2003 (7) TMI 498 - HC - Companies Law

Summary

Issues Involved:
1. Constitutionality of the Act.
2. Legality and validity of the notification specifying "Cooperative Bank" as "Bank."
3. Challenges to the issuance of notice under Section 13(2) of the Act.
4. Actions taken under Section 13(4) of the Act.
5. Simultaneous proceedings under different laws.
6. Binding decisions of other forums.
7. Conditions precedent for default and classification as non-performing assets.
8. Pendency of proceedings before BIFR.
9. Actions against guarantors.

Detailed Analysis:

1. Constitutionality of the Act:
The constitutional validity of the Act was challenged. It was argued that the provisions of the Act were arbitrary and violated Article 14 of the Constitution. The Court referred to the Division Bench decision in the case of M.R. Utensils v. Union of India, which had upheld the constitutional validity of the Ordinance preceding the Act. Since the Act replaced the Ordinance with pari materia provisions, the challenge to the constitutionality of the Act could not be entertained. The Court also noted that the petitioners' attempt to amend their petitions to challenge the vires of the Act lacked bona fides and was a dilatory tactic.

2. Legality and Validity of the Notification:
The notification dated 28-1-2003, specifying "Cooperative Bank" as "Bank" under the Act, was challenged. The petitioners contended that cooperative banks fell under the State List and not the Central List. The Court held that the Act aimed to enforce security interests of banks and financial institutions, including cooperative banks, which were covered under the Banking Regulation Act. The Court concluded that the notification was within the legislative competence of the Parliament and was valid.

3. Challenges to the Issuance of Notice under Section 13(2):
The petitioners challenged the notices issued under Section 13(2) of the Act, claiming they had not responded to the notices. The Court allowed the petitioners to submit their replies within 15 days and directed the banks to consider these replies before taking further action. If replies had already been submitted, the banks were instructed to consider them in light of the Court's observations.

4. Actions Taken under Section 13(4):
The petitioners challenged the actions taken by banks under Section 13(4) of the Act. The Court held that the petitioners had an alternative remedy under Section 17 of the Act and directed them to pursue this remedy. The Court emphasized that it would not entertain petitions under Article 226 of the Constitution if an efficacious alternative remedy was available.

5. Simultaneous Proceedings under Different Laws:
The petitioners contended that banks could not resort to two parallel remedies simultaneously. The Court held that the Act provided an additional remedy for enforcement of security interests and did not nullify the effect of binding judgments of competent forums. The Court directed that credit for any amount realized under the Act should be given in other proceedings.

6. Binding Decisions of Other Forums:
The petitioners argued that binding decisions of other forums on the amount due should be respected. The Court agreed, stating that banks could recover only the amount adjudicated by competent forums. If there were prohibitory orders against banks, they could not proceed under Section 13(4) without clarifying or vacating such orders.

7. Conditions Precedent for Default and Classification as Non-Performing Assets:
The petitioners challenged the actions of banks on the grounds that conditions precedent for default and classification as non-performing assets were not met. The Court allowed the petitioners to submit replies within 15 days, and the banks were directed to verify these conditions before proceeding under Section 13(4).

8. Pendency of Proceedings before BIFR:
The petitioners contended that proceedings before BIFR should bar actions under the Act. The Court held that banks could not take measures under Section 13(4) without the consent of 75% of secured creditors in cases where BIFR proceedings were pending.

9. Actions Against Guarantors:
The petitioners, who were guarantors, challenged actions taken against them. The Court held that guarantors had the same rights and liabilities as borrowers and directed that their cases be governed by the same principles.

Conclusion:
The Court dismissed the challenges to the constitutionality of the Act and the validity of the notification. It allowed petitioners to submit replies to notices under Section 13(2) and directed banks to consider these replies. The Court emphasized the availability of alternative remedies under the Act and directed petitioners to pursue them. The Court also provided guidance on handling simultaneous proceedings and respecting binding decisions of other forums.