Delhi High Court
Indo American Electricals Ltd vs Sanjay Gupta @ Sanjay Mahajan on 7 September, 2016
$~A-44
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of decision: 07.09.2016
+ CM(M) 884/2016
INDO AMERICAN ELECTRICALS LTD ..... Petitioner
Through Mr. S.Chakraborty, Advocate.
Versus
SANJAY GUPTA @ SANJAY MAHAJAN ..... Respondent
Through Mr.Naresh Sharma, Advocate.
CORAM:
HON'BLE MR. JUSTICE JAYANT NATH
JAYANT NATH, J.(ORAL)
CM No. 32709/2016 (exemption)
Allowed subject to all exceptions.
CM(M) 884/2016 and CM No. 32708/2016 (stay)
1. By the present petition, the petitioner seeks to impugn the order
dated 21.07.2016 by which an application filed by the petitioner/defendant
under Order 7 Rule 11 CPC was dismissed.
2. The contention of the petitioner is that the respondent has filed a suit
for recovery of Rs.5,95,390/-. The petitioner filed the application under
Order 7 Rule 11 CPC stating that the defendant/petitioner company has a
pending enquiry under BIFR and a reference has been made vide letter
dated 19.10.2014 and that the reference has been approved and a case has
been registered as Case No. 53/2014. On the basis of this averment, it was
stated that the plaint be rejected.
3. The impugned order of the trial court rejected the application giving
several reasons. It was firstly stated that as per the third proviso to Section
CM(M) 884/2016 Page 1
15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985
where the specified number of secured creditors take measures for
recovery of their secured debt under Section 13(4) of The Securitisation
and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 (hereinafter referred to as the „SARFAESI Act‟), then it
would automatically entail abatement of the reference/proceedings. Based
on the said interpretation, it was held that the reference stands
automatically abated. It is also stated that the last proceedings that have
been filed on record are dated 22.10.2015 before BIFR and that
subsequently, nothing has been filed by the petitioner pointing out what is
the stage of the proceedings or as to whether the name of the
petitioner/defendant is shown in the list of the secured creditors.
4. Learned counsel for the petitioner has relied upon the judgment of
the Division Bench of this court in the case of M/s. Global Infrastructure
Technology Ltd. vs. Kotak Mahindra Bank Ltd. & Ors. in W.P.(C)
4862/2013 dated 16.04.2014 to contend that this court has already held that
the satisfaction as stated in the third proviso to Section 15(1) of the SICA
regarding the reference having being abated can only be decided by BIFR.
He further submits that on the facts of the case, the Supreme Court in Civil
Appeal No. 3076/2016 dated 18.03.2016 modified the directions passed by
the Division Bench but did not disturb the findings of law recorded by the
Division Bench. He also relies upon the judgment of the Supreme Court in
the case of M/s. Madras Petrochem Ltd. & Anr. vs. BIFR & Ors., (2016)
4 SCC 1/(2016 SCC OnLine SC 86) for the said purpose.
5. Learned counsel appearing for the respondent has relied upon the
judgment of the Bombay High Court in the case of Nouveaw Exports
Private Limited vs. Appellate Authority for Industrial and Financial
Reconstruction Co. dated 19.05.2010 passed in W.P.(C) 2079/2010 to
CM(M) 884/2016 Page 2
contend that abatement as stipulated under the third proviso to Section
15(1) of the SICA could be automatic.
6. Learned counsel for the petitioner has in rejoinder pointed out that in
para 5 of the said judgment of the Bombay High Court relied upon by the
respondent, the High Court noted that the observations in the order may be
treated only as prima facie. He further submits that in view of the fact that
the Division Bench of this High Court has held differently, the legal
position as stated by this court would prevail before the trial court.
7. Section 15(1) of the SICA reads as follows:-
"15. Reference to Board.--
(1) When an industrial company has become a sick industrial
company, the Board of Directors of the company, shall, within
sixty days from the date of finalisation of the duly audited
accounts of the company for the financial year as at the end of
which the company has become a sick industrial company,
make a reference to the Board for determination of the
measures which shall be adopted with respect to the company:
Provided that if the Board of Directors had sufficient reasons
even before such finalisation to form the opinion that the
company had become a sick industrial company, the Board of
Directors shall, within sixty days after it has formed such
opinion, make a reference to the Board for the determination of
the measures which shall be adopted with respect to the
company:
Provided further that no reference shall be made to the Board
for Industrial and Financial Reconstruction after the
commencement* of the Securitisation 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
CM(M) 884/2016 Page 3
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-fourth 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."
8. In the context of who would determine that the Enquiry has abated
under third proviso to Section 15(1) of SICA, the Division Bench of this
High Court in the case of M/s. Global Infrastructure Technology Ltd. vs.
Kotak Mahindra Bank Ltd. & Ors. (supra) stated as follows:
"16. Apart from authority, it seems to us that it would be
incongruous to hold that a secured creditor or group of secured
creditors who represent 3/4ths in value of the financial
assistance in respect of "a financial asset" and thus are entitled
to recover the debt from the borrower without recourse to any
tribunal or court and by taking any of the measures to recover
the debt contemplated by section 13(4) of the SARFAESI Act
can also scuttle the revival of a sick industrial company by
asking for abatement of the reference pending before the BIFR
without satisfying the more stringent requirement of the 3rd
proviso to section 15(1) of SICA. To continue the example given
earlier, if the total debts due by the borrower to the secured
creditors is Rs. 100 crores, and if the contention of the
respondent is right, then Bank "B" and Bank "C" which
together have advanced Rs. 40 lakhs against the machinery can
not only take steps to recover the debts under the SARAFAESI
Act but also successfully ask for abatement of the reference
pending before the BIFR, though they woefully fall short of the
threshold limit of Rs. 75 crores set by the 3 rd proviso to section
15 (1) of the SICA. One fails to understand what purpose would
be served if such an interpretation canvassed on behalf of the
respondent is accepted.
17. The question whether the threshold limits/conditions set by
the 3rd proviso to section 15 (1) of SICA are satisfied is
necessarily to be based on data reflected by the accounts of the
CM(M) 884/2016 Page 4
petitioner and any other relevant material. That is an exercise
which can only be embarked upon by the BIFR. While therefore
setting aside the orders of the BIFR and the AIFR, we restore
the matter to the BIFR for a decision, to be taken after giving a
fair and reasonable opportunity to the parties to put forth their
respective cases and place on record the accounts and all other
relevant material. It shall be open to both sides to raise all
other contentions and arguments (on the merits of which we
express no opinion) which shall be considered and decided by
the BIFR. It would be expedient that the decision is rendered by
the BIFR within four months from today."
9. In an SLP against the above judgment, the Supreme Court in Civil
Appeal No.3076/2016 dated 18.03.2016 noted that a finding of fact had
been recorded by BIFR that the appellant before the Supreme Court was
holding 100% of the outstanding of the secured debts of respondent No.1.
Hence, the Supreme Court felt that the final direction of the High Court
remanding the matter back for determination of the same question was a
redundant exercise and accordingly set aside the impugned order.
However, the legal proposition laid down by this court had not been dealt
with by the Supreme Court.
10. In the context of the above, reference may also be had to the
judgment of the Supreme Court in M/s Madras Petrochem Ltd. & Anr. v.
BIFR & Ors.,(2016) 4 SCC 1. The Supreme Court in that judgment was
considering the interplay between the Sick Industrial Companies (Special
Provisions) Act, 1985 and the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002. The
Supreme Court held as follows:
"50. Another important aspect as to the construction of the
third proviso to Section 15(1) is the meaning of the expression
"such reference shall abate". One of the meanings of the
expression "abate" is "to put an end to; to curtail; to come to
CM(M) 884/2016 Page 5
naught". (See Ramanatha Aiyar's Law Lexicon). A reference
can be said to abate in one or several ways. One obvious way
that a reference abates is where the Board, after inquiry,
rejects the reference for the reason that the Board is satisfied
that the Company is not a sick industrial company as defined
under the Act. Another way in which a reference can abate is
where a scheme is implemented successfully, and the sick
industrial company is taken out of the woods successfully. A
third manner in which a reference can abate is when a scheme
or schemes have failed in respect of the sick industrial
company, and in the opinion of the BIFR, the said Company
ought to be wound up. A fourth instance of abatement is
provided by the third proviso to Section 15(1) of the Sick
Industrial Companies (Special Provisions) Act, 1985. And that
is that a reference which is pending in the sense understood
hereinabove shall abate if the secured creditors of not less
than 3/4th in value of the amount outstanding against the
financial assistance disbursed to the borrower, have taken
measures to recover secured debts Under Section 13(4) of the
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002. It is clear that the
third proviso to Section 15(1) seeks to strike a balance
between getting a sick industrial company out of the woods
and secured creditors being able to recover the debt owed to
them by such company. The legislature has thought it fit to
annul all proceedings before the BIFR only when at least
3/4th of the amount outstanding against financial assistance
disbursed to the borrower of such secured creditors have taken
the measures listed in Section 13(4) of the Securitisation and
Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002. The balance is therefore struck by
the figure of "not less than 3/4th". The legislature has inserted
this provision so that, if 3/4th or more of the secured creditors
get together to take measures Under Section 13(4) of the
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, they will not be
CM(M) 884/2016 Page 6
thwarted by the provisions of Section 22 of Sick Industrial
Companies (Special Provisions) Act, 1985, and it will not be
necessary for them to obtain BIFR permission before taking
any such measures. This construction of the third proviso to
Section 15(1) is in keeping with the march of events post
2002, when the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 came
to be enacted pursuant to various committee reports, and for
the reasons outlined hereinabove.
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54. The resultant position may be stated thus:
1. Section 22 of the Sick Industrial Companies (Special
Provisions) Act, 1985 will continue to apply in the case of
unsecured creditors seeking to recover their debts from a sick
industrial company. This is for the reason that the Sick
Industrial Companies (Special Provisions) Act, 1985 overrides
the provisions of the Recovery of Debts Due To Banks And
Financial Institutions Act, 1993.
2. Where a secured creditor of a sick industrial company seeks
to recover its debt in the manner provided by Section 13(2) of
the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, such secured
creditor may realise such secured debt Under Section 13(4) of
the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, notwithstanding
the provisions of Section 22 of the Sick Industrial Companies
(Special Provisions) Act, 1985.
3. In a situation where there are more than one secured
creditor of a sick industrial company or it has been jointly
financed by secured creditors, and at least 60 per cent of such
secured creditors in value of the amount outstanding as on a
record date do not agree upon exercise of the right to realise
their security under the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act,
CM(M) 884/2016 Page 7
2002, Section 22 of the Sick Industrial Companies (Special
Provisions) Act, 1985 will continue to have full play.
4. Where, Under Section 13(9) of the Securitisation and
Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002, in the case of a sick industrial
company having more than one secured creditor or being
jointly financed by secured creditors representing 60 per cent
or more in value of the amount outstanding as on a record date
wish to exercise their rights to enforce their security under the
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, Section 22 of the
Sick Industrial Companies (Special Provisions) Act, 1985,
being inconsistent with the exercise of such rights, will have
no play.
5. Where secured creditors representing not less than 75 per
cent in value of the amount outstanding against financial
assistance decide to enforce their security under the
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, any reference
pending under the Sick Industrial Companies (Special
Provisions) Act, 1985 cannot be proceeded with further-the
proceedings under the Sick Industrial Companies (Special
Provisions) Act, 1985 will abate."
Hence, the Supreme Court took the view that where 3/4 th or more of
the secured creditors get together to take measures under SARFAESI Act,
it is not necessary for them to obtain BIFR permission before taking such
measures.
11. On the facts of this case, it is not clear as to how the trial court came
to the conclusion that the proceedings have abated. The only light on this
aspect is shown in the orders of the BIFR dated 24.06.2015 where the
submission was noted on behalf of the SBI that SBI has taken symbolic
CM(M) 884/2016 Page 8
possession of two assets of the company. The issue however remains as to
whether the said act of SBI is covered by the third proviso to Section 15(1)
of SICA and if so, how? This is it not discussed in the impugned order.
The reference abates only when secured creditors representing not less
than 3/4th in the value of the amount outstanding against the financial
assistance disbursed to the borrowers of such secured creditors have taken
measures under Section 13(4) of the SICA. There are no facts available to
show that such an eventuality has taken place. The conclusion of
abatement by the trial court based on the order of BIFR dated 24.06.2015
is erroneous.
12. In view of the above, the present petition is allowed. The impugned
order passed by the trial court dated 21.07.2016 is set aside. The suit filed
by the respondent shall remain stayed till the pendency of the reference
before the BIFR. The respondent would be at liberty to move an
application for vacation of the stay in case subsequent developments take
place which warrant vacation of the present stay.
13. The petition stands disposed of.
14. Dasti.
JAYANT NATH, J
SEPTEMBER 07, 2016
Rb
CM(M) 884/2016 Page 9
