2012 (9) TMI 1092 - HC - Companies Law

Jurisdiction of Debt Recovery Tribunal (DRT) constituted under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 - Held that - Unable to agree with the dicta of Punjab Haryana High Court in Haryana Concast Limited (2009 (12) TMI 1014 - PUNJAB AND HARYANA HIGH COURT) and axiomatically allow these appeals and set aside the judgment of the Learned Single Judge. The applications filed by the Bank and the auction purchaser for de-sealing of the property would thus stand allowed. However, the sale proceeds in custody of the bank are subject to the claims if any under Sections 529 and 529A of the Companies Act. The bank to accordingly comply, specially with the provisos to Section 13(9) of the SARFAESI Act. We may highlight that the Supreme Court recently in Employees Provident Fund Commissioner Vs. Financial Liquidator of Esskay Pharmaceuticals Limited (2011) 10 SCC 727 has also held the dues under the Employees‟ Provident Fund and Miscellaneous Provisions Act, 1952 to be a first charge on the assets of an establishment and to be paid in priority to all other debts while distributing the sale proceeds. Since we have differed from the view taken by other High Courts, to give time for approaching the Supreme Court, we grant eight weeks time to the Official Liquidator to de-seal the premises and to put the auction purchaser into possession of the property. The Official Liquidator, if of the view that the sale by the Bank is in contravention of the SARFAESI Act and the Rules framed thereunder, shall also have liberty to approach the DRT under Section 17 thereof, within the said time of eight weeks. No costs.

Issues Involved:
1. Validity of the auction sale conducted by the bank under the SARFAESI Act without associating the Official Liquidator.
2. Applicability of Section 529A of the Companies Act to the SARFAESI Act.
3. Jurisdiction and role of the Company Court versus the Debt Recovery Tribunal (DRT) in the context of the SARFAESI Act.
4. Rights and obligations of the secured creditor and the Official Liquidator under the SARFAESI Act.

Issue-wise Detailed Analysis:

1. Validity of the auction sale conducted by the bank under the SARFAESI Act without associating the Official Liquidator:
The judgment addressed the validity of the auction sale conducted by the bank on 24.08.2011, which was challenged on the grounds that the Official Liquidator, appointed as Provisional Liquidator on 03.08.2011, was not associated with the auction process. The learned Company Judge initially held that the sale was invalid as the Official Liquidator should have been associated with the auction. However, upon appeal, it was determined that the SARFAESI Act allows secured creditors to enforce their security interest "without the intervention of the Court or Tribunal" (Section 13 (1)). The court emphasized that the SARFAESI Act is designed to enable secured creditors to sell their secured interests without court intervention, and associating the Official Liquidator would contradict this purpose. Therefore, the sale conducted by the bank was upheld as valid.

2. Applicability of Section 529A of the Companies Act to the SARFAESI Act:
The judgment examined whether the provisions of Section 529A of the Companies Act, which create a pari passu charge in favor of workmen's dues, apply to sales under the SARFAESI Act. The court noted that the SARFAESI Act, being subsequent legislation, overrides the Companies Act. However, the first proviso to Section 13(9) of the SARFAESI Act mandates that the amount realized from the sale of secured assets must be distributed in accordance with Section 529A of the Companies Act. The court concluded that while the distribution of sale proceeds must comply with Section 529A, the sale process itself does not require the involvement of the Official Liquidator.

3. Jurisdiction and role of the Company Court versus the Debt Recovery Tribunal (DRT) in the context of the SARFAESI Act:
The judgment clarified the distinct roles of the Company Court and the DRT. The court referred to the Supreme Court's decision in Allahabad Bank vs. Canara Bank, which held that the DRT has exclusive jurisdiction over the adjudication of liabilities and recovery of debts due to banks and financial institutions, even when a winding-up petition is pending. The court emphasized that the SARFAESI Act provides a complete mechanism for the enforcement of security interests by secured creditors without court intervention. Therefore, any grievances regarding the sale process under the SARFAESI Act must be addressed to the DRT, not the Company Court.

4. Rights and obligations of the secured creditor and the Official Liquidator under the SARFAESI Act:
The judgment highlighted the rights of secured creditors under the SARFAESI Act to enforce their security interests without court intervention. It also outlined the obligations of secured creditors to comply with the provisions of Section 13(9) of the SARFAESI Act, including the requirement to distribute sale proceeds in accordance with Section 529A of the Companies Act. The court noted that the Official Liquidator's role is limited to determining and receiving workmen's dues and does not extend to participating in the sale process. The court concluded that the SARFAESI Act's provisions regarding the sale of secured assets are comprehensive and do not necessitate the involvement of the Official Liquidator.

Conclusion:
The appeals were allowed, and the judgment of the learned Company Judge was set aside. The applications filed by the bank and the auction purchaser for de-sealing of the property were granted. The court emphasized that the sale proceeds in custody of the bank are subject to claims under Sections 529 and 529A of the Companies Act, and the bank must comply with the provisos to Section 13(9) of the SARFAESI Act. The Official Liquidator was granted eight weeks to de-seal the premises and put the auction purchaser into possession, with the liberty to approach the DRT if the sale is believed to contravene the SARFAESI Act.

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