Noble Aqua Pvt. Ltd. and 2 ors. Vs. State Bank of India and 4 ors. - Court Judgment

A.K. Ganguly, C.J.

1. This writ petition has been filed by Noble Aqua Private Ltd.- petitioner No. 1, who claims to be a company registered under the Companies Act and petitioner No. 2 is the Managing Director of petitioner No. 1 and the petitioner No. 3 is the wife of petitioner No. 2, the Managing Director of the petitioner-company.

2. The petitioners are challenging a notice dated 7.4.2007 ssued under Section 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security on Interest Act, 2002 (in short 'Securitisation Act'). The basic challenge in the writ petition is that the said notice is in contravention of provision of Section 22 of the Sick Industrial Companies (Special Provision) Act, 1985 (hereinafter referred to as 'SICA').

The petitioners' case is that it was engaged in the export business of Marine Food Products along with processing and manufacturing of marine food products since 1995. The company was earning profit till 2002-03. But in view of a sudden fall in export business, the company sustained huge loss from the year 2003-04 and it could not repay its loan. As such the company approached the Board for Industrial and Financial Reconstruction (hereinafter referred to as the 'BIFR') by an application under Section 15(1) of the SICA on 7.10.2005 in the requisite form. Initially the BIFR refused to register the reference, but the petitioner appealed against the said order and ultimately by an order dated 26.12.2005 in Appeal Case No. 39 of 2005 the application of the petitioner was directed to be registered under Section 15(1) of the SICA. Thus the petitioner's request for declaring his industrial unit as a sick unit was registered as case No. 173 of 2005. After completion of all formalities, the BIFR by its order dated 19.10.2006 sent notices to different parties including the Chairman and Managing Director of State Bank of India and fixed the date of hearing to 14.11.2006 in the office of BIFR, New Delhi.

3. In the hearing before the BIFR, representatives of the opposite party-Bank attended and opposed the petitioner's plea for declaring it a sick company. However, in the adjudication before the BIFR a declaration was given that the petitioner-company has become a sick unit as on 31.3.2005 in terms of Section 3(1)(o) of SICA and in terms of the power available to BIFR under Section 17(3) of SICA, the BIFR Bench appointed the opposite party-Bank as Operating Agency with directions to prepare a revival scheme for it, if feasible. The said order dated 14.11.2006 (Annexure-8) also records the request made by the opposite party-Bank for permission under Section 22(1) of SICA, but the same was opposed by the consultant appearing for the company to the effect that the said permission would delay the revival of the company and the said permission was not ultimately granted.

4. It may be noted that no appeal was filed by the opposite party-bank against the said order of BIFR. Even before hearing took place before the BIFR a petition was filed before the DRT, Cuttack by the petitioner on 10.7.2006 for suspension of further proceedings before the DRT, Cuttack. However, after the aforesaid order of the BIFR, SBI on several dates requested the petitioner-company to furnish its financial position and wanted it to deposit certain money. This was done by the SBI by its communications dated 6.12.2006 and 11.12.2006. To that the petitioner gave its reply by letter dated 20 12.2006. The petitioner then requested the SBI regarding revival package of its unit by its letter dated 22.12.2006. The petitioner also wrote a letter to the BIFR requesting them to give a suitable direction to the operating agency of SBI to give the petitioner company time to furnish all details and for not insisting on the closure of its small bank account operation for the job work income purpose. However, the SBI gave a letter dated 26.12.2006 in this regard. In that letter (Annexure-14), reference was made to the DRT proceeding and it was said that the DRT will take measures for seizure of the factory premises and the other fixed assets of the petitioner company for sale through public auction for recovery of the decretal dues of the bank. The petitioner by its letter dated 1.1.2007 asked the BIFR to maintain status quo with regard to possession of the unit till finalization of the rehabilitation package.

5. However, the fact remains that the bank had issued a notice under Section 13(2) of the Securitisation Act to the petitioner-company on 10.9.2004 and the petitioner had given a reply to the said notice by letter dated 1.11.2004. In that, the petitioner did not dispute the liability. The petitioner gave a compromise proposal of one time settlement. On the basis of the said proposal of the petitioner for one time settlement, the bank by its letter dated 27.6.2005 wrote back expressing their conditional acceptance of the one time settlement proposal. Ultimately the bank had issued the possession notice under Section 13(4) of the Securitisation Act on 7.4.2007 and this writ petition has been filed for quashing the said notice, inter-alia on the ground that the impugned notice is contrary to Section 22 read with Sections 16, 17 and 18 of SICA.

6. The learned Counsel for the bank urged that once the bank has initiated a proceeding under Section 13(4) of the Securitisation Act, the proceeding before the BIFR abates and the protection which the petitioner is claiming under Section 22 of the SICA is no longer available. It was also stated that the Bank has taken actions bonafide and as available to it under law to recover huge outstanding dues against the petitioner-company. It has also been stated that the writ petition itself is not maintainable as against the possession notice which was issued by the Bank under Section 13(4) of the Securitisation Act, inasmuch as, if, against the said action of the Bank the petitioner is aggrieved, it has a right of appeal under Section 17 of the said act. It is also stated that the Securitisation Act, having a non-obstante clause, and being an enactment subsequent to SICA, prevails over SICA and the rights and powers which have conferred upon the bank as a secured creditor under the Securitisation Act cannot be taken away in any manner under the provisions of SICA. It was also submitted that even though the bank has been appointed operating agency in the BIFR proceeding under SICA, that does not take away the bank's right given to it under the Securitisation Act as a secured creditor. These are basically the rival contentions between the parties.

7. For a proper appreciation of the protection which is claimed by the petitioner under Section 22 of SICA, it will be appropriate to set out the provisions of the same and which are set out below:

22 (1) Where in respect of an industrial company, an inquiry under Section 16 is pending or any scheme referred to under Section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under Section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof (and no suit for the recovery of money or for the enforcement of any security against the industrial company of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority.

This is not in dispute that the rehabilitation scheme of the petitioner-company is either under preparation or consideration and that being the position, the protection is given to such a company against any initiation or continuation of any winding up proceeding or execution of such proceeding or distress or any proceeding of the like nature against the properties of the industrial company. The position is that there is no blanket ban in respect of such proceeding, but such proceeding cannot be either initiated or proceeded against such company, except with the consent of the BIFR or the Appellate Authority as the case may be.

8. Here, admittedly no consent has been sought for by the bank for further proceeding against the petitioner company under Section 13(4) of the Securitisation Act. It has already been referred to hereinabove that Bank's prayer for permission under Section 22(1) of the SICA has been recorded in the order dated 14.11.2006, but the said permission has not been granted. This is clear from the order dated 14.11.2006 under Annexure-8. Against the said order the bank has not file any appeal.

9. The provisions of Section 22 of SICA have been considered by the Apex Court in several judgments. Reference in this connection may be made to the decision of the Supreme Court in the case of Real Value Appliances Ltd. v. Canara Bank and Ors. reported in : [1998]3SCR170 . In that case, even though the Apex Court deprecated the conduct of the company as unfair inasmuch as its attempt to keep the High Court in the dark about the BIFR proceeding was frowned upon by the Apex Court, even then the Apex Court held that the same will not vitiate the BIFR proceeding and refused to accept the contention of the respondents that in view of the company's conduct before the High Court, the reference proceeding under Section 15 of SICA and its registration would become bad. After saying so, the Court examined the protection given under Section 22 of SICA and in paragraph 23 of the said judgment learned Judges held that it is the legislative intention to see that no proceedings against the assets are taken before any such decision is given by the BIFR and the learned Judges further held that the 'action against the Company's assets must remain stayed as stated in Section 22 till final decisions are taken by the BIFR' (See para 23 at page 2071of the report). The same thing has been reiterated in paragraph 29 of the judgment where the learned Judges held that once the reference is registered... prohibition contained in Section 22 shall immediately come into play. (See para 29 at page 2072 of the report).

10. Reliance was also placed by the learned Counsel for petitioners on the judgment of NGEF Ltd. v. Chandra Developers (P) Ltd. And Anr. reported in : (2005)8SCC219 where it has been held that SICA has a non obstante clause and is a special statute and a complete code by itself and SICA will prevail over the Companies Act. It has been held in paragraph 43 at pages 234-235 of the said report that before a decision is arrived at by the BIFR the parties are given the opportunity of hearing. The provision of Section 22 of SICA was also considered and it was held that under Section 22 BIFR is. empowered to issue any direction in the interest of the sick industrial company or its creditors or share holders and direct the sick industrial company not to dispose of its assets except with its assent. It was also held in the said paragraph (page 235) that the scheme of the Act suggests that BIFR retains control over the assets of the company.

11. Reliance was also placed on a judgment of the Supreme Court in Jay Engineering Works Ltd. v. Industry Facilitation Council and Anr. reported in : AIR2006SC3252 . In that case Section 22 of SICA again came up for consideration and in paragraph 16 it was reiterated that SICA is a complete code by itself and Section 22(1) has been quoted. After quoting the said Section, the learned Judges explained the said Section in paragraph 17 and the provision of Section 22 has been referred to as grant of 'statutory injunction'. It was held in paragraph 18 that the adjudicatory process of making an award of interest on delayed payment to Small Scale Ancillary Industrial Undertakings Act, 1993 may not come within the purview of SICA but once an award is sought to be executed, the same shall come within the purview of injunction under Section 22. In coming to the said conclusion the learned Judges relied on the non obstante clause in Section 32(1) of SICA. In paragraph 21 of the said judgment (page 3255), the legislative intent in enacting SICA has been explained as follows:

21. The 1985 Act was enacted in the public interest. It contains special provisions. The said special provisions had been made with a view to secure the timely detection of sick and potentially sick companies owning industrial undertakings, the speedy determination by a Board of experts for preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies and the expeditious enforcement of the measures so determined and for matters connected therewith or incident thereto.

12. Then again the rationale behind Section 22 of the Act has been explained in paragraph 22 at page 3256 of the said report, the relevant portion of which is set out below:.. Section 22 of the 1985 Act provides for a safeguard against impediment that is likely to be caused in the implementation of the Scheme. Section 22 was also held to be of wide import as regards suspension of legal proceedings from the moment, the inquiry is started till after the implementation of the scheme or disposal of the scheme under Section 25 of the 1985 Act.

13. In Morgan Securities and Credit Pvt. Ltd. v. Modi Rubber Ltd. reported in : AIR2007SC683 again the said Section 22 came up for consideration. In that case also the legislative intent behind the promulgation of SICA has been explained as follows :

SICA was enacted in order to afford maximum protection of employment, optimize the use of financial resources, salvaging the assets of production, realizing the amounts due to the Banks and to replace the existing time consuming and inadequate machinery by efficient machinery for expeditious determination and with a view to securing the timely detection of sick and potentially sick companies owning industrial undertakings, the speedy determination by a Board of experts of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies and the expeditious enforcement to the measure so determined and for matters connected therewith or incidental thereto.

14. In Bireswar Das Mohapatra and Anr. v. State Bank of India reported in 2006 (II) OLR 423, a Division Bench of this Court held construing Section 32 of SICA, which contains a non obstante clause, that the overriding clause in SICA is only subject to Foreign Exchange Regulation Act, Urban Land Ceiling Act and Section 72(a) of the Income Tax Act subject to the amalgamation of sick industrial company with another company. Save and except that, the provisions of SICA have been given an overriding effect over any other law. In paragraph 31 of the said judgment, the objects behind enacting SICA have been perceived as follows:

31. SICA was enacted in 1985 with the purpose of utilizing productive industrial assets and affording protection of employment and optimizing the use of the funds of the banks and financial institutions. For doing the same it was considered imperative to revive and rehabilitate the potentially viable sick industrial companies as quickly as possible. Thus the twin objects behind enacting SICA was to salvage the productive assets and realize the amounts due to the banks and financial institutions to the extent possible from the non-viable sick industrial companies through liquidation of those companies (see the Statement of Objects and Reasons of SICA)....

15. In view of such consistent judicial opinion, this Court holds that the petitioner company is entitled to protection of Section 22 of SICA. In this case, there is an order, on a contested hearing in which the Bank participated, that the company is sick and its revival package is Under process.

16. Faced with that situation, the learned Counsel for the bank argued that a reference under SICA will abate in view of the issuance of notice by the bank under Section 13(4) of the Securitisation Act.

In support of such contention learned Counsel relied on amendment to Securitisation Act under Section 41 thereof to certain enactments, and one of such enactment is SICA. Such amendments have been given in the Schedule to Section 41 of SICA. From a perusal of the said Schedule it appears that to Section 15 of SICA the following amendments have been introduced in Section 41 of the Securitisation Act. The said amendment is as follows:

In Section 15, in Sub-section (1), after the proviso, insert the following:

Provided further that no reference shall be made to the Board for Industrial and Financial Reconstruction after the commencement of the Securitization and reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, where financial assets have been acquired by any securitisation company or reconstruction company under Sub-section (1) of Section 5 of that Act.

Provided also that on or after the commencement of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, where a reference is pending before the Board for Industrial and Financial Reconstruction, such reference shall abate if the secured creditors, representing not less than three-fourths in value of the amount outstanding against financial assistance disbursed to the borrower of such secured creditors, have taken any measures to recover their secured debt under Sub-section (4) of Section 13 of that Act.

17. Relying on the proviso to the said amendment, learned Counsel submitted that in the instant case since the notice under Section 13(4) of the Securitization Act has been issued reference before BIFR has abated.

This Court is unable to appreciate the aforesaid contention. The proviso makes it very clear that same will come into force where a reference is pending before the BIFR. Such reference will abate if the secured creditors representing not less than three-fourths in value of the amount outstanding against financial assistance disbursed to the borrower, have taken any measures to recover their secured debt under Sub-section (4) of Section 13 of the Securitization Act.

18. In the instant case, admittedly the notice under Sub-section (4) of Section 13 of the Securitization Act has been issued on 7.4.2007. But long before that, the company has been declared a sick industrial company by an order of the BIFR dated 14.11.2006. Therefore, the proceeding under the SICA was not at the stage of reference. The proceeding has gone far ahead of that and culminated in an order by which the company was declared sick on 14.11.2006. The said order was passed by the BIFR after hearing the bank and by the said order the bank was appointed an operating agency with a direction to prepare the revival scheme. Therefore, in the facts of this case, the reference cannot abate since the matter under SICA is not pending in reference before the BIFR. Even though the bank is a party to the said order, it has neither filed any appeal therefrom nor has it asked for consent under Section 22 to proceed against the petitioner company. Therefore, this argument raised by the learned Counsel for the Bank cannot be accepted.

19. Learned counsel for the bank raised another contention, namely, that against the order under Section 13(4) of the Securitization Act there is a right of appeal under Section 17 of the said Act and the writ petition, without filing the appeal, is not maintainable. In the instant case the said argument of non-exhaustion of the statutory remedy by way of appeal cannot be accepted. In view of the bar under Section 22 of SICA, the bank cannot proceed with its notice under Section 13(4) of the Securitization Act. Therefore, where there is a clear statutory bar under SICA, which is a special statute, the right of appeal which is given against the step under Section 13(4) of the Securitization Act need not be exhausted by the petitioner in filing a writ petition challenging that step. It is well settled that one of the exceptions where the statutory remedy need not be exhausted is where there is a clear statutory bar on the part of the authority to enforce its case. So in the present case, the plea of non-exhaustion of statutory remedy cannot be a ground. Apart from that the question involved is a question of jurisdiction of the bank to exercise its power under Section 13(4) of the Securitization Act in view of the bar under Section 22 of the SICA. Since a valid question of jurisdiction falls for decision in this case, the High Court should decide such question instead of asking the parties to seek the statutory remedy.

20. Apart from that in the instant case, the Court has to give a harmonious construction of the overriding clauses contained both in SICA and in the Securitization Act. The Securitization Act is a later Act and in the Securitization Act the overriding clause is contained in Section 37, which is as follows :

37. Application of other laws not barred.- The provisions of this Act or the rules made thereunder shall be in addition to, and not in derogation of, the Companies Act, 1956 (1 of 1956), the Securities Contracts (Regulation) Act, 1956 (42' of 1956), the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) or any other law for the time being in force.

A perusal of the said Section makes it clear that the same will not be in derogation of any other law for the time being in force. Therefore, the protection which has been given to a sick industrial company under a previous special statute, namely, SICA of 1985 has not been taken away by Section 37 of the Securitization Act. The aforesaid amendment which has been made in Section 41 of the Securitisation Act has been discussed above and this Court has also held that as a result of such amendment the present proceeding under SICA cannot abate. Since the proceeding under SICA cannot abate and the petitioner has been declared a sick industrial company, the bank cannot proceed against the petitioner in respect of its notice under Section 13(4) of the Securitization Act in view of the statutory bar created under Section 22 of SICA.

21. So this writ petition succeeds and the notice under Section 13(4) of the Securitization Act is quashed. But this Court makes it clear that even after this decision, it is open to the bank to apply for the consent of the BIFF under Section 22(1) of SICA to proceed against the petitioner in terms of its notice under Section 13(4) of the Securitization Act.

Some other decisions have been cited at the bar, but in view of the facts of this case they are not discussed.

The writ petition is allowed to the extent indicated above. There shall be no order as to costs.

I. Mahanty, J.

22. I. agree