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TMI Blog2006 (8) TMI 641X X X X Extracts X X X X X X X X Extracts X X X X ..... n Bank, M.G. Road, Pondicherry, to the tune of ₹ 26,50,00,000/-. The said mill offered as security its land and building situate at Ariyur. The Directors of the mill, viz. V. Kannan and V. Baskaran, stood as guarantors for the due repayment of the loan amount and they also offered their personal properties as collateral security. The mill, however, committed default in repayment of the loan amount. The bank after declaring the loan account of the mill as non performing asset, proceeded to issue the notice under Sec.13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (in short SARFAESI Act), which was challenged by the mill by filing a writ petition (W.P. No.33700 of 2004) before this Court. This Court, by order dated 6-12-2004, disposed of the said writ petition by directing the borrower-mill to repay the entire loan amount in three instalments and in default, the bank was entitled to proceed against the mill in accordance with law. The mill committed default as it did not pay even the first instalment as directed by this Court. The bank, in terms of the order passed by this Court, proceeded further and after compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores belonging to P.N.L. Nidhi Limited and diverted the said amount to their own trade and business in M/s. Arunachalam Sugar Mills Limited, Tamil Nadu and M/s. New Horizon Sugar Mills Limited, Pondicherry and Sri Malini Spinning Mills Limited, Tamil Nadu. In the said criminal case, the Chief Judicial Magistrate, Pondicherry, based on the entries found in the revenue records and the encumbrance certificates produced before him by the investigating officer, had passed an order dated 18-2-2005 directing the attachment of various properties standing in the names of the accused V. Kannan and V. Baskaran and their mother Sivapriya. 4. In the mean time, the Government of Pondicherry, in exercise of the powers conferred under the provisions of the Pondicherry Protection of Interests of Depositors in Financial Establishment Act, 2004, issued a notification in G.O.Ms. No.12 dated 18-2-2006 ordering the attachment of the properties allegedly acquired by M/s. Pondicherry Nidhi Limited (PNL Nidhi Limited), Pondicherry. 5. In view of the order dated 18-2-2005 passed by the Chief Judicial Magistrate in Crime No.31 of 2004 attaching the properties standing in the names of M/s. V. Kannan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... New Horizon Sugar Mills have filed two writ petition, viz. W.P. Nos.9713 and W.P. No.10052 of 2006. While in W.P. No.9713 of 2006 they challenge the validity of G.O.Ms. No.12 dated 18-2-2006, in W.P. No.10052 of 2006, they challenge the validity of the provisions of the Pondicherry Protection of Interests of Depositors in Financial Establishments Act, 2004. 9. Two more writ petitions were filed, viz. W.P. Nos.7076 and 8800 of 2006 by M/s. Indian Renewable Energy Development Agency Limited, New Delhi and M/s. Arunachalam Sugar Mills Limited, Pondicherry respectively challenging the validity of G.O.Ms.No.12 dated 18-2-2006. 10. Shri V.T. Gopalan, learned senior counsel appearing for Indian Bank, who is the petitioner in C.R.P. No.1352 of 2005 and W.P. No.5389 of 2006, submitted that when once the issue relating to sale of the properties in question of the second respondent Mill under the provisions of the SARFAESI Act had been concluded by this Court by dismissing the writ petitions filed challenging the action taken by the petitioner bank under the provisions of the SARFAESI Act, the learned Chief Judicial Magistrate ought to have taken note of the order passed by this Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sec.13(4) of the SARFAESI Act by the petitioner-bank. 13. Shri T.R. Rajagopalan, learned senior counsel appearing for M/s. EID Parry India Limited, who is the petitioner in W.P. No.6453 of 2006, submitted that in view of the impugned notification the petitioner, who is the successful bidder in the auction sale and in whose favour the sale has also been confirmed by this Court, is put to serious prejudice as the entire amount has already been paid and the possession alone is denied. Learned senior counsel submitted that property in question belongs to the sugar mill and not the personal properties of M/s.V. Kannan and V. Basakaran and, therefore, the attachment is illegal. Learned senior counsel further submitted that the provisions of Protection of Interest of Depositors' in Financial Establishment Act, 2004 will have no application to the property in question purchased by the petitioner as the same was purchased in an auction sale held by the Indian Bank under the provisions of SARFAESI Act. Learned senior counsel further submitted that the impugned notification attaching the property after the Indian Bank had enforced its rights as a secured creditor under the SARFAESI Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question under the provisions of the SARFAESI Act and the action of the Government of Pondicherry in issuing the impugned notification belatedly was an afterthought and with an oblique motive to defeat the rights and interests of the secured creditors like the petitioner of their valuable rights to sell the secured assets under the provisions of the SARFAESI Act. The Government while issuing the impugned notification had failed to take into consideration the security interest of various secured creditors like the petitioner. Learned counsel further submitted that the Pondicherry Protection of Interests of Depositors in Financial Establishment Act, 2004 was enacted to secure the interests of the depositors in non-banking companies and therefore, the properties belonging to New Horizon Sugar Mills Limited and Arunachalam Sugar Mills Limited, which are companies registered under the Companies Act having separate legal entity, cannot be attached under the impugned notification. The said Act was enacted totally for a different purpose, i.e. to protect the interests of the depositors in the financial establishments whereas the provisions of the SARFAESI Act are to regulate the securit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncurrent List of the Constitution of India, but falls entirely under the Union List. Learned senior counsel further submitted that the said enactment directly conflicts with the provisions of the Companies Act and the Reserve Bank of India Act. When once the Government of Pondicherry did not have the legislative competence to enact the said enactment and therefore ultra vires the Constitution of India, as a necessary corollary, the impugned notification issued by the Government of Pondicherry in G.O.Ms. No.12 dated 18-2-2006 in exercise of powers under Sec.4(2) of the said Act is also liable to be set aside. Further, when PNL Nidhi Limited is a company registered under the Companies Act, the provisions of the said Act do not apply as such financial companies have been excluded from the definition of financial establishment under Sec.2(d) of the said Act. 19. In reply to the above submissions, Shri T. Murugesan, learned Senior Government Pleader for Union Territory of Pondicherry, submitted that several complaints were received from the depositors/general public against the Chairman/Diectors of M/s.PNL Nidhi Limited alleging misappropriation of huge amounts deposited by the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial Magistrate, Indian Bank, filed a petition before the Chief Judicial Magistrate for either lifting the order of attachment in respect of the properties sold by them to M/s. EID Parry India Limited in the auction sale proceedings held under Sec.13(4) of the SARFAESI Act. The said bank as well as the M/s. EID Parry India Limited have also filed the writ petitions challenging the impugned notification passed by the Government of Pondicherry. The accused persons and the group of companies owned by them have also filed writ petitions challenging the action taken by the Government as also the validity of the provisions of the Pondicherry Protection of Interests of Depositors in Financial Establishments Act, 2005. 20. Learned senior counsel submitted that the order of attachment of properties was initially by the criminal court which is competent and having jurisdiction under the Code of Criminal Procedure Code to pass such an order. In fact, Indian Bank itself has filed a petition for lifting the order of attachment in so far as the properties sold by them to M/s. EID Parry India Limited in the auction sale held under Sec.13(4) of the SARFAESI Act. In the present civil revision pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k is beyond their powers. Further, when there is a specific order of the Chief Judicial Magistrate, which got merged with the impugned notification, the Registration Department could not register the sale certificate. Under Sec.10(3) of the Pondicherry Protection of Interests of Depositors in Financial Establishments Act, 2005, any person claiming an interest in the attached property may file his objections before the Designated Court. In the present case, since a court has been designated and notified vide G.O.Ms.No.26/05/LD dated 26-10-2005, the concerned petitioner could very well approach the Designated Court and file their grievances. 22. Learned senior counsel further submitted that the properties were attached under the special enactment made under the Pondicherry Protection of Interests of Depositors in Financial Establishments Act, 2005 and Sec.4 of the said Act provides for attaching the personal assets of the promoters, partners, directors, managers or members or any other person of the defaulting financial establishment. It is purely in exercise of the powers conferred under Sec.4 of the said Act, the assets owned by the promoters/Directors of M/s.PNL Nidhi Limited w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .13(4) of the SARFAESI Act has already been initiated and the said proceedings were almost reached a finality, but in view of the impugned notifications, the said properties could not be registered and legally transferred in the name of the buyers as the Registering Authority refused to register the sale instrument in view of the impugned Government Order. According to them the said properties could not be attached under the impugned orders and, therefore, the attachment should be lifted. The grievance of M/s. New Horizon Sugar Mills, petitioner in W.P. No.1897 of 2006, is that Indian Bank, after adjusting their claim against them, is withholding excess of the sale consideration received from M/s. EID Parry India Ltd. and that such excess amount should be directed to be returned to them. 24. As already stated, Indian Bank offered credit facilities to M/s. New Horizon Sugar Mills Limited to the tune of ₹ 26.50 crores. For availing the said credit facility, the borrower-mill had offered as security interest the property belonging to the mill comprised in R.S. No.7/2 and 118 of Ariyur Village, all that part and parcel of the land measuring to an extent of 42.24 acres by creat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es that were already ordered to be attached by the Chief Judicial Magistrate. In view of these subsequent developments, EID Parry India Limited could not get the property registered in their favour since the registering authority refused to register the document in view of the impugned order of attachment passed by the Government. 25. In the above facts and circumstances, the point that arise for consideration is when once the property in question was duly attached and brought to public sale in terms of the provisions of SARFAESI Act, can the very same property be attached by the Government by issuing the impugned notification under the Pondicherry Protection of Interests of Depositors in Financial Establishment Act, 2004. Before considering this question, since arguments were addressed on the maintainability of the civil revision petition, that issue is taken up for consideration first. 26. Learned senior counsel for the revision petitioner submitted that the civil revision petition was filed under Art.227 of the Constitution of India, challenging the order of attachment dated 8-2-2005 passed by the Chief Judicial Magistrate and seeking the relief of lifting the order of att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AND OTHERS (2005 [11] SCC 195) and ESTRALLA RUBBER v. DASS ESTATE (P) LTD. (2001 [8] SCC 97). Learned senior Government Pleader, therefore, submitted that the revision petition is liable to dismissed as not maintainable. 29. Heard both the learned senior counsel. The present civil revision petition, as is clear from the grounds of revision, challenges the proceedings of the Chief Judicial Magistrate, Pondicherry in Crime No.31 of 2004 only in so far as it relates to the property in question, i.e. property of New Horizon Sugar Mills Ltd. The revision petitioner is aggrieved over the inclusion of the property in question in the order of attachment passed by the Chief Judicial Magistrate. On coming to know that the property of New Horizon Sugar Mills is also included in the order of attachment, the revision petitioner filed a petition before the Chief Judicial Magistrate praying for raising of the attachment in so far as it related to the property in question since they have first charge over the said property and further that the said property had already been sold pursuant to the proceedings initiated under Sec.13(4) of the SARFAESI Act. The Chief Judicial Magistrate has not pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s.EID Parry India Limited was also confirmed by this Court on 12-07-2005 when the writ petition filed by the mill was dismissed. It is pertinent to note that in W.P. No.9834 of 2005 filed by PNL Depositors Welfare Association as early as on 23-03-2005 challenging the auction sale notice, Superintendent and Inspector CID, Pondicherry were arrayed as respondents 4 and 5. Therefore, they have the knowledge about the proceedings initiated against the said property under SARFAESI Act. From the dates and events, it is clear that the proceedings against the property in question under the SARFAESI Act has been initiated in the year 2004 and the Government as well as the depositors of PNL Nidhi Limited are aware of such proceedings. Therefore, when the proceedings initiated by the bank under SARFAESI Act has got the approval of the High Court by way of passing interim orders at the interlocutory stage permitting the proceedings under Sec.13(4) to go on, but not to finalise the sale and, thereafter, even the sale held under Sec.13(4) was confirmed and the writ petition was dismissed, the aggrieved persons, be it depositors of PNL Nidhi Limited and/or the Government of Pondicherry as protec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey are related to the property in question. The orders of attachment passed by the Chief Judicial Magistrate and the Government of Pondicherry are inconsistent with the proceedings initiated under the SARFAESI Act. Act I of 2005 came into force on 24-3-2005 whereas the proceedings under SARFAESI Act were initiated much earlier and completed on 24-3-2005. Therefore, I am of the considered view that the said property is to be excluded from the impugned orders of attachment. Accordingly, the attachment in respect of the said property is lifted. To this limited extent, the impugned orders of attachment passed by the Chief Judicial Magistrate and the Government of Pondicherry in so far as it related to the said property are set aside. Needless to mention, it is open to the depositors or their association and/or the competent authority appointed by the Government of Pondicherry under the Act passed to protect the interests of the depositors to file appeal, if they so desire, under Sec.17 of the SARFAESI Act. 32. The impugned order of attachment dated 18-02-2005 passed by the Chief Judicial Magistrate in Crime No.31 of 2004 and the impugned order of attachment passed by the Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e bank is making payments to the other creditors and by undertaking this exercise, the bank has assumed the role of Official Liquidator of the petitioner company, which is wholly impermissible in law. 34. Considering the grievance of the petitioner in the light of the facts and circumstances of the case that in respect of the property in question proceedings under SARFAESI Act had already been initiated, that sale of the property in question under Sec.13(4) had been concluded and confirmed by this Court in the writ proceedings, that the entire amount had been received by the bank, that some surplus amount, according to the petitioner, are now lying with the bank, that the petitioner is aggrieved by the action of the bank in retaining such excess amount and paying from out of it to the other creditors of the petitioner, and that when the SARFAESI Act itself provides for a right of appeal via Sec.17 thereof to any person aggrieved by any of the measures taken by the secured creditor under Sec.13(4) of the SARFAESI Act, I am of the view that ends of justice would be met if the petitioner is permitted to approach the appellate authority under Sec.17 of the SARFAESI Act for appropria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Depositors in Financial Establishments Act, 2004 or any one who has been aggrieved by the measures taken under Sec.13(4) of the SARFAESI Act against the said properties by the petitioner to file an appeal before the Tribunal under Sec.17 of the SARFAESI Act. With the above direction, the writ petition is disposed of. 36. W.P. Nos.8797, 8800 and 9713 of 2006 challenge the validity of the G.O. Ms. No.12 dated 18-02-2006 issued by the Government of Pondicherry and to quash the same. W.P. No.10052 of 2006 challenges the provisions of the Pondicherry Protection of Interests of Depositors in Financial Establishment Act, 2004 (Act I of 2005) as ultra vires Constitution of India. 37. The above said writ petitions have been filed by the New Horizon Sugar Mills Limited, Arunachalam Sugar Mills Limited and M/s. V. Kannan and others, who are none else than the Director/persons interests in the said sugar mills and also Promoters/Directors of PNL Nidhi Limited. 38. On the question of vires of Act 1 of 2005, it was argued that the Government of Pondicherry has no legislative competence to enact the said Act since the said subject, in pith and substance, falls neither under List II (Sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g in List 1 of the Seventh Schedule to the Constitution. The incorporation, regulation and winding up of trading corporations are covered by Entry 43 and Entry 44 of List 1 to Seventh Schedule in respect of which State Legislature has no competence to enact a legislation. In exercise of the powers under Entries 43 and 44 of List 1, Parliament has enacted Sections 58AA and 58AAA of the Companies Act and also incorporated provisions under Chapter IIIB and IIIC of the Reserve Bank of India Act, 1934. When the companies registered under the Companies Act are excluded due to the incompetence of the State Legislature to enact any law in respect of matters covered by List 1 of the Seventh Schedule, the Government of Pondicherry has no jurisdiction in law to make the provisions of the Act 1 of 2005 applicable to PNL Nidhi Limited and therefore, the impugned notification is liable to be struck down. 40. On the other hand, learned Senior Government Pleader appearing for the Government of Pondicherry submitted that State Legislature is competent to enact Act 1 of 2005 and the impugned notification dated 18-2-2005 passed under Sec.4(2) of the said Act is legally sustainable. 41. I have g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of Act 1 of 2005. The contentions on the question of legislative competence and vires of the Act were also similar to the raised before me. The learned Judge, after interpreting the relevant Entries in List I, List II and List III to the Seventh Schedule to the Constitution of India and upon analysing various decisions of the Supreme Court on the issue, held that the Tamil Nadu Protection of Interests of Depositors (in Financial Establishments) Act, 1997 was valid and not unconstitutional or ultra vires as contended by the writ petitioners/finance companies. The relevant portions of the judgment are as follows: It is settled law that, when a vires of an enactment is impugned, there is an initial presumption of its constitutionality and if there is any difficulty in ascertaining the limits of the Legislative power, the difficulty must be resolved, as far as possible in favour of the Legislature putting the most liberal construction upon the Legislative entry so that it may have the widest amplitude. The burden is on the petitioners to prove affirmatively of its invalidity. In determining whether the impugned Act is a law with respect to a given power, the Court has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability in India and it deals with several monetary systems for the Indian Monetary System and Banking business have to be carried in accordance with the Reserve Bank of India Act. On the other hand, as stated earlier, Tamil Nadu Act 44 of 1997 is intended to safeguard the interest of depositors by providing stringent measures against those who deprived the depositors their dues. Section 3 of the Tamil Nadu Act is so exhaustive and comprehensive, so as to bring within its clutches the dealings of such concerns if they turn to the detrimental interest of depositors. It is also clear from the provisions of R.B.I. Act that, there is a prohibition viz. that unincorporated body should not accept deposits. The Tamil Nadu Act provides for recovery of monies due to the public on such deposits. To put it in nutshell, Reserve Bank of India Act has imposed a prohibition and the Tamil Nadu act has provided for recovery of deposits from persons who have defaulted to repay. ... ... ... In view of Entry 32 in State List in the VII Schedule to the Constitution, I am satisfied that the State Legislature is competent to enact Tamil Nadu Act 44 of 1997. As observed earlier, even though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and to protect the interests of the depositors and general public it became necessary to attach certain other properties of the said financial establishment. The details of the properties so attached are given in the schedule to the impugned notification. A perusal of the schedule shows that the attached properties stand in the name of M/s. V. Kannan and V. Baskaran and their mother Mrs. Sivapriyai. Sec.4(2) of the Act 1 of 2005 clearly states that the Government may, in order to protect the interests of the depositors of such financial establishments issue an order in the Official Gazettee attaching the money or property believed to have been acquired by such financial establishment either in its own name or in the name of any other person from and out of the deposits collected by the financial establishments and where it transpires that such money or other property is not available for attachment or not sufficient for repayment of the depositors, such other property of the said financial establishments or the personal assets of the promoters, partners, directors, managers or members or anyother person of the said financial establishments. Therefore, it is clear that under the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legality in the impugned notification dated 18-02-2006. However, in view of my discussions and findings in the Civil Revision Petition and the connected writ petitions, the impugned order of attachment passed vide G.O. Ms. No.12 dated 18-02-2006 is interfered with only to the limited extent in so far as it related to the properties against which proceedings under SARFAESI Act has already been initiated. Therefore, the attachment in respect those properties alone are lifted and in other respects, the impugned notification stands legally valid. Accordingly, the writ petitions challenging the validity of Act 1 of 2005 and the impugned G.O. Ms. No.12 dated 18-02-2006 are dismissed. 45. It is brought to the notice of this Court that the Government of Pondicherry has constituted a Designated Court vide G.O. Ms. No.26/05/LD dated 26-10-2005 and a competent authority has also been appointed in respect of this financial establishment. In such circumstances, as stated above, save those properties in respect of which proceedings had already been initiated by the respective bank/financial institution under the provisions of the SARFAESI Act, it is open to all parties concerned, who are aggr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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