M/s. Madras Petrochem Ltd. & ANR. Vs. BIFR & Ors. [January 29, 2016]
2016 Latest Caselaw 99 SC

M/s. Madras Petrochem Ltd. & ANR. Vs. Board for Industrial and Financial Reconstruction (BIFR) & Ors.

[Civil Appeal Nos. 614-615 of 2016 arising out of SLP (Civil) Nos. 26170-26171 of 2008]

R.F. Nariman, J.

1. Leave granted.

2. The present appeals raise interesting questions on 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 facts in appeals arising out of Special Leave Petition (Civil) Nos.26170-26171 of 2008 are as follows.

3. The net worth of the Appellant No.1 Company, having eroded completely, the appellant No.1 company filed a reference under Section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 before the BIFR, which was registered as BIFR Case No.115 of 1989. On 13.12.1989, after making an inquiry under Section 16(1) of the Sick Industrial Companies (Special Provisions) Act, 1985, the Appellant company was declared sick and ICICI was appointed as the Operating Agency to formulate a rehabilitation scheme.

On 3.7.1991, the first rehabilitation scheme prepared by the Operating Agency was sanctioned, which envisaged the takeover of the appellant company by one Mahavir Plantation Limited - i.e. appellant No.2. The first scheme was finally declared a failure, and the Appellant No.1 company, on 17.1.1995, was directed to submit a fresh, comprehensive, revised rehabilitation scheme which was duly circulated. Objections to the said scheme were heard by the BIFR and the scheme finally sanctioned was in the form of a change of management of the appellant no.1 company subject to various modifications to be carried out. After the Appellant No.1 company's management changed hands, the second scheme, after being reviewed from time to time, was declared as failed on 16.5.2000.

Despite efforts by the Operating Agency to attempt to revive the company, all such efforts failed, and ultimately, on 30.4.2001, BIFR, on the basis of the recommendation of the Operating Agency, formed a prima facie opinion that the appellant No.1 company should be wound up under Section 20(1) of the Sick Industrial Companies (Special Provisions) Act, 1985. On 27.7.2001, the BIFR confirmed its prima facie opinion after noting that the appellant No.1 company had been enjoying protection under the Sick Industrial Companies (Special Provisions) Act, 1985 for the last 12 years. There being no acceptable viable rehabilitation proposal after the failure of two schemes, the appellant no.1 company was not likely to make its net worth exceed its accumulated losses, and therefore BIFR recommended to the High Court of Bombay that the said company be wound up. On 4.2.2002, appellant No.1's challenge to the BIFR order was dismissed by the AAIFR.

4. While matters stood thus, ICICI issued a notice dated 20.11.2002 under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 to the appellant No.1 company and followed it up with a possession notice dated 9.5.2003. On 8.8.2003, ICICI issued a sale notice for and on behalf of all the secured creditors of the appellant No.1 company. Meanwhile, appellant Nos. 1 & 2 filed a writ petition before the Delhi High Court being Writ Petition Nos.48-49 of 2004 challenging the AAIFR order dated 4.2.2002 and the BIFR order dated 25.7.2001. On 7.1.2004, the Delhi High Court stayed both the orders, which stay continued until 24.7.2008, when, by the impugned judgment, the Writ Petition was dismissed.

5. Meanwhile, the sale notice of 8.8.2003 was challenged before the DRT by the appellants. The said challenge was unsuccessful, as a result of which an appeal was filed before the DRAT, which, by its order dated 30.6.2005, upset the DRT order and set aside the sale notice. However, by a judgment of the Madras High Court, in a challenge to the aforesaid order dated 30.6.2005, the Madras High Court set aside the DRAT order. The sale of movable assets for a sum of Rs.4.65 crores was also confirmed by the Madras High Court in favour of one M/s Rahamath Steel. Vide the said order the Madras High Court also permitted the creditors of the Company to proceed with the sale of its immovable property subject to a minimum reserve price of Rs.25 crores. This order was never challenged and has attained finality.

6. Meanwhile, based on a winding up proceeding by M/s BHEL, an unsecured creditor, and another winding up proceeding based on the opinion of the BIFR under Section 20 of the Sick Industrial Companies (Special Provisions) Act, 1985, the Bombay High Court wound up the appellant No.1 company.

7. While matters stood thus, the Delhi High Court passed the impugned order on 24.7.2008, as has been stated hereinabove, in which it was of the view that Section 15(1) proviso 3 of the Sick Industrial Companies (Special Provisions) Act, 1985, when construed to include all proceedings under the Sick Industrial Companies (Special Provisions) Act, 1985, would make the present proceedings under the Sick Industrial Companies (Special Provisions) Act, 1985, abate on the facts of this case. Ultimately, in this view of the matter, and differing with a judgment of the Orissa High Court, the Delhi High Court disposed of the appellants' writ petition as having become infructuous.

8. Appeals have been filed against the said order by the present appellants which appeals, as has been stated hereinabove, raise interesting questions of law on the interplay of the Sick Industrial Companies (Special Provisions) Act, 1985 with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

9. A few subsequent events also need to be stated for the sake of completion. On 20.11.2008, the Bombay High Court modified its order dated 30.8.2007 and restrained the Official Liquidator from taking possession of the secured assets of the company, and permitted the creditors to pursue their remedies under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. M/s. Alchemist ARC Ltd. issued a sale notice on behalf of all the creditors of the appellant No.1 company for a sum of Rs.222.59 crores on 6.4.2013. Appellant No.2, being the corporate guarantor of the appellant no.1 company, filed an appeal challenging the sale notice of 6.4.2013. On 13.5.2013, DRT Chennai dismissed this petition. Vide an order dated 19.3.2014, the DRAT, Chennai, in an appeal made to it, directed, by way of an interim order, that appellant No.2 pay a sum of Rs.53.77 crores within the time stated therein.

This DRAT order was challenged before the Madras High Court which, by its order dated 21.4.2014, refused to interfere with the said order dated 19.3.2014, and granted some additional time to appellant No.2 to pay the said amount of Rs.53.77 crores. We have been informed that the said amount has not been paid till date. The appellant No.2 has challenged this order of 21.4.2014 before this Court. However, the said SLP is lying in defect as on date despite the expiry of more than one and a half years.

10. Mr. C.N. Sreekumar, learned counsel appearing on behalf of the appellant No.1 company, submitted before us that the effect of the interim order of 7.1.2004 of the Delhi High Court is that the reference made by the appellant No.1 company gets revived. He further submitted that no winding up order could be made in view of such revival, and that such orders are therefore non est, and the present appeals cannot be regarded as infructuous. He added that Section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 would automatically come into play to protect the assets of the appellant No.1 company.

He also submitted before us, that in any case, regard being had to the object of the Sick Industrial Companies (Special Provisions) Act, 1985, it would override the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. For this purpose, he relied on a judgment by this Court in KSL & Industries Ltd. v. Arihant Threads Ltd., (2015) 1 SCC 166, which held that the Sick Industrial Companies (Special Provisions) Act, 1985 has overridden the Recovery Of Debts Due To Banks And Financial Institutions Act, 1993. The said Act, being a predecessor to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and dealing with the same subject matter as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - namely, recovery of debts due to banks and financial institutions, would lead to the conclusion that the 2002 Act is also overridden.

He further contended that Section 37 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 expressly refers to the Recovery Of Debts Due To Banks And Financial Institutions Act, 1993, and since Section 34(2) of the Recovery Of Debts Due To Banks And Financial Institutions Act, 1993, refers to the Sick Industrial Companies (Special Provisions) Act, 1985, Section 37 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 should also be construed so as to include a reference to the Sick Industrial Companies (Special Provisions) Act, 1985. His further contention is that on a true construction of Section 15(1) proviso 3 of the Sick Industrial Companies (Special Provisions) Act, 1985, the Orissa High Court is correct and that since the expression "reference" would only include the initial stage of filing and registration of a reference before the BIFR, such stage having gone long ago, the proceedings before BIFR are very much alive and have not abated.

11. Shri C.A. Sundaram, learned senior counsel, appearing on behalf of M/s Alchemist Asset Reconstruction Company Limited, which is substituted in place of respondent Nos.2,3,4,6 and 9, has submitted that the effect of the interim order dated 7.1.2004 does not revive the reference of the appellant No.1 company before BIFR. For this purpose he relied upon Shree Chamundi Mopeds Ltd. v. Church of South India Trust Assn., (1992) 3 SCC 1. He also submitted that in any event the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 would override the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985, so that even if the stay order dated 7.1.2004 had the effect of reviving the reference, that in itself would not restrain the secured creditors from proceeding under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, nor would it render the winding up order passed by Bombay High Court non est.

He also submitted that a large number of judgments of various High Courts have taken the view which is taken in the impugned judgment, and that the expression "reference" would include all stages of a proceeding under the Sick Industrial Companies (Special Provisions) Act, 1985 including the stage of operation of a scheme. For this purpose, in particular, he relied heavily on a full bench decision of the Madras High Court in M/s. Salem Textiles Limited v. The Authorized Officer and Ors., reported in AIR 2013 Madras 229.

He also argued that since the Recovery Of Debts Due To Banks And Financial Institutions Act, 1993 expressly named the Sick Industrial Companies (Special Provisions) Act, 1985 in Section 34(2), the Sick Industrial Companies (Special Provisions) Act, 1985 obviously overrode that Act. What is significant is that the corresponding section, namely, Section 37 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, expressly omits any reference to the Sick Industrial Companies (Special Provisions) Act, 1985, making it clear that the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 would prevail over the Sick Industrial Companies (Special Provisions) Act, 1985.

That being the case, he argued that this Court's judgment in KSL & Industries Ltd. Vs. Arihant Threads Ltd., (2015) 1 SCC 166, is, therefore, clearly distinguishable. He also argued that at the end of the day, since the movable property of the appellant No.1 company had been sold off, and since various High Courts - including Bombay and Madras - have passed a number of orders, both winding up the company and dismissing petitions challenging the action of his client in proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, all that remains is sale of the immovable property of the appellant No.1 Company and that, therefore, nothing really remains in these appeals, which have become infructuous.

Discussion:-

12. The arguments of counsel have been wide ranging, but at the end of the day various Sections of three statutes have to be interpreted by this Court. Before embarking on a consideration of the arguments and the interpretation of these provisions, it will be important to first set them out. THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 "Section 15. Reference to Board 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 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. Section 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.

(2) Where the management of the sick industrial company is taken over or changed in pursuance of any scheme sanctioned under section 18 notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or in the memorandum and articles of association of such company or any instrument having effect under the said Act or other law

a) it shall not be lawful for the shareholders of such company or any other person to nominate or appoint any person to be a director of the company;

b) no resolution passed at any meeting of the shareholders of such company shall be given effect to unless approved by the Board.

(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, assurance 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 adoptions 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.

(4) Any declaration made under sub-section (3) with respect to a sick industrial company shall have effect notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law, the memorandum and articles of association of the company or any instrument having effect under the said Act, or other law or any agreement or any decree or order of a court, tribunal, officer or other authority or of any submission, settlement or standing order and accordingly,-

(a) any remedy for the enforcement of any right, privilege, obligation and liability suspended or modified by such declaration, and all proceedings relating thereto pending before any court, tribunal, officer or other authority shall remain stayed or be continued subject to such declaration; and

(b) on the declaration ceasing to have effect-

(i) any right, privilege, obligation or liability so remaining suspended or modified shall become revived and enforceable as if the declaration had never been made; and

(ii) any proceeding so remaining stayed shall be proceeded with, subject to the provisions of any law which may then be in force, from the stage which had been reached when the proceedings became stayed.

(5) In computing the period of limitation for the enforcement of any right, privilege, obligation or liability, the period during which it or the remedy for the enforcement thereof remains suspended under this section shall be excluded. Section 32. Effect of the Act on other laws

(1) The provisions of this Act and of any rules or schemes made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any other law except the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973) and the Urban Land (Ceiling and Regulation) Act, 1976 (33 of 1976) for the time being in force or in the Memorandum or Articles of Association of an industrial company or in any other instrument having effect by virtue of any law other than this Act.

(2) Where there has been under any scheme under this Act an amalgamation of a sick industrial company with another company, the provisions of section 72A of the Income-tax Act, 1961 (43 of 1961), shall, subject to the modifications that the power of the Central Government under that section may be exercised by the Board without the Central Government under that section may be exercised by the Board without any recommendation by the specified authority referred to in that section, apply in relation to such amalgamation as they apply in relation to the amalgamation of a company owning an industrial undertaking with another company. The Recovery Of Debts Due To Banks And Financial Institutions Act, 1993 Section

17. Jurisdiction, powers and authority of Tribunals.

(1) A Tribunal shall exercise, on and from the appointed day, the jurisdiction, powers and authority to entertain and decide applications from the banks and financial institutions for recovery of debts due to such banks and financial institutions.

(2) An Appellate Tribunal shall exercise, on and from the appointed day, the jurisdiction, powers and authority to entertain appeals against any order made, or deemed to have been made, by a Tribunal under this Act. Section 18. Bar of Jurisdiction. On and from the appointed day, no court or other authority shall have, or be entitled to exercise, any jurisdiction, powers or authority (except the Supreme Court, and a High Court exercising jurisdiction under articles 226 and 227 of the Constitution) in relation to the matters specified in section 17.

34. Act to have over-riding effect.-

(1) Save as provided under sub- section (2), the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.

(2) The provisions of this Act or the rules made thereunder shall be in addition to, and not in derogation of, the Industrial Finance Corporation Act, 1948 (15 of 1948), the State Financial Corporations Act, 1951 (63 of 1951), the Unit Trust of India Act, 1963 (52 of 1963), the Industrial Reconstruction Bank of India Act, 1984 (62 of 1984), the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and the Small Industries Development Bank of India Act, 1989 (39 of 1989). The Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002 Section 13.

Enforcement of security interest

(1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of court or tribunal, by such creditor in accordance with the provisions of this Act.

(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub- section (4).

(3) The notice referred to in sub-section (2) shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of secured debts by the borrower.

(3A) If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any objection, the secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate within one week of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower: PROVIDED that the reasons so communicated or the likely action of the secured creditor at the stage of communication of reasons shall not confer any right upon the borrower to prefer an application to the Debts Recovery Tribunal under section 17 or the Court of District Judge under section 17A.

(4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:--

(a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;

(b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset:

PROVIDED that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt:

PROVIDED FURTHER that where the management of whole of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security for the debt.

(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor;

(d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.

(5) Any payment made by any person referred to in clause (d) of sub-section (4) to the secured creditor shall give such person a valid discharge as if he has made payment to the borrower.

(5A) Where the sale of an immovable property, for which a reserve price has been specified, has been postponed for want of a bid of an amount not less than such reserve price, it shall be lawful for any officer of the secured creditor, if so authorised by the secured creditor in this behalf, to bid for the immovable property on behalf of the secured creditor at any subsequent sale.

(5B) Where the secured creditor, referred to in sub-section (5A), is declared to be the purchaser of the immovable property at any subsequent sale, the amount of the purchase price shall be adjusted towards the amount of the claim of the secured creditor for which the auction of enforcement of security interest is taken by the secured creditor, under sub-section (4) of section 13.

(5C) The provisions of section 9 of the Banking Regulation Act, 1949(10 of 1949) shall, as far as may be, apply to the immovable property acquired by secured creditor under sub-section (5A).]

(6) Any transfer of secured asset after taking possession thereof or take over of management under sub-section (4), by the secured creditor or by the manager on behalf of the secured creditor shall vest in the transferee all rights in, or in relation to, the secured asset transferred as if the transfer had been made by the owner of such secured asset.

(7) Where any action has been taken against a borrower under the provisions of sub-section (4), all costs, charges and expenses which, in the opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, shall be recoverable from the borrower and the money which is received by the secured creditor shall, in the absence of any contract to the contrary, be held by him in trust, to be applied, firstly, in payment of such costs, charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue of the money so received shall be paid to the person entitled thereto in accordance with his rights and interests.

(8) If the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secured asset.

(9) In the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-section (4) unless exercise of such right is agreed upon by the secured creditors representing not less than sixty per cent in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors:

PROVIDED that in the case of a company in liquidation, the amount realised from the sale of secured assets shall be distributed in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of 1956):

PROVIDED FURTHER that in the case of a company being wound up on or after the commencement of this Act, the secured creditor of such company, who opts to realise his security instead of relinquishing his security and proving his debt under proviso to sub-section (1) of section 529 of the Companies Act, 1956 (1 of 1956), may retain the sale proceeds of his secured assets after depositing the workmen's dues with the liquidator in accordance with the provisions of section 529A of that Act:

PROVIDED ALSO that the liquidator referred to in the second proviso shall intimate the secured creditors the workmen's dues in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of 1956) and in case such workmen's dues cannot be ascertained, the liquidator shall intimate the estimated amount of workmen's dues under that section to the secured creditor and in such case the secured creditor may retain the sale proceeds of the secured assets after depositing the amount of such estimated dues with the liquidator:

PROVIDED ALSO that in case the secured creditor deposits the estimated amount of workmen's dues, such creditor shall be liable to pay the balance of the workmen's dues or entitled to receive the excess amount, if any, deposited by the secured creditor with the liquidator:

PROVIDED ALSO that the secured creditor shall furnish an undertaking to the liquidator to pay the balance of the workmen's dues, if any.

Explanation: For the purposes of this sub-section,--

(a) "record date" means the date agreed upon by the secured creditors representing not less than three-fourth in value of the amount outstanding on such date;

(b) "amount outstanding" shall include principal, interest and any other dues payable by the borrower to the secured creditor in respect of secured asset as per the books of account of the secured creditor.

(10) Where dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the secured creditor may file an application in the form and manner as may be prescribed to the Debts Recovery Tribunal having jurisdiction or a competent court, as the case may be, for recovery of the balance amount from the borrower.

(11) Without prejudice to the rights conferred on the secured creditor under or by this section, the secured creditor shall be entitled to proceed against the guarantors or sell the pledged assets without first taking any of the measures specified in clauses (a) to (d) of sub-section (4) in relation to the secured assets under this Act.

(12) The rights of a secured creditor under this Act may be exercised by one or more of his officers authorised in this behalf in such manner as may be prescribed.

(13) No borrower shall, after receipt of notice referred to in sub-section (2), transfer by way of sale, lease or otherwise (other than in the ordinary course of his business) any of his secured assets referred to in the notice, without prior written consent of the secured creditor. Section 35. The provisions of this Act to override other laws The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Section 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. Section 41. Amendments of certain enactments The enactments specified in the Schedule shall be amended in the manner specified therein."

THE SCHEDULE (Section 41)

Year

Act No.

Short title

Amendment

1956

1

The Companies Act 1956

In section 4A in sub-section (1) after clause (vi) insert the following:-- "(vii) the securitisation company or the reconstruction company which has obtained a certificate of registration under sub-section (4) of section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002".

1956

42

The Securities Contracts (Regulation) Act 1956

In section 2 in clause (h) after sub-clause (ib) insert the following:-- " (ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002".

1986

1

The Sick Industrial Companies (Special Provisions) Act 1985

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 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 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."

13. It is important at this stage to refer to the genesis of these three legislations. Each of them deals with different aspects of recovery of debts due to banks and financial institutions. Two of them refer to creditors' interests and how best to deal with recovery of outstanding loans and advances made by them on the one hand, whereas the Sick Industrial Companies (Special Provisions) Act, 1985, on the other hand, deals with certain debtors which are sick industrial companies (i.e. companies running industries named in the schedule to the Industries (Development and Regulation) Act, 1951) and whether such "debtors" having become "sick", are to be rehabilitated. The question, therefore, is whether the public interest in recovering debts due to banks and financial institutions is to give way to the public interest in rehabilitation of sick industrial companies, regard being had to the present economic scenario in the country, as reflected in Parliamentary Legislation.

14. We begin, first, with the Sick Industrial Companies (Special Provisions) Act, 1985. The Statement of Objects and Reasons for this Act reads as under:

"THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 STATEMENT OF OBJECTS AND REASONS The ill effects of sickness in industrial companies such as loss of production, loss of employment, loss of revenue to the Central and State Governments and locking up of investible funds and financial institutions are of serious concern to the Government and the society at large.

The concern of the Government is accentuated by the alarming increase in the incidence of sickness in industrial companies. It has been recognized that in order to fully utilize the productive industrial assets, afford maximum protection of employment and optimize the use of the funds of the banks and financial institutions, it would be imperative to revive and rehabilitate the potentially viable sick industrial companies as quickly as possible. It would also be equally imperative 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.

It has been the experience that the existing institutional arrangements and procedures for revival and rehabilitation of potentially viable sick industrial companies are both inadequate and time-consuming. A multiplicity of laws and agencies makes the adoption of coordinated approach for dealing with sick industrial companies difficult. A need has, therefore, been felt to enact in public interest a legislation to provide for timely determination by a body of experts of the preventive, ameliorative, remedial and other measures that would need to be adopted with respect to such companies and for enforcement of the measures considered appropriate with utmost practicable despatch.

The salient features of the Bill are- application of the legislation to the industries specified in the First Schedule to the Industries (Development and Regulation) Act, 1951, with the initial exception of the scheduled industry relating to ships and other vessels drawn by power, which may however be brought within the ambit of the legislation in due course; Identification of sickness in an industrial company, registered for not less than seven years, on the basis of the symptomatic indices of cash losses for two consecutive financial years and accumulated losses equalling or exceeding the net worth of the company as at the end of the second financial year; the onus of reporting sickness and impending sickness at the stage of erosion of fifty per cent. or more of the net worth of an industrial company is being laid on the Board of Directors of such company; where the Central Government or the Reserve Bank is satisfied that an industrial company has become sick, it may make a reference to the Board, likewise if any State Government, scheduled bank or public financial institution having an interest in an industrial company is satisfied that the industrial company has become sick, it may also make a reference to the Board; establishment of Board consisting of experts in various relevant fields with powers to enquire into and determine the incidence of sickness in industrial companies and devise suitable remedial measures through appropriate schemes or other proposals and for proper implementation thereof; constitution of an Appellate Authority consisting of persons who are or have been Supreme Court Judges, senior High Court Judges and Secretaries to the Government of India, etc., for hearing appeals against the order of the Board."

15. A cursory reading of the Act shows that a Board for Industrial and Financial Reconstruction is set up by the Act, before which references are made. Such references can be made under Section 15 of the Act, not only by an industrial company as defined, which, as has been stated above, is a company which runs any of the industries specified in the first schedule to the Industries (Development and Regulation) Act, 1951, but also by the Central or State Government, or public financial institution, or State level institution, or a scheduled bank, as the case may be. Such reference can only be made if the company concerned has turned sick i.e. it has to be a company running an industry mentioned in the first schedule to the Industries (Development and Regulation) Act, 1951, and must be a company registered for not less than 5 years, which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth. An inquiry into the working of such "sick industrial company" is to be made by the said Board on receipt of a reference or upon application or suo motu. If the Board is satisfied that the Company has indeed become a sick industrial company, the Board shall decide as to whether it is practicable for the Company to make its net worth positive within a reasonable time.

This it may do under Section 17 of the Act, by order under sub-section (2) of Section 17. If this is not possible, then the Board may appoint an Operating Agency who will prepare a scheme for rehabilitation mentioned in Section 18 which the Board may then sanction. The scheme may provide for all or any of the things mentioned in the said Section, and finally, the scheme may work successfully, resulting in the Company's net worth turning positive, or may be unsuccessful. In the event of it being unsuccessful, the Board may modify such scheme or ask for the preparation of a new scheme.

If, at the end of the day, the first scheme or any successive schemes ultimately fail, the Board has then to be of the opinion that such Company is not likely to make its net worth positive, and that therefore it is to forward its opinion under Section 20 of the Act to the concerned High Court to proceed with the winding up of the said company. Section 22, which is of crucial importance in the working of the Act, suspends various legal proceedings, contracts etc., while a reference before the Board is pending, for the duration of the inquiry to be made and/or scheme prepared and finally sanctioned, and for the entire period of the working of the said scheme.

Both Section 22(1) and (4) contain non obstante clauses overriding inter alia the Companies Act and any other law. In order to better implement the provisions of this Act, Section 32 also contains a non obstante clause overriding all other laws including Memoranda and Articles of Association of the industrial company or any other instrument having effect by virtue of any other law, except the Foreign Exchange Regulation Act of 1973 and The Urban Land (Ceiling and Regulation) Act, 1976.

16. While this Act had worked for a period of about 7 years, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 was brought into force, pursuant to various Committee reports. The Statement of Objects and Reasons for this Act reads as follows:-

"STATEMENT OF OBJECTS AND REASONS OF THE RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993

Banks and financial institutions at present experience considerable difficulties in recovering loans and enforcement of securities charged with them. The existing procedure for recovery of debts due to the banks and financial institutions has blocked a significant portion of their funds in unproductive assets, the value of which deteriorates with the passage of time. The Committee on the Financial System headed by Shri M. Narasimham has considered the setting up of the Special Tribunals with special powers for adjudication of such matters and speedy recovery as critical to the successful implementation of the financial sector reforms.

An urgent need was, therefore, felt to work out a suitable mechanism through which the dues to the banks and financial institutions could be realized without delay. In 1981, a Committee under the Chairmanship of Shri T. Tiwari had examined the legal and other difficulties faced by banks and financial institutions and suggested remedial measures including changes in law. The Tiwari Committee had also suggested setting up of Special Tribunals for recovery of dues of the banks and financial institutions by following a summary procedure. The setting up of Special Tribunals will not only fulfill a long-felt need, but also will be an important step in the implementation of the Report of Narasimham Committee.

Whereas on 30th September, 1990 more than fifteen lakhs of cases filed by the public sector banks and about 304 cases filed by the financial institutions were pending in various courts, recovery of debts involved more than Rs.5622 crores in dues of Public Sector Banks and about Rs.391 crores of dues of the financial institutions. The locking up of such huge amount of public money in litigation prevents proper utilisation and recycling of the funds for the development of the country. The Bill seeks to provide for the establishment of Tribunal and Appellate Tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions. Notes on clauses explain in detail the provisions of the Bill."

17. The Recovery Of Debts Due To Banks And Financial Institutions Act, 1993 took away the jurisdiction of the courts and vested this jurisdiction in tribunals established by the Act so as to ensure speedy recovery of debts due to the banks and financial institutions mentioned therein. This Act also included one appeal to the Appellate Tribunal, and transfer of all suits or other proceedings pending before any court to tribunals set up under the Act. The Act contained a non obstante clause in Section 34 stating that its provisions will have effect notwithstanding anything inconsistent contained in any other law for the time being in force or in any instrument having effect by virtue of any other law.

In the year 2000, this Act was amended so as to incorporate a new sub-section (2) in Section 34 together with a saving provision in sub-section (1). It is of some interest to note that this Act was to be in addition to and not in derogation of various Financial Corporation Acts and the Sick Industrial Companies (Special Provisions) Act, 1985. Clearly, therefore, the object of the 2000 amendment to the Recovery of Debts due to Banks and Financial Institutions Act, 1993 was to make The Sick Industrial Companies (Special Provisions) Act, 1985 prevail over it.

18. Regard being had to the poor working of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was brought into force in the year 2002.

The statement of objects and reasons for this Act reads as under:-

"STATEMENT OF OBJECTS AND REASONS OF THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002

The financial sector has been one of the key drivers in India's efforts to achieve success in rapidly developing its economy. While the banking industry in India is progressively complying with the international prudential norms and accounting practices, there are certain areas in which the banking and financial sector do not have a level playing field as compared to other participants in the financial markets in the world. There is no legal provision for facilitating securitisation of financial assets of banks and financial institutions. Further, unlike international banks, the banks and financial institutions in India do not have power to take possession of securities and sell them. Our existing legal framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms.

This has resulted in slow pace of recovery of defaulting loans and mounting levels of nonperforming assets of banks and financial institutions. Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms have considered the need for changes in the legal system in respect of these areas. These Committees, inter alia, have suggested enactment of a new legislation for securitisation and empowering banks and financial institutions to take possession of the securities and to sell them without the intervention of the court. Acting on these suggestions, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002 was promulgated on the 21st June, 2002 to regulate securitisition and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. The provisions of the Ordinance would enable banks and financial institutions to realise long-term assets, manage problem of liquidity, asset liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce nonperforming assets by adopting measures for recovery or reconstruction.

2. It is now proposed to replace the Ordinance by a Bill, which, inter alia, contains provisions of the Ordinance to provide for-

(a) registration and regulation of securitisation companies or reconstruction companies by the Reserve Bank of India;

(b) facilitating securitisation of financial assets of banks and financial institutions with or without the benefit of underlying securities;

(c) facilitating easy transferability of financial assets by the securitisation company or reconstruction company to acquire financial assets of banks and financial institutions by issue of debentures or bonds or any other security in the nature of a debenture;

(d) empowering securitisation companies' or reconstruction companies to raise funds by issue of security receipts to qualified institutional buyers;

(e) facilitating reconstruction of financial assets acquired by exercising powers of enforcement of securities or change of management or other powers which are proposed to be conferred on the banks and financial institutions;

(f) declaration of any securitisation company or reconstruction company registered with the Reserve Bank of India as a public financial institution for the purpose of section 4A of the Companies Act, 1956;

(g) defining 'security interest' as any type of security including mortgage and change on immovable properties given for due repayment of any financial assistance given by any bank or financial institution;

(h) empowering banks and financial institutions to take possession of securities given for financial assistance and sell or lease the same or take over management in the event of default, i.e. classification of the borrower's account as non-performing asset in accordance with the directions given or under guidelines issued by the Reserve Bank of India from time to time;

(i) the rights of a secured creditor to be exercised by one or more of its officers authorised in this behalf in accordance with the rules made by the Central Government;

(j) an appeal against the action of any bank or financial institution to the concerned Debts Recovery Tribunal and a second appeal to the Appellate Debts Recovery Tribunal;

(k) setting up or causing to be set up a Central Registry by the Central Government for the purpose of registration of transactions relating to securitisation, asset reconstruction and creation of security interest;

(l) application of the proposed legislation initially to banks and financial institutions and empowerment of the Central Government to extend the application of the proposed legislation to non-banking financial companies and other entities;

(m) non-application of the proposed legislation to security interests in agricultural lands, loans not exceeding rupees one lakh and cases where eighty per cent, of the loans are repaid by the borrower.

3. The Bill seeks to achieve the above objects."

19. This Act was brought into force as a result of two committee reports which opined that recovery of debts due to banks and financial institutions was not moving as speedily as expected, and that, therefore, certain other measures would have to be put in place in order that these banks and financial institutions would better be able to recover debts owing to them.

20. In a challenge made to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 in Mardia Chemicals Ltd. Etc. v. Union of India (UOI) and Ors. Etc. Etc., (2004) 4 SCC 311, this Court went into the circumstances under which the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was enacted, as follows:- "Some facts which need to be taken note of are that the banks and the financial institutions have heavily financed the petitioners and other industries. It is also a fact that a large sum of amount remains unrecovered. Normal process of recovery of debts through courts is lengthy and time taken is not suited for recovery of such dues.

For financial assistance rendered to the industries by the financial institutions, financial liquidity is essential failing which there is a blockade of large sums of amounts creating circumstances which retard the economic progress followed by a large number of other consequential ill effects. Considering all these circumstances, the Recovery of Debts Due to Banks and Financial Institutions Act was enacted in 1993 but as the figures show it also did not bring the desired results. Though it is submitted on behalf of the petitioners that it so happened due to inaction on the part of the Governments in creating Debts Recovery Tribunals and appointing presiding officers, for a long time. Even after leaving that margin, it is to be noted that things in the spheres concerned are desired to move faster.

In the present-day global economy it may be difficult to stick to old and conventional methods of financing and recovery of dues. Hence, in our view, it cannot be said that a step taken towards securitisation of the debts and to evolve means for faster recovery of NPAs was not called for or that it was superimposition of undesired law since one legislation was already operating in the field, namely, the Recovery of Debts Due to Banks and Financial Institutions Act. It is also to be noted that the idea has not erupted abruptly to resort to such a legislation.

It appears that a thought was given to the problems and the Narasimham Committee was constituted which recommended for such a legislation keeping in view the changing times and economic situation whereafter yet another Expert Committee was constituted, then alone the impugned law was enacted. Liquidity of finances and flow of money is essential for any healthy and growth-oriented economy. But certainly, what must be kept in mind is that the law should not be in derogation of the rights which are guaranteed to the people under the Constitution.

The procedure should also be fair, reasonable and valid, though it may vary looking to the different situations needed to be tackled and object sought to be achieved. In its Second Report, the Narasimham Committee observed that NPAs in 1992 were uncomfortably high for most of the public sector banks. In Chapter VIII of the Second Report the Narasimham Committee deals about legal and legislative framework and observed:

"8.1. A legal framework that clearly defines the rights and liabilities of parties to contracts and provides for speedy resolution of disputes is a sine qua non for efficient trade and commerce, especially for financial intermediation. In our system, the evolution of the legal framework has not kept pace with changing commercial practice and with the financial sector reforms. As a result, the economy has not been able to reap the full benefits of the reforms process. As an illustration, we could look at the scheme of mortgage in the Transfer of Property Act, which is critical to the work of financial intermediaries...." One of the measures recommended in the circumstances was to vest the financial institutions through special statutes, the power of sale of the assets without intervention of the court and for reconstruction of assets.

It is thus to be seen that the question of non-recoverable or delayed recovery of debts advanced by the banks or financial institutions has been attracting attention and the matter was considered in depth by the Committees specially constituted consisting of the experts in the field. In the prevalent situation where the amounts of dues are huge and hope of early recovery is less, it cannot be said that a more effective legislation for the purpose was uncalled for or that it could not be resorted to.

It is again to be noted that after the Report of the Narasimham Committee, yet another Committee was constituted headed by Mr. Andhyarujina for bringing about the needed steps within the legal framework. We are therefore, unable to find much substance in the submission made on behalf of the petitioners that while the Recovery of Debts Due to Banks and Financial Institutions Act was in operation it was uncalled for to have yet another legislation for the recovery of the mounting dues. Considering the totality of circumstances and the financial climate world over, if it was thought as a matter of policy to have yet speedier legal method to recover the dues, such a policy decision cannot be faulted with nor is it a matter to be gone into by the courts to test the legitimacy of such a measure relating to financial policy.

We may now consider the main enforcing provision which is pivotal to the whole controversy, namely, Section 13 in Chapter III of the Act. It provides that a secured creditor may enforce any security interest without intervention of the court or tribunal irrespective of Section 69 or Section 69-A of the Transfer of Property Act where according to sub-section (2) of Section 13, the borrower is a defaulter in repayment of the secured debt or any instalment of repayment and further the debt standing against him has been classified as a non-performing asset by the secured creditor. Sub- section (2) of Section 13 further provides that before taking any steps in the direction of realizing the dues, the secured creditor must serve a notice in writing to the borrower requiring him to discharge the liabilities within a period of 60 days failing which the secured creditor would be entitled to take any of the measures as provided in sub-section (4) of Section 13.

It may also be noted that as per sub-section (3) of Section 13 a notice given to the borrower must contain the details of the amounts payable and the secured assets against which the secured creditor proposes to proceed in the event of non-compliance with the notice given under sub-section (2) of Section 13." [at para 34,36 and 38]

21. The "pivotal" provision namely Section 13 of the said Act makes it clear that banks and financial institutions would now no longer have to wait for a Tribunal judgment under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 to be able to recover debts owing to them. They could, by following the procedure laid down in Section 13, take direct action against the debtors by taking possession of secured assets and selling them; they could also take over the management of the business of the borrower. They could also appoint any person to manage the secured assets possession of which has been taken over by them, and could require, at any time by notice in writing to any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due from the borrower, to pay the secured creditor so much of the money as is sufficient to pay the secured debt.

22. In order to further the objects of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Act contains a non obstante clause in Section 35 and also contains various Acts in Section 37 which are to be in addition to and not in derogation of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Three of these Acts, namely, the Companies Act, 1956, the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992, relate to securities generally, whereas the Recovery Of Debts Due To Banks And Financial Institutions Act, 1993 relates to recovery of debts due to banks and financial institutions.

Significantly, under Section 41 of this Act, three Acts are, by the schedule to this Act, amended. We are concerned with the third of such Acts, namely, the Sick Industrial Companies (Special Provisions) Act, 1985, in Section 15(1) of which two provisos have been added. It is the correct interpretation of the second of these provisos on which the fate of these appeals ultimately hangs.

23. It is in this background that we need to embark on the next step, namely, to consider the following two questions which arise on the facts of this case: (1) Whether the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 prevails over the Sick Industrial Companies (Special Provisions) Act, 1985; and (2) Whether the expression "where a reference is pending" in Section 15 (1) proviso 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 would include all proceedings before the BIFR or only proceedings at the initial reference stage.

24. The occasion for answering question no. 1 is Shri Sreekumar's argument that the effect of the Delhi High Court's stay order dated 7.1.2004 is that the reference before the BIFR springs back into life, and with it Section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985. It is also occasioned by a further argument that the winding up order passed by the Bombay High Court dated 30.8.2007 being in the teeth of the stay order and Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, is non est and therefore the appeals before this Court have not become infructuous.

If Shri C.N. Sreekumar is right, then after enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, because of the presence of Secti