Lg Electronics Ltd. vs Usha (India) Ltd. And Anr.
2007 Latest Caselaw 967 Del

JUDGMENT

A.K. Sikri, J.

Page 1587

1. This petition raises an interesting question touching the extent and reach of Section 22 of the Sick Industrial Companies (Special Provisions) Act (in short 'the SICA'), namely, whether the security deposit given by the tenant to the company (which is before the Board for Industrial and Financial Reconstruction/Appellant Authority for Industrial and Financial Reconstruction) is covered by Section 22 of the SICA and the tenant is precluded from filing the suit/proceedings or the execution petition to recover back this security amount which was given as deposit at the time of taking the company's premises on rent? We may first set down the facts surrounding this question which has arisen for consideration.

2. The appellant (hereinafter referred to as 'the decree holder') entered into a lease agreement with the respondent No. 1 (hereinafter referred to as the Page 1588 JD No. 1) in respect of premises bearing No. A-42, Mohan Co-operative Industrial Estate, Mathura Road, New Delhi, at a monthly rent of Rs. 7,26,600/- exclusive of electricity and water charges vide lease dated 15.3.1997. Separate maintenance agreement was also signed between the decree holder and sister concern of JD No. 1 (hereinafter referred to as 'the JD No. 2). The decree holder also handed over a sum of Rs. 2,03,44,800/- as interest free security to JD No. 1 and a sum of Rs. 87,93,200/- as interest free security deposit to JD No. 2. This lease and maintenance agreements were terminated vide notice dated 12.12.1999 by the decree holder, with effect from 14.3.2000. However, as the JDs did not come forward to take possession of the premises and did not return the security money either, the decree holder filed Suit No. 762/2000 in this Court against the JDs and certain other persons to deliver back the premises to JDs and for return of its security deposit. On 20.5.2000 order was passed by a learned Single Judged of this Court permitting the decree holder to deposit the keys of the premises through a Local Commissioner. This suit was ultimately decreed on admissions, while allowing the application of the decree holder under Order VI Rule 12 of the Code of Civil Procedure. The decree in the sum of Rs. 2,31,25,803/- with proportionate cost and pendente lite and future interest at the rate of 12% per annum was passed. Prior to that, on an application preferred by the Jds, possession of leased premises was handed over to JD No. 1 vide order dated 25.1.2002 by releasing the keys, which were deposited in the Court.

3. In January 2002, JD No. 1 had moved an application before the BIFR seeking a declaration that it had become a sick industrial unit. However, this fact was not disclosed in the pending suit and for this reason, the Court had proceeded with the suit which culminated into aforesaid decree. The BIFR ultimately rejected the reference on 28.10.2002. The JD No. 1 filed an appeal there against before the AAIFR.

4. The JDs also preferred an appeal against the judgment and decree dated 6.9.2002 passed by the learned Single Judge before the Division Bench of this Court. In this appeal, for the first time the JDs disclosed that JD No. 1 company had filed proceedings under SICA, which were pending before the AAIFR. Notwithstanding this plea, the Division Bench proceeded to hear the appeal on merits and dismissed the same on 1.6.2003 by passing the following order:

FAO (OS) 164/03

The tenant L.G. Electronics (India) Ltd. has already vacated the premises. The short question, which arises in the appeal, is as to whether the tenant is entitled to security amount deposited by it or not. The Ld. Single Judge has directed to pay the security amount deposited by the tenant. The judgment which is passed by the Ld. Single Judge seems to be just and correct. No interference is called for by this Court. The appeal is devoid of merits and is dismissed. FAO (OS) 164/03 and CM Nos. 402 and 403 of 2003 are accordingly disposed of.

5. In the order dated 1.6.2003, plea raised by the appellant about the pendency of the proceedings under SICA has not been considered. However, Page 1589 the JDs also did not prefer any further appeal against the order of the Division Bench and, therefore, the decree passed by the learned Single Judge attained finality.

6. The decree holder in the meantime had filed the execution petition for execution of the decree passed by the learned Single Judge. In the execution petition notice was issued to the JDs. JD No. 1 on receiving the notice, moved an application for stay of the proceedings stating that since the matter was pending before the AAIFR, there was a bar under Section 22 of the SICA in so far as continuation of proceedings in the execution petition is concerned.

7. Allowing this application, the learned Single Judge has vide impugned judgment dated 15.9.2003, stayed the execution proceedings. It is this order which is the subject-matter of challenge in this appeal and the question which need consideration has already been delineated in the opening para of the judgment.

8. We heard the learned Counsel for the appellant. Mr. R.K. Sharma, Advocate, appeared for the respondent Nos. 6 and 7 and submitted that the respondent Nos. 6 and 7 were only proforma respondents and, therefore, he had nothing to argue. Mr. Harpreet Singh Popli, Advocate, who was appearing for the respondent Nos. 1 to 5 submitted that his clients had taken the file from him and in spite of various letters written, the counsel had not received any response. He, in fact, wanted discharge from the case. When it was pointed out to him that issue could still be argued as it was pure legal issue, he remained unenthused and only wanted to be recused from the case in view of the apathy shown by respondent Nos. 1 to 5. Be that as it may, since the respondent Nos. 1 to 5 had taken away the file from the counsel, it was for them to make alternate arrangement for their representation before the Court, more so when the counsel had written various letters and apprised them of the dates fixed in this case. In these circumstances, we had no alternative but to proceed with the matter.

9. We may state at the outset that even the appeal filed by the JD No. 1 before the AAIFR has since been dismissed on 4.8.2006. In view thereof, there is no impediment, in any case, to proceed with the execution petition. However, learned Counsel for the appellant submitted that decree holder had reasonable apprehension that JD No. 1 may still approach the BIFR again as has been happening in the past. He also stressed that since the issue raised is an important one and such eventualities may keep occurring, there should be a pronouncement thereon. We may note that there is no judgment of this Court or the Supreme Court directly dealing with such a question, though there are few judgments of other High Courts. Therefore, we persuaded ourselves to decide the question of law involved.

10. Mr. Chandhiok, learned senior counsel appearing for the appellant, had made two-fold submissions:

(a) JD No. 1 had not taken up the plea of Section 22 of the SICA before the learned Single Judge, who tried the suit and ultimately even the decree came to be passed on merits. Further, this plea was subsequently raised before the Division Bench. However, notwithstanding such a plea, the Division Bench proceeded to decide the case on merits and dismissed Page 1590 the appeal which was countenanced by the JDs by not challenging it further. Therefore, the JD was estopped from raising the same plea in the execution proceedings and the judgment of the Division Bench operated as constructive res judicata as well. He submitted that the learned Single Judge has not decided this question correctly, while rejecting the contention of the decree holder on the ground that the judgment of the Division Bench vide which appeal of the JDs was dismissed, did not operate as res judicata on the ground that the issue was not decided on merits. He submitted that when the plea was specifically raised, but the Division Bench still proceeded to decide the appeal on merits, it would imply rejection of the plea based on Section 22(1) of the SICA. Therefore, constructive res judicata would apply, more so when the JDs approbated the judgment of the Division Bench by not filing any further appeal. Apart from other judgments, he referred to the judgment of the Division Bench of this Court to support this plea.

(b) Second argument, which was raised, was that bar of Section 22 of the SICA, would not apply as the money in question, which was given by the decree holder to the JD Nos. 1 and 2 was the security deposit. It was trust money kept with the JD Nos. 1 and 2, which these JDs were under a legal obligation to refund on the termination of the tenancy and on handing over the possession of the tenanted premises back to them. Such money could not be treated as property of the JD No1 and Section 22 would have no application, which puts a bar on the proceedings against any of the properties of industrial company.

11. We are of the opinion that the appeal warrants to be allowed on the ground that Section 22 would not cover the proceedings where execution of refund of security is sought. The relevant portion of Section 22 of the SICA reads as under:

...no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of industrial company or for the....

12. We may, at the outset, refer to the judgment of the Supreme Court in the case of Shree Chamundi Mopeds Ltd. v. Church of SIT Asson. . Though it is not an authority which directly deals with the issue at hand, it would provide us some direction to deal with the question, which has fallen for consideration. In this case, the Supreme Court categorically held that eviction proceedings initiated by a landlord against a tenant company (which has gone sick and proceedings pending before the BIFR/AAIFR) would not fall under Section 22 of the SICA. The Court opined that three kinds of proceedings were contemplated under that provisions, namely, (a) proceedings for winding up of the industrial company; (b) proceedings for execution, distress or the like against the properties of the sick industrial company; (c) proceedings for the appointment of receiver. It would be of interest to take Page 1591 note of the reasons given by the Apex Court while holding that eviction proceedings are not covered by any of the aforesaid three categories:

12. Eviction proceedings initiated by a landlord against a tenant company would not fall in categories (1) and (3) referred to above. The question is whether they fall in category (2). It has been urged by the learned Counsel for the appellant company that such proceedings fall in category (2) since they are proceedings against the property of the sick industrial company. The submission is that the leasehold right of the appellant-company in the premises leased out to it is property and since the eviction proceedings would result in the appellant-company being deprived of the said property, the said proceedings would be covered by category (2). We are unable to agree. The second category contemplates proceedings for execution, distress or the like against any other properties of the industrial company. The words 'or the like' have to be construed with reference to the preceding words, namely, 'for execution, distress' which means that the proceedings which are contemplated in this category are proceedings whereby recovery of dues is sought to be made by, way of execution, distress or similar process against the property of the company. Proceedings for eviction instituted by a landlord against a tenant who happens to be a sick industrial company, cannot, in our opinion, be regarded as falling in this category.

13. We are also unable to agree with the contention of the learned Counsel for the appellant company that the leasehold interest of the appellant company in premises leased out to it is property for the purpose of Section 22(1). It is no doubt true that leasehold interest of the lessee in the premises leased out to him is property which can be transferred and the said interest can also be attached and sold by way of execution in satisfaction of a decree against a lessee. In that sense, it can be said that the leasehold interest of a company is its property. But the question is whether the same is true in respect of the interest of a company which is in occupation of the premises as a statutory tenant by virtue of the protection conferred by the relevant rent law because in the instant case on the date of reference to the Board the proceedings for eviction of the appellant company were pending and the appellant company was in occupation of the premises only as a statutory tenant governed by the provisions of the Karnataka Rent Control Act. In Smt. Gian Devi Anand v. Jeevan Kumar and Ors. 1985 Suppl. (1) SCR 1, this Court has laid down that the termination of a contractual tenancy does not bring about a change in the status and legal position of the tenant unless there are contrary provisions in the relevant Rent Act and the tenant, notwithstanding the termination of tenancy, does enjoy an estate or interest in the tenanted premises.

13. The Court, thus, held that the premises leased out to the sick industrial company would not become the property of the sick industrial company and proceedings for eviction instituted by the landlord against the tenant, Page 1592 who happens to be a sick industrial company could, therefore, continue. The sustenance, which can be drawn from this judgment, is this:

If the security deposit given by the tenant to the landlord, which is a company and has become a sick industrial company now, does not become the property of the sick company, bar under Section 22 of the SICA would not apply.

Therefore, the question arises is as to what is the nature of this 'security deposit' given by the decree holder to the judgment debtor at the time of taking the premises from the judgment debtor on rent. In Permanand Verma and Anr. v. Vimal Chand Jain , some indication is given as to what is the "purpose of security." The Court held thus:

...The purpose of a security is totally different. The same is generally meant to secure the landlord against various defaults of the tenant at the time of final determination of the lease. Such defaults may include damage to the property, arrears of rent, arrears of rent, arrears on account of electricity or water charges etc.

14. It is not even necessary to draw inference from the aforesaid pronouncements as we have the case law dealing precisely with the same issue posed by us above. The Division Bench of Madhya Pradesh High Court in the case of NEPA Ltd. v. Manoj Kumar (2002) (1) MPHT 125 answered the question by holding that security deposit was not the 'property' of the landlord, being held in trust by the said landlord/JD. The perusal of the judgment would show that the Court referred to the Oxford Shorter English Dictionary as well as Law Lexicon to find the meaning of 'Security'. It would be worthwhile to reproduce the detailed discussion contained in the said judgment on this aspect:

6. The language of Section 22(1) of the Act is clear. It bars execution against the "property of the company". The security deposit made by the decree-holder for due performance of the contract entered into with the company cannot by any stretch of imagination be held to be the property of the company especially when it has been set apart in the form of a fixed deposit by the company in its name. As per Oxford Shorter English Dictionary the meaning of deposit is "something laid up in a place, or committed to the charge of a person for safe-keeping". The person with whom such deposit is made is known as 'depository'. He is a person with whom anything is lodged in trust; a trustee; one to whom anything is committed or confided. In Law, a bailee of personal property to be kept for the bailor without recompense. In Law Lexicon by P.R. Aiyar edited by Justice Y.V. Chandrachud, the word 'deposit' is defined : "Thing stored or entrusted for safe-keeping", an act by which a person receives the thing of another person, with the obligation to keep it and to return it in kind; a naked bailment of goods, to be kept for the depositor without reward and to be returned when he shall require it; the delivery of a thing for custody, to be redelivered on demand without compensation. Page 1593 The essence of a deposit is that there must be a liability to return it to the party by whom or on whose behalf it is made on the fulfilllment of certain conditions.

7. The person with whom the 'security deposit' is made in a bailee or the trustee of that money and that is to be refunded to the person by whom the deposit has been made. The deposit is only for the purpose of safe keeping. The person with whom the deposit has been made holds it in trust for the depositor and has to return it to the depositor when the entrustment is over. The holder of the trust cannot be permitted to say that it is his own money or his own property. The depository cannot plough this money for running its business.

8. The word deposit has been used in Article 70 of the Limitation Act, 1963 (Article 145 of the Limitation Act, 1908). In that context it has been held that a suit against the Government for recovery of money kept as security deposit for the proper discharge of the plaintiffs functions as Government auctioneer is a suit against a depository and is governed by Article 145 of the Limitation Act, 1908. The term moveable property within Article 145 includes 'money' as well. The deposit is in the nature of a trust Union of India v. Mohd. Sultan , and Zila Parishad v. B.D. Kapur . That being the nature and character of a 'security deposit' it cannot be blended with the other property of the depository and it must be refunded when the purpose of deposit is over.

9. It has been observed by a Division bench of this Court in Kedia v. Appellate Authority 2000 (1) MPLJ 242 that the SICA was enacted to provide opportunity to sick industrial companies to revive and be rehabilitated or wind up. Its purpose was not to enable unscrupulous companies to feign and manipulate sickness and to make a buck out of it. Section 22(1) was only a tool to achieve this object. Its terms were, therefore, to be interpreted reasonably and in that spirit and perspective. Otherwise it would be breed dishonesty, encourage unfair practices and shady dealings and defeat the very purpose for which the Statute was enacted. There is no dearth of instances where unscrupulous companies had misused this provision by manipulating sickness to ward off legitimate claims of creditors. Therefore, it requires both caution and circumspection to extend protection of Section 22(1) to such companies.

10. In the present case it is not disputed that the amount was deposited by the decree holder with the judgment-debtor company as "security deposit" for performance of the contract and after adjudication by the arbitrator appointed under the Arbitration and Conciliation Act, 1996, the amount of security deposit which was set apart in a fixed deposit, is to be refunded to the decree-holder after deduction of certain amount. This security deposit was not the property of the industrial company but it is the property of the decree-holder being held in trust by the Page 1594 judgment-debtor company and, therefore, it cannot invoke Section 22(1) of the Act in this case and refuse refund of the deposit. In this context the observations of the Division Bench referred above become very pertinent. In all fairness the judgment-debtor should not refuse to refund the security deposit. The chances of the revival of the company are likely to be very bleak if it loses its goodwill and credit in the market by refusing to refund even the security deposit which is not the property of the company. That may amount to breach of trust. As observed by the Supreme Court in Dy. Commercial Officer v. Corromandal Pharmaceutical : "Definitely Section 22 is not meant to breed dishonesty nor can it be so operated as to encourage unfair practices". The first objection of the judgment-debtor, the petitioner herein, is rejected.

15. Karnataka High Court has taken same view in the case of Deepak Insulated Cable Corporation Ltd. v. Union of India and Ors. [2001] 106 CC 380. That is also a judgment of the Division Bench. We extract the relevant portion of that judgment as well in order to appreciate the reasons given by Karnataka High Court in support of its aforesaid views:

6. The only facet of Section 22(1) of the Act can be said to be of some relevant to the present appeal is that relief for recovery of money that is prohibited under the Act in respect of a company under revival by the BIFR. The question is whether the claim for return of deposit could be termed as "suit for recovery of money" against the company. If the answer is in the affirmative then the appellant-company would succeed and not otherwise.

7. The term "deposit" has been defined by the Explanation to Section 58A as a deposit of money with a company including an amount borrowed by it but excluding such categories of amount as may be prescribed in consultation with the Reserve Bank of India. The learned single judge has considered this question in detail. He has placed reliance on the decision of the Supreme Court (sic) in Vijay Mills Co. Ltd. v. State of Gujarat [1990] 68 Comp Case 597. The apex court had occasion in that case to decide the question whether the provisions contained in Section 22(1) of the Act extended to criminal prosecution of the company for its failure to pay the amount of sales tax recovered by it on behalf of the Government from the customers. The apex court held that the amount recovered from the customers by the company does not belong to it but it is held in trust to be passed over to the Government and in that view of the matter held that Section 22(1) of the Act would not extend to the criminal prosecution for failure to pay the sales tax as the same does not come under the ambit of Section 22(1) of the Act.

8. A deposit by the depositor is not a sum lent to the company but is a sum deposited with the company to be held in trust by the company Page 1595 till the time of maturity. It is not a loan in the strict sense of the term. Therefore, any claim for return of a deposit made with the company cannot be termed as a suit for recovery of money due. Section 22(1) prohibiting as it does the taking up of certain proceedings against the company, without the consent of the Board, which proceedings in the natural course of things can be resorted to against the company without any reservation whatsoever by the person or persons interested, it goes without saying that the prohibitions contained in Section 22(1) do not lent themselves to any liberal interpretation. The said provisions must be interpreted in a limited sense and cannot be said to cover situations where there really is no element of execution, distress or the like against any property owned by the industrial company. Interpreting the term "no suit for recovery of money" thus, we find that it certainly would not cover a simple claim made by depositors for the return of their deposits after maturity. As held by the apex court in the decision, supra, it is a sum kept with the company by the depositors in trust for return after maturity. The learned single judge has on proper and detailed appreciation of the matter has come to the correct conclusion. The reasons assigned by the learned single judge for arriving at the said conclusion are well-founded and do not call for any interference.

16. We are in respectful agreement with the views taken by Madhya Pradesh as well as Karnataka High Courts.

17. Perusal of the judgment of the learned Single Judge, which is impugned in this appeal, would show that though the question as to whether the security deposit is not to be treated as an asset or property of the sick company was noted, but without answering this question and discussing as to what would be the character of "security deposit" for tenanted premises, only on the ground that in the execution the decree holder was seeking to recover money, the learned Single Judge opined that it would be covered by the express language of Section 22 of the SICA. This, to our mind, may not be the correct approach, in view of our discussion above. The order of the learned Single Judge is, therefore, liable to be set aside on this ground itself. Therefore, we need not go into the other contention raised by the learned Counsel for the decree holder in this appeal based on constructive res judicata.

18. The appeal is accordingly allowed. The execution petition shall proceed on merits.

19. No costs.