the Companies Act, the sale is void. It was also held that it is an invalid sale as it was held within six months from the date of presentation of winding up petition, and also under Section 531A as the sale was held within a period of one year from the date of presentation of winding up petition. That apart, the learned Trial Judge held that the mandatory requirement for holding the sale as provided under Rule 9 (1) (2) (3) (4) & (5) of the Rules framed under the SARFAESI Act, having not been adhered to, the sale is also invalid. Therefore, His Lordship set aside the same and the writ petition (W.P. No. 19297 of 2012) and company application (C.A. No. 421 of 2013) filed by the auction purchaser were allowed, and the writ petition (W.P. No. 33655 of 2011) and company application (C.A. No. 1972 of 2011) filed by the appellant were dismissed. 6. Sri S. Ravi, le....
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.... held under SARFAESI Act can only be questioned before Tribunal under DRT alone, Company Court has no jurisdiction. 8. He also submits that Company Application No. 421 of 2013 in Company Petition No. 215 of 2010 and Writ Petition No. 19297 of 2012 filed by the auction purchaser are mala fide. The auction purchaser after having accepted the conclusion of the sale and having paid consideration money is estopped from setting up such plea. He argues that the immovable property admittedly belonged to the guarantors, who are private individuals, and the said company has nothing to do with it. The movable properties belonged to the company and were hypothecated to the appellant bank and the subsequent hypothecation to SBI Global Factors Limited does not invalidate the sale by the appellant. 9. Learned counsel for the Official Liquidator, while opposing this appeal, contends that the contention of the appellant is unacceptable as the principle laid down by the Apex Court in Allahabad Bank case (2000) 4 SCC 406 does not apply as the Apex Court in the said Case, looking into the provisions of the RDB and FI Act, wherein the said Act was stated to be overriding Act 1956. Therefore, the ....
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.... or before the fifteenth day of confirmation of sale of the immovable property or within such extended period as may be agreed upon in writing between the parties. This would be clear from the provisions of Rule 9(4) of the SARFAESI Act as the purchaser has remitted the sale consideration or arranged to adjust the sale consideration after the stipulated period. He complains that the appellant bank has also grossly violated the provisions of Sections 531 and 537 of Act 1956 that clearly mandates that sales as affected by the parties concerning the assets of the company in liquidation, as was done by the Indian Bank, are hit by the provisions of Act 1956. Apart from the judgment cited by him as above, he has placed reliance on the following decisions. "(i) Rajasthan State Financial Corporation and another v. Official Liquidator (2005) 8 SCC 190 (ii) Sri Siddeswara Cooperative Bank Ltd. v. Ikbal (2013) 10 SCC 83 (iii) Haryana State Industrial and Infrastructure Development Corporation v. Haryana Concast Ltd. (2010) 158 Company Cases 168" 11. Learned counsel for respondent No. 1, namely the auction purchaser, submits that the provisions of Act 1956 h....
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....the winding up of the company, the Company Court has jurisdiction to entertain and dispose of the same and hence the claim petition filed by the respondent auction purchaser is not maintainable and the Company Court was right in declaring that the said is void. He says that Section 537 of Act 1956 is mandatory and not directory. The word used in the provision is shall, which necessarily indicate mandatory character. Further, the very object of the provisions relating to winding up are to protect and balance the interest of various secured creditors, public dues and workmen etc. If without leave of the Court, the assets of the company are sold, the same will jeopardize the very object. On his part of legal submissions, he has placed reliance on the following decisions: "(i) Mathew Varghese v. M. Amritha Kumar and others (paragraphs 45 and 46 of the judgment) (ii) Saharas case (para 66 of the judgment) (iii) Bakemens Industries case (paras 40 & 76 of the judgment)" 13. Learned counsel for the SBI Global Factors Limited argues on the same lines as has been argued by the learned counsel for the Official Liquidator and opposes these appeals. 14. After he....
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.... as part of the securities. The said couple who are the Directors of the said company stood guarantors. It is further stated that the said company failed to repay the loan amount as per the terms of sanction and also loan documents and thus committed default in repayment of dues to the Bank. Because of failure as above, the said loan accounts were classified as Non Performing Asset accounts and the appellant Bank, being secured creditor, as per the provisions of SARFAESI Act, 2002, has invoked the provisions of the said Act after following due process of law as contemplated under the said Act and the Security Interest (Enforcement) Rules, 2002 has taken possession of the said properties and sold the secured assets i.e., the above said hypothecated and mortgaged properties. 18. In the affidavit in reply of the auction purchaser, while dealing with the above statement of the appellant Bank, in paragraph-7 made the following statement the averments in paragraph 11 and 12 (A) to (E) of counter-affidavit the facts borne out of record and hence they do not need any reply. The 2nd respondent Bank in these paragraphs narrated all the facts that led to filing of various cases against the....
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....vered dealing with not only company applications but also the writ petitions. But whether mortgaged securities can be brought for scrutiny before the Company Judge or not is the question. On careful reading of the entire judgment of His Lordship, we do not find that this issue was at all addressed. It appears that His Lordship proceeded on the basis that all the securities belonged to the company. It is settled position of law that shareholders and directors stands separate from the Company, as far as the legal status is concerned. We, therefore, clarify and hold that the Company Court has no jurisdiction in any manner whatsoever to deal with mortgaged properties even assuming the contention raised by the auction purchaser that the question of illegality and invalidity with regard to sale, is correct. This is absolutely inherent lack of jurisdiction. Therefore, we hold in exercise of jurisdiction under the Companies Act finding and decision of the learned Trial Judge with regard to mortgaged properties is without jurisdiction. The Company Court is concerned with regard to the assets and properties of the company in liquidation. 22. But this does not solve the problem as it appea....
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.... up in the case of a voluntary winding up, shall be deemed to correspond to the act of insolvency in the case of an individual. A. Avoidance of voluntary transfer.- Any transfer of property, movable or immovable, or any delivery of goods, made by a company, not being a transfer or delivery made in the ordinary course of its business or in favour of a purchaser or encumbrancer in good faith and for valuable consideration, if made within a period of one year before the presentation of a petition for winding up by the tribunal or the passing of a resolution for voluntary winding up of the company, shall be void against the liquidator. 537. Avoidance of certain attachments, executions, etc., in winding up by Tribunal.- (1) Where any company is being wound up by the Tribunal-- (a) any attachment, distress or execution put in force, without leave of the Tribunal against the estate or effects of the company, after the commencement of the winding up; or (b) any sale held, without leave of the Tribunal, of any of the properties or effects of the company after such commencement, shall be void. (2) Nothing in this section applies to any proceedings....
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....borrower: Provided that the reasons so communicated or the likely action of the secured creditor at the stage of communication of reasons shall not confer any right upon the borrower to prefer an application to the Debts Recovery Tribunal under section 17 or the Court of District Judge under section 17A. (4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:- (a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset; (b) take over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured asset: Provided that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt: Provided further that where the management of whole of the business or part of the business is....
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.... money which is received by the secured creditor shall, in the absence of any contract to the contrary, be held by him in trust, to be applied, firstly, in payment of such costs, charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue of the money so received shall be paid to the person entitled thereto in accordance with his rights and interests. (8) If the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secured asset. (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 upon by the secured creditors representing not less than sixty per cent in value of the amount outstanding as on a ....
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....application in the form and manner as may be prescribed to the Debts Recovery Tribunal having jurisdiction or a competent court, as the case may be, for recovery of the balance amount from the borrower. (11) Without prejudice to the rights conferred on the secured creditor under or by this section, the secured creditor shall be entitled to proceed against the guarantors or sell the pledged assets without first taking any of the measures specified in clauses (a) to (d) of sub-section (4) in relation to the secured assets under this Act. (12) The rights of a secured creditor under this Act may be exercised by one or more of his officers authorised in this behalf in such manner as may be prescribed. (13) No borrower shall, after receipt of notice referred to in subsection (2), transfer by way of sale, lease or otherwise (other than in the ordinary course of his business) any of his secured assets referred to in the notice, without prior written consent of the secured creditor. 35. The provisions of this Act to override other laws.-- The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other l....
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....he civil court has been ousted absolutely in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to determine. It will appear from Section 17 of the SARFAESI Act that any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of Section 13 taken by this secured creditor or his authorized officer under this Chapter may make application to the Debts Recovery Tribunal having jurisdiction in the matter within forty-five days from the date on which such measures had been taken. If aforesaid provision of sub-section (1) of Section 17 is read with Section 34, it would be clear that the Civil Court has no jurisdiction to entertain any move to challenge the action of secured creditor under this Act. A fairly recent decision of the Supreme Court in the case of Official Liquidator, U.P. and Uttarakhand v. Allahabad Bank and others ruled in paragraph-35 of the report as follows. 35. It has been submitted by Mr. Banerji, learned Senior Counsel, that if the Company Court as well as DRT can exercise jurisdiction in respect of the same auction or sale after adjudication by DRT, there would ....
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....d) 25. Again the Apex Court in case of Jagdish Singh v. Heeralal (2014) 1 SCC 479, observed in paragraph 24 of the report as proposition of law as follows: "Any person aggrieved by any of the measures referred to in sub-section (4) of Section 13 has got a statutory right of appeal to the DRT under Section 17. The opening portion of Section 34 clearly states that no civil court shall have the jurisdiction to entertain any suit or proceeding in respect of any matter which a DRT or an Appellate Tribunal is empowered by or under the Securitisation Act to determine. The expression in respect of any matter referred to in Section 34 would take in the measures provided under sub-section (4) of Section 13 of the Securitisation Act. Consequently, if any aggrieved person has got any grievance against any measures taken by the borrower under sub-section (4) of Section 13, the remedy open to him is to approach the DRT or the Appellate Tribunal and not the civil court. The civil court in such circumstances has no jurisdiction to entertain any suit or proceedings in respect of those matters which fall under subsection (4) of Section 13 of the Securitisation Act because those matters f....
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....ons in two different Acts on the same subject. Similar view is expressed by the Division Bench of the Bombay High Court in case of The Akola Oil Industries (under liquidation) through Official Liquidator v. State Bank of India 2006 (1) Bom. CR. 362. Therefore, the provisions of SARFAESI Act will prevail over the provisions of Section 537 of the Companies Act to the extent of inconsistency. We, accepting contention of Mr. S. Ravi, hold that no leave is required under Section 537 of the Companies Act, moreover jurisdiction of the Company Court is also ousted as discussed above. 29. Next, the question appears to us whether the provisions of Section 531 & 531A of the Companies Act will be applied or not in this case. 30. We have already held to the extent of inconsistency provision of the Companies Act are to be overlooked. For this, we have to examine the provisions of sub-sections (4) & (6) of Section 13 of the SARFAESI Act to find element of inconsistency on this issue. These provisions are set out hereunder: 13. Enforcement of security interest. (4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), ....
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....are constrained to hold that the provisions of Sections 531 & 531A have no manner of application and the same do not apply in case of valid sale undertaken under the SARFAESI Act and the Rules framed thereunder. Besides we fail to comprehend how Section 531A is applicable carefully reading the same on fact in this case. In order to apply this section, three factual conditions must be satisfied viz., (i) transfer must be by the company (ii) it must be voluntary (iii) such transfer must be within one year before presentation of winding up petition. In this case admittedly transfer is not made by company not even on behalf of the company, but by secured creditor, appellant herein, by virtue of power coupled with right under sub-section (4) of Section 13 of the SARFAESI Act. This could have been decided by the Debts Recovery Tribunal itself since writ court has decided on the admitted fact. Thus the decision of the Hon'ble trial judge while applying the aforesaid provisions in the instant sale without examining the implications of sub-sections (1), (4) & (6) of Section 13 of SARFAESI Act at all, is unacceptable legally. We accordingly overrule these findings and decisions in this r....
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....wing judgment of the Supreme Court and those of other High Courts granted relief. 39. Now, the fourth question is whether the sale can be held invalid because of the alleged non-compliance of the mandatory provisions of the Rules framed under the SARFAESI Act. 40. The learned trial Judge himself has noted that there is not enough material to examine the allegations made by the writ petitioners and countered by the appellant. In spite of noting this fact, the learned trial Judge thought that it should be decided and so decided. We are of the view that all materials namely advertisement, conditions of sale and other things are not produced before us also. Therefore we do not like to decide this issue conclusively nor do we accept such decision of the learned Trial Judge in absence of such materials and also for the reasons stated hereunder. 41. The learned trial Judge has not rendered any findings as to whether the loan granted to the auction purchaser subsequent to the auction being held are correlated to sale of the securities. In other words, whether repayment of the loan is dependent upon lawful and valid completion of sale held by the appellant under the SARFAESI Act. I....