Mandvi Co-Operative Bank Ltd. And ... vs Anant V. Hegade
2006 Latest Caselaw 1064 Bom

JUDGMENT

D.Y. Chandrachud, J.

1. The Insolvency Petition was filed by the Mandvi Co-operative Bank Ltd., on the basis of an award of the Co-operative Court dated 7th August, 2000. Based thereon, an Insolvency Notice was taken out on 9th May, 2003 under which the amount that was due and payable was quantified at Rs. 94.07 lakhs with future interest on the principal sum of Rs. 69.21 lakhs from 1st July, 2002. The Insolvency Notice was served on the Debtor on 24th December, 2003. The Debtor took out a Notice of Motion (Notice of Motion 17 of 2004) for setting aside the Insolvency Notice. The Motion was dismissed in default on 20th July, 2004. Subsequently, in Notice of Motion 174 of 2004, the earlier Motion was restored to file. In Notice of Motion 17 of 2004 which was for setting aside the Insolvency Notice, Consent Terms were arrived at between the Bank and the Judgment Debtor under which the Debtor admitted the claim of the Bank in the amount of Rs. 1.07 crores together with interest at the rate of 12.5% per annum on the principal sum of Rs. 69.21 lakhs from 1st December, 2004. There was a default on the part of the Judgment Debtor in complying with the Consent Terms. In the meantime, Manipal Finance Corporation Ltd. was brought on the record as substituted Petitioning Creditor. The claim of the substituted Petitioning Creditor was in respect of the amount due and payable under a hire purchase agreement dated 30th September, 1995 and, according to the substituted Petitioning Creditor, the claim against the Debtor was in the amount of Rs. 25.43 lakhs together with future interest from 1st August, 1999.

2. An affidavit in reply has been filed on behalf of the Debtor to the Insolvency Petition. The first line of defence is that under Section 9A of the Presidency Towns Insolvency Act, 1909, the claim of a creditor who is prosecuting an insolvency proceeding should be based on a decree and order of the Competent Court. Hence, it has been submitted that the claim under a hire purchase agreement did not amount to a valid claim in the eyes of law. Now in the present case, the proceedings in insolvency were initiated by the Bank, based on an award of the Co-operative Court. The act of insolvency was complete on 20th July, 2004, on the expiry of the statutory period after the service of the Insolvency Notice. The substituted Petitioning Creditor is entitled in law to pursue the proceedings on the basis of the act of insolvency as originally committed by the Debtor since the consequence thereof would enure to the benefit of the general body of Creditors. The substituted Petitioning Creditor is required to meet the definition of the expression "creditor" in the Presidency Towns Insolvency Act, 1909 and it is to be noted that Section 2(a) defines the expression "creditor" to include a decreeholder. Therefore, once an Insolvency Notice was validly issued by the original Petitioning Creditor and the act of insolvency was complete upon the failure of the Debtor to comply with the requisition contained therein, the consequence of the commission of an act of insolvency must enure to the benefit of the general body of Creditors. The fact that the original Petitioning Creditor has lost interest in the proceedings would not make any difference to the position in law; for the substituted Petitioning Creditor steps into the shoes of the original Petitioning Creditor in pursuing the insolvency proceedings. The contention that there was no decree or order in favour of the substituted Petitioning Creditor is, as already noted above, without any merit since the expression "creditor" is defined to include a decree holder. Section 13(2) postulates that at the hearing of the Petition, the Court shall require proof of the debt of the Petitioning Creditor and of the act of insolvency or if more than one act of insolvency is alleged in the petition, some one of the alleged acts of insolvency. Apart from the claim of the Petitioning Creditor which is crystallised in an adjudication by the Co-operative Court, the claim of the substituted Petitioning Creditor has also been crystallised in an arbitral award.

3. Finally, it is urged on behalf of the Debtor that the Company with which the hire purchase agreement has been entered into is declared as a sick industrial Company under the Sick Industrial Companies (Special Provisions) Act, 1985 and that the Debtor who is the guarantor would be entitled to the benefit of the provisions of Section 22(1). The operation of Section 22(1), it has to be noted, is divided into two parts. In the first part, the provision lays down that no proceedings for the winding up of the industrial company or for the execution, distress or the like against any of the properties of the industrial company or for the appointment of a Receiver in respect thereof shall lie or be proceeded with. Under the second part which came in by way of an amendment of 1994, no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with. In either case, the consent of the BIFR is required. The embargo in the second part is to a suit for recovery or for enforcement of security or any guarantee. This position was noted in a judgment of a Division Bench of this Court in Dual Singhal v. State of Maharashtra 2001 (106) Com. Cases 587. The Division Bench held that as far as proceedings against a guarantor of a loan to an industrial company are concerned, the bar under Section 22 is only restricted to a suit and does not apply to any other proceeding. The only proceeding against the guarantor of a loan to an industrial company which is barred under Section 22 is a suit and nothing else. The Division Bench held that an insolvency notice is not a suit and, therefore, the said proceeding was not barred.

4. In a subsequent decision in Kailash Nath Agarwal v. Pradeshiya Industrial and Investment Corporation of U.P. Ltd. 2003(2) Scale 160 the Supreme Court held that there was no reason for widening the scope of the word 'suit' in Section 22 so as to cover proceedings against the guarantor of an industrial company. The Court held that the object of the SICA and for introducing the 1994 amendment was to facilitate the rehabilitation or the winding up of sick industrial companies and it is not the stated object of the Act to protect any other object or body. The Court held that if a creditor enforces a guarantee in respect of a loan granted to the industrial company, the provisions of the Act would not be rendered nugatory and all that could happen would be that the guarantor would step into the shoes of the creditor vis-a-vis the company to the extent of the liability met. Explaining the earlier judgment of the Supreme Court, in Patheja Bros. Forgings and Stampings v. ICICI Ltd. 2000(6) SCC 545 the Court held that the observations therein could not be read to hold that protection of guarantors of loans to a sick company is an object of the 1994 amendment which must colour the interpretation of the amendment. Till 1994 no protection was afforded to guarantors under the Act at all. A limited protection has been given in 1994. Hence, the Supreme Court held that the expression used being clear and unambiguous, it was not for the Court to question the legislature and/or to give a wider protection than it did. This position has been followed in a judgment of this Court dated 15th March, 2005 (Re : Ajay Surendra Tanna and another, judgment Debtors, Ex-parte SICOM Limited). In these circumstances, it cannot be said that the proceedings in insolvency against the Debtor would militate against the provisions of Section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985.

5. The Insolvency Petition has to be allowed and is accordingly allowed. The petition is made absolute in terms of prayer Clauses (a) and (b).