Dena Bank vs M/S Thermex Enterprises Ltd And Ors

The appellant Bank, which now stands merged with Bank of India, was aggrieved by the order dated 19.11.2018 passed by the Tribunal below(DRT-1, Delhi) in the Securitisation Application filed under Section 17(1) of SARFAESI Act against it by respondent no.1 herein. The S.A. was filed when the respondent Dena Bank officials sealed its defaulting borrower's(respondent no.2 herein) property, which was mortgaged in its favour by respondent no.2, alongwithall the finishedgoods/raw material etc. lying inside that property. The appellant's case was that out of the goods lying inside the premises of the bank's borrower, respondent no.2 herein, sealed by the respondent Bank on 17.02.2018 raw material/finished products(Ingots/Billet/Steel Bars)weighing 1137.620 Metric Tonnes(MT) belonged to the appellant. Raw material(Ingots/Billets) had been given to respondent no.2(borrower) for being converted into finished items(TMT Bars) on job work basis under two separate Job Work Agreements dated 2.11.2015 and 25.01.2017. According to the appellant those goods/raw material could not be sealed alongwith the mortgaged premises and hypothecated items and on the demand of the appellant the same had to be released in its favour after de-sealing the sealed mortgaged premises of the bank's borrower but the bank refused to do that and so the appellant was constrained to approach the DRT with an S.A.

In the S.A. the appellant bank and the securitisation applicant(respondent no.1)adduced documentary evidence to substantiate its case that all the sealed goods lying inside the mortgaged premises of Dena Bank were not hypothecated by respondent no.2 in favour of Dena Bank and some of the raw material had been entrusted by the appellant to respondent no.2 borrower for being converted into finished goods. The learned DRT accepted the case of the securitisation applicant, respondent no.1 herein, vide its order dated 19.11.2018 and directed the appellant bank to open the sealed mortgaged factory premises of its borrower and to release 1137.620 MT of raw material/finished products belonging to the respondent no.1 herein.

The impugned order dated 19.11.2018 passed by DRT notices the facts of the case in detail, evidence adduced and the submissions advanced there on behalf of the appellant herein, the bank as well as the bank's borrower, respondent no.2 herein. To avoid repetition of the facts and contentions of the parties the order of the DRT is re-produced below:-

"M/s Thermex Enterprises Ltd. (hereinafter referred to as the security applicant) has filed the present appeal/ Application under Sections 17 & 27 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 read with Security Interest (Enforcement) Rules, 2002 (for short, the SA) for seeking appropriate order directing 1st respondent bank to de-seal the premises and permitting the security applicant to lift the goods of a total quantity of 1137.620 MT, comprising of raw material (ingot/ Billet) 397.175 MT and finished goods (TMT) 740,445 MT and to award damages in favour of the security applicant against 1st respondent bank for withholding its stocks / goods since 17th February, 2018.

In nutshell, the case of the security applicant, as is revealed from the contents of the S.A., is as under:

The security applicant has been purchasing the raw material i.e. Ingot, Billet and Scrap from different Companies and selling the same alongwith finished goods i.e. TMT to various parties depending upon their orders from time to time. The security applicant had entered into a job work agreement dated November 02, 2015 with respondent no. 2 and pursuant thereto it had been supplying the raw material to respondent no.2 as per its requirements and had been converting the raw material into the finished goods as per the specification and requirement of the security applicant from time to time. On 25th January, 2017 respondent no.2 entered into an amended job work agreement and the security applicant had been supplying the goods to respondent no.2 at its work place at A-1, Industrial Area, South of GT road, Ghaziabad(UP) and as per terms of invoices, respondent no.2 was required to deliver goods as per requirements and specification at the godown of the security applicant. The managerial staff of the security applicant had been deputed at the premises for which respondent no.2 had allocated. The security applicant had been filing Excise Returns, Sales Tax until the GST was made applicable. Despite having knowledge that respondent no.2 is having their manufacturing activity from A-1 Industrial Area, South of GT road, Ghaziabad (UP) on the basis of job work of the security applicant, on17th January, 2018 the respondent bank had obtained the physical possession of the stocks owned by the security applicant lying in the shed of respondent no.1 and even without preparing inventory of the stocks. According to the security applicant, the stocks taken into possession is completely uncharged and is not hypothecated with the 1st respondent bank which has no lien over the same, thus, cannot be permitted to take possession of the same. Therefore, it is submitted that the measures for taking over the un- hypothecated stocks is contrary to law and mandatory provisions of the SARFEASI Act. It is further the case of the security applicant that vide its communication dated February 21, 2018 requested the respondent no.1 bank to allow it to lift the goods but did not permit the security applicant which having left with no other option filed representation dated 23rd February, 2018 requesting the 1st respondent bank to allow it to lift the goods owned by it on 26th February, 2018 at 11:00 AM. The security applicant has been served with letter dated 23rd February, 2018 issued by the 1st respondent bank mentioning the quantify owned by the security applicant lying in the factory premises of respondent no.2 comprising raw material of 397.175 M.T. and finished goods (TMT) 740.445 M.T. It is submitted that the 1st respondent bank has illegally obtained the physical possession particularly when the security applicant has already annexed all the invoices issued by it in favour of respondent no.2 in relation to supply of raw material and other documents of ownership. Accordingly, the actions/ measures initiated by 1st respondent bank are challenged being totally against the roof of the SARFEASI Act especially when the goods owned by the security applicant are not charged nor are under lien with 1st respondent bank and the same are in contravention of Section 31 of the SARFEASI Act and as such the same are liable to be set aside. Furthermore, the actions/ measures are claimed to be totally in contravention of the representation dated 21st February, 2018 and thus are liable to be quashed.

In its reply, the respondent bank has contended that it seems to be a case of proper and strategic commercial understanding between the security applicant and respondent no.2 and the purpose is only to abuse the provision and deprive the respondent no.1 of its lawful dues. It is submitted that the possession has been obtained by Dena Bank Consortium comprising of 11 banks in all. On merits, it is submitted that there is no document on record to support the address of the registered office of the security applicant. It is further contended that the goods nowhere belongs to the security applicant. The credit facilities have been extended by Dena Bank consortium and OA No. 431 of 2017 and OA no. 893 of 2016 are pending adjudication before this Tribunal and there is no material on the record of either of the two OAs to show that the hypothecated goods at the premises had any claim from any other artificial person or individual, whatsoever. The alleged document qua job work or even amended job work agreement has got no legal sanctity and complete financial papers have neither been placed by the security applicant nor by respondent no.2. In fact, the goods actually belong to respondent no.2 and the raw material was being supplied by the security applicant to respondent no.2. The security applicant cannot rely upon the invoices which are unbelievable. It cannot be believed that excise duty, sales tax and even GST was ever paid qua the alleged goods. As per the answering respondent no.1 all the goods available at the site are hypothecated with it and respondent no.2 or even the security applicant for that matter have no challenge to its claim. Denying all contra allegations levelled in the present SA the answering respondent no.1 Dena bank has prayed for dismissal of the same with costs.

Respondent no.2 M/s Rathi Super Steel Ltd. in its reply has submitted that the security applicant Company is neither a borrower nor guarantor in relation to the credit facilities sanctioned in its favour by the respondent no.1 bank. It is further submitted that in terms of the Job Work Agreement dated November 02, 2015 the security applicant company had been supplying the raw material to the answering respondent no.2 Company was converting the raw material i.e. Ingot/ Billet into the TMT Bars (Steel Bars/ Rods) as per the requirement of the security applicant. The answering respondent no.2 further submits that all the transactions which had been entered into between the security applicant Company and the answering respondent no.2 are purely commercial business transactions and the security applicant had been sending the raw material along with the invoices which were delivered at its factory premises and all the raw material was duly inspected by the officials of the security applicant Company before unloading the same in the factory premises and all the raw material was duly inspected by the officials of the security applicant company before unloading the same in the factory premises of the answering respondent no. 2 company. It is further submitted that the goods of the security applicant company are lying at the factory premises of respondent no. 2 company which includes the raw material and finished goods. According, to the answering respondent no. 2 company, the goods owned by the security applicant company are not changed/hypothecated to the respondent no. 1 bank, which has no even served any notice on the answering respondent no. 2 company before proceeding ahead for obtaining the physical possession of the immovable property, plant and machinery and the stocks in process. The action of the respondent no. 1 is alleged to be illegal and respondent no. 2 reserved its right to challenge the same. It is further contended that respondent no. 1 bank has illegally obtained the physical possession of the stock more particularly when it was only required to obtain the physical possession of the stock which is charged and hypothecated with it and even after due verification of the same. The whole action of respondent no. 1 bank is alleged to be in contravention of the statutory provisions of the SARFEASI Act and the Rules framed thereunder. Ultimately, a prayer has been made to direct the respondent no. 1 bank to de-seal the property and hand over physical possession of the property bearing No. A-1, Industrial Area, South of G.T. Road, Ghaziabad, UP to the answering respondent no. 2.

In its separate reply, respondent no. 3 (ASREC India Ltd.) has contended that the present S.A filed against Dena Bank is not maintainable as the other members of the consortium are also necessary parties and the present S.A is liable to be dismissed solely on this ground of non-impleadment of necessary parties. It is submitted that Joint Deed of Hypothecation dated November 12, 2014 was executed by respondent no. 2 and all fixed and moveable assets, plant and machinery and other assets lying at property namely A-1, Industrial Area, South of GT Road, Ghaziabad, UP had been hypothecated to the consortium of banks and in view thereof, the claim of ownership of the security applicant over any part of the manner whatsoever. The answering respondent no. 3 further submits that no information about the alleged Job Work Agreement of the security applicant with respondent no. 2 had ever been furnished to the Lead Bank or any other members of the consortium and, as such, the consortium of banks is not bound by the alleged Job Work Agreement. Admittedly, the property at A-1, Industrial Area, South of GT Road, Ghaziabad, UP is mortgaged with the consortium of banks and all fixed and movable assets, plant and machinery and other assets lying there are hypothecated to the consortium of banks on pari-passu basis. Supporting the case pleaded by respondent no.1 bank, it is contended that for the gross negligence of the security applicant, the recoverability of public money of hundreds of crores rupees ought not to be prejudiced by the unsubstantiated allegations levelled by the security applicant and if the security applicant has truly suffered any loss, it is entitled to recover the same from respondent no.2 by initiating appropriate legal proceedings, but the security applicant is not entitled for release of the stocks of raw material etc. of which the possession has already been taken by the banks on 17th February, 2018. Denying the case of the security applicant on merits, a prayer has been made to dismiss the present SA with costs.

In support of its case, the security applicant has filed evidence affidavit of Mr. Anil Kumar Mishra, its Director, who has reiterated its case as stated in the SA, and has also exhibited documents Exs. AW-1/2 to AW-1/5 (pages no. 100-167), AW-1/6 to AW-1/8, AW-1/10 to AW-1/2, has also marked documents as AW-1/1, AW-1/2, AW-1/5 (pages 32-99), AW-1/6 (page no. 40- 44), AW-1/9 and AW-1/13 to AW-1/17. On the other hand, the respondent no.1 bank has filed evidence affidavit of Mr. RadheyShyamMeena, its Assistant General Manager, and has also exhibited documents as Exs. RW- 1/1 to RW-1/13. Whereas respondent no.2 has filed evidence affidavit of Mr. Y.V. Singh, its Managing Director, and has exhibited documents as Exs. RW- 2/1 to RW-2/5 and RW-2/8 and has also marked documents as RW-2/6 & RW-1/7. Similarly respondent no.3 has filed evidence of RW-3 Mr. Ashok Kumar, its Assistant Vice President and has produced photocopy of Joint Deed of Hypothecation as Mark RW-3/1.

I have heard learned counsel for the parties and have gone through the pleadings and other material on record.

Now the point for consideration is whether the security applicant is entitled to lift the goods of a total quantity of 1137. 620 MT comprising of raw material (Ingot/ Billet) 397.175 MT and finished goods (TMT) 740.445 MT under Section 17 of the SARFAESI Act,2002 as prayed for.

The contention of the security applicant is that it entered into job work agreement with respondent no.2 for converting raw material into finished goods and has been regularly supplying the goods raw material i.e. Ingot/ Billet as per job agreement dated 2nd November, 2015. It further contends that in view of the changes in tax laws i.e. after commencing of the GST, it entered into an amended job agreement dated 25th January, 2017 and while so on 17th February, 2018 the respondent bank had obtained physical possession of the immovable property at A-1, Industrial Area, South of GT Road, Ghaziabad, UP alongwith uncharged goods, which are owned by the applicant Company had requested the respondent bank tode-seal the premises and permit it to lift the stocks as per list attached to the communication dated 21st February, 2018. It is further contended that the security applicant Company again on 23rd February, 2018 requested the respondent bank by fixing the time on 26th February, 2018 at 11 A.M. to lift the stocks owned by it, but the security applicant Company received a letter dated 23rd February, 2018 rejecting its request and, as such, the security applicant is constrained to file the present SA for de-sealing the premises and for permission to lift its stock lying therein.

On the other hand, the respondent bank has resisted the claim of the security applicant contending that the goods do not belong to the security applicant and it appears that there is strategic commercial understanding between the security applicant and respondent no.2 and credit facilities were extended by Dena Bank Consortium and OAs No. 431 of 2017 and No. 893 of 2016 are pending adjudication and the alleged documents qua job work relied upon the security applicant have no legal sanctity and, in fact the goods belong to respondent no.2 and it cannot be believed that excise, sales tax or even GST was not paid qua the alleged goods and the documents relied upon the security applicants are not genuine and not tally with the documents on record and there is a serious doubt as to their correctness in regard to the goods of the security applicant. It is further contended that the goods are hypothecated as per Law and the possession thereof has already been taken and the OAs are pending and, as such, the claim of the applicant bank is to be rejected. The other newly impleaded respondent no.3 namely, M/s ASREC (India) has also resisted the claim of the security applicant on the same lines.

In order to establish its case, the security applicant has filed Job Work Agreement dated 2nd November, 2015 and Amended Job Work Agreement dated 25th January, 2017 as well as the Invoices issued by respondent no. 2 in its favour as Annexures A-3 to A-6. Certificate issued by the Government of India is Annexure A-7. The security applicant has also filed documents in relation to GST as Annexure A-8, its Operational Register as Annexure A-9, Stock Register as Annexure A-10, Representation dated 21st February 2018 as Annexure A-11, communication dated 23rd February, 2018 as Annexure A-12 and A-13, letter dated 26th February, 2018 written by respondent no. 2 to it as Annexure A-14 and proof of payments made by the applicant company for job work to respondent no. 2 as Annexure A-15. In reply, though the hypothecation agreement is filed, but the same is general with regard to the plant and machinery stock in trade and there is no specific document filed by the respondent bank that the goods i.e. raw material and the finished goods claimed by the security applicant is not a job work and that it is purchased by respondent no. 2 Company. Admittedly, respondent no.1 bank has taken possession of the industrial unit on 17th February, 2018. Though the respondent no. 1 bank claims that the documents filed by the security applicant are not genuine, but it has filed stock register of respondent no. 2 company to show that the goods are not of job work, but it has purchased the same from the security applicant company straightway. Though respondent no. 1 bank has denied the nexus in between the security applicant company and respondent no. 2 but the averment made at page no. 3, Para 6, of its interim reply filed vide Diary No. 3287 dated 22nd March, 2018 reveals its admission to the effect that "it is correct that raw material was being supplied by the applicant to the respondent no. 2". Then at page no. 4, Para 7, it is mentioned that "the raw material and finished goods at site are the secured assets of respondent no. 1 qua credit facilities extended in this respect.' Similarly, at page no. 5 in Para 8, it is averred that "The stock register does seem to be a document which just cannot be believed leave alone any support to the case of the applicant." In the same para, it is further mentioned that "infact goods were sold".

If the goods were purchased as contended by respondent no. 1 bank, then there shall be payment of value in addition to the tax prior to the commencement of GST and for payment of GST after the goods for service tax are induced. Now the factory is in the custody of respondent no. 1 bank. The proof of payment of taxes are available with the authorities of the concerned State Government and Central Government, but for the reasons best known to respondent no. 1 bank, it did not choose to obtain any tax return filed by respondent no. 2 company to prove that in fact the good were outright sale by the security applicant company to it and the same were not of job work. Thus, respondent no. 1 bank and the newly added respondent no. 3 M/s ASREC (India) Ltd. have failed to show that it is a case of outright purchase of the stock from the security applicant by respondent no. 2 company and not it is a case of job work. On the other hand, the security applicant has examined its Director, namely, Mr. Anil Kumar Mishra who has exhibited / marked documents as Exs. AW-1/1 to AW-1/15, which are Annexures A-1 to A-15 annexed with the present SA.

Thus, the security applicant by exhibiting the invoices of respondent no. 2 company, stock register and e-way bills issued by the Government of Uttar Pradesh have clearly and categorically established that it used to supply ingot, billet and scrap as raw material to respondent no. 2 company, which after completion of job work, used to supply TMT bars to the security applicant company and the security applicant has been able to establish that the goods of a total quantity of 1137.620 MT comprising of raw material (ingot/billet) 397.175 MT and finished goods (TMT) 740.445 MT are lying in the premises of respondent no. 2 relating to the security applicant.

Though the respondent no.1 bank has filed its evidence and has exhibited report of the Chartered Accountant, inventory and photographs, but it has failed to show that the material was purchase by respondent no. 2 company as contended by it.

Viewed from any angle, the security applicant company has been able to prove its claim over the stock sought to be released from the possession of respondent no. 1 bank. Accordingly, the present Securitisation Application is allowed and the respondent no. 1 bank is directed to de-seal the premises in question and to deliver total quantity of 1137.620 MT comprising of raw material (ingot / billet) 397.175 MT and finished goods (TMT) 740.445 MT to the security applicant Company within one week from today, failing which the Security Applicant Company is entitled to receive the same through the process of the Tribunal. The parties are left to bear their own costs. File be consigned to records."

This order of the DRT had been challenged by Dena Bank as thre lead Bank,which Bank, as noticed already, stood merged with Bank of Baroda.

I have heard counsel for the bank, borrower and the securitisation applicant and have also perused the records of the DRT. Submissions made by the counsel for the parties have also been considered.

From a reading of the impugned order of DRT, submissions made at the bar and perusal of the records of the DRT the undisputed position which emerges is that Dena Bank and some other banks as a consortium of banks had given loan facilities to respondent no.2 M/s Rathi Super Steel Ltd. The re-payment of the loan was secured by way of equitable mortgage of property no. A-1, Industrial Area, South of GT Road, Ghaziabad(UP). In that premises the bank's borrower was carrying on its business of manufacture of steel barsetc. and at the time of sanction of financial facilities all the stocks of raw material etc. lying in the said mortgaged property at that time and which were to come in future also were hypothecated in favour of the banks. In that regard a joint hypothecation agreement dated 12.11.2013 was also executed between the consortium members and the borrower Company. Under that hypothecation agreement Dena Bank was also constituted by the borrower as its attorney to do whatever in the event of default of payment of banks'dues. Since the borrower Company failed to repay the loan money to the lending banks proceedings under SARFAESI Act were initiated and the above referred mortgaged factory premises in Ghaziabad was taken over alongwith plant and machinery as also raw material and finished products etc. on 17.02.2018. At that stage the respondent no.1 started this legal battle claiming that it had entrusted some raw material to banks' borrower for conversion into steel bars etc. which was liable to be released to it since the same was not the hypothecated property of the banks. As noticed above the DRT has accepted that case of respondent no.1 and allowed its S.A.

Learned counsel for respondents 1 and 2 have fully supported the impugned order and the direction given therein to the bank for de- sealing f the factory premises and release of material to respondent no.1 herein(securitisation applicant) as had been prayed for by it in the S.A.

Learned counsel for the appellant however seriously contended that respondents 1 and 2 have colluded with each other to somehow or the other stall the recovery of huge amount of public money to the tune of over five hundred crores. It was contended that the learned DRT had accepted the case of securitisation applicant before it, respondent no.1 herein, in its entirety as gospel truth without even noticing very material pleas raised before it by the bank and has simply brushed them aside without any discussion and reasons. Learned counsel had submitted that before the DRT it had been pointed out that it cannot grant any relief of de-sealing of the mortgaged factory since the same already stood attached on 13.02.2018 by the competent authority under the Prevention of Money Laundering Act,2002(PMLA) and a complaint under Section 5 of the said Act also stood filed before the competent authority for confirmation of the provisional attachment and confiscation etc. In that complaint the defaulting borrower, respondent no.2 herein, as and Dena Bank ware also parties. Thus, counsel submitted, without waiting for the final outcome of that complaint the DRT could not have passed a direction for the de-sealing of attached factory irrespective of whether the raw/material lying therein which was being sought to be released by respondent no.1 herein in its favour claiming the same to be owned by it and not hypothecated in favour of Banks actually was owned by respondent no.1 though the Bank had seriously refuted that claim of respondent no.1.

Significantly, the fact that proceedings under PMLA had been initiated was not controverted either by the counsel for the respondent no.1 or of respondent no.2, defaulting borrower, during the course of arguments. The appellant had placed on record documents pertaining to those proceedings and the same were placed before the DRT also as is evident from the perusal of the record of DRT which was summoned for the disposal of this appeal. Learned counsel also submitted that the learned DRT had also ignored documents placed before it as a part of the complaint case under PMLA which showed that the dealings between the respondents 1 and 2 were old and the relationship of theirs was of a seller of raw material(respondent no.1 herein) and buyer(respondent no.2 herein) and further that in order to secure the payment of price of the raw materialrespondent no.2 had been getting LCs opened in favour respondent no.1(securitisation applicant). All that, submitted counsel, negatived the story of entrustment of raw material to respondent no.2 on job work basis but the learned Presiding Officer of the DRT very conveniently had turned a blind eye to all that material and went ahead to pass a direction for de-sealing of the factory which already stood attached under PMLA provisions whereof prevail over the provisions of SARFAESI Act.

After giving my thoughtful consideration to the submissions made from both sides I find myself persuaded to accept the submissions made by the learned counsel for the appellant that the learned DRT has passed the impugned order completely swayed only by the documents placed before it on behalf of the securitisation applicant as if the material placed on record by the Bank was not even to be considered. The learned DRT was duty bound to refer to the above noted material placed before it from the side of Bank and then to examine the worth of that material. Having not done that a material irregularity and illegality has been committed by the DRT which is sufficient to set aside its final impugned order and to remand back the matter for a fresh order in accordance with law giving due consideration to the material placed on record by the bank with special reference to the proceedings under PMLA whereunder it was being examined whether the mortgaged factory in question which was attached by PMLA authorities and now ordered to be de-sealed by the DRT which direction has the effect of release of the attached property to the defaulting borrower, was a product of crime of money laundering.

This appeal is accordingly allowed and the impugned order of DRT is set aside. The case is remitted back to the DRT for a fresh decision to be given after giving due consideration to the material placed on record by the Bank also.

The DRT shall now take up the S.A. for 'directions' on 28.3.2020 at 2 p.m. and the fresh order shall be passed within two months uninfluenced by the impugned order. Records of DRT shall be sent back before the said date alongwith a copy of the present order. It is needless to state that all the parties shall be heard before passing of the fresh order, It is also clarified that this Tribunal has not gone into the merits of the material relied upon by any of the parties which now will be appreciated again by the DRT keeping in mid the observations made hereinabove.