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TMI Blog2014 (11) TMI 1199X X X X Extracts X X X X X X X X Extracts X X X X ..... s Civil Court (not apparently company court), but after winding up order is passed by virtue of the provisions of Section 446 (2) of the Companies Act, the Company Court exercises jurisdiction of the civil court. So, essentially, the company court becomes civil court. What is important is not the nomenclature of the Court, but power and functions exercised by that Court. In view of discussions above, accepting argument of Mr. S. Ravi and rejecting contention of the learned counsel for the respondent and Official Liquidator, we hold that the company court has no jurisdiction to deal with the issues arising out of action of secured creditor under Section 13 of SARFAESI Act. Whether the provisions of Sections 531, 531A 537 of the Companies Act, 1956 have any manner of application with regard to sale of securities conducted under the SARFAESI Act? - HELD THAT:- It will appear from Section 13(1), as quoted above, it clearly provides that without intervention of the Court or Tribunal action can be taken for sale of securities, whereas the provisions of Section 537 of Companies Act requires leave of Company Court - this is apparent inconsistency in two competing provisions in two dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. All these appeals are preferred by the Indian Bank, a secured creditor of a company - M/s. Laran Sponge Minerals Private Limited now in liquidation (hereinafter referred to as the said Company). The facts leading to preferring the appeals are shortly put hereunder: The said company availed itself of various credit facilities from the appellant Bank and in consideration thereof it hypothecated its plant and machinery and other movables as securities therefor. Apart from the above securities, one Smt. P. Latha and one Sri P. Vara Prasada Raju, who are the Directors of the said company, stood guarantors for repayment of dues of the appellant. They mortgaged their immovable properties viz., large plot non-agricultural land situated in the State of Karnataka and two flats in Hyderabad. As there has been default in repayment of the loan amount by the said company to the appellant, the loan accounts were classified as Non Performing Asset (NPA). Accordingly, the appellant Bank under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as SARFAESI Act) took possession of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed Company Application being No. 1972 of 2011 on 27.12.2011 for a direction to the Official Receiver to clarify suitably with regard to the mortgaged properties in his letter dated 20.09.2011 addressed to the Sub-Registrar. While the matter stood thus, the auction purchaser complained that the possession of the said properties was not given and further there were dues claimed by several authorities and that the property is not free from encumbrance. As such, the auction purchaser avoided the sale and more so the appellant Bank threatened the auction purchaser to treat the loan account as Non Performing Asset. In this background, auction purchaser filed W.P. No. 19297 of 2012 on 26.6.2012 for the relief claimed therein. Thereafter, the auction purchaser also filed company application being C.A. No. 421 of 2013 for setting aside the sale alleging several irregularities, suppression of facts and violation of Sections 531, 531A and 537 of the Companies Act. It was further alleged that the properties are not properly valued and the encumbrances were not disclosed and possession was not delivered effectively. It was also asserted that there were several claims of taxes etc., of a larg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer under SARFAESI Act? (2) Whether the sale is void and fraudulent as contended by the Official Liquidator (wrongly typed in the copy of the judgment as Receiver)? (3) Whether the sale is vitiated for several of the irregularities raised by the auction purchaser and if so it is liable to be set aside? 5. The Hon'ble trial Judge held that the sale conducted by the authorized officer is hit by the provisions of Sections 531, 531A 537 of the Companies Act. It was held that since no leave of the Court was obtained, as required under sub-section (b) of Section 537 of the Companies Act, the sale is void. It was also held that it is an invalid sale as it was held within six months from the date of presentation of winding up petition, and also under Section 531A as the sale was held within a period of one year from the date of presentation of winding up petition. That apart, the learned Trial Judge held that the mandatory requirement for holding the sale as provided under Rule 9 (1) (2) (3) (4) (5) of the Rules framed under the SARFAESI Act, having not been adhered to, the sale is also invalid. Therefore, His Lordship set aside the same and the writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) of the SARFAESI Act would prevail over the provisions of Sections 446 and 537 of Act 1956 in view of overriding effect of the SARFAESI Act as stated in Section 35 therein. He contends with the support of judgment of the Supreme Court in case of Jagdish Singh v. Heeralal others, that sale held under SARFAESI Act can only be questioned before Tribunal under DRT alone, Company Court has no jurisdiction. 8. He also submits that Company Application No. 421 of 2013 in Company Petition No. 215 of 2010 and Writ Petition No. 19297 of 2012 filed by the auction purchaser are mala fide. The auction purchaser after having accepted the conclusion of the sale and having paid consideration money is estopped from setting up such plea. He argues that the immovable property admittedly belonged to the guarantors, who are private individuals, and the said company has nothing to do with it. The movable properties belonged to the company and were hypothecated to the appellant bank and the subsequent hypothecation to SBI Global Factors Limited does not invalidate the sale by the appellant. 9. Learned counsel for the Official Liquidator, while opposing this appeal, contends that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssociated by them while conducting the sale. That apart, the Official Liquidator, who is also a secured creditor, since he represents the workers, was also not associated with the sale conducted by the Indian Bank. The balance amount of purchase price shall be paid by the purchaser to the Authorized Officer on or before the fifteenth day of confirmation of sale of the immovable property or within such extended period as may be agreed upon in writing between the parties. This would be clear from the provisions of Rule 9(4) of the SARFAESI Act as the purchaser has remitted the sale consideration or arranged to adjust the sale consideration after the stipulated period. He complains that the appellant bank has also grossly violated the provisions of Sections 531 and 537 of Act 1956 that clearly mandates that sales as affected by the parties concerning the assets of the company in liquidation, as was done by the Indian Bank, are hit by the provisions of Act 1956. Apart from the judgment cited by him as above, he has placed reliance on the following decisions. (i) Rajasthan State Financial Corporation and another v. Official Liquidator (2005) 8 SCC 190 (ii) Sri Siddes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the time of presentation of the petition for winding up. Thus, the sale is subject to the provisions of Act 1956 from the date of commencement of the winding up proceedings, i.e., 1.11.2011 and as per Section 446(d) of Act 1956 any question whatsoever, whether on law or fact, which may relate to or arise in the course of the winding up of the company, the Company Court has jurisdiction to entertain and dispose of the same and hence the claim petition filed by the respondent auction purchaser is not maintainable and the Company Court was right in declaring that the said is void. He says that Section 537 of Act 1956 is mandatory and not directory. The word used in the provision is shall, which necessarily indicate mandatory character. Further, the very object of the provisions relating to winding up are to protect and balance the interest of various secured creditors, public dues and workmen etc. If without leave of the Court, the assets of the company are sold, the same will jeopardize the very object. On his part of legal submissions, he has placed reliance on the following decisions: (i) Mathew Varghese v. M. Amritha Kumar and others (paragraphs 45 and 46 of the judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Latha (Guarantor) 2. Flat No. 301, 3rd Floor, Bhawani Towers, Plot Nos. 1 2, Vengal Rao Nagar, Hyderabad Mortgage P. Vara Prasada Raju (Guarantor) 3. Flat No. 403, Vayuputhra Towers, Premises bearing No. 482 of MIG-1, Premises No. 483 of MIG-1 of KPHB Colony, Balanagar Mandal, Hyderabad. Mortgage Smt. P. Latha 17. It was stated that the aforesaid mortgage as part of the securities. The said couple who are the Directors of the said company stood guarantors. It is further stated that the said company failed to repay the loan amount as per the terms of sanction and also loan documents and thus committed default in repayment of dues to the Bank. Because of failure as above, the said loan accounts were classified as Non Performing Asset accounts and the appellant Bank, being secured creditor, as per the provisions of SARFAESI Act, 2002, has in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Hon'ble Court may be pleased to direct the Official Liquidator to clarify his communication dated 20.09.2011 to the Sub-Registrar, Halkundi Village, Bellary District, Karnataka that the instructions given in the said letter not to transfer, alienate, create any third party charge over the property standing in the company's name without the leave of the Hon'ble High Court or until further orders from his office are not applicable to the personal immovable properties sold by the petitioner Bank relating to the guarantors of the company namely Sri P. Varaprasad Raju and Smt. P. Latha together with the plant and machinery existing on the said properties. 21. The impugned judgment was delivered dealing with not only company applications but also the writ petitions. But whether mortgaged securities can be brought for scrutiny before the Company Judge or not is the question. On careful reading of the entire judgment of His Lordship, we do not find that this issue was at all addressed. It appears that His Lordship proceeded on the basis that all the securities belonged to the company. It is settled position of law that shareholders and directors stands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p which, had it been made, taken or done by or against an individual within three months before the presentation of an insolvency petition on which he is adjudged insolvent, would be deemed in his insolvency a fraudulent preference, shall in the event of the company being wound up, be deemed a fraudulent preference of its creditors and be invalid accordingly: Provided that, in relation to things made, taken or done before the commencement of this Act, this sub-section shall have effect with the substitution, for the reference to six months, of a reference to three months. (2) For the purposes of sub-section (1), the presentation of a petition for winding up by the Tribunal and the passing of a resolution for winding up in the case of a voluntary winding up, shall be deemed to correspond to the act of insolvency in the case of an individual. A. Avoidance of voluntary transfer.- Any transfer of property, movable or immovable, or any delivery of goods, made by a company, not being a transfer or delivery made in the ordinary course of its business or in favour of a purchaser or encumbrancer in good faith and for valuable consideration, if made within a period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 fifteen days 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Act, 1949 (10 of 1949) shall, as far as may be, apply to the immovable property. (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 creditors 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uidator: 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 sixty per cent 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es general legislation in the same field or in case of inconsistency. In the case of Allahabad Bank case (2000) 4 SCC 406 the Supreme Court while examining the scope of the provisions of Recovery of Debts due to Banks and Financial Institutions Act, 1993 held that it being subsequent legislation and being a special law which would prevail over the general law namely the Companies Act, 1956. The language of Section 34 of the RDB Act is almost similar to that of the SARFAESI Act. The only distinguishing feature is that the provisions of Companies Act was not saved at all therein as it will appear from sub-section (2) of Section 34 of the RDB Act. It will appear from Section 34 of the SARFAESI Act the jurisdiction of the civil court has been ousted absolutely in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to determine. It will appear from Section 17 of the SARFAESI Act that any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of Section 13 taken by this secured creditor or his authorized officer under this Chapter may make application to the Debts Recove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine of election. It is difficult to conceive that there are two remedies. It is well settled in law that if there is only one remedy, the doctrine of election does not apply and we are disposed to think that the Official Liquidator has only one remedy i.e. to challenge the order passed by the Recovery Officer before DRT. Be it noted, an order passed under Section 30 of the RDB Act by DRT is appealable. Thus, we are inclined to conclude and hold that the Official Liquidator can only take recourse to the mode of appeal and further appeal under the RDB Act and not approach the Company Court to set aside the auction or confirmation of sale when a sale has been confirmed by the Recovery Officer under the RDB Act. (emphasis supplied) 25. Again the Apex Court in case of Jagdish Singh v. Heeralal (2014) 1 SCC 479, observed in paragraph 24 of the report as proposition of law as follows: Any person aggrieved by any of the measures referred to in sub-section (4) of Section 13 has got a statutory right of appeal to the DRT under Section 17. The opening portion of Section 34 clearly states that no civil court shall have the jurisdiction to entertain any suit or proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 227 of the Constitution of India to entertain any dispute and it cannot be taken away by way of simple legislation. 28. Now, we examine the third question. We have already discussed that to the extent of inconsistency provision of SARFAESI Act will prevail over Companies Act. We examine whether there has been apparently inconsistent provision for taking action by the secured creditor in this Act vis-`-vis Companies Act. It will appear from Section 13(1), as quoted above, it clearly provides that without intervention of the Court or Tribunal action can be taken for sale of securities, whereas the provisions of Section 537 of Companies Act requires leave of Company Court. We, accordingly, hold this is apparent inconsistency in two competing provisions in two different Acts on the same subject. Similar view is expressed by the Division Bench of the Bombay High Court in case of The Akola Oil Industries (under liquidation) through Official Liquidator v. State Bank of India 2006 (1) Bom. CR. 362. Therefore, the provisions of SARFAESI Act will prevail over the provisions of Section 537 of the Companies Act to the extent of inconsistency. We, accepting contention of Mr. S. Rav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ights in, or in relation to, the secured asset transferred as if the transfer had been made by the owner of such secured asset. (emphasis supplied) 31. It is clear from sub-section (6) the moment action taken under sub-section (4) by the secured creditor or any manager on his behalf of the secured creditor for transfer all rights shall vest in the transferee in relation to the secured assets. In other words, if action taken under Section 13(4) is found to be lawful and valid in accordance with SARFAESI Act, no other legal provision can invalidate it. Whereas Sections 531 531A provide otherwise if any transfer including sale is effected in violation thereof the same is invalid and void. Thus it appears that there has been glaring inconsistency naturally, we are constrained to hold that the provisions of Sections 531 531A have no manner of application and the same do not apply in case of valid sale undertaken under the SARFAESI Act and the Rules framed thereunder. Besides we fail to comprehend how Section 531A is applicable carefully reading the same on fact in this case. In order to apply this section, three factual conditions must be satisfied viz., (i) transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny, under Sections 529 and 529A of the Companies Act. 37. Punjab and Haryana High Court in case of Haryana State Industrial and Infrastructure Development Company v. Haryana Concast Limited another (2010) 158 Company Cases 168 while examining legal implication of provision of Sections 13(4), 9, 35 of SARFAESI Act vis-`-vis Section 529A of Companies Act held that there is no inconsistency of the provision of Section 13 of SARFAESI Act with Sections 529 and 529A of the Companies Act, 1956 as by the proviso in sub-section (9) of Section 13 above two sections of the Companies Act are saved. 38. In an unreported decision of the learned Single Judge of this Court in the matter of M/s. Pioneer Alloy Casting Limited (in liquidation) on C.A. No. 525 of 2012, no legal ratio is to be found. His Lordship following judgment of the Supreme Court and those of other High Courts granted relief. 39. Now, the fourth question is whether the sale can be held invalid because of the alleged non-compliance of the mandatory provisions of the Rules framed under the SARFAESI Act. 40. The learned trial Judge himself has noted that there is not enough material to examine t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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