Syndicate Bank vs M/S. Mullangie Spintex Pvt. Ltd. & ...
2010 Latest Caselaw 4585 Del

*           IN THE HIGH COURT OF DELHI AT NEW DELHI


                                                        Reserved on : 22.09 2010
%                                                  Date of decision : 29.09.2010


+                           WP (C) No. 234 / 2009


SYNDICATE BANK
    ...    ...    ...                 ...       ...       ...       ...        ...       ... PETITIONER
                                Through : Mr. Adarsh B. Dial, Sr. Advocate
                                          with Ms. Sumati Anand and
                                          Ms. Ananya Datta Majumdar,
                                          Advocates.

                                     -VERSUS-

M/S. MULLANGIE SPINTEX PVT. LTD. & ORS.
     ...    ...    ...    ...    ...   ...    ...                            ...     RESPONDENTS
                                Through : Ms. Maneesha Dhir with
                                          Ms. Jayashree Shukla,
                                          Ms. Preeti Dalal and
                                          Ms. Purti Marwaha,
                                          Advocates for R - 1.

CORAM :

HON'BLE MR. JUSTICE SANJAY KISHAN KAUL
HON‟BLE MR. JUSTICE VALMIKI J. MEHTA

1.        Whether the Reporters of local papers
          may be allowed to see the judgment?                            Yes

2.        To be referred to Reporter or not?                             Yes

3.        Whether the judgment should be
          reported in the Digest?                                        Yes


SANJAY KISHAN KAUL, J.

1. The claim of the petitioner bank to have the exclusive

right to appropriate the insurance amount received in

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respect of the hypothecated stocks and raw materials

without making a reference or obtaining prior permission

of the Board for Industrial and Financial Reconstruction

(for short, „BIFR‟), despite a pending reference before the

BIFR, has given rise to these proceedings.

2. Respondent No. 1 company is engaged in the business of

cotton yarn and availed of working capital limit from the

petitioner bank from 1996 onwards against hypothecated

stocks, raw materials, etc. The petitioner bank had the

exclusive first charge as per a Deed of Hypothecation

and under the terms of the insurance policy securing the

goods read with the Deed of Hypothecation, the

petitioner bank was entitled to receive the amount from

the insurance company directly.

3. A fire took place at the premises of respondent No. 1 on

09.04.1998 which destroyed the raw materials, finished

goods, etc. A claim was lodged with the insurance

company which settled the claim amount at only

Rs.33.15 lakhs. Respondent No. 1 company aggrieved by

the same filed a petition before the National Consumer

Dispute Redressal Commission (for short, „NCDRC) which

gave a favourable verdict for an amount of Rs.1.49 crores

with interest @ 12% p.a. from October, 1998 till date of

payment as per the judgment dated 23.02.2007. The

appeal filed by the insurance company before the

Supreme Court was dismissed in limine on 10.07.2007.

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4. Respondent No. 1 company went into financial difficulties

in the meantime and, thus, filed an application under

Section 15 of the Sick Industrial Companies (Special

Provisions) Act, 1985 (for short, „SICA‟). Since the net

worth of respondent No. 1 company stood eroded, it was

declared as a sick undertaking within the provisions of

the SICA on 13.03.2001. A draft scheme was sought to

be propounded, but it is stated that the same was

rejected on 25.04.2003. As yet, no scheme stands finally

approved.

5. Respondent No. 1 company initiated discussions with the

petitioner bank for one-time settlement (for short, „OTS‟).

A letter dated 14.07.2007 was addressed by respondent

No. 1 to the petitioner bank in the following terms :-

"Sub: Request for One Time Settlement of Mullangie Spintex Private Limited Reg.

With reference to the discussion I had with Assistant General Manager, Regional Office, I thank for the help extended by you in going for one-time settlement. As per the discussion, I hereby agree to pay One Crore Sixteen Lakhs towards full & final settlement, out of which I will pay Rs.40.00 lakhs and above on or before 31st July, 2007 and balance amount of Rs.76.00 lakhs on or before 30th September, 2007, hope my request will be considered and consent letter be issued to me for depositing the amount on No-Lien Account."

6. In terms of the aforesaid letter, a sum of Rs.40 lakhs was

paid by respondent No. 1. The settlement proposal was

examined by the petitioner bank and was approved by

the letter dated 04.09.2007 addressed by the Deputy

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General Manager to the Asst. General Manager, Recovery

Cell, Regional Office, Bellary in the following terms :-

"Reg: Settlement proposal of M/s. Mullangie Spintex Pvt. Ltd., A/c at Bellary Main Branch.

We have for reference your office note dated 10.08.07 forwarded under cover of letter No. 2126/0617/2007/REC dated 16.08.07 recommending settlement proposal of the captioned company for Rs.116.00 lakh and subsequent letters No. 2138 dated 17.08.07 and No. 2155 dated 20.08.07.

In the light of your recommendations, the Competent Authority has permitted Bellary Main Branch to settle the dues of its captioned borrower amounting to Rs.127.57 lakhs by accepting Rs.116.00 lakhs as against the Book Balance of Rs.73.00 lakhs, involving write off of Rs.NIL and waiver of Rs.11.57 lakhs as on 30.06.2007. The settlement amount shall be paid as under and also shall comply with the following conditions:

1. Rs.40 lakhs lying in "No Lien Account" to be adjusted immediately.

2. Balance settlement amount of Rs.76 lakhs to be paid by the company before 30.9.2007.

3. Interest from 1.7.2007 to 30.9.2007 is waived.

4. Future expenses/cost, if any, shall be borne by the party.

5. This is without prejudice to the Bank‟s right to recover the entire dues in the event of party‟s failure to pay the compromise amount as per settlement sanction.

6. Please confirm adjustment of amount kept in "No lien a/c".

7. Branch shall inform RO/CO about the details of payments made by the company.

If the dues are not settled as per the terms of sanction, the concession granted shall stand revoked and the entire dues shall be recovered as per the original terms.

We request you to convey the sanction to the party against an acknowledgement and their acceptance for the terms of the sanction shall be obtained, under information to Branch with

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instructions to collect the offer amount as per terms of sanction.

Please keep us informed of the developments."

(emphasis supplied)

7. A perusal of the aforesaid shows that the only concession

shown was by waiver of penal interest by waiver of

Rs.11.57 lakhs as on 30.06.2007. A sum of Rs.40 lakhs

lying in the no-lien account (for short, „NLA‟) was

adjusted. The balance settlement amount of Rs.76 lakhs

had to be paid on or before 30.09.2007.

8. However, soon thereafter, the petitioner bank addressed

a letter dated 17.09.2007 to The New India Assurance

Company Ltd. stating that since the Special Leave

Petition filed by the insurance company against the order

of the NCDRC had been dismissed, the claim awarded by

the forum be directly remitted to the bank. In response

to this letter, the insurance company on 19.09.2007

remitted the amount of Rs.2,73,54,109/- to the petitioner

giving the bifurcations as under:

                "Amount Awarded                                  Rs.1,49,44,000.00
                Interest awarded @12% w.e.f.
                09/09/1998 to 19/09/2007 -
                3266 days                                        Rs.1,60,46,171.00

                Gross Amount                                     Rs.3,09,90,171.00

                Less TDS @ 22.66% on Interest                    Rs.(-)36,36,062.00
                As per Sec. 194A of IT Act

                Net Amt. Payable                                 Rs.2,73,54,109.00"

9. The petitioner bank having received the aforesaid

amount on 19.09.2007, on the very next day of

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20.09.2007, withdrew the sanction of the OTS as per the

letter of that date. It is necessary to reproduce the

contents of the said letter, which are as under:

"In furtherance to our letter No. 056:0600:OTS: F123-4 dated 05.09.2007 wherein the sanction of OTS was communicated to you. Vide your letter dated 14.07.2007, you have agreed to pay Rs.116.00 lakh towards OTS out of which Rs.40.00 lakhs on or before 30.07.2007 and the balance of Rs.76.00 lakh on or before 30.09.2007. You have also deposited Rs.40.00 lakhs in No Lien A/c. Earlier you have represented about the pendency of litigation against the New India Assurance Co. Ltd. upto the stage of the order of National Consumer Dispute Redressal Commission (NCDRC). You have hypothecated the entire stocks, work in process and finished goods to the Bank as the sole charge holder. In the fire accident that occurred during April, 1998, the stocks at various stages were destroyed. Your claim for compensation was for Rs.242.38 lakhs. But the Insurance Co. settled the claim only for Rs.33.15 lakhs. Therefore, you have filed a complaint against the Insurance Co. before NCDRC and the claim has been enhanced to Rs.149.44 lakhs and payable with interest at 12% p.a. from October, 1998 till payment and the amount payable will be approximately Rs.300.00 lakhs.

The bank has not received any summons in the SLP filed by New India Assurance Company against the NCDRC before the Supreme Court of India. The developments were/are being reported to the Bank by you only and the Bank purely relied upon your reporting regarding the developments before the Supreme Court of India from time to time.

At the time of consideration of your request for OTS, the fact about the order of National Commission was a material factor. The Bank was informed that the Insurance Co. had filed already a Special Leave Petition before the Hon‟ble Supreme Court of India against the orders of NCDRC and the same was pending. Since the probable time that would be taken by the Hon‟ble Supreme Court of India and also it was not sure whether the Supreme Court could confirm the award or reduce it, instead of waiting for the final disposal of SLP, the bank took up the proposal for OTS for _____________________________________________________________________________________________

consideration. Now it is noticed that the SLP filed by the Insurance Co. was disposed off on 10.07.2007 itself dismissing the appeal filed by the Insurance Co. It is observed that the Hon‟ble Supreme Court heard the counsel appearing for the parties. Hence, it is very clear that you appeared in the Supreme Court through your counsel on 10.07.2007, supported the award of NCDRC for Rs.149.44 lakh with interest at 12% and opposed the SLP filed by the Insurance Co. You are also aware that on 10.7.2007 the Supreme Court has confirmed the said award under which you would be getting a sum of Rs.300.00 lakh approximately at present. But in your letter dated 14.07.2007 which is after the order dated 10.07.2007 of the Supreme Court there was absolutely no reference about the said important factor. Having knowledge of the latest developments and the favourable order, you have purposely withheld that piece of information from the bank. The said act of yours is mala fide. Therefore, the Bank has reason to believe that you wanted to derive undue benefit of getting maximum sacrifice from the bank under the OTS by simply agreeing to pay Rs.116.00 lakh as against the assured receipt of Insurance claim of Rs.300.00 lakh approximately. Since the amount, payable relates to the stock damaged in the fire, which were solely secured by a deed of hypothecation in favour of the bank, the bank is entitled to get and adjust the insurance claim towards the full liability of the Company.

In view of the above, the OTS sanctioned to you vide our letter referred to above is forthwith withdrawn and you are informed that you are liable to pay the full liability as on the date of receipt of the insurance amount from the Insurance Co. at our end."

(emphasis supplied)

10. A perusal of the aforesaid letter shows that according to

the petitioner bank, it was relying upon the information

furnished by respondent No. 1 about the progress of the

claim. We may notice at this stage itself that the

petitioner bank was, in fact, a party before the NCDRC,

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though senior counsel for the petitioner claimed that they

had never appeared though served. The sole basis for

withdrawal of the OTS as set out in the letter dated

20.09.2007 is that in the letter dated 14.07.2007 of

respondent No. 1 proposing the OTS, no reference was

made to the dismissal of the appeal by the Supreme

Court on 10.07.2007, which was material for purposes of

the decision-making process of the bank and that the

bank had been influenced by the fact that the appeal

may take time for disposal. Another letter was

addressed on 21.09.2007 in terms whereof it was

claimed that after adjustment of the amount of

Rs.40,00,175/- submitted initially in the NLA for the OTS,

a further amount of Rs.1,78,75,733/- had been adjusted

against the liability of respondent No. 1 and the balance

of Rs.94,78,376/- was being sent to respondent No. 1.

11. A controversy, thus, arose whether the petitioner bank

could have withdrawn the OTS on 20.09.2007 primarily in

view of the receipt of the amount from the insurance

company on 19.09.2007 having acted on the OTS by

appropriating the sum of Rs.40 lakhs ostensibly on the

ground that while proposing the OTS, respondent No. 1

had not intimated the factum of dismissal of the appeal

by the Supreme Court four days before, though the bank

was aware of the order of the NCDRC in favour of

respondent No. 1. It is the case of respondent No. 1 that

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the petitioner bank being a party to the proceedings

could hardly claim lack of knowledge and, in fact, knew

of all the proceedings and with open eyes accepted the

OTS. It is also the case of respondent No. 1 that the

approval letter dated 04.09.2007 itself shows that the

amount was settled at Rs.127.57 lakhs as on 30.06.2007

with only waiver of penal interest of Rs.11.57 lakhs with

write off being „NIL‟. Only future interest from

01.07.2007 to 30.09.2007 was waived. Despite this, the

bank appropriated a sum of Rs.1,78,75,733/- besides the

sum of Rs.40,00,175/- totalling to Rs.2,18,75,908/-, which

apart from any other reason, shows that huge amount

has been appropriated by the bank contrary to what was

due.

12. Respondent No. 1 aggrieved by this action of the

petitioner bank filed an application before the BIFR under

Section 22(1) of the SICA for refund of the amount on the

ground that the petitioner bank had appropriated the

amount without obtaining the permission of the BIFR,

which it could not do. This application was contested by

the petitioner bank. Respondent No. 1 is also stated to

have filed a writ petition in the Karnataka High Court

seeking refund of the entire compensation amount

received from the insurance company.

13. The BIFR passed the order dated 23.10.2007 on the

application of respondent No. 1 examining the rival

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contentions including the submissions of M/s. KSIIDC,

which was also one of the parties to the proceedings

before the NCDRC. M/s. KSIIDC was equally aggrieved by

the unilateral appropriation of the insurance amount by

the petitioner bank and claimed that the petitioner bank

had failed to perform the duties as an operating agency

(for short, „OA‟). However, it was simultaneously

submitted that in case the petitioner bank was to

continue as the OA, the BIFR may direct the petitioner

bank to hold the insurance claim amount in NLA to be

appropriated as per the directions of the Karnataka High

Court / BIFR. The BIFR after discussing all these aspects

as per the proceedings recorded on 23.10.2007 inter alia

asked the petitioner bank to explain how it could

unilaterally appropriate the insurance claim amount

without making a reference or obtaining the prior

permission of the BIFR and directed the petitioner bank

to deposit the entire amount of Rs.178.765 lakhs

appropriated by them from the insurance claim amount

in a NLA within two weeks. Respondent No. 1 company

was also asked to deposit the amount received by it from

the bank out of the insurance amount in a NLA.

14. The petitioner bank aggrieved by the order of the BIFR

preferred an appeal before the Appellate Authority for

Industrial and Financial Reconstruction (for short, „AAIFR‟)

in February, 2008. During the pendency of the appeal, a

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further order came to be passed by the BIFR on

14.08.2008 recording that the amount had not been

transferred to the NLA by the petitioner bank and its

conduct is unbecoming of an OA. Notice was issued

under Sections 30 (4) of the SICA for non-compliance and

non-implementation of the directions of the Bench / BIFR.

The petitioner bank was further discharged from the

responsibility of an OA and Canara Bank was appointed

as the OA.

15. The appeal filed by the petitioner was finally dismissed

by the AAIFR on 20.10.2008. The appeal order records

that the basic point urged by the petitioner bank was

that respondent No. 1 company acquired the goods on

the basis of loans / advances obtained from the bank and

the goods were hypothecated with the bank with no

other party having a charge on the goods. Since these

goods had been destroyed in a fire, respondent No. 1

company was compensated by insurance company as

per the orders passed by NCDRC affirmed by the

Supreme Court, the bank had the first right on the

compensation received. This was stated to be as per the

terms of the Deed of Hypothecation and the BIFR had no

jurisdiction to set aside the terms of the contract or to go

into the question whether the petitioner bank was right in

going back from the OTS Agreement. It had further been

pleaded by the petitioner bank that no declaration had

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been made under Section 22(3) of the SICA and no

scheme had been sanctioned to supersede the contract

between the parties. A plea was also raised of violation

of principles of natural justice and that the order of the

BIFR was not an interlocutory order and, if implemented,

would prejudicially affect the interest of the petitioner

bank. The AAIFR came to the conclusion that the

proceedings of the BIFR clearly showed that adequate

opportunity had been granted to the petitioner bank in

the proceedings to represent its case. The plea that the

order was not interlocutory in nature was also rejected

since insurance money was only directed to be placed in

the NLA, which implied that the final use of the money

would be determined in terms of the sanctioned scheme,

if any, and in case no revival is possible, further orders

could be passed by the BIFR. No direction had been

passed for the money to be paid to respondent No. 1

company.

16. The impugned order also states that Section 22(3) of the

SICA relates to a situation falling under the purview of

Sections 16, 17 and 18 of the SICA and the BIFR is

empowered in the interest of the sick industrial company

to halt the operation of contracts, agreements,

settlements, awards or instruments in force. The BIFR,

however, observed that insofar as withdrawal of the

petitioner bank from the OTS is concerned, that aspect

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could not be examined by the BIFR. In any case, that

aspect was sub judice before the Karnataka High Court.

The factum of the plant and machinery being charged to

M/s. KSIIDC has also been noticed. The compensation

awarded by the NCDRC as per its order was based upon a

consideration of the total damages suffered by

respondent No. 1, which included both stocks as well as

machinery and, thus, the petitioner bank did not have

the sole claim on the insurance compensation amount.

Thus, if the action of the petitioner bank was to be

sustained, it would mean that one of the two secured

creditors would be fully compensated in terms of the

principal and interest (total outstanding) while the other

secured creditor would be left to take all the hit insofar

as the concessions are concerned. It was, thus, observed

that in any rehabilitation scheme, all secured creditors

are given equal treatment in terms of the compensation

paid on sacrifice made and the compensation paid to the

petitioner bank was subject to the orders to be passed by

the Karnataka High Court.

17. The present writ petition under Article 226 and 227 of the

Constitution of India has been filed seeking to set aside

the aforesaid order passed by the AAIFR on 20.10.2008.

18. Learned senior counsel for the petitioner-bank has once

again before us argued the case as before the AAIFR. It

is the plea of the petitioner that Section 22 of the SICA

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would have no application to appropriation of the

insurance claim especially as no special declaration had

been made by the BIFR suspending the operation of any

contract. In this behalf, learned senior counsel relied

upon the observations of the Supreme Court in Morgan

Securities & Credit (P) Ltd. v. Modi Rubber Ltd., (2006) 12

SCC 642 wherein it was observed that a statutory

distinction has been made by the legislature as regard

initiation and / or continuation of proceedings on the one

hand and suspension thereof on the other. Thus, under

Section 22(1) of the SICA, no specific order was required

to be passed by the BIFR, while a specific declaration was

required to be made under Section 22(3) in relation to

the matters enumerated thereunder. In the former case,

statutory impact was to be automatic, whereas in the

latter case, the BIFR is required to apply its mind having

regard to the facts and circumstances of each case.

19. Learned senior counsel also sought to derive strength

from the judgment of learned Single Judge of this Court in

Enchante Jewellery v. Citibank N.A., 2009 (109) DRJ 239

dealing with a suit claim for damages on account of

repossession of the vehicle of the plaintiff company. It

was held that the bank was entitled to take repossession

of the hypothecated vehicle. The findings, however

based on the facts, are that the plaintiff made a false

averment of placing jewellery within the car and

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jewellery having been taken away. The plaintiff had

incurred liability in respect of the car without giving

specific information to the defendant bank that it was a

sick industrial company and the matter was already

pending before the BIFR. Thus, the asset had been

acquired after the proceedings of the BIFR were already

pending, asset being the car. We may also notice that

the only two issues framed were as to whether the

plaintiff is entitled to decree of damages and whether the

defendant bank had committed any breach of contract.

20. Learned senior counsel has emphasised the observations

made in the judgment that there was no provision in the

SICA under which the bank, which had given loan on

hypothecation of vehicles, was required to go to the BIFR

and seek permission for repossession of vehicles

hypothecated to it in case of default in payment of EMIs.

It was, however, simultaneously observed that the

plaintiff had, in fact, concealed its status of sick company

from the defendant bank.

21. Learned senior counsel also contended that the

petitioner bank as assignee under the policy is directly

entitled to receive the amount of the insurance company

under the statutory provisions of the Insurance Act, 1938

(more specifically Section 38) and the Transfer of

Property Act, 1882 (more specifically Sections 130 and

135). In this behalf, learned senior counsel has relied

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upon the judgment of the Supreme Court in Krishna Food

and Baking Industry Private Limited v. New India

Assurance Company Limited & Anr., (2008) 15 SCC 631

to the effect that where there is an assignment of

insurance policy in favour of the bank, the bank was

entitled to get the amount from the insurance company.

However, the issue of the effect of pending proceedings

before the BIFR were not in question in this case.

22. Learned senior counsel also referred to the observations

made in para 10 of the impugned order that the bank

had the right to decide upon the terms of the settlement

between itself and the contracting party and in case of

breach, the matter could not be adjudicated upon by the

BIFR or the AAIFR.

23. Lastly, it was contended that in view of the claim pending

before the Karnataka High Court, the BIFR and the AAIFR

should have held their hand.

24. Learned counsel for respondent No. 1 has emphasized on

the fact that the OTS was agreed upon on 04.09.2007

and in pursuance thereto a letter was issued to

respondent No.1 company on 05.09.2007 communicating

the acceptance of OTS and giving time till 30.09.2007 to

pay the amount settled. The sum of Rs.40 lakhs lying in

NLA was immediately adjusted on 13.09.2007 and the

balance of Rs.76 lakhs had to be paid on or before

30.09.2007. Before expiry of that date on 17.09.2007,

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the petitioner bank wrote to the insurance company

requesting that the amount awarded by NCDRC as

affirmed by the Supreme Court be directly remitted to it

and the insurance company duly remitted the amount of

Rs.273.54 lakhs on 19.09.2007. In terms of the OTS, the

petitioner could have adjusted only the amount of Rs.76

lakhs. On the other hand, having received the amount,

the petitioner bank sought to revoke the OTS on

21.09.2007 on the spacious plea of being uninformed of

the proceedings of the Supreme Court. Learned counsel

for R-1 drew our attention to the undisputed fact of the

petitioner being a party in those proceedings. At the

stage when the proceedings were going on before the

NCDRC, the petitioner bank even filed an affidavit, which

was duly examined. Thus, the petitioner bank was

keeping a full watch on all the proceedings and, thus, can

hardly be said to be ignorant of the proceedings.

Learned counsel has emphasized that the petitioner bank

could not have withdrawn the OTS and has relied upon

the judgment of the Supreme Court in Sardar Associates

& Ors. v. Punjab and Sind Bank & Ors., (2009) 8 SCC 257

to contend that the bank is bound by the OTS arrived at

as per the RBI guidelines.

25. Insofar as the issue of appropriation of the amount by the

petitioner bank is concerned, it was submitted that

Section 22(1) of the SICA is applicable as the monies

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received on behalf of the company are property of the

company and cannot be unilaterally appropriated by the

bank without prior permission of the BIFR. The

submission was that the insurance amount was actually

owned by the company, but in terms of the Deed of

Hypothecation and the insurance policy, the bank sought

direct payment. Such amount could have been kept only

in trust by the petitioner bank and more so since it was

the OA at the relevant time. Learned counsel seeks to

draw strength from various judgments of the Supreme

Court.

26. In Maharashtra Tubes Ltd. V. State Industrial &

Investment Corporation of Maharashtra Ltd. and Anr.;

(1993) 2 SCC 144 where it was held that even the powers

conferred under a special statute as in Section 29 and/or

Section 31 of the State Financial Corporation Act, 1951

would have to yield to the provisions of Section 22(1) of

SICA and no coercive action was possible under the State

Financial Corporation Act, 1951.

27. Similarly in The Gram Panchayat and Anr. V. Shree

Vallabh Glass Works Ltd & Ors.; AIR 1990 SC 1017, it was

held that all proceedings to recover property tax under

Section 129 of Bombay Village Panchayat Act, 1958

would not lie except with consent of the BIFR and in the

absence of approval, the remedy is not extinguished but

is postponed.

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28. In Real Value Appliances Ltd. V. Canara Bank & Ors; JT

1998 (3) SC 715, a similar view has been taken in respect

of pending proceedings under the Companies Act, 1956.

29. In Rishabh Agro Industries Ltd. V. P.N.B.Capital Services

Ltd; (2000) 5 SCC 515, it was held that the deemed date

of commencement of enquiry for purposes of Section 22

of SICA was the date of submission of reference under

Section 15 of SICA. In company proceedings, where the

debtor had agreed to pay instalments and failed to pay

the same, an order of winding up against the company

was passed. This order was stayed by the Division Bench

and thereafter a reference was filed by the company

under Section 15(1) of SICA. The application filed by the

company before the High Court under Section 22 of SICA

was held to be valid in these facts.

30. Lastly, a reference was made to NGEF Ltd. V. Chandra

Developers (P) Ltd.; (2005) 8 SCC 219 where it was held

that till a company remains sick, the BIFR alone shall

have jurisdiction as regards the sale of its assets and

even the Company Court in a winding up proceedings

would not have jurisdiction.

31. Learned counsel sought to distinguish the judgments

relied upon by learned senior counsel for the petitioner

bank and contended that Section 22(3) of the SICA would

have no application in the present case as it is concerned

with suspension of award, agreement, contract, etc. The

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judgment in Morgan Securities & Credit (P) Ltd.‟s case

(supra) was in relation to an award under the Arbitration

Act.

32. Learned counsel emphasized that in Enchante Jewellery‟s

case (supra), learned Single Judge of this Court dealt with

a vehicle being a car under a hire-purchase agreement.

The property being the vehicle had not passed on to the

party, but was with the bank. The transaction was also

without disclosing the fact to the bank that proceedings

are already pending before the BIFR. In the present

case, the stocks / goods are owned by respondent No. 1

company and only hypothecated to the petitioner bank.

The question of hypothecation would arise once the

property was with respondent No. 1. Thus, any monies

received for loss of property of respondent No. 1

company would again belong to the company.

33. Learned counsel further pointed out that the judgment in

Canara Bank v. Krishna Food and Baking Industry Pvt.

Ltd.‟s case (supra) did not even deal with a case of a sick

company and there was, thus, no question of obtaining a

prior permission of the BIFR.

34. We have carefully examined the rival contentions of the

parties. The principal aspect, which has to be kept in

mind, is that the SICA was enacted with the objective of

timely detecting sick and potentially sick companies

owning industrial undertakings so that speedy preventive

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measures could be taken for rehabilitation of the

company, if possible. It is in these circumstances that

Chapter III of the SICA deals with reference / enquiries

and schemes. Section 15 deals with reference to the

Board / BIFR, while the provisions of Sections 16 to 18

deal with the inquiry into the working of the sick

industrial company and preparation of a scheme for its

rehabilitation. Section 19 refers to rehabilitation of the

sick company by giving financial assistance and if no

such revival is possible, the adverse opinion for winding

up is forwarded to the High Court under Section 20 of the

SICA.

35. The objective of Section 22 of the SICA making provisions

for suspension of legal proceedings, contracts, etc. is that

coercive processes against the company should be kept

in abeyance till it is found out whether such rehabilitation

is possible and a revival scheme may require sacrifices

both by secured and unsecured creditors. The catena of

judgments cited by learned counsel for R-1 show that

primacy of the BIFR in respect of all matters of the sick

company and that the powers to be exercised under SICA

preserving the assets would supersede the powers under

different statutes including specific legislations like the

State Financial Corporations.

36. We are of the view that the legal position is quite clear

that remedy of courts and specialized tribunals to

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recover amounts is not permissible for a creditor so long

as the proceedings are pending before the BIFR and the

BIFR alone is the „master of ceremonies‟.

37. In the facts of the present case, the question of

suspension of any contracts, agreements, settlements,

awards, etc. is not involved for which a specific order has

to be passed by the BIFR under sub-section (3) of Section

22 of the SICA. To appreciate the distinction between

sub-section (1) and sub-section (3) of Section 22 of the

SICA, we reproduce both of them as under:

                "22. Suspension                   of     legal       proceedings,
                contracts, etc.

(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 or 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.

... ... ... ... ... ... ...

(3) Where an inquiry under section 16 is pending or any scheme referred to in section 17 is under preparation or during the period of consideration of any scheme under section 18 or where any such _____________________________________________________________________________________________

scheme is sanctioned thereunder, for due implementation of the scheme, the Board may by order declare with respect to the sick industrial company concerned that the operation of all or any of the contracts, assurances of property, agreements, settlements, awards, standing orders or other instruments in force, to which such sick industrial company is a party or which may be applicable to such sick industrial company immediately before the date of such order, shall remain suspended or that all or any of the rights, privileges, obligations and liabilities accruing or arising thereunder before the said date, shall remain suspended or shall be enforceable with such adaptations and in such manner as may be specified by the Board.

Provided that such declaration shall not be made for a period exceeding two years which may be extended by one year at a time so, however, that the total period shall not exceed seven years in the aggregate."

38. It can hardly be doubted that the goods in question were

owned by respondent No. 1 company. The property and

the goods remained of respondent No. 1 company. The

goods were insured. The arrangement with the

insurance company was that in case of loss of goods, the

amount would be directly remitted to the petitioner bank

for securing the financial assistance given by the

petitioner bank to respondent No. 1. Thus, the monies

received in case of loss of goods by the bank were

actually monies of the company, which would go towards

the settlement of the claim of the bank.

39. It is in the aforesaid circumstances that learned counsel

for respondent No. 1 has rightly distinguished the

judgment of learned Single Judge in Enchante Jewellery‟s

case (supra) where the vehicle in question remained the _____________________________________________________________________________________________

property of the bank till the entire finance was not paid

with the right to repossess the vehicle. This is, of course,

apart from the fact that it was not even disclosed to the

bank that the company was already before the BIFR.

40. The monies received by the petitioner bank from

respondent No. 1, as observed aforesaid, were monies of

respondent No. 1 company and in view of the pendency

of proceedings before the BIFR could not have been

unilaterally appropriated without the prior permission of

the BIFR. Undoubtedly, no permission of the BIFR was

obtained. The strange aspect is that the petitioner bank

was, in fact, the OA, which was responsible for default of

a scheme for revival. There were only two secured

creditors, i.e.., the petitioner bank and KSIIDC. The

conduct of the petitioner bank naturally resulted in

protest from KSIIDC and the failure of the petitioner bank

to comply with directions of the BIFR has even resulted in

a subsequent order replacing it as OA. The judgment in

Canara Bank v. Krishna Food and Baking Industry Pvt.

Ltd.‟s case (supra), in any case, has no application as the

same deals with the aspect of assignment of insurance

policy and transfer of the amount to a bank, but is

nowhere concerned with the rights and obligations

arising from the pendency of proceedings before BIFR.

41. In the proceedings before the BIFR, the aspect of OTS is

not really required to be gone into, especially as

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respondent No. 1 has preferred a writ petition before the

Karnataka High Court and as to whether the petitioner

bank could at all have walked away from the OTS would

be decided in those proceedings, but suffice to say that

the change of heart of the petitioner bank arose after

having appropriated the initial amount of Rs.40 lakhs and

after receipt of a larger sum from the insurance company

and that too within the time granted to respondent No. 1

to make the balance payment as per the OTS.

42. The petitioner bank was fully aware of all the

proceedings relating to the insurance claim being a party

to those proceedings. We are unequivocally of the view

that the impugned orders passed by the BIFR and

affirmed by the AAIFR were, in fact, in accordance with

law and in the best interest of respondent No. 1 company

while protecting the interest of the petitioner bank. No

direction was passed for the petitioner bank to deposit

the amount with respondent No. 1 company, but the

direction was only to keep the amount received in the

NLA as the compensation to be paid to the petitioner

bank was also dependent on the fate of the proceedings

before the Karnataka High Court where the aspect of the

OTS had to be gone into. There was no question of the

petitioner bank unilaterally appropriating the complete

insurance amount without moving an appropriate

application before the BIFR.

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43. If the plea of the petitioner bank was to be accepted, a

chaotic situation would arise where every secured

creditor having some security would seek to move

against the security to quickly liquidate it and

appropriate the amount contrary to the interest of other

secured creditors and unsecured creditors. This can

hardly be permitted and would defeat the very object of

the SICA where the disbursement of funds is an

important aspect for purposes of rehabilitation and where

sacrifices may be called for from both secured and

unsecured creditors. The petitioner bank is not the only

secured creditor, there being two secured creditors and

the endeavour of the petitioner bank to steal a march

over the other secured creditor, i.e., KSIIDC cannot be

appreciated. Thus, KSIIDC rightly objected before the

BIFR to such unilateral appropriation of the insurance

amount by the petitioner bank leaving KSIIDC high and

dry and in an unequal bargaining position in case

rehabilitation scheme was to be propounded. The

secured creditors are liable to be treated at par. The

improper conduct of the petitioner bank has even

resulted in it being replaced as OA.

44. The interim directions of the BIFR dated 23.10.2007 as

contained in para 6(b) and para 6(c) directing the

petitioner bank to explain its stand of unilateral

appropriating the insurance claim without making a

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reference to the BIFR and directing the petitioner bank to

deposit the amount in the NLA cannot be faulted.

45. The writ petition being devoid of any merit is dismissed

with costs of Rs.10,000/-.

SANJAY KISHAN KAUL, J.

September 29, 2010                                       VALMIKI J. MEHTA, J.
madan

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