CASE NO.: Appeal (civil) 5347 of 2007 PETITIONER: Zenith Steel Tubes & Industries Ltd & Anr. RESPONDENT: SICOM Limited DATE OF JUDGMENT: 21/11/2007 BENCH: Altamas Kabir & B.Sudershan Reddy JUDGMENT:
J U D G M E N T
Arising out of S.L.P. (CIVIL) NO.8486 OF 2007
Altamas Kabir, J.
1. Leave granted.
2. The appellant no.1 company was carrying on
business of manufacturing galvanised pipes. In
November, 1992 the appellant-company approached the
respondent for financial assistance amounting to
Rs.1,42,000/- to meet a part of the cost for setting
up a factory in village Madap, Taluq Kolhapur in the
District of Raigarh for the manufacture of
galvanised pipes. The said amount was duly
sanctioned and the said sum of Rs.1,42,000/- was
advanced by the respondent to the appellant company.
An agreement was entered into for a term loan and
the appellant-company also created a security for
repayment of the amount by hypothecating its plant
and machinery and creating an equitable mortgage of
its factory premises situated in the above mentioned
village. A loan agreement was executed on 30.3.1993
for repayment of the loan in various instalments. On
the same day, the second appellant executed a
personal guarantee for repayment of the loan amount
in case of default by the appellant-company.
3. The appellant-company committed several
defaults in repayment of the loan amount compelling
the respondent to issue a notice on 16.10.98 calling
upon the appellant-company to pay the overdue amount
within a stipulated period. Despite such notice, the
appellant-company failed to make payment and
accordingly, by a further notice dated 10.1.1999 the
respondent called upon the appellant-company to
repay the entire amount due and payable to the
respondent by 3.2.1999 failing which the possession
of the assets of the appellant-company would be
taken on 5.2.1999.
4. Since, despite such notice the appellant-
company failed and neglected to pay the entire
amount as demanded, the respondent issued a notice
to the appellant no.2 on 13.6.2000 calling upon him
to pay the entire amount by invoking the personal
guarantee given by the second appellant. As in the
case of the appellant-company, the second appellant
did not also make the payment as demanded, and
consequently, the respondent filed a petition
against the second appellant under Section 31(1)(aa)
of the State Financial Corporations Act, 1951, on
10.10.2000 for enforcing the personal guarantee
given by the said appellant.
5. In the meantime, the appellant-company applied
to the Board for Industrial and Financial
Reconstruction (BIFR) and was declared a sick
company by the BIFR under the provisions of the Sick
Industrial Companies (Special Provisions) Act, 1985,
(SICA), and the company is still under the said
Board.
6. Taking advantage of the aforesaid position, the
second appellant contended before the single Judge
of the Bombay High Court that in view of Section 22
of the aforesaid Act, the personal guarantee given
by the second appellant could not be invoked. It was
also contended that the respondent could not enforce
the guarantee till such time as the assets which had
been mortgaged in its favour had not been realised.
Both the said contentions were rejected by the
learned single Judge upon holding that the liability
of the guarantor was independent of that of the
principal debtor, and accordingly, the guarantee
could be invoked and the amount could be recovered
from the guarantor. The guarantor was directed to
pay Rs.1,67,89,225/- with further interest on the
principal amount of Rs.92 lakhs from the date of the
petition till payment at the rate of 12%. The said
decision of the learned single Judge was challenged
by the appellants herein before the Division Bench
of the Bombay High Court in Appeal No.1/2007. The
Division Bench on consideration of the different
decisions of this Court came to the conclusion that
the provisions of Section 22 of SICA, as amended in
1994, did not prohibit any proceeding, other than a
suit for enforcement of any security against the
guarantor. On such finding and also upon holding
that the liability of the guarantor was co-extensive
with the principal debtor and that the creditor was
not required to exercise his right as a mortgagee
before proceeding against the guarantor, the
Division Bench dismissed the appeal with costs on
29.1.2007. It is the decision both of the learned
single Judge as also the Division Bench of the High
Court which is the subject matter of this appeal.
7. Appearing in support of the appeal, Mr. Shekhar
Naphade, learned Senior Advocate, submitted that
both the learned single Judge and the Division Bench
of the High Court had erred in giving a narrow
meaning to the word suit as used in Section 22 of
SICA. He submitted that the context in which the
expression suit had been used in Section 22 of the
aforesaid Act made such expression all pervasive to
include other proceedings as well before a court or
other authority empowered to recover debts and other
dues against the company. It was urged that in the
case of Maharashtra Tubes Limited v. State
Industrial Corporation of Maharashtra Ltd. (1993) 2
SCC 144, it had been held that the expression
proceedings in Section 22(1) of SICA must be
widely construed and could not be confined to legal
proceedings understood in the narrow sense of
proceeding in a court of law or a legal tribunal for
attachment and sale of the debtors property.
However, since the said decision could be applied to
companies only and not to guarantors, the
legislature amended the provisions of Section 22(1)
so as to extend the protection given to companies to
guarantors also so that they too were given the
protection of Section 22 of the Act. Mr. Naphade
submitted that the object with which the 1985 Act
was enacted was primarily to assist sick industries
which had failed to meet their financial
obligations. It was urged that in certain cases it
was the Directors of the company who themselves
stood guarantee for the loans advanced to the
company and the enforcement of such guarantee
against the Directors would cause obstructions in
the way of the BIFR to revive the said company,
which was also one of the objects of the 1985 Act.
8. In this regard, Mr. Naphade also referred to
the decision of this Court in Patheja Bros. Forgings
& Stamping and anr. v. ICICI LTd. and others, 2000
(6) SCC 545, where the question involved was whether
Section 22 of the SICA would cover a suit against a
guarantor of a loan or advance that had been granted
to an industrial company. Mr. Naphade pointed out
that upon holding that the words of Section 22 were
crystal clear and there was no ambiguity therein,
this Court had held that no suit for enforcement of
a guarantee in respect of a loan or advance granted
to the industrial company concerned would lie or
could be proceeded with without the consent of the
Board or the Appellate Authority under the Act. Mr.
Naphade also submitted that while dealing with the
aforesaid question, this Court had overruled the
decision of the Bombay High Court in Madalsa
International Ltd. v. Central Bank of India, AIR
1998 Bom 247, wherein it had been held that Section
22 would apply to companies only and not to
guarantors who would be affected personally and the
words of any guarantee in respect of any loan or
advance granted to the industrial company would
have to be read as the guarantee given by the
industrial company itself and none else.
9. To emphasise his aforesaid submission Mr.
Naphade laid particular emphasis on the decision of
this Court in Paramjit Singh Patheja vs. ICDS Ltd.
(JT 2006 (10) SC 41) where in connection with the
enforcement of an arbitral award and the issuance of
an insolvency notice under Section 9(2) of the
Presidency Towns Insolvency Act, 1909 this Court,
inter alia, held that it is a well established rule
that a provision must be construed in a manner which
would give effect to its purpose and to cure the
mischief in the light of which it was enacted. It
was further observed that the object of Section 22
of SICA in protecting guarantors from legal
proceedings pending a reference to BIFR by the
principal debtor was to ensure that a scheme for
rehabilitation would not be defeated by isolated
proceedings adopted against the guarantors of a sick
company. In order to achieve such purpose, it was
imperative that the expression suit in Section 22
be given its plain meaning, namely, any proceedings
adopted for realisation of a right vested in a party
by law.
10. Mr. Naphade then submitted that the Bombay High
Court had wrongly relied upon the decision of this
Court in Kailash Nath Agrawal & Ors. vs. Pradeshiya
Industrial & Investment Corporation of U.P. Ltd. &
Anr. (2003 (4) SCC 305), wherein the decision
rendered by this Court in the Maharashtra Tubes case
(supra) as also in Patheja Bros. Forging case
(supra) were distinguished and it was held that in
both the cases while considering the effects of the
amendment to Section 22(1) of SICA, the Courts were
concerned with suits which had been dealt with in
the case of Patheja Bros, and not with proceedings
indicated in the first part of Section 22(1) of the
1985 Act. Mr. Naphade added that the decision in the
Maharashtra Tubes case (supra) had been rendered
prior to the amendment of Section 22(1) of SICA,
where as Pathejas case, as also the case of
Paramjit Patheja were rendered after the amendment
was effected, to extend the protection of Section 22
to guarantors as well.
11. Mr. Naphade submitted that the decision in
Kailash Nath Agrawals case had been rendered by
this Court in the context of interpretation of the
expressions suit and proceedings used in Section
22(1) of SICA, 1985. In construing the said two
expressions this Court was of the view that while
the expression proceedings used in Section 22(1)
would have to be confined to companies alone, the
expression suit had been introduced by amendment
to extend the protective cover of Section 22 to
guarantors as well. It was submitted that the
purpose for which such amendment had been effected,
namely, to extend the protective cover of Section 22
to guarantors also, would be rendered meaningless if
coercive action continued to be taken against
guarantors who could even be the Directors of the
company in question. It was urged that the
continuing ambiguity was sought to be explained in
the Paramjit Singh Patheja case (supra) wherein it
was explained that the expression suit would have
to be understood in a larger context to include
other proceedings as well before a legal forum.
12. Mr. Naphade submitted that, in any event, the
liability of the appellant No. 2 under the guarantee
given could be enforced under Section 31((1)(aa) of
the State Financial Corporations Act, 1951, only if
and when the appellant made a default in repayment
of the loan. Having regard to the fact that the
appellant No.1 had made a reference to the BIFR
under Section 15 of the 1985 Act, the liability of
the appellant-company stood suspended under Section
22 of the said Act. As the liability of the
appellant-company stood suspended, there could be no
question of any default having been committed by the
appellant company towards repayment of the loan.
According to Mr. Naphade, since the respondent had
filed an application under Section 31(1)(aa) of the
above Act making only a monetary claim against the
appellant no.2, on a true construction of the above
provisions the said Section permits enforcement only
of the security given by the guarantor and since in
the instant case the respondent had filed an
application not for enforcement of any security but
for claiming only the amount of guarantee the same
could not be enforced against the appellant No.2.
According to Mr. Naphade the appellant No.2 has not
given any other security which could be proceeded
against by the respondent.
13. Mr. Naphade submitted that the Bombay High
Court had no jurisdiction to entertain the
application made under Section 31(1)(aa) of the Act
and the order passed there above was a nugity.
14. It was also submitted that I.A. No.1 of 2007
was filed in the special leave petition for leave to
place on record additional grounds as set out in the
application and prayed that the same be allowed to
be placed on record by way of additional grounds.
Inasmuch as, such prayer was objected to on behalf
of the respondent, Mr. Naphade referred to the
decision of this Court in the Management of State
Bank of Hyderabad vs. Vasudev Anant Bhide etc., 1969
(2) SCC 491, wherein while considering as to whether
a claim was barred under Article 137 of the
Limitation Act, an objection was taken that such
ground had not been raised either before the Labour
Court or even in the special leave petition filed in
this Court. In the said case, on an application made
to permit the appellant to raise the question of
limitation based upon Article 137 of the Limitation
Act, this Court permitted the appellant to raise
such plea as no fresh facts were required to be
investigated and the matter could be dealt with as a
pure question of law.
15. Mr. Naphade also referred to the decision of
this Court in Pandurang Ramchandra Mandlik v.
Shantibai Ramchandra Ghatge and ors. (1989 Supp (2)
SCC 627) which was a case dealing with ousting of
jurisdiction of the Civil Court with regard to the
provisions of Section 80 and Section 85 of the
Bombay Tenancy and Agricultural Lands Act, 1948.
Referring to the decision of the Judicial Committee
in Secretary of State v. Mask and Company (AIR 1948
PC 105), where it was observed that the exclusion of
the jurisdiction of the Civil Court was not to be
readily inferred, but that such exclusion must
either be explicitly expressed or clearly implied,
it was held that there was nothing in the language
or context of Section 80 or Section 85 of the above
Act to suggest that the jurisdiction of the Civil
Court was expressly or by necessary implication
barred with regard to the question as to whether the
defendants have become statutory owners of the land.
16. Mr. Naphade concluded his submissions by urging
that both the learned single Judge and the Division
Bench of the Bombay High Court had misconstrued the
provisions of Section 22 of the 1985 Act, as
amended, in holding that the amended provisions
granting protection to guarantors in suits for
enforcement, could not be stretched to include
proceedings for enforcement as well.
17. Appearing for the respondent, Mr. Jay Savla,
learned advocate, contended that the controversy
regarding the protection given by Section 22 of SICA
to guarantors had been set at rest by this Court in
Kailash Nath Agrawals case (supra). He submitted
that while in the case of Patheja Bros. Forgings &
Stamping case (supra) this court had to consider
whether a suit against a guarantor would be covered
by the protection provided under Section 22(1) of
SICA, the question in Kailash Nath Agrawals case
this Court was concerned not with a suit but a
proceeding for recovery of dues and in those
circumstances this Court had examined the use of the
expressions proceeding and suit used in
different parts of Section 22(1) of SICA. It was in
that context that this Court distinguished the
earlier decision in Patheja Bros. Forgings &
Stampings case and upon holding that since the
legislature had expressly chosen to make a
distinction between suits for recovery of money and
enforcement of guarantees and proceedings for the
recovery of money, such distinction had to be given
effect to. It was held that even under the amended
provisions only a limited protection had been
afforded to guarantors with regard to the recovery
of dues by way of suit, but not by way of
proceedings, and, accordingly, a proceeding for
recovery of money against a guarantor would stand
outside the protection afforded under Section 22(1)
of the 1985 Act.
18. It was urged that in the instant case, a
situation similar to that in Kailash Nath Agrawals
case had arisen, since the proceeding had been
initiated against the guarantor under the relevant
provisions of the State Financial Corporations Act,
1951, which stood outside the purview of Section
22(1) of SICA.
19. Mr. Savla submitted that although the decision
in Kailash Nath Agrawals case was not referred to
by the Division Bench of the Bombay High Court, a
similar decision rendered by the Division Bench of
the Bombay High Court in Dewal Singhal vs. State of
Maharashtra (2001 (106) Company Cases 587) was
relied upon. In the said decision it was held that
the protection conferred on guarantors under Section
22 of SICA is a limited protection and the bar is
restricted only to a suit and did not apply to any
other proceedings.
20. Mr. Savla referred to the decision of this
Court in BSI Ltd. and Anr. v Gift Holdings Pvt. Ltd.
and Another, (2000 (2) SCC 737), which was rendered
in a slightly different situation involving a fine
imposed on a company in a criminal case against the
company and its Directors under Section 138 of the
Negotiable Instruments Act, 1881. It was held in
that case that the ban envisaged in Section 22(1) of
SICA would not be attracted in case of punishment of
fine imposed on the company for such offence if it
was with the consent of the BIFR. Furthermore, the
ban imposed under the said provision of SICA against
maintainability of a suit for recovery of money
would not cover prosecution proceedings for an
offence under Section 138 of the Negotiable
Instruments Act. This Court observed that as the
ambit of suit has been clearly delineated in
Section 22(1) itself, it could not be stretched by
employing the maxim that contemporaneous exposition
is the best and strongest in law.
21. Mr. Savla urged that a proceeding under the
State Financial Corporations Act could not be
equated with a suit as had been held by this Court
in Gujarat State Financial Corporation vs. M/s.
Natson Manufacturing Co.(P) Ltd. (1979 (1) SCR 372)
and having regard to the decision in Kailash Nath
Agrawals case (supra) such a proceeding would not
be entitled to the protection envisaged under
Section 22(1) of SICA.
22. As to the second limb of Mr. Naphades
submission regarding the right of the respondent to
proceed against the guarantor before realising its
securities, Mr. Savla reiterated the High Courts
view that the claim against the guarantor was
against him personally and was independent of the
sureties given in mortgage by the Principal Debtor.
Mr. Savla submitted that the decision rendered in
Kailash Nath Agrawals case does not appear to have
been brought to the notice of the Honble Judges
deciding the Paramjeet Singh Patheja case (supra)
and same was decided on other earlier decisions of
this Court which dealt essentially with suits for
recovery of dues.
23. It was submitted that since the Division Bench
of the High Court took a view which finds support in
Kailash Nath Agrawals case, no case had been made
out for interference with the same.
24. In the decisions of this Court cited before us,
two divergent views have been expressed in respect
of the same issue involved in this appeal. In the
other decisions, this Court had no occasion to go
into the said issue which involved the
interpretation of the Section 22(1) of the SICA in
respect of either proceedings or suits
respectively. In Kailash Nath Agrawals case
(supra) this Court has taken the view that the
legislature appears to have knowingly used two
different expressions in Section 22(1) of SICA,
namely, proceeding in the first part and the
expression suit in the second part and the
protection of Section 22 extended to guarantors in
respect of suits alone and the use of the expression
proceeding could not be extended to include suits
as well nor could the expression suit be extended
to include the expression proceeding also. On the
other hand, in Paramjeet Singh Pathejas case
(supra) it was held that the expression suit which
extends the protection of Section 22(1) to
guarantors, would have to be interpreted to include
proceeding also, in view of the intention of the
legislature to protect sick industrial companies
where references were pending before the BIFR. It is
also evident from the decision in Paramjeet Singh
Pathejas case (supra) that the views expressed in
Kailash Nath Agrawals case (supra) had not been
brought to the notice of the learned Judges who
decided the matter. Even if we are inclined to
agree with one of the two interpretations, the
anomalous situation will continue since the
decisions are that of coordinate Benches.
25. In such circumstances, we consider it fit and
proper that the matter should be referred to a
larger Bench to resolve the existing anomaly
resulting from the different views expressed in the
two above-mentioned cases.
26. Accordingly, the Registry is directed to place
this matter before the Honble the Chief Justice of
India for appropriate orders in the light of what
has been stated hereinbefore.
