TaxTMI 
TaxTMI 
2009 (1) TMI 955
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....ocate FOR ONGC MR Kamal Trivedi, Ld. Advocate General, assisted by MS Sangeeta Vishan, AGP, for Opponent(s) CAV JUDGMENT (Per : HONOURABLE MR.JUSTICE D.A.MEHTA) (1) This group of appeals has been preferred challenging the judgment and order dated 09.07.2007 of the learned Single Judge (hereinafter referred to as 'the Company Court') dismissing Company Application No.489 of 2006 filed by the appellant of Appeal No.156 of 2007, and similar other matters. (2) It is an accepted position that the facts stated in Appeal No.156 of 2007 are similar to those involved in other appeals and the learned advocates appearing for the respective parties have treated O.J. Appeal No.156 of 2007 as the principal appeal. Hence, hereinafter reference to the facts shall be from the record of O.J. Appeal No.156 of 2007, unless specifically mentioned otherwise. The appellant has formulated the following 19 questions of law, stated to be arising out of the judgment of the Company Court: "QUESTIONS OF LAW: (i) Whether the Company Court has erred in adopting a completely erroneous procedure in the conduct of this application, particularly in impleading the Chief Contro....
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....s justified in rejecting the contention raised by the Appellant relying upon Section 28 of the Registration Act, 1908 read with Section 65 thereof that the registration of document at one place, where one of the properties in any of the loan transactions is situated is sufficient to fulfill the requirements of the Registration Act, 1908? (xi) Whether the Company Court was justified in rejecting the contention raised in Question (x) above, inter alia, on the ground that details of properties with separate identification, etc. as required under Section 21 of the Registration Act, 1908 have not been met by the Deed of Assignment and the Appellant cannot be heard to say relying upon Section 65 that it is the duty of Sub-Registrar to forward the document at various places for registration where the property is situated? (xii) Whether the Company Court has erred in not calling upon the Appellant to place before the Court the original document and examine the same particularly before opining that the details in respect of immovable properties are not sufficient to comply with the requirement of Section 21 of the Registration Act, 1908? (xiii) Whether the Company....
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....basket of debts of the Assignor Bank along with underlying security interest (if any) have been assigned/transferred on "as is where is" and "as is what is" basis to the Assignee Bank at the defined purchase price. On behalf of the Company (in liquidation), the Official Liquidator and the workmen of the Company (in liquidation), a preliminary objection was raised resisting the application for substitution made by the Assignee Bank. (4) The Company Court has found that the Deed of Assignment is not a valid piece of document for various reasons set out in the judgment and thus held that the request for substitution cannot be granted. The operative part of the impugned judgment reads as under: "39. In view of the aforesaid observations and discussion, as the rights are not acquired by the assignee through the process known to law, the applicants cannot be permitted to be substituted in place of secured creditors of the company in liquidation (assignor) However, in view of the aforesaid, the situation has arisen, resulting into abandonment of the rights by the assignor and non-acquiring of the rights by the assignee. It may be that in a given case on account of ultimate est....
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....he provisions of the Banking Regulation Act, 1949 (the B.R. Act). (6) Initially it was submitted that the said aspect of the matter could not be raised and considered in the appeal because the Company Court had raised the said issue, joined Reserve Bank of India (RBI) as a necessary party in the Company Application, RBI had filed two detailed affidavits along with the guidelines issued for purchase/sale of Nonperforming Financial Assets, and thereafter RBI was deleted from the array of the respondents. Thus in fact, the said issue had been considered by the Company Court and it can be presumed to have been held by the Company Court that such an exercise viz. sale and purchase of NPAs, was permissible under the provisions of the B.R. Act. Therefore, neither the Assignees nor the Assignors could be called upon to once again submit as regards an issue which was concluded in their favour by the Company Court, in appeals filed by the Assignee Banks. However, subsequently the learned counsel accepted that it was open to the Appellate Court to go into the said legal issue and various submissions have been made on the basis of the provisions of the B.R. Act. (7) It was submitted that....
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....yzing the aforesaid provisions it was contended that it was open to the Assignor Bank to deal with any property or any right in any such property which may form the security or part of the security for the purposes of satisfaction of any of its claims, and correspondingly it was permissible to the Assignee to acquire and hold and generally deal with any such property which is dealt with as aforesaid by the Assignor Bank. That once it was accepted that lending of monies and recovery thereof was a permissible form of business under the B.R. Act, acquiring and undertaking the whole or part of any such business was a permissible activity forming part of the same business. That it was open to do all such other things as are incidental or conducive to the promotion or advancement of the business of the banking company; meaning thereby, the Assignor Bank was entitled to sell away its NPAs as an incidental activity, or it was conducive to the promotion or advancement of the business of the Assignor Bank to get rid of its debts so as to ensure a better financial position. That the assignment of debt was only one of the modes of recovery. In summary it was submitted that the Assignee of an N....
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.... all loan accounts in the books of the Assignor Bank and the Assignee Bank would be treated as debts and it was open to transfer the same as a single portfolio. In support of the submissions, by way of illustration, it was submitted that it was always possible to gift immovable or movable property by one document, or mortgage various immovable properties situated in different parts of the country by one document, etc. 7.5) Similarly, it was submitted that the findings of the Company Court on the issue of registration are not correct. That registration of a document was permissible at a place where one of the properties was situated as provided under Section 28 of the Registration Act, 1908 (the Registration Act) and under Section 65 of the Registration Act the registering authority was under an obligation to inform other registering authority under whose jurisdiction the other properties were located. Similarly, in so far as provisions of the Bombay Stamp Act, 1958 (the Stamp Act) are concerned, it was submitted that the document was adequately stamped and the entire procedure adopted by the Company Court of calling upon the Chief Controlling Revenue Authority, Gujarat State, se....
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.... only the principal amount outstanding; whereas the debts actually run into hundreds of crores of rupees. That under the Securitisation Act such an activity was not permissible unless and until a securitisation company or a reconstruction company had been constituted in accordance with the provisions of the Securitisation Act. The assignee bank was thus acting as a Securitisation Company without following the required procedure under the provisions of the Securitisation Act. 8.1) Referring to provisions of Section 23 of the Indian Contract Act, 1872 it was submitted that object of an agreement or consideration of an agreement is lawful, unless forbidden by law, or if permitted, would defeat the provisions of any law, etc. and, therefore, permitting the assignee bank to go ahead with the assignment would defeat the provisions of the Securitisation Act. The transaction in question was also opposed to public policy, as the assignee bank would show in its balance-sheet an NPA of the assignor bank as if it was not an NPA considering the fact that the assignor bank had transferred the NPA at throw away price. That when the provisions of the Securitisation Act only envisage either the ....
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....s not entitled to the pari passu charge over the assets of the company (in liquidation). (9) Learned Advocate General appearing on behalf of the Chief Revenue Controlling authority submitted that the said authority had placed on record only its opinion in so far as calculation of the stamp duty is concerned without expressing any final view of the matter because the said authority had been called upon by the Company Court to assist the Court. The views expressed in the affidavitin- reply were only prima facie views and not an expression of opinion after adjudication of an issue. Therefore, the said expression cannot be permitted to be concluding the issue in so far as the assignor or the assignee banks are concerned. (10) In rejoinder, apart from reiterating what was stated in the principal address it was submitted that though vide Clause No.2.2.3 and 7.1.3 the Deed of Assignment talked of obligations being transferred, a reasonable construction of the Deed would show that the obligation vis-a-vis the debtor remained with the assignor and the agreement between the assignor and the assignee does not bind the customer. 10.1) That in so far as the modification of the charge a....
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....s of business in which banking companies may engage. -- (1) In addition to the business of banking, a banking company may engage in any one or more of the following forms of business, namely:-- (a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hoondees, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures certificates, scrips and other instruments and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller's cheques and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling of foreign exchange including foreign bank notes; the acquiring, holding issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the negotiating of loans and advances; the receiving of....
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....e, and all instruments referred to in clause (a) of sub-section (1) of Section 6." (13) The definition of the term "banking" would primarily denote that the same means accepting of deposits of money from the public which is repayable on demand or otherwise, and permitting withdrawal of such deposits by cheque, draft, etc.; the purpose of accepting such deposits of money is for lending or investment. Thus, the core business of any bank is to accept money deposited by a customer and utilise the same for lending to another customer or for the purposes of an investment. In other words, the deposits of money are accepted at certain rates of interest and such monies are invested or lent out at a rate of interest which is normally, marginally higher than the rate at which the deposits have been accepted entitling the bank to record profits by such differential rate of interest. The activity of lending would definitely include the right to recover the amount lent just as an investment carries with it a right to recover the amount invested after earning interest therefrom. In the simplest form of this business, "banking" as defined by Section 5(b) of the B.R. Act does not envisage any ri....
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....he depositors or prejudicial to the interests of the banking company; AND (d) to secure proper management of any banking company generally. Thus, the present transaction viz. assignment in question, cannot fall within any of the four prescribed requirements so as to enable RBI to record its satisfaction for the purposes of issuing directions. In fact, no directions are issued and guidelines cannot be equated with directions. If at all any directions have been issued they have not been placed on record and attention of the Court is not invited to any such directions. (15) At this stage, a contention based on a decision of this Court in the case of Barkha Investment and Trading Co. Vs. Commissioner of Income-tax, [2006] 281 ITR 316 (Guj.), may be considered. It was submitted that the aforesaid decision has laid down that a decision by the RBI would be final in so far as the financial system is concerned. The reliance is misplaced. The Court was concerned with efficacy of directions issued by RBI under the provisions of the Reserve Bank of India Act, 1934, namely, Reserve Bank of India's Non-banking Financial Companies (Directions), 1977. In the present, as noted, no directions....
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....rwise; (x) the providing of safe deposit vaults; (xi) the collecting and transmitting of money and securities; (18) On a close reading of the aforesaid activities it becomes clear that the concept of buying and selling is available as part of the additional business only for the purposes of certain categories of activities, for instance, in case of bills of exchange, hoondees, promissory notes, etc; or in case of dealing in bullion and specie; or foreign exchange, including foreign bank notes; dealing in stock, funds, shares, debentures, etc.; bonds, scrips or other forms of securities on behalf of constituents or others. The activity of purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the negotiating of loans and advances is one form of business, but the kind of transaction that is under consideration in the present case cannot fall within such an activity. The activity under contemplation in the clause is negotiating of loans, etc. for the constituents, namely, for whom bonds, scrips, etc. are purchased or sold. (19) Similarly, the second of the activities relating to lending or advancing of money ei....
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....underlying security guaranteeing repayment of the debt cannot be treated to be an independently tradable property. Such a property, namely, the underlying security, would come into possession of the banking company in satisfaction of the claim and not during subsistence of the claim. The stage at which the property comes into possession has to be understood and considered so as to correctly read the provision. An illustration of application of this clause would be where a suit for recovery is filed and the debtor offers some property, movable or immovable, in satisfaction of the claim; or, in a case where, when the suit is decreed in favour of the creditor, the Court or the Tribunal orders handing over possession of certain properties, may be of the guarantor also and not only of the borrower, towards satisfaction of the outstanding dues. Therefore, the activity of purchasing and selling debts cannot fall within clause (f) of sub-section (1) of Section 6 of the B.R. Act. (22) A great deal of emphasis was laid on behalf of the assignor and the assignee banks on provisions of Section 6(1)(g) of the B.R. Act to submit that this was one clause which permits dealing in any property o....
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.... appear. The assignor and the assignee banks thus cannot successfully contend that clause (g) permits them to trade in debts. (24) In fact the concept of trading in debts is, by its very nature, abhorrent to the concept of banking in any form, either the form of primary business of banking or the additional activities, namely, forms of business envisaged by provisions of Section 6 of the B.R. Act. The reason for this is not far to seek. A bank is normally not expected to function to the detriment of its financial well being. When a debt is purchased at a price fixed, may be after ascertaining the worth of the borrower by the seller, it is not possible for the assignee bank to say with certainty that the assignee bank shall earn therefrom, namely, recover more than what was paid for the debt to the assignor bank. This fact was accepted by the learned counsel appearing for both the assignor and the assignee banks, namely, the likelihood of incurring of loss in a transaction. More so when the transaction consists of a basket of debts wherein even the assignor bank is not in a position to specify the amount for which a particular debt falling within the basket is sold. To put it dif....
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....in the property of the company which the company can exchange, lease, mortgage, sell, improve, etc. A debt per se cannot be leased or mortgaged. First of all such a debt has to be property and right of the Company. The right that a company has is the right to recover its outstanding dues. An outstanding loan cannot be improved, developed, etc. therefore, all the activities envisaged by clause (l) take their meaning from the context. The said clause refers to the movable or immovable property which a bank may acquire or hold as a person, like a building in which the bank is housed, the furniture, fixtures, etc. which the bank acquires and holds, which can be sold, improved, managed, developed, exchanged, leased out, mortgaged, disposed of or turned into account or otherwise dealt with. Therefore, even this clause cannot permit any trading in debts. (26) The next clause, i.e. clause (m) of subsection (1) of Section 6 of the B.R. Act relates to acquiring and undertaking the whole or any part of the business of any person or company, when such business is of a nature enumerated or described in the sub-section. In other words, the entire business of another bank or a part of the busi....
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....trade in debts as a form of business which is incidental to the business of banking. In fact the prohibition laid down by sub-section (2) of Section 6 of the B.R. Act would operate and no banking company would be entitled to engage in any form of business other than those forms of business referred to in sub-section (1) of Section 6 of the B.R. Act. (28) It is not the case of either the assignor or the assignee banks that this is a form of business which the Central Government has, by notification in the official gazette, specified to be a form of business in which it would be lawful for a banking company to engage as stipulated by clause (o) of subsection (1) of Section 6 of the B.R. Act. (29) The issue may be considered from a slightly different dimension. Section 6(2) of the B.R. Act provides that no banking company shall engage in any form of business other than those referred to in Section 6(1) of the B.R. Act. Under Section 8 of the B.R. Act a banking company is prohibited from trading in goods, either by way of buying or selling or bartering of goods, except in connection with the realisation of security given to or held by the banking company. The Proviso to Section 8....
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....ction 6 of the B.R. Act, but the same is subject to the caveat laid down by Section 8 of the B.R. Act. The activity of trading, i.e. buying and selling, has been provided by the B.R. Act only in certain cases as noted hereinbefore, by only certain clauses of subsection (1) of Section 6 of the B.R. Act. The legislative scheme envisaged by Section 5(b), Section 6(1), Section 6(2) and Section 8 of the B.R. Act indicates that a banking company is not entitled to engage in any form of business other than those specified by Sections 5(b), 6(1) and the exception stipulated by Section 8 of the B.R. Act. The prohibition is absolute in terms when one reads Sections 6(2) and 8 together. Therefore, the recourse to provisions of general law cannot be had either by the assignor or the assignee bank, and the transaction in question cannot be said to be a transaction within the meaning of the provisions of the B.R. Act as a business and cannot be permitted. (31) During course of hearing the learned counsel for the assignor and the assignee banks placed heavy reliance on the following observations of this Court in the case of Commissioner of Income-tax Vs. Baroda Peoples Co-operative Bank Ltd., ....
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.... the business of banking. Thus all investments, even if one accepts Revenue's artificial distinction, surplus or not, are essential and conducive to the promotion or advancement of the business of banking." To submit that when the assignor bank divested itself of NPAs the balance-sheet of the assignor bank would reflect sound financial health of the assignor bank and would thus be in the interest of the customers viz. the depositors. (32) The aforesaid observations have to be first of all understood in the context of the controversy brought before the High Court in the said case i.e. : "Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was right in allowing deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, on interest income as being attributable to the business of banking?" The basic contention of the revenue therein was that the profits and gains envisaged by Section 80P of the Income-tax Act, 1961 must be profits and gains of business attributable to any one or more of the specified activities and the interest income earned on investments can be said to be attributable to investments which are only statutori....
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....ould vary from customer-tocustomer, which might have forced the customer to default. To lump all such outstanding loans and as a consequence the respective borrowers, in one basket by categorizing each one of them under one label or category would be doing injustice to the basic fabric of the trust reposed by the customer in the bank, in the banker. (34) More so, when the customer is not even intimated before the transaction, before the assignment is undertaken. Post assignment, mere intimation cannot be a substitute for a notice prior to the transaction being undertaken by the assignor bank. (35) The legislature has in the past, while framing laws relating to taking over / acquiring properties of citizens, not provided for an opportunity of hearing, but when such legislations have been challenged, the Apex Court has consistently laid down that a notice granting an opportunity of hearing is a must, even in absence of a provision. The case of C.B. Gautam Vs. Union of India & Ors., [1993] 199 ITR 530, relates to compulsory acquisition of property under provisions of Chapter XX-C of the Income-tax Act, 1961 wherein the Court has read in the requirement of a reasonable opportunit....
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.... the same creditor bank may have first charge and second charge over same or different properties of the same borrower. If the creditor bank cannot seek priority qua the debt relatable to the second charge in the winding up proceedings, then by merely clubbing such debts relatable to the first charge and the debts relatable to the second charge in one basket the assignee bank cannot claim that the assignee should be substituted in place of the first charge holder-assignor bank. Considering the nature of the basket it would become well nigh impossible for any one to locate the debt relatable to the second charge, and thus, the entire purpose of enacting Section 529A of the Companies Act would get frustrated. Hence, the exercise undertaken by the assignors and the assignees cannot be permitted in law. (38) The Scheme of the Securitisaction Act can be broadly divided into two parts. The first part being under Chapter II of the Securitisation Act dealing with REGULATION OF SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS OF BANKS AND FINANCIAL INSTITUTIONS; while the second part forming Chapter III relating to ENFORCEMENT OF SECURITY INTEREST. Thus as stated in the STATEMENT OF....
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....powering the banks and financial institutions to take possession of the securities and to sell such securities without the intervention of the Court. Thus, indicating that the concept of securitisation was, even otherwise, not available to a Banking Company who is a lender. If the lender cannot directly undertake securitisation, the law cannot be twisted and read to mean that the activity of securitisation can be undertaken by assignment of debts. (40) The assignors are not entitled to transfer the debts, with or without security, under the provisions of the B.R. Act, which lay down the kinds of business which the assignor or the assignee bank can, as banking companies, undertake. Therefore, unless and until the provisions of the B.R.Act permit transfer by way of the transaction in question, there is no question of undertaking an exercise to find out a prohibition and then, say that in absence of a specific prohibition treat the activity to be a permissible activity. To the contrary the position in law is, that only certain defined, specified activities laid down in the B.R.Act, and subsequently in the Securitisation Act, are permissible. Otherwise, as noted hereinbefore, the B.....
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....ion therefore not only involves assignment but also the concept of novation. If, as claimed by the assignor bank, the assignee bank has been substituted in the contract in place of the assignor bank, the entire contract containing respective rights and obligations would stand transferred, and as accepted by the Counsel for the assignee bank, the law does not permit transfer of obligations. Thus, if the obligations are not transferred, which obviously cannot be transferred, the original contract has undergone change, the terms have varied to the said extent, and thus there is a novatio. In such an eventuality the customer, unless and until a party to a contract with the assignee bank, would have no liability. The submission on this count, that the deed of assignment should be reasonably construed and that any such clause transferring obligation would not bind the customer, but would be binding only the parties to the agreement, requires to be noted only to be rejected. The agreement has to be read as a whole : it cannot be read to mean that one part binds the parties to the agreement and also the customer; while the other part is binding only to the parties entering the contract and....
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....ompanies Act in the following words: "13. Section 529-A of the Act opens with a nonobstante clause and stipulates that notwithstanding anything contained in any other provisions of the Act or any other law for the time being in force in the winding up of a Company, workers' dues and debts due to secured creditors, shall rank pari passu and shall be paid in priority to all other debts. Therefore, the said provision has an overriding effect not only qua the provisions of the Act but also any other law for the time being in force. Section 529-A of the Act was inserted on the statute book vide Act No. 35 of 1985 with effect from 24.5.1985 and, therefore, would override all other provisions of the Act as well as any other law in force on the said date. 14. Therefore, prima facie, provisions of Section 42 of ULC Act cannot claim primacy over provisions of Section 529-A of the Act considering the fact that ULC Act was brought on statue in 1976 while Section 529-A of the Act is a subsequent legislation brought on statute book in 1985. Possibly this aspect of the matter, may not have been brought to the notice of the Company Court. However, the jurisdiction vested in a....
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.... workmen's dues. The purpose of Section 529-A is to ensure that the workmen should not be deprived of their legitimate claims in the event of the liquidation of the Company and the assets of the Company would remain charged for the payment of the workers' dues and such charge will be pari passu with the charge of the secured creditors. There is no other statutory provision overriding the claim of the secured creditors except Section 529-A. This Section overrides preferential claims under Section 530 also. Under Section 529-A the dues of the workers and debts due to the secured creditors are to be treated pari passu and have to be treated as prior to all other dues. 9. Therefore, the law is clear on the matter as held in UCO Bank's case that Section 529-A will override all other claims of other creditors even where a decree has been passed by a Court. 10. Therefore, claims, if any, of O.N.G.C. will have to be worked out in accordance with Sections 529 and 529-A of the Companies Act as well. The contention advanced on behalf of O.N.G.C. by Shri Raju Ramchandran that if a mandamus had been issued, it will prevail over any law is not tenable and is rejecte....
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....iolation of the provisions of the B.R. Act, which is the statute governing the business conduct of the assignor and the assignee banks. Hence, various decisions cited at the Bar in relation to the provisions of T.P. Act, Registration Act, Stamp Act, etc. are not referred and dealt with. (48) To summarise: (a) neither the definition of the term "banking" as appearing in Section 5(b) of the B.R. Act, nor the extended meaning available in terms of provisions of Section 6 of the B.R. Act can take within its sweep the transaction in question; (b) the provisions of the B.R. Act do not give any right to deal in securities acquired at the time of lending; (c) the right to realize a security to ensure recovery of outstanding debt cannot be stretched to mean a right to deal in securities; (d) the definition of "banking policy" under Section 5(ca) of the B.R. Act cannot permit framing of such a policy which permits trading in debts as the debts are not acquired as a part of banking activity but come into existence upon advancement of a loan. The requirements of Section 5(ca) of the B.R. Act cannot be said to have been met with by such an assignment; ....
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....t of trading in debts is, by its very nature, abhorrent to the concept of banking in any form, either the form of primary business of banking or the additional activities envisaged by Section 6 of the B.R. Act; (n) the entire transaction is based on a speculative form of activity which can never be a permissible mode of activities as part of, or in addition to, or incidental to or conducive to the promotion for advancement of the business of a banking company; (o) the transaction in question is not a form of business which the Central Government has specified to be a form of business in which it would be lawful for a banking company to engage in, as notified in the official gazette; (p) Section 6(2) of the B.R. Act read with Section 8 of the B.R. Act and the Explanation under Section 8 of the B.R. Act make it clear that the kind of activity reflected by the present transaction cannot be permitted under the provisions of the B.R. Act. From this it cannot be inferred that because of the prohibition in the B.R. Act recourse can be had to general law; (q) the activity undertaken in the form of the transaction in question cannot be termed to be either....