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Judgment
Sudhansu Jyoti Mukhopadhaya, J
M/s State Bank of India on behalf of Consortium Banks Assets Management Branch, Bangalore filed application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the 'I&B Code') for initiation of 'Corporate Insolvency Resolution Process' against M/s. Metal Closure Pvt. Ltd. ('Corporate Debtor'). The Adjudicating Authority (National Company Law Tribunal), Bengaluru Bench vide impugned order dated 14th December, 2018 having admitted the application, the Appellant-Director has challenged the order.
The case of the Appellant is that the State Bank of India granted credit facilities to the 'Corporate Debtor' since 2007. Subsequently, the Corporation Bank started granting credit facilities to the 'Corporate Debtor' since 14th August, 2009. On 31st January, 2010, the account of the 'Corporate Debtor' was classified as an 'Non Performing Asset' (for short the 'NPA') by State Bank of India. However, it was restructured on 17th February, 2010 and no notice of classification was given to the 'Corporate Debtor'.
The Punjab National Bank entered the consortium on 26th June, 2010 by sanctioning certain facilities to the 'Corporate Debtor'. The UCO Bank also sanctioned working capital cash credit and Letter of Credit Limit to the 'Corporate Debtor' on 11th April, 2012.
The 'Corporate Debtor's' financial rating was done on 2nd July, 2013 by credit rating agency, ICRA. The relevant portion of such report is reproduced below: -
"The company has been regular in servicing all its principal and interest obligations in a timely manner and there has not been any delay or default (a missed or delayed payment in breach of the agreed terms of the issue) during the specified period. We also confirm that there has been no re-schedulement in regard to any of company's debt obligations. We also confirm that there has been no overdrawal of the drawing power sanctioned by the bank for a period of more than 30 consecutive days in case of bank facilities which do not have scheduled maturity/ repayment dates."
According to the Appellant, a Joint Lenders Meeting was held between the Members of the Consortium on 28th April, 2014 with the 'Corporate Debtor'. It Minutes recorded that on 31st March, 2014, the Company's IRAC (Income Regulation and Asset Classification) status at that time was 'Standard Asset'. The Minutes also recorded that APITCO, State Bank of India's external consultant had recommended that the working capital limits of the Company be enhanced. In fact, the 'Corporate Debtor' had been making regular payments of the principal amount as well as interest to the Consortium and thereby a total sum of Rs.101.14 crores was paid to the Consortium between 2010 to 2015.
Further, case of the Appellant is that on 21st June, 2014 the Consortium entered into a Master Joint Lenders Forum Agreement to deal with the subject account. In the meantime, it was decided that a Concurrent Auditor be appointed.
The 'Corporate Debtor' was declared to be a NPA by the State Bank of India on 28th May, 2014 and the Punjab National Bank also declared the account of 'Corporate Debtor' as NPA on 30th June, 2014. The Deputy General Manager, State Bank of India, in view of the failure of re-structuring, requested that the date of NPA of the 'Corporate Debtor' be changed to 31st January, 2010. Such suggestion was approved on 10th July, 2014.
Learned Counsel appearing on behalf of the Appellant relied on the aforesaid decision to change the date of NPA to 31st January, 2010 to contend that default, if any, occurred prior to 31st January, 2010. According to the learned Counsel, more than three years were passed since 31st January, 2010, the application under Section 7 of the I&B Code filed by the State Bank of India was time barred.
It was submitted that the Consortium held meeting on 22nd July, 2014 and decided to appoint a Concurrent Auditor at Bangalore Unit to oversee all payments and receipts. Further, Security Guards were also appointed at the Bangalore Unit of the 'Corporate Debtor'.
The State Bank of India by letter dated 1st August, 2014 intimated the Sankaran and Krishnan, Chartered Accountants, appointing them as Concurrent Auditors for Bangalore Plant. The State Bank of India, thereafter, on 5th August, 2014 intimated the 'Corporate Debtor' that the State Bank of India had arranged for a Concurrent Auditor and Security Guards at Bangalore and Kunigal Factories w.e.f. 1st August, 2014. On the same day, the State Bank of India intimated the Director, Kashi Security and Consulting Pvt. Ltd. authorizing it to deploy Security Guards at Bangalore and Kunigal Plants of the 'Corporate Debtor'. It was objected by the 'Corporate Debtor' on 7th August, 2014.
The case of the Appellant is that the State Bank of India issued notice under Section 13(2) of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the 'SARAFAESI Act') on 12th August, 2014, calling upon the 'Corporate Debtor' to repay a sum of Rs.71,27,47,889/-. The 'Corporate Debtor' was also declared to be a 'Non Performing Asset' by Corporation bank on 10th October, 2014. Notice of restoration of NPA was issued on 14th October, 2014.
The UCO Bank also declared the 'Corporate Debtor' a NPA on 31st December, 2014, which was followed by 'Possession Notice' given by the State Bank of India under Rule 8(1) of the Security (Interest) Rules, 2012 on 20th February, 2015 in relation to the Bangalore Unit of the 'Corporate Debtor' on 20th/21st February, 2015. However, the possession notice was withdrawn on 22nd June, 2015, but the Bank continued to be in physical possession of the Plants. However, Concurrent Auditors kept vigilant on the audit of the 'Corporate Debtor'.
The State Bank of India issued a letter on 7th July, 2015 withdrawing the notice dated 12th August, 2013 issued earlier under Section 13(2) of the SARAFAESI Act.
The Appellant also lodged a complaint with respect to cheating and fraud by the Company's CFO Mr. Mahesh Hegde and others against the 'Corporate Debtor' at Ashok Nagar Police Station. The State Bank of India filed OA No.21/2016 seeking recovery of a sum of Rs.200,07,06,237.21/-before the Debts Recovery Tribunal (hereinafter referred to as the 'DRT'). In the original application, the 'Corporate Debtor' had also filed its claim seeking payment of Rs.1299 crores.
Against the application of the State Bank of India, the 'Corporate Debtor' moved in appeal under Section 17 of the SARAFAESI Act on 28th January, 2016 seeking to quash the taking over possession of the Plants of the 'Corporate Debtor' and appointment of Concurrent Auditor.
It is informed that OA filed by the State Bank of India and the SARAFAESI Act proceedings filed by the 'Corporate Debtor' are still pending before the DRT, Bangalore. On account of the repeated adjournments, the Bank ultimately moved an application under Section 7 of the I&B Code.
It appears that a FIR was lodged by the 'Corporate Debtor' and the same was registered against the employees of the Bank and other accused. The charge-sheet in the above case was filed before the ACMM, Bangalore. The application was submitted by the 'Financial Creditor' before the Adjudicating Authority (National Company Law Tribunal) Bangalore Bench on 23rd July, 2018 showing a default of Rs.733,84,00,000/-.
Subsequently, the State Bank of India has sought amendment in the petition before the Adjudicating Authority to change the amount of default mentioned in the original petition as Rs.733,84,00,000/- to Rs.282,02,71,568.08/-, which was allowed by the Adjudicating Authority on 11th July, 2018. In the FIR also charge-sheet was submitted, followed by the impugned order of admission passed on 14th December, 2018.
Learned Counsel for the Appellant submitted that as the application under Section 7 of the I&B Code filed by the Bank was barred by limitation, no debt is payable by the 'Corporate Debtor' in the eyes of law.
According to the learned Counsel for the Appellant, the Bank had been in critical position of the management of the Corporate Debtor since 2015. It had already taken steps under Section 13(4) for enforcement of security interest and also taken action under Section 15 to take over the Management of the Company under the SARFAESI Act. It was submitted that once, possession in terms of Section 13(4) is taken, the asset of the Company vests with the Bank as it is the owner of the asset. Reliance has been placed on judgment of the Hon'ble Supreme Court in "Transcore vs. Union of India" - (2008) 1 SCC 125. It was submitted that in fact, the Management of the Company was actually taken over.
We have heard learned Counsel for the Appellant and learned Counsel appearing on behalf of the Respondents, who have opposed the prayer and taken plea that the claim was not barred by limitation.
The records suggest that the State Bank of India on 1st August, 2014 intimated the Partner of one Sankaran & Krishnan, Chartered Accountants, appointing them as Concurrent Auditors for one of the Unit of the 'Corporate Debtor' is extracted below: -
"V.V. Krishnamurthy,
Partner,
Sankaran & Krishnan,
12/!A, First Floor,
17th Cross, 29th Main,
JP Nagar VI Phase,
Bangalore-560078.
AMCB/RM-2/683 01.03.2014
Dear Sir,
M/S METAL CLOSURES P LTD. BANGALORE (MCPL) CONCURRENT AUDIT
With reference to the above, we appoint you as concurrent auditor for the captioned unit financed by a consortium, with immediate effect. The scope of audit would be as under.
I. Verification of Cash Flows: -
a) Inflows
Monitoring all the cash inflows to the company on an ongoing basis so as to ensure that all inflows are properly accounted for and are credited only to their escrow account maintained with us.
(b) Outflows:-
Monitoring of all payments made to from the company's accounts in order to ensure that no funds are diverted and are used only for the purpose of working capital i.e. raw materials, stores, consumables etc and statutory payments. No payments are to be made to NBFCs, unsecured creditors, unsecured loans and on account of capital goods.
II. Inventory
Monitoring purchase of all raw materials and their accounting in the company's books.
III. Compliance and Verification
(i) Compliance with regard to irregularities pointed out by Stock Auditors.
(ii) Verification of statement being provided to the consortium banks, to ensure that factual position of stocks and receivable is furnished without any distortion.
(iii) Monitoring payments to managerial officials to ensure that they are in tune with past salary/ remuneration paid.
IV. Fixed Assets: Monitoring of Sale/ Transfer of fixed assets. Information regarding sale of fixed assets should be brought to our notice immediately.
V. Monitoring of Consortium Decisions and submission of reports
(i) Preparation of monitoring report for submission to Consortium Leader in the prescribed format, at monthly or at such required periodicity.
(ii) Report for a particular month to be submitted by 10th of the next month.
VI. Visits to the units outside Bangalore Auditors to visit the units located outside Bangalore as per the advise of the Bank.
VII. General
a. The accounts maintained by the company at Bangalore, Kunigal and Himachal Pradesh should be monitored from Bangalore.
b. The Auditors shall carry out the audit for minimum period of 3 working days in a week.
c. Travelling, Conveyance, Boarding Expenses, if any incurred (applicable for unit visits outside Bangalore) would be payable as per the actual expanses over and above the monthly fees.
d. a consolidated Audit Fee of Rs.50,000 per month, inclusive of applicable Service Tax would be paid as remuneration, payable on or before 7th of the following month.
e. We reserve our right to modify the terms of reference at any point in time.
f. The services of the auditor may be terminated by the Bank by giving a notice 15 days in advance.
Please return the duplicates of this letter, enclosed, duly signed by you in token of your acceptance of the terms & conditions of appointment mentioned there.
Yours faithfully,
Sd/-
Asst. General manager & RM-2."
It is followed by letter dated 5th August, 2014, issued by the State Bank of India to The Director, Kashi Security and Consulting Pvt. Ltd. to deploy Security Guards to monitor the movement of the goods in & out of the factory etc. as extracted below: -
"The Director,
Kashi Security and Consulting Pvt. Ltd.
3332, 13th Main,
6th Cross, HAL 2nd Stage,
Bangalore-560038.
SMCB / RM-2 / MCPL/ 05.08.2014
Dear Sir,
Metal Closures Pvt. Limited (MCPL) Deployment of security
With reference to the above, we authorize you to deploy security guard at the premises of MCIL, at the addresses given below:
a. No.39/4B, Dodda Kallasandra, Kanakapura Raod, Bangalore - 560 062. Tel-2632 0501
b. Plot no.37 & 38, KIADB Industrial Area, Kunigal, Tumkur.-572 130, Tel-0813 222 0349
The terms and conditions of deployment are as under:
a. The security guards should monitor the movement of good in & out of the factory and details viz. Particulars of goods, invoice no, date etc should be noted.
b. While manufactured products can be permitted to be transported out of the factory, no machinery should be permitted to be shifted without our permission in writing. In case of any attempt to shift machinery, the undersigned should be informed immediately by the guards.
c. 3 guards will be deployed at each of the premises, @ one guard in a shift of 8 hrs.
d. The rate per security guard deployed at Kunigal plan will be Rs.12,350.00 per month + Service Tax
e. The rate per security guard deployed at Bangalore plant will be Rs.14276.00 per month + Service Tax.
f. This arrangement can be cancelled by us by giving a notice 30 days in advance.
The contact person in MCIL is Mr. Mahesh Hegde, Chief Financial Officer. Contact No. 98450 37701.
In case of any dispute with company officials please contact following officials of our bank:
Mr. Manjunath Service Officer - Phone: 080 25943727 Mobile: 9845226873
Mr. Ramesh AGM & RM - Phone: 080 25943743 Mobile: 9980030303
Yours faithfully
Sd/-
Asst. General Manager & RM-2"
The aforesaid action on the part of the State Bank of India was opposed by the 'Corporate Debtor' by letter dated 7th August, 2014, whereby it was intimated that there was no necessity to engage any Security Guards as the 'Corporate Debtor' has Security Guards from M/s. Eagle Eye Security, serving the Company since last 12 years. By a subsequent letter dated 11th August, 2014, the 'Corporate Debtor' intimated the State Bank of India that the 'Corporate Debtor' being the owner of the premises, the Bank has no right to appoint the Security, unless physical possession of the Unit is taken over along with secured asset under section 13(4) of the SARFAESI Act, 2002.
Records suggest that notice was issued to the 'Corporate Debtor' by State Bank of India on 12th August, 2014 under Section 13(2) of the SARFAESI Act, intimating them that the accounts have been classified as 'NPA' on 28th May, 2014. The 'Corporate Debtor' was asked to deposit the outstanding liability owing to the Bank amounting to Rs.71,27,47,889/-.
The State Bank of India, subsequently, on 21st February, 2015 giving a reference to notices issued by the Consortium of Bank under Section 13(2) of the SARFAESI Act dated 12th August, 2014, 24th July, 2014 and 1st December, 2014, intimated the 'Corporate Debtor' that since the 'Corporate Debtor' failed to make payment , the possession of the properties mortgaged to the Consortium of Banks consisting of State Bank of India, Punjab National Bank, Corporation bank and UCO Bank as detailed in the schedule were taken over on 20th February, 2015 and the notice thereof was given to the 'Corporate Debtor' by 'General Public Notice' by publication in the newspaper 'The New Indian Express' and 'Samyuktha Karnatka' on 21st February, 2015. The borrower/ Guarantors in particular and the public in general were cautioned not to deal with the properties of the 'Corporate Debtor' as referred to therein. The copies of 'Possession Notice' were also issued in the newspaper on 21st February, 2015.
We have already noticed that the State Bank of India filed one OA No.21/2016 on 28th December, 2015 for recovery of sum of Rs.200,07,06,237.21 before the DRT. In the same way, the 'Corporate Debtor' has also filed counter claim, seeking payment of Rs.1299 crores. Against the action of the Bank, the 'Corporate Debtor' also filed an appeal under Section 17 of the SARAFAESI Act on 28th January, 2016. Both, the aforesaid OA and application under Section 17 filed by the 'Corporate Debtor' are pending before the DRT.
The records also suggest that the properties of the 'Corporate Debtor' were mortgaged, its 'Possession Notice' was given, followed by possession taken by the State Bank of India and other Banks.
In the aforesaid background, it is to be determined, as to whether the application under Section 7 of the I&B Code was barred by limitation and, if not, whether the claim of the Banks was barred by limitation to hold that there is no debt payable in the eyes of law?
For computing the period of limitation of an application under Section 7, one should refer to Article 137 of Part II of Third Division of the Schedule of Limitation Act, 1963, as quoted below: -
"PART II - OTHER APPLICATIONS
Description of application
Period of limitation
Time from which period being to run
Any other application for which no period of limitation is provided elsewhere in this division.
Three years
When the right to apply accrues"
The right to apply under Section 7of the I&B Code, accrued to the Bank only since 1st December, 2016, i.e., when I&B Code came into force. From the aforesaid provision, we find that the application under Section 7 is not barred by limitation.
To find out, as to whether the claim is barred by limitation or not, one should refer to Articles 61 & 62 of Part-V of First Division. It relates to mortgage of property (Article 61) and enforcement of payment of money secured by a mortgage (Article 62), as quoted below: -
"PART V - SUITS RELATING TO IMMOVABLE PROPERTIS
Description of suit
Period of limitation
Time from which period being to run
By a mortgagor- (a) to redeem or recover possession of immovable property mortgaged.
(b) to recover possession of immovable property mortgaged and afterwards transferred by the mortgagee for a valuable consideration
(c) to recover surplus collection received by the mortgagee after the mortgage has been satisfied.
Thirty years
Twelve years
Three years
When the right to redeem or to recover possession accrues.
When the transfer becomes known to the plaintiff
When the mortgagor re-enters on the mortgaged property.
To enforce payment of money secured by a mortgage or otherwise charged upon immovable property.
Twelve years
When the money sued for becomes due."
Apart from the fact that the Bank had taken action under Section 13(4) of the SARAFAESI Act and the matter is pending before the DRT since 2015-16, there being 12 years of limitation prescribed for enforcement of payment of money secured by a mortgage, we hold that the claim of the none of the Consortium Banks are barred by limitation and, therefore, the 'Corporate Debtor' cannot claim that the debt is not payable in the eyes of law.
Learned Counsel for the Appellant gave an idea that the Management of the 'Corporate Debtor' was taken over by the State Bank of India and, therefore, if there was any default, the Promoters cannot be blamed. However, from the record we find that though, the possession of the one or the other Unit of the 'Corporate Debtor' were taken over by the Bank, they only deployed their Security Guards and appointed Concurrent Auditors, but not taken over the actual Management of the 'Corporate Debtor'. The Management remained with the Promoters of the 'Corporate Debtor', who in fact, opposed the appointment of the Security Guards. In absence of any specific order of taking over the Management in terms of Section 13(4)(b) of the SARAFAESI Act, which includes the right to transfer by way of lease, assignment or sale for realizing of the secured asset, we hold that the Management of the 'Corporate Debtor' continued with the Promoter. Therefore, if there is any default on the part of the 'Corporate Debtor' to pay the debt amount, the Appellant cannot pass the blame on the Bank.
In view of the aforesaid finding and in absence of any merit, we are not inclined to interfere with the impugned order of admission dated 14th December, 2018. The Appeal is accordingly dismissed. No costs.