Bharat Explosives Ltd. vs Lakshmi Vilas Bank Ltd. And Ors.

Ranjit Singh, J

Respondent Lakshmi Vilas Bank Ltd. had initiated action under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, the SARFAESI Act) by issuing notice under Section 13(2) followed by notice under Section 13(4) of the Act. Aggrieved against the same, appellant M/s. Bharat Explosives Ltd. filed S.A. No. 11/2009 before the Tribunal below. The said S.A. was dismissed by the Tribunal on 23.3.2012 which is now appealed against by the appellant by filing Appeal No. 78/2014. The appellant had also sought review of the order dated 23.3.2012 passed by the Tribunal dismissing its S.A. The review application has also been dismissed by the Tribunal on 8.5.2014 against which the appellant has filed another appeal (No. 64/2015). Both the appeals being against the same cause of action are heard together and are disposed of through this common order.

The facts have been noticed from Appeal No. 78/2014.

The Bank had initiated action under the SARFAESI Act for recovery of a sum of Rs. 270.49 lacs. Respondent No. 1 Bank issued notices under Section 13(2) and, thereafter, under Section 13(4) of the said Act on 7.1.2009. The appellant filed this S.A. pleading that the reference filed by the company before BIFR was registered and is pending and thus Bank would be barred from taking action under the SARFAESI Act.

The plea otherwise to challenge the action under the SARFAESI Act was that respondent Lakshmi Vilas Bank does not have support of three-fourths of total secured creditors and thus the action initiated without the concurrence of the other Banks/FIs against the appellant was not maintainable.

The appellant would plead that it had received financial assistance/loan from the respondents under the Working Capital Term Loan, Letter of Guarantee, having first charge on plant and machinery and fixed assets for term loan of Rs. 175 lacs which was reduced to Rs. 50.90 lacs. The respondent-Bank had also second charge on fixed assets on Lalitpur Plant along with State Bank of Mysore for Rs. 78.74 lacs and a charge on pari passu basis with State Bank of Mysore on inventory and for the amount outstanding for a period of not more than 90 days, charge with State Bank of India for Rs. 98 lacs. The plea accordingly is that respondent Lakshmi Vilas Bank could take action under the SARFAESI Act only to the extent of only Rs. 50.90 lacs in regard to the movable property on which it had a first charge for Rs. 50.90 lacs with second pari passu charge of State Bank of Mysore to the extent of Rs. 78.74 lac. As per the appellant there were other secured creditors including State Bank of India claiming Rs. 45.92 lacs and State Bank of Mysore claiming Rs. 50 lac having pari passu second charge and Madhya Pradesh State Industrial Development Corporation claiming Rs. 24.62 lacs. On this basis, the appellant would contend that action initiated by respondent No. 1 Bank to issue possession notice under Section 13(4) of the SARFAESI Act was in violation of Section 13(9) of the SARFAESI Act and also Section 15 of SICA. The prayer accordingly was to quash this notice.

The appellant had taken action to amend the S.A. by incorporating certain pleadings, twice, ultimately to urge that the first respondent did not have three-fourths of the total due from the secured creditors and in the absence of consent of other creditors steps taken by it were in violation of Section 13(9) of the SARFAESI Act. Another plea advanced was that the respondent-Bank had not complied with the mandate of Section 13(3A) of the SARFAESI Act and had not responded to the objection filed by the appellant within the time stipulated.

Respondent No. 1 Bank had filed written statement pleading that the S.A. was barred by time. As per the respondent-Bank, it had more than three-fourths of the total liability payable by the appellant company to its secured creditors. The respondent-Bank in its letter 18.11.2008 had statedly clarified that the appellant was a defaulter and is liable to pay a sum of Rs. 270.49 lacs and further interest thereon which was more than three-fourths of the value of the amount outstanding to the secured creditors of the appellant. The Bank accordingly had pleaded that the measure initiated by it under Section 13(4) of the SARFAESI Act was clearly maintainable. The plea also was that as per Section 15 of SICA, such reference would stand abated and closed.

Respondent-Bank would also point out that symbolic possession of property was obtained on 7.1.2009. The appellant had come with the request letter dated 29.11.2008 offering to pay a sum of Rs. 1 lac and for paying the balance in instalments out of the income generated by the operation of Lalitpur plant. This offer was rejected. It was accordingly urged that the appellant had failed to make out a case for any relief in the S.A.

In its written statement filed, State Bank of India stated that it had disbursed to loan to M/s. Bulk Explosive Limited for which the company had mortgaged land, building and machinery of the factory at 74, Udyog Deep Industrial Area, Vidyan, District Sidhi, MP. As per State Bank of India, Lakshmi Vilas Bank (respondent No. 1) and State Bank of Mysore (respondent No. 2) had not granted any loan to M/s. Bulk Explosive Ltd. The plea accordingly was that the appellant was falsely trying to make out a case that three-fourths of the secured creditors had not consented for action under Section 13(4) of the SARFAESI Act. This plea of the appellant was described as an incorrect plea. It was pointed out that State Bank of India had issued possession notice in regard to property at Sidhi and that the dues of respondent No. 1 and State Bank of India was more than three-fourths of the secured debts availed by the appellant. The Bank would also plead that issuance of possession notice by both the Banks would clearly show as well that the both the Banks had consented for action.

The State Bank of Mysore filed a separate written statement to urge that the appellant had availed long term Working Capital Loan of Rs. 50 lacs from the Bank on 27.9.2007. This loan was granted subject to pari passu charge of Lakshmi Vilas Bank with State Bank of Mysore. The said charge was duly registered with Registrar of Companies. It was thus pleaded that the respondents were entitled to receive dues from the appellant.

The Tribunal below has decided the S.A. on merits after the rejecting the plea of the Bank that S.A. was barred by time. The other submissions advanced on behalf of the appellant were also rejected and the S.A. was dismissed. The appellant, therefore, has filed the present appeal. Since the plea for review of the order was also declined, the order passed on the review is challenged by filing a separate appeal, as already noted.

The Counsel for the appellant has mainly canvassed his plea on the basis of Section 13(9) of the SARFAESI Act. While making reference to notice issued under Section 13(2) of the Act, the Counsel would highlight the fact that respondent No. 1 Bank had issued notice in regard to nature of facilities like Working Capital Term Loan-I of Rs. 50.90 lacs, Working Capital Term Loan-II of Rs. 78.74 lacs and Working Capital Term Loan of Rs. 98 lacs. The security agreement referred to in the notice are Demand Promissory Notes, Letter of Undertaking for payment of instalments, Form No. 241(R) and Form No. 355 - Term Loan Agreements, Form No. 85(R)-Counter Indemnity and finally Letter of Hypothecation-Form No. 583. The description of security is given as under:

"Description of security:

(1) 1st charge on current assets, present and future receivables, furniture and fittings, tools accessories and parts pertaining to hypothecated machineries of the pharma NG project of the company situated at Lalitpur, on pari passu basis with State Bank of Mysore (SBM).

(2) And first charge on land and building and Plant and Machineries situated at Village Amarpur, Mahera and Sirshikhera in Dist. Lalitpur in U.P. on pari passu basis with SBI & SBM."

Reference is then made to notice under Section 13(4) of the Act, for taking possession of immovable property, i.e., all that part and parcel of the property of land together with factory building machineries embedded in the earth, accessories and other immovable and movable assets and other buildings/sheds constructed therein - located about 9 KM from Lalitpur-Jhansi Highway Road, and situated in villages Amarpur, Mahera and Sirshikhera Gram Sabhas Mahera and Kargan, Goan Sabhas Kargan and Mahera, Lalitpur Tahsil, Lalitpur Pargan, Lalitpur District in Uttar Pradesh having total extent of 994.31 acres of land. The Counsel would contend that the respondent Lakshmi Vilas Bank has only first charge on the fixed assets of the appellant and second charge of pari passu charge basis with State Bank of Mysore to the extent of Rs. 78.74 lacs.

The plea accordingly was that the proceedings could be initiated in respect of Rs. 50.90 lacs only. The plea is that in the case of financing of the financial assets by more than one creditor, then no secured creditor shall be entitled to exercise any or all rights conferred on him unless exercise of such rights is agreed upon by the secured creditors representing not less than three-fourth of the value of the amount outstanding.

The Tribunal has rejected this contention by making reference to the wording of Section 13(9) of the Act. The Counsel would contend that Tribunal below had done so by partly quoting provisions of Section 13(9) of the Act without realizing the full effect of the said section. The plea in short is that respondent No. 1 Bank could not have competently initiated action under the SARFAESI Act unless it was agreed upon by the other secured creditors representing not less than three-fourth in value of the amount outstanding.

Since the entire submission of the appellant is based on the provisions of Section 13(9) of the Act, the said section may call for a notice and is as under:

"(9) In the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to Sub-section (4) unless exercise of such right is agreed upon by the secured creditors representing not less than three-fourth in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors:

Provided that in the case of a company in liquidation, the amount realized from the sale of secured assets shall be distributed in accordance with the provisions of Section 529A of the Companies Act, 1956 (1 of 1956):

Provided further that in the case of company being wound up on or after the commencement of this Act, the secured creditor of such company, who opts to realize his security instead of relinquishing his security and proving his debt under proviso to Sub-section (1) of Section 529 of the Companies Act, 1956 (1 of 1956), may retain the sale proceeds of his secured assets after depositing the workmen's dues with the liquidator in accordance with the provisions of Section 529A of that Act:

Provided also that the liquidator referred to in the second proviso shall intimate the secured creditors the workmen's dues in accordance with the provisions of Section 529A of the Companies Act, 1956 (1 of 1956) and in case such workmen's dues cannot be ascertained, the liquidator shall intimate the estimated amount of workmen's dues under that section to the secured creditor and in such case the secured creditor may retain the sale proceeds of the secured assets after depositing the amount of such estimated dues with the liquidator:

Provided also that in case the secured creditor deposits the estimated amount of workmen's dues, such creditor shall be liable to pay the balance of the workmen's dues or entitled to receive the excess amount, if any, deposited by the secured creditor with the liquidator:

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 three-fourth 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."

The reading of this provision would show that in case of financing of a financial asset by more than one secured creditors or a joint financing of financial asset, no secured creditor shall be entitled to exercise any or all its rights unless exercise of such rights is agreed upon by secured creditors representing three-fourth in value of amount outstanding.

At the first blush the impression that would appear from the contents of this submission is that it is made for the benefit of the secured creditors. Once the financial asset is financed by more than one secured creditor, then the secured creditor is not entitled to exercise any or all such rights unless he represents three-fourth of the value of the outstanding dues. The grievance, if any, obviously would be of secured creditor for which the borrower really cannot make any grouse. The borrower in any case cannot avoid recovery whether it be for one or more secured creditors.

Even otherwise, in the present case, the appellant had made an attempt to make out a case that the outstanding amount due towards respondent 1 Bank was less than three-fourth by urging that only part of the amount was secured. As per the Counsel, 'financial asset' would constitute only the secured assets. It may have to be seen if the 'financial assets' is to be taken only on the basis of secured asset. Thus the issue is of financing of a financial asset. Financial asset is defined in Section 2(1) to mean a debt or receivables and includes--

(i) a claim to any debt or receivables or part thereof, whether secured or unsecured; or

(ii) any debt or receivables secured by, mortgage of, or charge on, immovable property; or

(iii) a mortgage, charge, hypothecation or pledge of movable property; or

(iv) any right or interest in the security,

(v) any beneficial interest in property, whether movable or immovable, or in such debt, receivables, whether such interest is existing, future, accruing, conditional or contingent; or

(vi) any financial assistance."

Thus, Section 2(1) defines the financial asset to mean a debt or receivables and these would include the claim of any debt which is receivable whether secured or unsecured. The submission that the financial assets would have to be read to mean and restricted to secured assets would amount to doing violation to the definition of term 'financial asset' contained in Section 2(1) of the SARFAESI Act.

I am rather surprised at the line of submission pursued by the Senior Counsel for the appellant that for the purposes of Section 13(9) of the Act the definition of the term 'financial assets' as given in Section 2(1) of the Act would not fully apply. The Counsel has made an attempt to make good his submission by referring to Section 2(1)(iii) as per which 'financial assets' is referred as including a mortgage, charge, hypothecation, pledge of movable property etc. How this will support the submissions made by the Counsel is beyond my comprehension. The financial assets have been defined to mean 'a debt or receivables' and this would include any debt or receivables or part thereof whether secured or unsecured. There is no rule of interpretation brought to my notice that the term 'financial assets' would have restricted meaning for the purpose of Section 13(9) of the SARFAESI Act. The term 'financial assets' is defined to include what is stated in Clauses (i) to (vi). I am in no position to accept this argument advanced by the Counsel for the appellant.

The Tribunal below has also considered this definition and so also the definition of the term 'secured creditor' which means any Bank or financial institution or consortium or group of Banks or financial institutions which would also include debenture trustee appointed by the Bank or financial institution, or any other trustee holding securities on behalf of Bank, etc. in whose favour of security interest is created for due repayment by any borrower. It is, therefore, rather difficult to accept the submission made by the Counsel for the appellant.

Rather, I find that there is hardly any need for further debate in this regard as the Hon'ble Delhi High Court in the case of Chemstar Organics India Limited v. Bank of Baroda & Ors., WP(C) 1487/2011, has expressed a view that borrower cannot press the provisions of Section 13(9) of the Act as such a right can be exercised by any other Bank or financial institution which had advanced loan in order to safeguard their interest and borrower cannot avoid payment to the creditor relying upon Section 13(9) of the Act. When the attention of the Counsel was drawn to this judgment which is found noticed in the order passed by the Tribunal below while rejecting the review application filed by the appellant, the learned Counsel was a bit apologetic while conceding that he failed to take notice of this fact. The view formed by this Tribunal, therefore, has also been the view of the Hon'ble Delhi High Court that the provisions of Section 13(9) are meant for the benefit of the Banks and financial institutions. The appellant borrower, therefore, cannot take shelter behind this provision to avoid payment to the creditors.

The next ground pressed before me is in regard to violation of Section 13(3A) of the SARFAESI Act. Plea is that the appellant had represented against the notice issued under Section 13(2) of the Act. Reference is made to a communication dated November 2008 which is stated to be objection filed by the appellant against the notice issued. The Counsel for the appellant would submit that this objection was dated 3.11.2008 and the same had been received by the Bank on 4.11.2008, Concededly, this notice was not dated. The appellant has not been able to succeed in its attempt to link document showing receipt of letter on 4.11.2008 really to be the response to notice. The Tribunal has also found that the copy produced by the appellant to prove this receipt was only a copy of the track report taken from the internet and was not the original copy produced on record. Referring to the judgment relied upon by the appellant to challenge the action of the Bank in exhibiting certain document merely as having been received, the Tribunal has applied the ratio of law that mere marking of the document will not amount to proof of contents of the document and therefore those documents cannot be considered for any purpose, being not admissible. The view formed by the Tribunal below is legally appropriate. The observation recorded by the Tribunal below that this omission of putting date on the said letter may be intentional and not an omission by oversight is a view which is reasonable and probable. Since the objection filed by the appellant has been found to be undated, it may not be possible to link this with the receipt produced on record. The receipt of the notice/objection has not been denied by the Bank but the Bank has responded by saying that the objection raised by the appellant was replied in time on 18.11.2008. The material on record would not fully establish the contention of the appellant that the respondent had not replied to this notice within seven days. The view formed by the Tribunal below is reasonable and well made out from the evidence and material on record. Merely because another view is possible would not be a good ground to interfere with the impugned order.

In addition to the submissions made and noticed above, the Counsel for the appellant has made yet another grievance in regard to the tampering of the record. The Bank has produced on record the copy of the Term Loan Agreement for Machinery/Goods/Stocks where the description of the hypothecated goods, machinery and stocks is recorded. In the documents filed and annexed by the Bank, the following endorsement is contained in the schedule, which bears the signature of the borrower at two places:

"1st charge on current assets, present and future receivables furniture and fittings, tools, accessories and other parts of machineries, machineries embedded in the earth with State Bank of Mysore. Factory situated at Lalitpur in U.P. and Waidhan district Sidhi, M.P. and various vehicles."

The Counsel for the appellant would point out that the copy of this Term Loan Agreement had been sent to the office of the Registrar of Companies for registering the charge, which was without any such endorsement as reproduced above. Copy of the document available on the file of the Registrar statedly has been produced by the appellant. On this basis it is urged that this endorsement was made subsequently while the signatures of the borrower had been obtained in blank.

In order to satisfy myself, I had required of the Bank to show the original of this Term Loan Agreement. The original when produced is found containing the above said endorsement which was duly singed by the borrower at two places. The borrower had signed at one place for Bharat Explosives Ltd. as Managing Director. Another signature is on the left side below the endorsement. Both these signatures are seen on the document which is placed on record by the appellant, but it does not contain this endorsement. The signatures on the document are not denied. If that be so, the appellant would have to do a lot of explanation as to why the Managing Director endorsed his signatures leaving a space between the printed word 'Schedule' under which the description of the hypothecated goods, machinery and stocks is recorded and the place where signatures are endorsed. Even otherwise, copy of record from the Registrar has been produced by the appellant without sufficiently proving that the copy which was submitted with the Registrar contained any endorsement or not. The Counsel for the Bank would submit that sometimes the copy is given to the borrower to submit with the Registrar.

Words like 'For Bharat Explosive Ltd.' above the signature and 'Managing Director' below the signatures are missing in the photocopy which has been produced on record by the Bank. This may be due to while getting the photocopy made of the same. These words, however, are seen available on the original. One may have to appreciate this submission in the document that this loan agreement for machinery, goods and stocks was on the basis of hypothecation of machinery/goods/stocks. The description of the machinery, goods and stocks which were hypothecated were bound to be reflected in the schedule. It is not the case of the appellant that it had not hypothecated the machinery, goods and stocks. What is material to see is the original which has been produced and which contains the endorsement and signatures. The appellant did not succeed in any manner showing that this was done subsequently to allege the tampering of the documents. One could even understand the signatures of the borrower at one place on the right side where he has endorsed his signature as Managing Director. There is no explanation forthcoming as to why the appellant signed on the left side of document which is on the copy produced by the appellant. What for the appellant had endorsed his signature at two places thus has remained unexplained. Therefore, I am not inclined to accept the contention of any forgery. No interference in the impugned order on this ground is called for. In the light of discussion made above, I do not find any reason to interference in the impugned order. Accordingly, the appeal is dismissed.