IN THE HIGH COURT OF KERALA AT ERNAKULAM
WP(C).No. 27021 of 2010(C)
1. BPL LIMITED, HAVING ITS
... Petitioner
Vs
1. PEGASUS ASSETS RECONSTRUCTION
... Respondent
2. DEUTSCHE BANK AG, GLOBAL MARKETS
3. RESERVCE BANK OF INDIA,
For Petitioner :SRI.E.K.NANDAKUMAR
For Respondent :SRI.GEORGE THOMAS MEVADA
The Hon'ble MR. Justice C.K.ABDUL REHIM
Dated :22/11/2010
O R D E R
C.R.
C.K.ABDUL REHIM, J.
-------------------------------------------------------
W.P.(C).Nos. 25000 & 27021 of 2010
-------------------------------------------------------
Dated this the 22nd day of November, 2010
J U D G M E N T
———————-
The petitioner in WP(C).No.27021/2010 is a
Public Limited Company incorporated under the provisions
of the Companies Act 1956, carries on business inter alia in
manufacturing medical equipments in the field of cardiology,
patient monitoring, imaging etc (hereinafter referred to as
the petitioner company). They are also manufactures of
Printed Circuit Boards and alkaline Batteries. The company
claims to be providing employment to about 1200 persons,
directly and indirectly. The factory of the petitioner
company is located at Palakkad in Kerala. The petitioner in
WP(C).No.25000/2010 is a trade union registered under the
provisions of the Trade Unions Act 1926, representing
workers of the petitioner company.
2. The challenge in these writ petitions is against
proceedings initiated under section 13 of the Securitisation
and Reconstruction of Financial Assets and Enforcement of
W.P.(C).25000 & 27021/10 -2-
Security Interest Act (SARFAESI Act) by M/s. Pegasus Assets
Reconstruction Private Limited (respondent No.1 in
WPC.27921/2010 and respondent No.3 in WPC.No.25000/2010)
against the assets of the petitioner company.
3. Parties in both these writ petitions are one and the
same. The pleadings on facts and grounds, as well as exhibits
produced are more or less the same in both these cases. For the
sake of convenience, the order of the parties as well as the order
of exhibits is referred hereinafter as in its order in WP(C).
No.27021/2010.
4. A brief history on the facts of the case is as follows.
With respect to liquidating debts of the petitioner company, an
arrangement with its secured creditors and preferential share
holders were evolved in the form of a scheme, which was filed
before this court under the provisions of section 391 to 394 of
the Companies Act. The scheme was approved with effect from
31.3.2003, through Ext.P1 judgment in C.P.No.13/2005. By
virtue of the scheme, the debts of the petitioner company as on
31.3.2003 along with underlying securities were restructured
and the rights and liabilities between the petitioner and its
secured creditors and preferential share holders were settled.
The scheme in question is produced as Ext.P2.
W.P.(C).25000 & 27021/10 -3-
5. An Assets Reconstruction Company, viz. M/s. Assets
Reconstruction Company of India Limited (ARCIL) had acquired
debts and secured assets of the petitioner company from its
various secured creditors (Banks and other financial institutions)
by virtue of separate agreements. M/s. ARCIL, through
agreements dated 5.4.2008 and 7.4.2008 had assigned their
rights along with the underlying securities, which constitute
55% of the total debts of the petitioner company, in favour of the
2nd respondent, which is a banking company constituted under
the provisions of the Banking Regulation Act 1949 (BR Act) .
Exts. P3 and P4 are the agreements executed between ARCIl and
the 2nd respondent. The 2nd respondent in turn assigned the
above debts and underlying securities in favour of the 1st
respondent, which again is another asset reconstruction
company, by virtue of Ext.P5 agreement.
6. According to the petitioner company, they were
negotiating with the 2nd respondent Bank for settlement of the
liabilities. But pursuant to Ext.P5 agreement the 1st respondent
caused Ext.P7 legal notice calling upon the petitioner company
to make payment of outstanding balance of Rs.275,47,28,329.14
(Rupees Two Hundred and Seventy Five crores, Forty Seven
lakhs, Twenty Eight Thousand, Three Hundred and Twenty Nine
W.P.(C).25000 & 27021/10 -4-
and paise Fourteen only). The petitioner company had caused
Ext.P8 reply requesting the 1st respondent not to precipitate the
issue since negotiations with the 2nd respondent was at close to
finalisation of settlement. The 1st respondent was requested to
wait till finalisation of the proposed settlement. But the 1st
respondent issued demand notice under Section 13(2) of the
SARFAESI Act as per Ext.P9. Eventhough the petitioner
company had addressed the 2nd respondent Bank to permit
settlement of the liabilities in terms of the ‘one time settlement’
arrived upon, the 2nd respondent, through Ext.P11 letter, had
denied of having any such settlement. The petitioner company
thereupon caused reply to the demand under section 13(2),
which was considered and rejected by the 1st respondent through
Ext.P13. Subsequently the 1st respondent had issued Ext.P14
series notices under the Security Interest (Enforcement) Rules
2002 intimating steps taken as contemplated under section 13(4)
of the SARFAESI Act. The publication of possession notice was
effected through Ext.P15.
7. In both these writ petitions the proceedings initiated
under section 13 of the SARFAESI Act is challenged more or less
on the same grounds. Specific contention is that, the acquisition
of financial assets by a securitisation/reconstruction company
W.P.(C).25000 & 27021/10 -5-
from another securitisation/reconstruction company is not
permissible under the provisions of the SARFAESI Act, as
clarified by Reserve Bank of India in its Master Circular dated
1.7.2010 (Ext.P16). It was also contended that Section 5 of the
SARFAESI Act which permits acquisition of any financial assets
of a bank or a financial institution by any securitisation or
reconstruction company, does not contemplates a further
transfer of such financial assets to any other Bank or a financial
institution or a transfer by one securitisation or reconstruction
company to another securitisation or reconstruction company.
In other words, the provisions does not contemplate transfer of a
financial asset already acquired by a securitisation company or a
reconstruction company to any other Bank, or to any other
securitisation/reconstruction company. The contention is that
the provision contemplates only one transfer and not any
subsequent transfers. There is no provision enabling an Asset
Reconstruction Company (ARC) or a securitisation company for a
subsequent transfer of the secured assets and for that reason
subsequent transfers if any effected is without jurisdiction and
illegal. The powers conferred on a Securitisation/ARC under
section 13 of the Act is only to proceed against the borrower,
notwithstanding anything contained in section 69 or 69A of the
W.P.(C).25000 & 27021/10 -6-
Transfer of Property Act, in order to enforce a security without
intervention of the court or Tribunal, and such power can only
be exercised in the manner prescribed under the provisions
contained in the Act, and any deviation from the same cannot be
permitted, is the contention.
8. In view of the above proposition canvassed, contention of
the petitioner is that; the transfer of the debts and underlying
securities of the petitioner company by M/s. ARCIL to the 2nd
respondent and the subsequent transfer by the 2nd respondent
to the 1st respondent are illegal and invalid, and therefore the 1st
respondent is not entitled to invoke section 13 of the SARFAESI
Act. According to the petitioner, the contents of Ext.P13 letter
to the effect that the petitioner had already accepted and
acquiesced the transaction, could not be of no avail, because the
agreement between ARCIL and the 2nd respondent or between
the 2nd respondent and the 1st respondent does not indicate any
transfer of the rights to initiate proceedings under the
SARFAESI Act. When a statute does not permit certain
transfers, mere waiver or acquiescence will not amount to
legalising such illegal transfer. Since the transfers are void ab
initio, the question of consent or acquiescence does not arise,
is the contention.
W.P.(C).25000 & 27021/10 -7-
9. It is further contended that the 2nd respondent is a
banking company under the BR Act and its activity is strictly
confined to that of “Banking” as defined under section 5 (b) of
the BR Act. Being a Bank, the 2nd respondent is restrained from
undertaking any activity not permitted under section 6 of the BR
Act. Under section 8 of the BR Act the Banks are prohibited
from engaging in any trading or buying and selling, subject to
certain exceptions set out therein. Therefore, the acquisition of
debts by respondent No.2 from ARCIL is not an activity coming
within the purview of the BR Act. The agreement between
ARCIL and the 2nd respondent is in the nature of a speculative
trading activity which is prohibited under the provisions of the
BR Act. It is also contended that such an activity is prohibited
under the provisions of the SARFAESI Act since section 5 of that
Act permits only securitisation/reconstruction companies to
acquire financial assets. Since the 2nd respondent had never
validly acquired any title to the debts of the petitioner, any
subsequent transfer made by the 2nd respondent is void ab
initio. The alleged acquisition by way of agreement between
respondents 1 and 2 is a ‘non est’ in the eye of law and it will not
confer any right on the 1st respondent, is the contention.
10. According to the petitioner the entire transaction of
W.P.(C).25000 & 27021/10 -8-
assignment of debts of petitioner Company by ARCIL to the 2nd
respondent, and the further transaction of assignment by the 2nd
respondent to the 1st respondent, were done only to circumvent
the provisions of law restricting such transfers. Therefore it is
contended that the transactions are colourable and carried out in
order to defeat the legal restrictions. It is contended that such
transactions were done only with an unlawful intention of
circumventing provisions of the SARFAESI Act and such contract
is therefore void ab initio under the provisions of Section 23 of
the Indian Contract Act 1872. Further contention is that, since
the 2nd respondent held the debts only for a short period of less
than three months, it is evident that the said respondent was
trading in debts, circumventing the guidelines and the norms
prescribed by Reserve Bank of India. Therefore the petitioner is
seeking to quash the proceedings initiated under the SARFAESI
Act.
11. In the counter affidavit filed by respondents 1 and 2,
maintainability of these writ petitions were challenged on the
basis of availability of efficacious remedies provided under the
SARFAESI Act. Various legal precedents were pointed out in
which the Hon’ble Supreme Court had deprecated the practice
followed by some of the High Courts in interfering with steps
W.P.(C).25000 & 27021/10 -9-
initiated under the SARFAESI Act, exercising power under
Article 226 of the Constitution of India. The restrictions
imposed under section 34 of the SARFAESI Act barring
interference of the civil courts, was also pointed out. Further
contention is that the petitioner company had accepted the 1st
respondent as the ultimate assignee of its debts and also made
repayments to the 1st respondent. On the basis of such
acceptance and acquiescence the petitioner company could not
challenge the transfer of debts and assets in favour of the 1st
respondent, is the contention. The petitioner company was also
accused with suppression of material facts from this court, like
filing of WP(C).No.25000/2010 by the trade union seeking
identical reliefs on the very same grounds.
12. According to respondents there was a clear attempt of
misleading, which had resulted in multiplicity of proceedings and
abuse of the process of law. Impleading of the 2nd respondent
and the non impleading of ARCIL were pointed out in order to
contend that there is mis-joinder as well as non-joinder of
necessary parties. It is further contended that, the acquisition
of debts of the petitioner company was done after obtaining
sanction from the 3rd respondent, the Reserve Bank of India.
Copy of the request made by the 1st respondent in this regard
W.P.(C).25000 & 27021/10 -10-
and the sanction issued by the 3rd respondent are produced along
with the counter affidavit of the 1st respondent as Exts.R1(B) and
R1(C) respectively. It is further contended that subsequent to
the transfer of assets, the petitioner company had effected part
repayments to the 1st respondent, to the tune of a sum of
Rs.30,01,55,000/-. Ext.R1(E) series letters are produced to show
that the petitioner company had confirmed/acknowledged the
debt due to the 1st respondent and also acknowledged the
amounts outstanding, as on 30.11.2009. It is further pointed out
that the petitioner company, in its annual report for the financial
year 2008-09, had recognised the first respondent as its creditor
and in the auditors report it is admitted that the petitioner
company had defaulted repayments of amounts due to the
consortium lenders comprised of the first respondent. The first
respondent also points out that replies issued by the petitioner to
the statutory notices, Ext.R1(G) and R1(H) will indicate
acknowledgment of the outstanding liability due to the first
respondent.
13. According to the 1st respondent, acquisition of any
debt by a Bank and/or a subsequent assignment thereof is only
an act incidental/conducive to advancement of business of
banking, which is permitted under section 6(1)(n) of the BR Act.
W.P.(C).25000 & 27021/10 -11-
The assignment of security is a legally accepted right when the
debt is sold or purchased among banks. The sale and purchase
of debt/non performing debt is not an independent activity
carried out by the Banks, but it is a banking activity arising out
of and closely related to banking business, is the contention.
Since respondent No.3 had approved the assignment in favour of
respondent No.1, through Ext.R1(C), the petitioner can hardly
contend that the assignment is violative of the BR Act. It is
stated that, the BR Act does not prohibit in any manner a
banking company from dealing on its debts. On the other hand,
section 8 of the BR Act specifically permits such dealing, and
therefore the argument of the petitioner that the banking
company is not permitted to deal with debts under the BR Act, is
highly misconceived and untenable, is the contention.
14. It is further contended that the provisions of the
SARFAESI Act does not prohibit a banking company from
acquiring or otherwise dealing in securities. A financial asset
within the meaning of the SARFAESI Act includes a debt with
underlying security. Therefore contention of the 1st respondent
that the SARFAESI Act does not envisage dealing in debt by a
Bank, is incomprehensible. Section 13 of the Act provides
enforcement of a security interest by any secured creditor
W.P.(C).25000 & 27021/10 -12-
including a banking company or an asset reconstruction
company, and the same does not draw a distinction between the
powers of a banking company and an asset reconstruction
company, as far as enforcement of the securities held by them.
Therefore the contentions attempting any such distinction is not
legally tenable, is the argument.
15. The contentions of the petitioner that, section 5 will
prohibit acquisition of any financial asset by a Bank or a
financial institution from an asset reconstruction company, is
refuted. It is also refuted that section 5(2) does not contemplate
transfer of financial assets in between securitisation company or
reconstruction company or bank or financial institution inter se.
According to the respondents, it is well settled law that unless
the Act expressly prohibit such transfers, they are deemed to be
permitted. The SARFAESI Act does not restrict in any manner
any number of transfers, is the contention.
16. According to the 1st respondent the proceedings
initiated under section 13 of the SARFAESI Act is perfectly legal
and valid, because the transfers and acquisitions through which
the debts and the underlying securities were assigned to the 1st
respondent is legal and valid. The allegations of the petitioner
describing the assignment as a colourable transaction is stoutly
W.P.(C).25000 & 27021/10 -13-
denied and the further allegations that such transfer was
carried out in order to defeat the legal restrictions on
assignments of debts, is also denied. The allegation that such
transactions were initiated only for circumventing the provisions,
norms etc. are totally baseless. The further allegation that the
assignment agreements were executed with an unlawful object is
denied. The contentions that such agreements are hit by the
provisions of section 23 of the Indian Contract Act is also
refuted. The allegation that the assignment is non est and it is
a sham transaction was stoutly denied. There is no basis for the
contention that such assignments will not confer any valid rights
on respondent No.1, is the argument. The contentions based on
alleged violation of section 13(9) of the SARFAESI Act was also
denied by the 1st respondent.
17. Heard Mr. A.M. Shaffique, senior counsel appearing
for the petitioner in WP(C).No.27021/10 and Mr.P.K.Suresh
Kumar, counsel appearing for the petitioner in WP(C).
No.25000/10. On behalf of the 1st respondent, Mr.Pravin
Samdani, senior counsel addressed elaborate arguments.
M/s.ICICI Bank Limited, who got themselves impleaded as
additional respondents in both these cases was represented by
Mr.Pathrose Mathai, Senior Advocate. The 2nd respondent Bank
W.P.(C).25000 & 27021/10 -14-
was represented through Mr.V.Chithambaresh, Senior Advocate.
18. I am inclined to consider the question regarding
maintainability of these writ petitions as a foremost issue.
Mr.Samdani raised a contention that, challenge against the
proceedings under Section 13 of the SARFAESI Act could not be
entertained under Article 226 of the Constitution of India, in
view of Section 17(1) of the said Act. It is provided under
Section 17(1) that any person including the borrower if
aggrieved by any of the measures referred to in sub-section 4 of
Section 13, is at liberty to approach the Debts Recovery Tribunal
making an application in the matter, within 45 days from the
date on which such measures are taken. Placing reliance on
Mardia Chemicals Ltd. and others Vs. Union of India and
others [(2004) 4 SCC 311], learned counsel contended that
the proceedings under Section 17 of the Act, is not an appellate
in nature. The Hon’ble Supreme Court observed that it seems to
be a misnomer and in fact it is the initial action which is brought
before a forum as prescribed under the Act. It is the stage of
initial proceedings like filing of a suit in civil court. The Hon’ble
Supreme Court observed that, as a matter of fact, a proceedings
under Section 17 of the Act are in lieu of a civil suit, which
remedy is ordinarily available, but for the bar under Section 34
W.P.(C).25000 & 27021/10 -15-
of the Act. It is pointed out that, the Hon’ble Supreme Court had
struck down the provisions contained under Section 17(2) (which
then existed) insisting a pre-condition for payment of 75% of the
amount. Further, amendments brought in, with effect from
11.11.2004, had relieved the borrower from the burden of
making any pre-deposit. Therefore it is contended that invoking
remedy under Section 17(1) is more efficacious. In a very recent
decision of the Hon’ble Supreme Court in United Bank of India
Vs. Satyawati Tondon and others (2010 (8) SCC 110) it was
held that the remedy provided under Section 17 is equally
efficacious. It is found that sub-section 2 of Section 17 casts a
duty on the Tribunal to consider whether the measures taken by
the secured creditor for enforcement of security interest are in
accordance with the provisions of the Act and the Rules. If the
Tribunal comes to the conclusion that the measures taken by the
secured creditor are not in consonance with sub-section (4) of
Section 13, then it can direct the secured creditor to restore
management of the business or possession of the secured assets
to the borrower. The apex court held that the borrowers would
get a reasonably fair deal and opportunity to get the matter
adjudicated upon before the Debts Recovery Tribunal. The effect
of some of the provisions may be a bit harsh for some of the
W.P.(C).25000 & 27021/10 -16-
borrowers, but on that ground the impugned provisions of the
Act cannot be said to be unconstitutional, in view of the fact that
the object of the Act is to achieve speedier recovery of dues
declared as ‘NPAs’ and to achieve better availability of capital
liquidity and resources to help in growth in economy of the
country and welfare of the people in general, which would
subserve the public interest. In the said decision, the Hon’ble
apex court opined that the High Courts while exercising its extra
ordinary jurisdiction under Article 226 is duty-bound to take all
the relevant facts and circumstances into consideration.
Pointing out to the availability of effective alternate remedies the
Hon’ble apex court expressed serious concern that, despite
repeated pronouncements, the High Courts continue to ignore
the availability of statutory remedies under DRT Act and
SARFAESI Act and exercise jurisdiction under Article 226 for
passing orders which have serious adverse impact on the right of
Banks and other financial institutions for recover their dues. The
Hon’ble apex court also observed that they hope and trust that in
future the High Courts will exercise their discretion in such
matters with greater caution, care and circumspection.
19. Per contra, Mr.Shaffique put forth arguments
contending that the proceedings now initiated by the 1st
W.P.(C).25000 & 27021/10 -17-
respondent is wholly without jurisdiction and in such case
availability of alternate remedy is not a bar for the High Courts
to exercise jurisdiction under Article 226. He relied on the
decision of the Hon’ble Supreme Court in Whirlpool
Corporation Vs. Registrar of Trade Marks, Mumbai ((1998)
8 SCC 1) in support of the above proposition. It is held therein
that having regard to the facts of each case the High Court has a
discretion to entertain a writ petition. But the High Court has to
impose upon restrictions, one of which is that, if an effective and
efficacious remedy is available the High Court would not
normally exercise its jurisdiction. But it is held that the
alternative remedy will not operate as a bar in at least three
contingencies, namely, where the writ petition has been filed for
enforcement of any of the Fundamental Rights or where there
has been a violation of principle of natural justice or where the
order or proceedings are wholly without jurisdiction or when the
vires of an Act is challenged. A legal proposition somewhat
identical in nature was reiterated by the Hon’ble Supreme Court
in Harbanslal Sahnia and another Vs. Indian Oil
Corporation Ltd. and others ((2003) 2 SCC 107), following
the dictum laid in Whirlpool Corporation’s case (cited supra).
According to Mr. Shaffique, the observations contained in the
W.P.(C).25000 & 27021/10 -18-
United Bank of India’s case (cited supra) are subject to
propositions laid in the above two decisions, and the exemptions
mentioned therein are still available, which comes within the
absolute discretion of the High Courts to exercise writ
jurisdiction under Article 226.
20. While considering the rival submissions, it is pertinent
to take note of certain observations made by the Hon’ble
Supreme Court in United Bank of India’s case.
“It is thus evident that the remedies available to
an aggrieved person under the SARFAESI Act are
both expeditious and effective. Unfortunately, the
High Court overlooked the settled law that the
High Court will ordinarily not entertain a petition
under Article 226 of the Constitution if an
effective remedy is available to the aggrieved
person and that this rule applies with greater
rigour in matters involving recovery of taxes,
cess, fees, other types public money and the dues
of banks and other financial institutions. In our
view, while dealing with the petitions involving
challenge to the action taken for recovery of the
public dues, etc., the High Court must keep in
mind that the legislations enacted by Parliament
and State Legislatures for recovery of such dues
are code unto themselves inasmuch as they not
only contain comprehensive procedure for
recovery of the dues but also envisage
W.P.(C).25000 & 27021/10 -19-
constitution of quasi judicial bodies for redressal
of the grievance of any aggrieved person.
Therefore, in all such cases, High Court must
insist that before availing remedy under Article
226 of the Constitution, a person must exhaust the
remedies available under the relevant statute.
While expressing the aforesaid view, we
are conscious that the powers conferred upon
the High Court under Article 226 of the
Constitution to issue to any person or authority,
including in appropriate cases, any Government,
directions, orders or writs including the five
prerogative writs for the enforcement of any of
the rights conferred by Part III or for any other
purpose are very wide and there is no express
limitation on exercise of that power but, at the
same time, we cannot be oblivious of the rules of
self-imposed restraint evolved by this court,
which every High Court is bound to keep in view
while exercising power under Article 226 of the
Constitution. It is true that the rule of
exhaustion of alternative remedy is a rule of
discretion and not one of compulsion, but it is
difficult to fathom any reason why the High
Court should entertain a petition filed under
Article 226 of the Constitution and pass interim
order ignoring the fact that the petitioner can
avail effective alternative remedy by filing
application, appeal, revision, etc. and the
W.P.(C).25000 & 27021/10 -20-
particular legislation contains a detailed
mechanism for redressal of his grievance. It
must be remembered that stay of an action
initiated by the State and/or its
agencies/instrumentalities for recovery of taxes,
cess, fees, etc. seriously impedes execution of
projects of public importance and disables them
from discharging their constitutional and legal
obligations towards the citizens. In cases
relating to recovery of the dues of banks,
financial institutions and secured creditors, stay
granted by the High Court would have serious
adverse impact on the financial health of such
bodies/institutions, which ultimately prove
detrimental to the economy of the nation.
Therefore, the High Court should be extremely
careful and circumspect in exercising its
discretion to grant stay in such matters. Of
course, if the petitioner is able to show that its
case falls within any of the exceptions carved out
in Baburam Prakash Chandra Maheshwari v.
Antarim Zila Parishad MANU/SC/0399/1968 :
AIR 1969 SC556; Whirlpool Corporation v.
Registrar of Trade Marks, Mumbai
MANU/SC/0664/1998 : (1998) 8 SCC 1 and
Harbanslal Sahnia and Anr. v. Indian Oil
Corporation Ltd. and ors. MANU/SC/1199/2002 :
(2003) 2 SCC 107 and some other judgments,
then the High Court may, after considering all
W.P.(C).25000 & 27021/10 -21-
the relevant parameters and public interest,
pass appropriate interim order.”
21. Considering the dictum laid as above, which directly
deals with the question regarding exercise of writ jurisdiction
when the remedy provided under the SARFAESI Act is
efficacious, I am of the view that the petitioners have not been
able to make out any strong circumstances which warrants
exercise of the discretionary jurisdiction, despite availability of
the effective alternate remedy, which will squarely fall within any
of the contingencies enumerated in Whirlpool’s case which was
reiterated in Harbanslal Sahnia’s case. Hence I am of the view
that the writ petitions need not be entertained based on the
challenges raised, and the petitioners herein can be given liberty
to invoke remedies available under Section 17(1).
22. However, since a basic legal question is raised
regarding the validity of the transfer of debts and underlying
securities, and since elaborate arguments were advanced from
both sides on that issue, I am constrained to consider those
aspects. One of the main contentions raised is that Section 5(1)
of the SARFAESI Act will not enable any Bank or financial
institution to acquire the financial assets of any other Banks or
financial institutions. It is contended that no Bank or financial
W.P.(C).25000 & 27021/10 -22-
institution is empowered to conduct trading on assets. Further
contention is that no securitisation company or reconstruction
company is entitled to transfer the financial assets acquired by
such company to any other securitisation/reconstruction
company or to any other Bank/financial institution. In order to
have a better appreciation it will be be beneficial to examine the
relevant provisions of the SARFAESI Act. Section 5(1) to (4)
deals with acquisition of rights or interests in financial assets,
which reads as follows:-
“5. Acquisition of rights or interest in
financial assets- (1). Notwithstanding anything
contained in any agreement or any other law for
the time being in force, any securitisation
company or reconstruction company may
acquire financial assets of any bank or financial
institution-
(a) by issuing a debenture or bond or any
other security in the nature of debenture,
for consideration agreed upon between
such company and the Bank or financial
institution, incorporating therein such
terms and conditions as may be agreed
upon between them; or
(b) by entering into an agreement with such
Bank or financial institution for the
transfer of such financial assets to such
W.P.(C).25000 & 27021/10 -23-
company on such terms and conditions as
may be agreed upon between them.
(2) If the bank or financial institution is a
lender in relation to any financial assets
acquired under sub-section (1) by the
securitisation company or the reconstruction
company, such securitisation company or
reconstruction company shall, on such
acquisition, be deemed to be the lender and all
the rights of such bank or financial institution
shall vest in such company in relation to such
financial assets.
(3) Unless otherwise expressly provided by
this Act, all contracts, deeds, bonds,
agreements, powers-of-attorney, grants of legal
representation, permissions, approvals,
consents or no-objections under any law or
otherwise and other instruments of whatever
nature which relate to the said financial asset
and which are subsisting or having effect
immediately before the acquisition of financial
asset under sub-section (1) and to which the
concerned bank or financial institution is a
party or which are in favour of such bank or
financial institution shall, after the acquisition
of the financial assets, be of as full force and
effect against or in favour of the securitisation
company or reconstruction company, as the
case may be, and may be enforced or acted
W.P.(C).25000 & 27021/10 -24-
upon as fully and effectually as if, in the place of
the said bank or financial institution,
securitisation company or reconstruction
company, as the case may be, had been a party
thereto or as if they had been issued in favour
of securitisation company or reconstruction
company, as the case may be.
(4) If, on the date of acquisition of financial
asset under sub-section (1), any suit, appeal or
other proceeding of whatever nature relating to
the said financial asset is pending by or against
the bank or financial institution, save as
provided in the third proviso to sub-section (1)
of section 15 of the Sick Industrial Companies
(Special Provisions) Act, 1985 (1 of 1986) the
same shall not abate, or be discontinued or be,
in any way, prejudicially affected by reason of
the acquisition of financial asset by the
securitisation company or reconstruction
company, as the case may be, but the suit,
appeal or other proceeding may be continued,
prosecuted and enforced by or against the
securitisation company or reconstruction
company, as the case may be. ”
Section 9 of the SARFAESI Act deals with measures for assets
reconstruction, which reads as follows:-
“9. Measures for assets reconstruction-
Without prejudice to the provisions contained
W.P.(C).25000 & 27021/10 -25-
in any other law for the time being in force, a
securitisation company or reconstruction
company may, for the purposes of asset
reconstruction, having regard to the guidelines
framed by the Reserve Bank in this behalf,
provide for any one or more of the following
measures, namely:-
(a) the proper management of the business of
the borrower, by change in, or take over
of, the management of the business of the
borrower;
(b) the sale or lease of a part or whole of the
business of the borrower;
(c) rescheduling of payment of debts payable
by the borrower;
(d) enforcement of security interest in
accordance with the provisions of this Act;
(e) settlement of dues payable by the borrower; (f) taking possession of secured assets inaccordance with th provisions of this Act.”
Section 10 enumerates other functions of the securitisation
company or reconstruction company which reads as follows:-
“10. Other functions of securitisation
company or reconstruction company-
(1) Any securitisation company or
reconstruction company registered under
Section 3 may-
W.P.(C).25000 & 27021/10 -26-
(a) act as an agent for any bank or financial
institution for the purpose of recovering
their dues from the borrower on payment
of such fee or charges as may be mutually
agreed upon between the parties;
(b) act as a manager referred to in clause (c)
of sub-section (4) of section 13 on such fee
as may be mutually agreed upon between
the parties;
(c) act as receiver if appointed by any court or
tribunal;
Provided that no securitisation company or
reconstruction company shall act as a manager
if acting as such gives rise to any pecuniary
liability.
(2) Save as otherwise provided in sub-
section (1), no securitisation company or
reconstruction company which has been
granted a certificate of registration under sub-
section (4) of section 3, shall commence or
carry on, without prior approval of the Reserve
Bank, any business other than that of
securitisation or asset reconstruction:
Provided that a securitisation company or
reconstruction company which is carrying on,
on or before the commencement of this Act, any
business other than the business of
securitisation or asset reconstruction or
business referred to in sub-section (1), shall
W.P.(C).25000 & 27021/10 -27-
cease to carry on any such business within one
year from the date of commencement of this
Act. “
23. Based on the above provisions, contention of the
petitioner is that since a trading on assets or a transfer of the
assets acquired by a securitisation/reconstruction company to
any other securitisation/reconstruction company or to any other
Bank/financial institution is not provided under the statute, such
an act on the part of any securitisation/reconstruction company
will be beyond the powers vested on it, and in doing so they will
be exceeding its realm of activities which is permitted under law.
According to learned senior counsel for petitioner, merely
because there is no express prohibition in doing any such act,
the 1st respondent could not contend that such a transfer was
also contemplated under the Act. Any assignment which is not
within the scope of acquisition of rights or interest in financial
assets, could not be justified by attempting any broader
interpretations to the provisions, is the contention.
24. Learned counsel placed reliance on a decision of the
apex court in State of Uttar Pradesh Vs. Singhara Singh and
others (AIR 1964 SC 358) to canvass the proposition that, if a
statute has conferred a power to do an act and has laid down the
W.P.(C).25000 & 27021/10 -28-
method in which that power has to be exercised, it necessarily
prohibits doing of the act in any other manner than what has
been prescribed. The principle behind the rule is that, if this
were not so the statutory provisions might as well not have been
enacted similarly. In The Gujarat Electricity Board Vs.
Girdharlal Motilal and another (AIR 1969 SC 267) it is
observed that if the legislature has prescribed a mode for
exercising of any power, that power can be exercised only in that
manner and in no other manner. So also, in K.L.Gupte Vs.
Corporation, Greater Bombay (AIR 1968 SC 303) the
Hon’ble Supreme Court observed that, where large powers are
given to certain authorities, the exercise whereof may make
serious inroads into the rights of property of private individuals,
we have to see whether there is any guidance to be collected
from the Act itself, its object and its provisions, in the light of the
surrounding circumstances which made the legislation
necessary, taken in conjunction with well known facts of which
the court might take judicial notice. Learned counsel also placed
reliance on a decision of this court in A. Padmanabhan Vs.
District Collector, Trivandrum (AIR 1982 KERALA 177). A
learned Single Judge of this court, referring to provisions
contained in Section 65 of the Kerala Revenue Recovery Act,
W.P.(C).25000 & 27021/10 -29-
observed that unless it is possible to locate specific conferment
of power to continue the recovery proceedings, even by resort to
Section 65, arrest in such cases has to be faulted.
25. Attempt of Mr.Samdani, learned senior counsel, on
the other hand, is to illustrate that Section 5(1) and (2) of the
SARFAESI Act will take within its scope and ambit any
acquisition of rights or interests in any financial assets from any
bank or financial institution or from any securitisation company
or reconstruction company, as the case may be. He pointed out
the wordings in Section 5(1), “may acquire financial assets of
any bank or financial institution “. He specifically points out that
the wording is “of any bank ” and not “from any bank “.
Referring to sub-section (2) of Section 5 it is also pointed out
that the securitisation company or reconstruction company on
acquisition of the financial assets will be deemed to be the
lender having all rights of such bank or financial institution
vested on it. That means the securitisation company or
reconstruction company will be vested with the right to transfer
the financial assets also, as a right which the bank or financial
institution is vested with, being a lender. The counsel further
draws attention to the definition of ‘financial asset’ under
Section (2)(1)(l) of the SARFAESI Act which includes any debt
W.P.(C).25000 & 27021/10 -30-
and beneficial interests in such debt [Section 2(1)(l)(ii) & 2(1)(l)
(v)]. The definition of debt under Section 2(1)(ha) in the
SARFAESI Act is as assigned in Section (2)(g) of the Recovery of
Debts due to Banks and Financial Institutions Act, 1993 (RDB
Act). The debt defined under Section 2(g) of the RDB Act will
take in the assigned debt also. Therefore it is contended that a
debt assigned by a bank or a financial institution in favour of a
securitisation/reconstruction company will also become a
financial asset which is assignable under Section 5(1) of the
SARFAESI Act. He further points out that by virtue of
amendments brought to the RDB Act in the year 2004 in Section
2(h)(ia), the definition of ‘financial institutions’ is expanded to
include securitisation companies or reconstruction companies
registered under the SARFAESI Act. Therefore it is contended
that any debt which is a financial asset, which has been acquired
by any financial institution, which includes a
securitisation/reconstruction company, is assignable under
Section 5(1) of the SARFAESI Act. Learned counsel further
pointed out definition of ‘secured creditor’ under Section 2(1)(zd)
of SARFAESI Act. By virtue of amendments brought in the year
2004 securitisation company or reconstruction company as the
case may be are also included along with bank or financial
W.P.(C).25000 & 27021/10 -31-
institutions. Therefore it is contended that on the basis of
acquisition of rights or interests in any financial asset of a bank
or a financial institution or securitisation/ reconstruction
company will automatically be placed in the status of a secured
creditor and therefore all rights for transfer or for reconstruction
or securitisation can be exercised by such a company in par with
exercise of such rights by the bank or financial institution.
26. Mr. Samdani further points out that the measures for
asset reconstruction provided under Section 9 is without
prejudice to provisions contained in any other law for the time
being in force. He also points out that Section 37 of the
SARFAESI Act makes it clear that the provisions contained
therein shall be in addition to and not in derogation of various
other statutes, including the RDB Act. Therefore, considering
the definition of various terms and other provisions contained in
the RDB Act the power of the reconstruction/securitisation
company is more wide, clear and evident is the contention.
27. While analysing the rival contentions, I notice that the
term ‘security interest’ is defined under Section 2(1)(zf) to mean
a right, title and interest of any kind created upon a property in
favour of a secured creditor by virtue of a mortgage, charge,
hypothecation or assignment, other than those specified in
W.P.(C).25000 & 27021/10 -32-
Section 31 of the Act. Section 2(1)(ze) defines ‘secured creditor’,
which includes among others any securitisation
company/reconstruction company also. Definition of ‘secured
debt’ in Section 2(1)(ze) when read with the definition of
‘secured creditor’ would indicate that the term ‘secured creditor’
has been assigned with a meaning under the SARFAESI Act,
other than what is understood in common parlance. Sub-section
(1) of Section 13 confers right on a ‘secured creditor’ to enforce
‘security interest’ without intervention of any court. The right
which a secured creditor can enforce is a ‘security interest’,
which according to its definition in the SARFAESI Act includes a
right created even by assignment. Since the definition of
‘secured creditor’ includes the securitisation/reconstruction
companies, such institutions are conferred with powers for
enforcement of security interest. When a securitisation or
reconstruction company acquires an asset, it becomes a ‘secured
creditor’, who is fully entitled to enforce the rights under Section
13. Going by the definition of ‘financial institutions’ as
illustrated above, it is evident that any Bank or financial
institutions as well as any securitisation or reconstruction
companies is entitled to acquire ‘security interest’ as
contemplated under Section 5(1) of the SARFAESI Act. The
W.P.(C).25000 & 27021/10 -33-
contention that such acquisition of rights or interest in financial
assets can only be carried out by a securitisation company or a
reconstruction company alone and not by any Bank or financial
institutions, is in my view, contrary to the scheme of the
SARFAESI Act, especially in view of the amendments brought
into definitions of various terms under the SARFAESI Act as well
as under the RDB Act.
28. The further question to be considered is as to whether
the 2nd respondent was restrained from acquiring any financial
assets in view of any of the provisions contained in the Banking
Regulation Act. As discussed above, since acquisition of
financial asset is a matter governed by provisions contained in
the SARFAESI Act, which enable any banking company to do
such transactions, I am of the view that unless the provisions in
the BR Act contains any specific restrictions, the 2nd respondent
could not be prevented from engaging in any such activity. Yet
another contention is that the provisions contained in the BR Act
expressly prohibits from engaging any trading or buying and
selling. In view of the findings arrived as above, I am not
agreeable with the contention that the acquisition of the
financial assets through transfer by itself will come within the
purview of, trading or buying or selling, as contemplated under
W.P.(C).25000 & 27021/10 -34-
Section 8 of the BR Act. Therefore I hold that the transfer of
secured assets of the petitioner company by ARCIL to the 2nd
respondent and the subsequent transfer by the 2nd respondent to
the 1st respondent are not in any manner prohibited and it is not
contrary to any of the provisions contained under the SARFAESI
Act or under the RDB Act or under the BR Act.
29. Further controversy exist as to whether the guidelines
issued by the Reserve Bank of India (RBI) is in any way
preventing the subsequent assignments of financial assets. It is
evident that the acquisition of the debts and the underlying
securities of the petitioner company was done after obtaining
sanction from the RBI. The documents produced as Ext.R1(B)
and R1(C) will clearly prove this aspect. Learned senior counsel
for the petitioner company placed reliance on clause (10) of the
RBI Guidelines, which was introduced on 22.4.2009. But it is
evident that the transfer of assets in the case at hand, from
ARCIL to the 2nd respondent and from the 2nd respondent to the
1st respondent, took place during the year 2008, which is well
before introduction of the above said guidelines. Therefore, in
view of the specific sanction obtained from RBI, such question
does not arise for consideration. Hence I hold that the impugned
transfers with respect to the debts and securities of the
W.P.(C).25000 & 27021/10 -35-
petitioner company is legal and valid, and such transactions
were done perfectly within the powers vested on respondents 1
& 2.
30. Incidentally it is worth mentioning that WP(C).
25000/2010 was filed by a Trade Union representing workers of
the petitioner company. The Trade Union is also challenging the
very same actions which are initiated under Section 13 of the
SARFAESI Act. The 1st respondent had questioned
maintainability of the writ petition on the ground of ‘locus standi’
of the petitioner. Mr. P.K. Suresh Kumar, learned counsel
appearing for the petitioner therein contended that the workers
of the company, being persons affected by taking over of
management of the company by the secured creditor (1st
respondent herein), are persons aggrieved by such actions and
hence they are entitled to challenge the validity of such actions.
Referring to a judgment of the Hon’ble Supreme Court reported
in AIR 1983 SC 75, the counsel pointed out that the apex court
held that the workers of a company can even resist a
proceedings initiated for winding up of the company. In view of
the fact that I am upholding validity of the assignments of debt
and securities of the petitioner company, in between
respondents 1 to 3, I am of the view that the question regarding
W.P.(C).25000 & 27021/10 -36-
maintainability of the said writ petition need not be adjudicated
upon. However, it is made clear that, if the petitioner in WP(C).
25000/2010 is further pursuing the challenges, the respondents
are at liberty to raise challenges on the question of
maintainability, and all the contentions raised in that respect is
left open for agitation.
31. The additional 4th respondent, M/s.ICICI Bank Ltd., is
sailing together with the petitioner company in its contentions
on merits of the grounds raised in these writ petitions. The
additional respondent claims to be a share holder of the
petitioner company alloted with considerable shares. Here also,
the 1st respondent is raising strong objections regarding ‘locus
standi’ of the share holder to raise challenges against the
proceedings initiated under the SARFAESI Act. But, for the very
same reasons as stated above, I am not entering upon any
findings with respect to the question regarding ‘locus standi’ of
the additional 4th respondent. Those questions are also left open
for agitation to all the parties concerned.
32. Senior Advocate Mr.V.Chithambaresh appearing for
the 2nd respondent Bank raised strong contentions in support of
the 1st respondent. It is alleged that the 2nd respondent was
unnecessarily dragged on to these litigations by suppression of
W.P.(C).25000 & 27021/10 -37-
material facts, with an attempt to mislead the court and
therefore they are entitled to be awarded with compensatory
costs. He also emphasized the contentions put forth by the 1st
respondent, to the effect that there was material suppressions
and the petitioners have not approached this court with clean
hands. He placed reliance on various reported decisions of this
court as well as the Hon’ble Supreme Court to canvass the
position that if the petitioner is approaching the court with
unclean hands suppressing material facts, then such litigations
are liable to be dismissed with compensatory costs. However, in
view of the fact that these writ petitions were entertained and
elaborate considerations on various legal questions were
attempted, I am not inclined to dismiss any one of the writ
petitions, solely on the premise of the alleged suppressions or
misleadings. In that respect alone I am not inclined to throw out
the writ petitions at the threshold. Considering the challenges
raised, I do not find force in the contention that the 2nd
respondent is a total stranger and a totally unnecessary party to
be impleaded.
33. It is pertinent to take note of the contentions of the 1st
respondent regarding the acknowledgment of debt by way of
part payments made by the petitioner company to the 1st
W.P.(C).25000 & 27021/10 -38-
respondent. The 1st respondent had produced Ext.R1(E) series
letters to show that the petitioner company had
confirmed/acknowledged the debt due to the 1st respondent and
also the amounts outstanding. It is further pointed out that the
annual report of the petitioner company contains such
acknowledgements. The contention of the 1st respondent is that
the petitioner company is prevented from raising any dispute in
view of the acquiescence. Per contra, contentions of the
petitioner company is that even assuming such acknowledgment
of debt or acquiescence exists, it will not prevent the petitioner
from raising the basic dispute regarding entitlement of the 1st
respondent to initiate proceedings under Section 13 of the
SARFAESI Act. With respect to the above controversy, I am
refraining from entering on any adjudication and from arriving at
any conclusions, in view of the fact that, as already observed, I
am proposing to reserve liberty of the petitioners to invoke
remedy under Section 17(1) of the SARFAESI Act, if sustainable
under law, on any of the grounds, other than the challenges
raised regarding legality and validity of the transfer of security
interest, which is held as valid herein above.
34. For the reasons mentioned above I am of the
considered view that these writ petitions deserve no merit.
W.P.(C).25000 & 27021/10 -39-
Challenge raised against the proceedings initiated under the
SARFAESI Act on the ground that, assignment of debts and
underlying securities of the petitioner company by M/s.ARCIL to
the 2nd respondent and the subsequent assignment by the 2nd
respondent to the 1st respondent in WP(C).27021/10 (3rd
respondent in WP(C).25000/10) is illegal and invalid, is hereby
negatived. I hold that those transactions are legal and valid
under the provisions of the SARFAESI Act, RDB Act and BR Act,
and it is not violative of the guidelines or norms prescribed by
the RBI. Accordingly the writ petitions are dismissed.
However, rights if any available to the petitioner to
challenge the proceedings initiated under the SARFAESI Act, on
any other grounds, are left open to be agitated before the
appropriate forum under Section 17(1) of the said Act.
C.K.ABDUL REHIM, JUDGE.
okb/pmn