Invent Assets Securitisation And Reconstruction Pvt. Ltd vs Emtex Industries (I) Ltd

Raj Mani Chauhan, J

This Appeal under Section 18 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred as the "SARFAESI Act") has been directed by the original respondent (hereinafter referred as the "appellant") against the impugned judgment and order dated 12th June, 2012 passed by Mr. P. Govindan, the then learned Presiding Officer (P.O.), DRT-III, Mumbai in S.A. No. 296/2011 (Emtex Industries (India) Limited v. Invent Assets Securitisation and Reconstruction Pvt. Ltd.), whereby the learned Presiding Officer has allowed the aforesaid S.A. filed by the respondents (original applicants). The factual matrix of the case may be briefly, stated as under:

The respondent No. 1 is a private limited company incorporated and registered under the Companies Act, 1956 having its registered office at F/S, MIDC, Badlapur, District Thane, Bombay - 421503 (Maharashtra). The applicant company had been engaged in processing of textile and marketing the same for various agencies for sale. The respondent No. 2 Shri Prakash Makharia and respondent No. 3 Pradeep Makharia are the directors of respondent No. 1. Admittedly, the respondent Nos. 2 and 3 along with one Mr. Pramod Makharia were joint owners of the property being residential land, building and structures standing thereon situated at Plot No. B-12, Part of Plot No. 5/1, Kapole Co-operative Housing Society Limited, JVDP Scheme, C.T.S. No. 844 and Municipal K. Ward No. 8112 (12) and being Part of S. No. 70 of Juhu Village and/or 287 of Vile Parle, Mumbai - 400049 admeasuring 1104.5 sq. yards (hereinafter referred as "secured asset").

The respondent No. 1 in or about January, 2001 had issued 10 lacs (Ten lacs) Preference Shares of the face value of Rs. 100/- each, aggregate nominal value of Rs. 1000/- lacs in favour of erstwhile Unit Trust of India (UTI) a body Corporate constituted under the Unit Trust of India Act, 1963. The respondent Nos. 2 and 3 along with Pramod Makharia stood guarantors in their individual and personal capacity to the preference shares issued by the respondent No. 1 in favour of UTI. They created English mortgage of their immovable properties as referred above by depositing the title deed and other relevant documents of the property with UTI and executed registered mortgage deed in favour of respondents.

In the year 2002, the Unit Trust of India Act was repealed by another enactment namely Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002. In pursuance of the above referred Act, UTI was succeeded by Administrator of a Specified Undertaking of Unit Trust of India (SUUTI) and UTI Trustee Company Private Limited (UTITCPL) of the UTI Mutual Fund (UTIMF). The successor of the erstwhile UTI vide deed of assignment dated 20th August, 2010 transferred all the rights, title and interest in the debt along with the underlying securities, interests and claims arising out of the subscription of the redeemable preference shares referred as above in favour of the appellant, the Invent Assets Securitisation and Reconstruction Pvt. Ltd. a company incorporated under the Companies Act, 1956 and registered as Securitisation and Asset Reconstruction Company pursuant to Section 2(za) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 having its Registered Office at 107, 10th Floor, Jolly Maker Chambers No. 2, 225, Nariman Point, Mumbai-400021. The appellant on the basis of aforesaid deed of assignment became entitled to the redeemable preference shares issued by respondent No. 1.

The erstwhile UTI had already issued recall notice on 11th July, 2002 to the respondent No. 1 calling upon it to pay a sum of Rs. 11,87,39,726.03 (Rupees eleven crores eighty-seven lacs thirty-nine thousand seven hundred twenty-six and paise three only) due as on 30th June, 2002 within 7 days from the date of the receipt of the said notice. But the respondent No. 1 did not pay any amount. The appellant as assignee of the successor of the erstwhile UTI, on 20th July, 2011 issued demand notice under Section 13(2) of the SARFAESI Act to the respondents as well as Shri Pramod Makharia calling upon them to pay an amount of Rs. 54,95,30,375/- along with future interest within 60 days from the date of issuance of the said notice. The respondent No. 1 on 13th September, 2011 sent its reply/objection to the aforesaid notice through its Advocate. The appellant after dealing with the objection sent by the respondent No. 1 sent its reply to the respondent No. 1 on 21st September, 2011. Since the respondents did not pay any amount as demanded by the appellant in its demand notice, therefore, the officer of the appellant took over the symbolic possession of the secured asset on 4th November, 2011 and affixed possession notice on the secured premises. The officer of the appellant got Panchanama prepared on the spot. They also published possession notice in three daily newspapers viz. Economic Times in English, Navbharat Time in Hindi and Nav Shakti in Marathi.

The respondent being aggrieved by the measures taken by the appellant under Section 13(4) of the SARFAESI Act, whereby it had taken over the symbolic possession of the secured assets filed Appeal/Securitisation Application No. 296/2011 under Section 17 of the SARFAESI Act. The respondents in the aforesaid S.A. have challenged the measures taken by the appellant under Section 13(4) of the SARFAESI Act mainly on the following grounds.

(i) As provided under Section 13(2) of the SARFAESI Act, the appellant can issue demand notice only, after classifying the account of the borrower as Non-Performing Asset (NPA). The appellant has not classified the account of respondent No. 1 as NPA and moreover, same cannot be classified as such. Therefore, the demand notice issued by the appellant under Section 13(2) of the SARFAESI Act is illegal. On the basis of such notice, no further measures can be taken by the appellant under Section 13(4) of the SARFAESI Act.

(ii) The amount claimed by the appellant is not "debt" within the meaning of Section 2(ha) read with clause Section 2(g) of the RDDBFI Act, 1993.

(iii) The appellant is not a secured creditor and it has got no security interest over the secured asset which can be enforced under the SARFAESI Act.

(iv) The appellant is shareholder of redeemable preference shares issued in favour of erstwhile UTI which can redeemed out of the profits of the respondent No. 1 company as provided under Section 80 of the Companies Act. If the company is not earning any profit, the fresh shares can be issued in lieu of redemption. The appellants therefore cannot proceed under the SARFAESI Act to recover the amount claimed in the notice.

(v) The respondent No. 1 company is declared as sick industrial unit by the BIFR, therefore, the appellant cannot proceed under the SARFAESI Act to recover the amount payable under the redeemable preference shares.

(vi) The redeemable preference shares which were subscribed by the erstwhile UTI, forms capital of the company cannot be termed as "debt" or "financial assistance". Therefore, the appellant cannot proceed under the SARFAESI Act for recovery of the amount payable on the maturity of the redeemable preference shares.

The respondents in the aforesaid in S.A. had sought for the following reliefs:

(a) The impugned possession notice dated 4th November, 2011 and the impugned public notice of possession dated 4th November, 2011 may please be quashed and set aside;

(b) The proceedings initiated by the respondent under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2003 pursuant to the impugned notice of possession dated 4th November, 2011 may please be quashed and set aside;

(c) The proceedings initiated by the respondent under the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 pursuant to the said impugned notice of possession dated 4th November, 2011 may please be stayed;

(d) Pending the hearing and final disposal of the application the proceeding initiated by the respondent under the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 pursuant to the impugned notice of possession dated 4th November, 2011 may please be stayed.

The appellant resisting the aforesaid S.A. filed by the respondents, filed affidavit of Gopi K. Sharma, its Senior Vice-President and the Financial Officers in reply. The deponent has stated that the appellant company is incorporated under the Companies Act and registered as Securitization and Reconstruction Company, pursuant to Section 3 of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and also secured creditor and Financial Institutions under Section 2(ha) of RDDBFI Act, 1993. The respondents/applicants approached to the erstwhile UTI at Mumbai for sanction of financial assistance by way of subscription to 10 lacs 0% redeemable preference shares of face value of Rs. 100/- each and aggregate nominal value of Rs. 1000/- lacs. UTI accepted their request and subscribed to redeemable preference share vide its sanction letter dated 22nd January, 2011 wherein the respondent Nos. 2 and 3 as well as one Shri Framed Makharia stood guarantors in their individual and personal capacity. They also mortgaged their immovable property i.e. secured asset in favour of the UTI to secure the repayment of the amount payable on the maturity of the redeemable preference shares. The UTI vide its aforesaid sanction letter had conveyed the terms and conditions for sanction of subscription of redeemable preference shares governing the rights and liabilities of the parties. The respondents in pursuant to the aforesaid sanction letter entered into subscription agreement on 27th January, 2011 which inter alia provides as follows:

(i) The respondent No. 1 shall issue Preference Share Certificate in such lots as may be required by the Erstwhile UTI. If so required by the Erstwhile UTI, the respondent No. 1 shall sub-divide or consolidate the certificates at any time without payment of any fee.

(ii) The respondent No. 1 has agreed to issue to the erstwhile UTI and the erstwhile UTI subscribed to the respondent No. 1's preference shares of the nominal value of Rs. 10 crores.

(iii) The respondent No. 1 shall allot fully paid up Preference Shares on the date of receipt of each disbursement from the Erstwhile UTI.

(iv) The preference share shall be redeemed in three annual installments of 30% and 40% respectively beginning from 31st March, 2002.

(iv) The preference share shall be redeemed in three annual installments of 30% and 40% respectively beginning from 31st March, 2002.

(v) Along with each installment of Redemption, the Redemption Premium would be payable so as to give the Erstwhile UTI a return of not less than 15% per annum annually on 0% preference shares aggregating to Rs. 10 crores or outstanding thereof at the end of each financial year during the tenure of the Preference Shares. In case of shortfall, higher redemption premium shall be paid along with installment redeemable at the end of financial year so as to provide the minimum rate of return as stated above.

(vi) The first installment of redemption premium shall be payable from the date of allotment/subscription upto 31st March, 2002 and subsequently every 31st March. The interest of the last broken period shall be payable together with the last installment of redemption of the Preference Shares.

(vii) The respondent No. 1 agreed that the Erstwhile UTI making an application for Rs. 10 crores face value of Preference Shares, their commitment to subscribe to the Preference Share will be deemed to have been fully discharged and the respondent No. 1 shall issue such allotment letter as may be deemed necessary.

(viii) In case of default by the appellant No. 1 in redemption of preference shares payment of redemption premium, additional interest, liquidated damages, penal interest and all other monies the UTI shall be entitled to recover the same by realizing/enforcing the security created pursuant to the following documents executed by the appellant No. 1 in favour of UTI--

(A) Personal guarantee of respondent Nos. 2 and 3 along with Mr. Pramod Makharia.

(B) Legal English Mortgage of residential plot and building situated at Village Vile Parle West, Mumbai.

The dependent has further stated that the respondent Nos. 2 and 3 along with Pramod Makharia signed and executed unconditional and irrevocable deed of guarantee on 27th January, 2001. The guarantors by the aforesaid guarantee had unconditionally guaranteed to the UTI due redemption of the preference share, payment on redemption of premium, additional interest, liquidated damages, penal interest on other monies payable to the appellant No. 1. The respondent Nos. 2 and 3 along with Pramod Makharia had agreed that in the event of default on the part of the respondent No. 1, the payment, repayment, redemption of any preference share, the claimed money referred to or in the even of default on the part of respondent No. 1 to comply with or perform with any terms and conditions contained in subscription agreement, the respondent Nos. 2 and 3 along with Pramod Makharia shall upon demand forthwith pay to UTI without demur all the claims, monies payable by the respondent No. 1 under the subscription agreement. The respondent Nos. 2 and 3 and Mr. Pramod Makharia in pursuant to the aforesaid terms and conditions executed deed of guarantee dated 27th January, 2001. The respondent No. 1 deposited letter dated 31st January, 2001, Original agreement of sale dated 16th June, 2001, original share certificate No. 33 with UTI. The Undertaking-cum-Indemnity dated 27th January, 2001 was signed and executed by the respondent Nos. 2, 3 and Pramod Makharia in favour of the UTI.

The deponent has further stated that the respondent No. 1 neglected to make payment of redemption premium, interest and other charges due in respect of the preference share and redemption, of preference share on due dates. The respondent No. 1 also committed various breaches of other terms and conditions of the said subscription agreement. The UTI, therefore, as provided in the Subscription Agreement became entitled to recall the entire principal amount of the preference share and demand the same together with all redemption premium, interest and other charges, dues in respect thereof from the respondents and accordingly, UTI on 11th July, 2001 issued recall notice, calling upon the respondent No. 1 to pay a sum of Rs. 11,87,39,726.03 within seven days from the date of receipt of notice. The respondent No. 1 in spite of service of recall notice, failed to make any payment.

The deponent has further stated that the Reference filed before the BIFR came to be dismissed and rejected on 4th October, 2006. After the said reference was rejected the UTI on 19th October, 2006 against issued a recall notice to the respondents calling upon them to pay an aggregate sum of Rs. 27,02,12,800/- due as on 301h September, 2007 within seven days from the receipt of the said notice. The respondents despite service of notice, did not pay any amount as demanded by the UTI.

The deponent further stated that the Authorized Officer of the appellant assignee issued demand notice dated 20th July, 2011 under Section 13(2) of the SARFAESI Act to the respondents as well as Mr. Pramod Makharia to pay a sum of Rs. 54,954,30,376/- along with future interest within 60 days from the date of receipt of notice. The respondents through their Advocate sent reply to the aforesaid notice issued by the Authorized Officer of appellant, wherein they had denied their liability and further alleged that the said notice is not tenable in view of proviso to Sub-section (1) of Section 15 of the Sick Industrial Companies (Special Provisions) Act (SICA) as a reference, bearing No. 305/2002 is pending before BIFR. The appellant had replied to the aforesaid objection filed by respondent No. 1 against the demand notice issued by its Authorized Officer under Section 13(2) of the SARFAESI Act. Since the respondent No. 1 did not make any payment, therefore, the Authorized Officer of the appellant on 4th November, 2011 took over symbolic possession of the secured asset and prepared Panchanama. He affixed the possession notice on the secured asset and prepared Panchanama. The Authorized Officer of the appellant published the possession notice in three daily newspapers, namely Economic Times (English), Navbharat Times (Hindi) and Navshakti (Marathi). The deponent has further stated that the appellant being secured creditor is entitled to enforce its security interest by proceeding under the SARFAESI Act. The measures taken by the appellant are in accordance with the statutory provisions under the Act as well as Rules framed thereunder. The appellant has sought for dismissal of the S.A. filed by the appellant.

The parties in support of their contentions filed affidavit and documentary evidence.

The learned Presiding Officer formulated the following points for determination:

(i) whether the applicants prove that the preference shares which were issued by the applicant No. 1 to the erstwhile UTI is not recoverable as debt and that the respondent, who is the assignee of the erstwhile UTI is not entitled to proceed against the Applicant under the SARFAESI Act?

(ii) whether the Applicants prove that the property in question is not secured asset and the respondent cannot proceed against the secured assets under the SARFAESI Act?

(iii) whether the respondent proves that the respondent cannot proceed against the secured assets under the SARFAESI Act?

The learned Presiding Officer mainly concentrated on issue No. 1 and held that the appellant being shareholder is not creditor of respondent No. 1. The shares subscribed by UTI were capital of respondent No. 1 company. Therefore, the amount payable by respondent No. 1 on Redeemable Preference Shares is not debt. The preference shares can be redeemed only out of the profit of respondent No. 1 company, as provided under Section 80 of the Companies Act. If the company is unable to earn any profit, it can issue shares towards Redeemable Preference Shares. The appellant, therefore, cannot be said to be secured creditor and it cannot proceed under the SARFAESI Act to recover the amount payable as debt. The learned Presiding Officer accordingly, decided Question Nos. 1 and 2 in the affirmative and Question No. 3 in the negative. The learned Presiding Officer consequently, held that the appellant, neither can issue demand notice under Section 13(2) of the SARFAESI Act nor can proceed further under Section 13(4) of the SARFAESI Act to take any measures provided therein. The learned Presiding Officer in view of the aforesaid finding allowed the S.A. filed by the appellant vide impugned judgment and order dated 12th June, 2012.

The appellant being aggrieved by the aforesaid judgment and order passed by the learned Presiding Officer has filed the present appeal.

The respondents have opposed the appeal.

Heard the learned Counsel for the parties and perused the materials available on record.

From a perusal of the impugned judgment and order passed by the learned Presiding Officer, it appears that the learned Presiding Officer has observed that the subscription of Redeemable Preference Shares by the erstwhile UTI of the respondent No. 1 company was in the nature of investment. The Redeemable Preference Shares issued by respondent No. 1 in favour of the appellant will be treated as its capital. The learned Presiding Officer has relied on the law down by the Hon'ble High Court of Andhra Pradesh in a case Lalchand Surana v. Hyderabad Vanaspathy Ltd., 1990 Company Cases 415, decided by the Hon'ble High Court of Andhra Pradesh, wherein the Hon'ble Court has held that the shareholder of the Redeemable Preference Shares does not automatically assumes, the character of a "creditor". The reason is that his share can be re-deemed only out of the profit of the company, which would otherwise be available for dividend or by fresh issue of shares. This is the limitation which is not applicable to an ordinary creditor. Therefore, the holding of Redeemable Preference Shares even where the shares are not redeemed by the company at the appropriate time continues to be share-holder. They do not become creditor and cannot, therefore, apply for winding-up of the company, held that erstwhile UTI being subscriber of redeemable shares was a share holder of the respondent No. 1 and not the creditor.

The learned Presiding Officer considered the meaning of 'debt' as defined under Section 2(g) of the RDDBFI Act. The learned Presiding Officer was of the view that the amount payable under the Redeemable Preference Shares does not fall within the meaning of 'debt' as defined under Section 2(g) of RDDBFI Act. The learned Presiding Officer further observed that the Redeemable Preference Shares on their maturity can be redeemed out of the profit of the company or by issuing fresh shares in lieu of the amount payable on the maturity of the Redeemable Preference Shares, as provided under Section 80 of the Companies Act. The learned Presiding Officer, therefore, held that the amount claimed by the appellant, who is the assignee of the successor of the erstwhile UTI, is not a secured creditor and the amount claimed by it is not debt. Therefore, the appellant cannot proceed under the SARFAESI Act to recover the amount payable under the Redeemable Preference Shares.

The learned Counsel for the appellant contended that the learned Presiding Officer did not appreciate the point in issue on the basis of the materials available on record. On the other hand, the learned Presiding Officer had swayed away with an article published, relating to Redeemable Preference Shares or debt, in Indian perspective, wherein a Circular dated 8th June, 2007 issued by Reserve Bank of India (RBI) had been dealt with, while the learned Presiding Officer was expected to consider the point in issue on the basis of materials available on record. The learned Counsel contended that if the UTI had simply subscribed the Redeemable Preference Shares of respondent No. 1 company, it would have been a case of investment and the subscriber, UTI could not be said to be a creditor and the amount invested by the UTI, by way of subscription of the Redeemable Preference Shares, could not be termed as debt. Consequently, the amount payable on maturity of the Redeemable Preference Shares, could not be treated as debt. In that situation, UTI could be entitled to the amount payable of the maturity of the Redeemable Preference Shares out of the profit on the company or by issuing fresh shares in lieu of the amount payable on the maturity of the Redeemable Preference Shares, as provided under Section 80 of the Companies Act. But in this case, the situation is otherwise.

The learned Counsel contended that in the case in hand, the respondent No. 1 had approached UTI for seeking financial assistance. UTI accepted its proposal for extending financial assistance, by way of subscription of Redeemable Preference Shares. As agreed by the parties, they executed subscription Agreement on 27th January, 2001. From a perusal of the Subscription Agreement, entered into by the erstwhile UTI and respondent No. 1, it appears that the terms and conditions in the Subscription agreement inter alia, provided that the company shall execute all relevant documents and create security of the said Redeemable Preference Shares as stated above within a period of three months. However, the creation of English mortgage of residential land and building situated at Vile Parle West, Mumbai is pre-disbursement condition.

From a perusal of the copy of the Resolution of the Board of Directors of respondent No. 1, Emtex Industries (I) Limited dated 23rd January, 2001, it appears that it is mentioned therein that the Chairman further informed the Board that pursuance to the applications made by the company, UTI vide its letter dated 22nd January, 2001 (sanction letter) has in principle agreed to provide financial assistance by way of subscription -- 0% preference shares of the face value of aggregating to Rs. 10 crores on the term and conditions detailed in the sanction letter.

The Chairman further informed the Board that as per sanction letter of UTI, the company has to execute demand promissory note, letter of continuity, undertaking, personal guarantee, and creates legal mortgage of residential land and building situated at Vile Parle West, Mumbai. The learned Counsel contended that Clause 2.1 of the Subscription Agreement clearly indicated that erstwhile UTI had subscribed the shares by way of financial assistance. The respondent No. 1 company had sought for financial assistance from UTI. Article 4 of the Subscription Agreement provides that in case of default by the company in redemption of preference shares, payment of redemption premium, additional interest, liquidated subscriber shall be entitled to recover the same by realizing/enforcing the security created pursuant to the following documents executed by the company in favour of the subscriber.

The learned Counsel contended that the aforesaid provision in the subscription agreement clearly indicates that UTI had subscribed the redeemable preferential shares by way of financial assistance of respondent No. 1 company which was secured by the personal guarantee of the guarantors and English mortgage to be executed by respondent Nos. 2 and 3 along with one Shri Pramod Makharia. The erstwhile UTI was, therefore, secured creditor as defined under Section 2(za) of the SARFAESI ACT. Now the appellant as assignee for the successor of UTI is also secured creditor and can enforce security interest under the SARFAESI Act. The learned Counsel contended that Clause 10 of the Deed of Mortgage executed by respondent Nos. 2 and 3, and one Shri Pramod Makharia provides that the mortgagor has now agreed to execute these present as security for payment of the said mortgage debt by the said company. The erstwhile, UTI wrote a letter on 1st July, 2002 to respondent No. 1 mentioning financial assistance by way of subscription to 0% Redeemable Preference Shares on private placement basis.

The learned Counsel contended that the appellant before this appellate Tribunal has filed number of documents, which includes letters written by respondent No. 1 to erstwhile, UTI as well as Balance Sheets of respondent No. 1 for the years 2002-03, 2003-04, 2003-05, wherein the amount payable under Redeemable Preference Shares have been shown as secured by personal guarantee of the Directors of respondent No. 1 company and English mortgage created by respondent Nos. 2 and 3, and one Shri Pramod Makharia. The respondent No. 1 Emtex Industries (i) Ltd. wrote a letter to the erstwhile, UTI on 151h January, 2001, drawing the attention of Mr. S.K. Shah, Chief Manager for corporate loan for Rs. 1.000/- lacs. In another letter dated 12th May, 2008 written by the respondent No. 1 Company to the Administrator of a Specified Undertaking of Unit Trust of India, UTI Towers, Bandra Kurla Complex, Bandra, Mumbai - 400051, it appears that this letter was written by respondent No. 1 company in reference with the discussions for settlement of their dues, relating to the Redeemable Preference Shares of the company. All the letters written by the company, to the erstwhile UTI clearly demonstrates that the amount payable on maturity of the Redeemable Preference Shares was treated by respondent No. 1 itself as debt/loan/financial assistance.

The learned Counsel contended that it is undisputed that the Redeemable Preference Shares issued by respondent No. 1 company were secured by creation of English mortgage as well as personal guarantee of the guarantors, the respondent Nos. 2 and 3, and one Shri Pramod Makharia.

The learned Counsel contended that the Hon'ble High Court or Calcutta in case of Hindustan Laminators Pvt. Ltd. v. Central Bank of India, (1998) 2 C.A.L.L.T. 281, has held that there cannot be a mortgage without debt, while there can be a debt without mortgage, since the amount of Redeemable Preference Shares was secured by creation of mortgage. Therefore, it was a debt.

The learned Counsel relying on case Jupiter Nevesh Pvt. Ltd. v. Administrator of Specified Undertaking, IV (2006) BC 165, decided by this Appellate Tribunal contended that this Appellate Tribunal in this case had taken a view where the Financial Institution had filed Original Application for recovery of the amount payable on maturity of the Redeemable Preference Shares, it will be 'debt'.

The learned Counsel contended that the learned Presiding Officer without dealing with the entire documentary evidence available on record has held that the amount claimed by the appellant was not a debt. Therefore, the appellant is not a secured creditor and it cannot proceed under the SARFAESI Act to recover the amount as claimed in the above notice. The finding of the learned Presiding Officer is not based on proper appreciation of documentary evidence on record and legal point involved in the matter. The impugned finding of the learned Presiding Officer is, therefore, bad in the eyes of law and liable to be quashed and the Appeal filed by the appellant deserves to be allowed.

Per Contra, the learned Counsel for the respondent No. 1 contended that the appellant claims to be assignee of the Redeemable Preference Shares from the successor of the erstwhile UTI. The Redeemable Preference Shares is nothing, but capital of the company. The respondent No. 1 is neither a borrower nor the amount invested by the erstwhile UTI, by way of subscription of preference shares is "debt" or financial assistance as defined under the SARFAESI Act. Section 80 of the Companies Act, 1956, provides a specific provision, as to how the redeemable preference shares can be redeemed. The learned Counsel contended that Section 80 of the Companies Act provides that no such share shall be redeemed, except out of the profits of the company, which could otherwise be available for a dividend or out of the profits of fresh issue of shares made for the purpose of redemption. No such share shall be redeemed, unless they are fully paid up. The premium, if any, payable on the redemption shall have been provided for out of the profits of the company or out of the company's share premium account before the shares are redeemed. In view of the provision of Section 80 of the Companies Act, the Redeemable Preference Shares can only be redeemed/repaid out of the profits of the company or by issuing fresh shares made for the purpose of redemption out of the profits of the company. Since respondent No. 1 company is not making any profit and did not have any capital reserved for redemption, therefore, the company could not redeem the shares. The appellant being share holder cannot proceed under the SARFAESI Act to recover the amount payable on the maturity of the redeemable shares as debt.

The second contention of the learned Counsel for the respondent No. 1 is that respondent No. 1 company is before Board for Industrial and Financial Reconstruction (BIFR), therefore 0% Redeemable Preference Shares issued in favour of the erstwhile, UTI, could not and cannot be redeemed or repaid. The appellant therefore, cannot proceed under the SARFAESI Act. The learned Counsel in support of his arguments, has placed reliance on cases Lalchand Surana v. Hyderabad Vanaspathy Ltd. (supra) decided by the Hon'ble Court of Andhra Pradesh and Globe United Engineering and Foundry Co. Ltd. v. Industrial Finance Corporation of India Ltd., (1974) 44 CC 347 (Delhi) decided by the Hon'ble High Court of Delhi.

The third contention of learned Counsel is that the subscription of Redeemable Preference Shares by erstwhile, UTI was by way of investment and not by way of financial assistance. Therefore, the appellant who is the assignee of the successor of erstwhile, UTI does not fall within the ambit of secured creditor. The appellant therefore, cannot enforce a security interest under the SARFAESI Act.

The fourth contention of the learned Counsel is that although respondent No. 1, erstwhile, UTI has entered into Subscription Agreement which provides for creation of mortgage and enforcement of such mortgage. But such agreement being contrary to Section 80 of the Companies Act, is hit by Section 23 of the Indian Companies Act, 1956 as such the same is void. Therefore, on the basis of such agreement, the appellant cannot enforce security interest upon the mortgagor's property and cannot proceed under the SARFAESI Act.

The fifth contention of the learned Counsel is that the erstwhile, UTI has already filed Original Application No. 318/2002 in DRT-I, Mumbai, for recovery of the amount payable on the maturity of the Redeemable Preference Shares, but the Suit was dismissed by DRT. Therefore, the appellant cannot proceed under the SARFAESI Act to recover the same amount.

The sixth contention of the learned Counsel for the respondent is that it is undisputed that the reference of respondent No. 1 is pending before the BIFR. Therefore, the appellant cannot proceed under the SARFAESI Act, in view of the provision under Section 22 of the Sick Industrial Companies (Special Provisions) Act (SICA).

The seventh contention of the learned Counsel is that respondent No. 1 had replied to the demand notice sent by the appellant under Section 13(2) of the SARFAESI Act, which was not dealt with by the appellant. The appellant did not communicate the decision taken by it on reply of respondent No. 1. Therefore, the action taken by the appellant under the SARFAESI Act is not in accordance with the provisions under Section 13(3A) of the SARFAESI Act.

The last submission of the learned Counsel for the respondent is that the appellant had illegally taken over the symbolic possession of the secured assets without following the statutory provisions. Therefore, the measures taken by the Authorized Officer under Section 13(4) of the SARFAESI Act is illegal.

The learned Counsel contended that the learned Presiding Officer has dealt with the issue, as to whether the amount claimed by the appellant is debt and the appellant is secured creditor. He on the basis of documentary evidence as well as keeping in view the definition of "debt" as defined under the RDDBFI Act, 1993 as well as the law laid down by the Hon'ble High Court of Andhra Pradesh in case, Lalchand Surana v. Hyderabad Vanaspathy Ltd. (supra) has held that the amount claimed by the appellant is not a debt and the appellant is not a secured creditor. The impugned judgment and order passed by the learned Presiding Officer does not suffer from error which does not call for any interference.

Considered the rival submission advanced by the learned Counsel for the parties.

From a perusal of the impugned judgment and order passed by the learned Presiding Officer, it appears that the learned P.O. relying on the judgment rendered by the Hon'ble High Court of Andhra Pradesh in case Lalchand Surana v. Hyderabad Vanaspathy Ltd. (supra) has held that the holders of Redeemable Preference Shares are not creditors because the shares can be redeemed only out of the profit of the company which can otherwise be available for dividend or fresh issue of shares.

In the above referred case before the Hon'ble Court, the petitioners who were the share holders of Hyderabad Vanaspathy Ltd., a Public Limited Company, approached the Hon'ble Court by filing Writ Petition for winding up of the company under Section 433(e) of the Companies Act. The Hon'ble Court after going through the relevant provisions under the Companies Act held that the appellants were not creditors rather they were share holders.

But the facts of the present case are not covered by the facts of the case referred before above. In the present case, it was not a mere subscription of the Redeemable Preference Shares of the company, rather there had been Subscription Agreement between the parties i.e. subscriber erstwhile, UTI and respondent No. 1. As provided in the Subscription Agreement, the company had to furnish guarantee as well as create English mortgage of the property for repayment of the amount payable on the maturity of the Redeemable Preference Shares. The respondent company had approached the UTI, seeking financial assistance. The copy of the Resolution of the Board of Directors of respondent No. 1 company dated 23rd January, 2001 shows that erstwhile UTI had accepted the offer of the company for providing financial assistance. The documents as referred by the learned Counsel for the appellant, clearly reflects that the amount payable on the maturity of the Redeemable Preference Shares was treated by respondent No. 1 as financial assistance. Had it been a case of simple investment by erstwhile, UTI by way of subscription of Redeemable Preference Shares, the case would have been squarely covered by the case of Lalchand Surana v. Hyderabad Vanaspathy Ltd. (supra) but this is not a case of simple investment.

In case of Jupiter Nevesh Pvt. Ltd. v. Administrator of Specified Undertaking (supra), the facts were that the appellant had approached the respondent Administrator of a Specified Undertaking of Unit Trust of India for financial assistance, which was accepted by the respondent, by way of subscribing Redeemable Preference Shares of the appellant company. When the appellant did not pay the amount payable after maturity of the Redeemable Preference Shares, the respondent filed Original Application before DRT-I, Mumbai, for recovery of dues against the appellant claiming the amount as debt. The appellant moved an application before the DRT raising preliminary objection that the amount claimed by the respondent, does not fall within the definition of debt, as defined under Section X2(g) of the RDDBFI Act. Therefore, the Original Application is liable to be dismissed. The learned Presiding Officer rejected the aforesaid Original Application filed by the appellant observing that the amount claimed by the respondent is debt. The appellant thereafter challenged the order passed by the learned Presiding Officer by filing Appeal before this appellate Tribunal. The appellate Tribunal upheld the finding of the learned Presiding Officer and held that the amount claimed by the financial institution as per allegation made in the Original Application prima facie, appears to be debt. The DRT, therefore, has jurisdiction to entertain the Original Application.

In case of Hindusthan Laminators Pvt. Ltd. v. Central Bank of India (supra), the Hon'ble High Court of Calcutta has observed that there can be a debt without mortgage, but there cannot be a mortgage without debt. In this case, admittedly, the respondent Nos. 2 and 3 along with one Shri Pramod Makharia had created English mortgage of their property to secure the amount payable on maturity of the Redeemable Preference Shares in favour of the erstwhile UTI. The amount claimed by the appellant in view of the facts of the case, cannot be said to be simple investment, rather the same has characteristics of a debt? From a perusal of the impugned judgment and order passed by the learned Presiding Officer, it appears that the learned Presiding Officer has held that the Redeemable Preference Shares are the capital of the company. Therefore, the amount payable on maturity of Redeemable Preference Shares, is not a "debt". The Presiding Officer did not properly appreciate the documents wherein respondent No. 1 has admitted that it had approached to erstwhile, UTI for financial assistance. The Board of Directors in their meeting accepted that it was a financial assistance extended by erstwhile, UTI. There had been a Subscription Agreement between erstwhile, UTI and respondent No. 1. As per the terms provided in the Subscription Agreement, the respondents were required to execute/create English mortgage of their property and furnish guarantee too which was done by the respondents. The respondent No. 1 in the several letters, has in so many words accepted the amount payable on maturity of the Redeemable Preference Shares as dues. The respondent No. 1 had approached UTI for One Time Settlement (OTS). All these documents were not properly considered by the learned Presiding Officer and moreover, the appellant has filed as many as 14 documents before this appellate Tribunal. These documents reflects that the respondent No. 1 has accepted the amount payable on the maturity of the Redeemable Preference Shares are dues and in some of the documents, respondent No. 1 has admitted the amount claimed by the appellant as loan. The impugned judgment and order passed by learned Presiding Officer is not based on proper appreciation of the documentary evidence on record. The documents filed by the appellant at this stage, are also required to be considered by the learned Presiding Officer. Moreover, the learned Presiding Officer has not dealt with all the contentions raised by respondents on merit, rather he has allowed the S.A. mainly on the ground that the amount claimed by the appellant is not a 'debt'. The documents filed by the appellant at the appellate stage also require to be considered for adjudication of the issue, as to whether the amount claimed by the appellant is 'debt'? and the appellant as assignee is secured creditor and it can proceed under SARFAESI Act to recover its dues. The impugned judgment and order passed by the learned Presiding Officer therefore, is liable to be quashed and the matter requires to be remanded back to the learned Presiding Officer, with direction that the learned Presiding Officer after appreciation of the documentary evidence available on record, will decide the S.A. of fresh, dealing with all the contentions raised by both the parties.

ORDER

The Appeal is, therefore, allowed and the impugned judgment and order dated 12th June, 2012 passed by the learned Presiding Officer in the S.A. No. 296/2011 [Emtex Industries (India) Limited v. Invent Assets Securitization and Reconstruction Pvt. Ltd.] is set aside and the matter is remanded back to the learned Presiding Officer, with a direction that the learned Presiding Officer after appreciation of the documentary evidence available on record, will decide the S.A. afresh dealing with all the contentions raised by both the parties, after hearing their Counsel.

The parties will appear before the DRT on 10th February, 2014 for hearing of the S.A.