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Judgment
P. Jyothimani, J.—This writ petition is directed against the resolution passed by the Executive Committe of the Central Board of State Bank
of India, namely, the first respondent dated 02.12.2005 for sale to ARCIL the financial assets in so far as it relates to the petitioner M/s. Sri Ranga
Industries and his family held company M/s. Llasar Flow Controls Pvt. Ltd. stated as Item Nos. 11 and 12 to the Annexure to the said resolution.
The petitioner has availed a financial facility of about Rs. 64 lacs in the form of term loan, working capital finance and cash credit facility from the
first respondent State Bank of India in the year 1982. The petitioner''s closely associated company, namely, M/s. Llasar Flow Controls Pvt. Ltd.,
has also availed financial facility of about Rs. 56 lacs from the first respondent State Bank of India in the year 1986. According to the petitioner, he
has been repaying promptly the amount in respect of both the loans to the Bank upto 1989. However, due to certain practical difficulties, namely,
the steep rise in the cost of raw materials, the petitioner was unable to continue the repayment. According to the petitioner, the liability as on
27.12.1990 of the petitioner company as per the books of the first respondent was Rs. 77.80 lacs and his associated company was Rs. 72.77
lacs. The first respondent Bank has instituted a Civil Suit bearing O.S. No. 72 of 1991 on the file of Sub-Court, Coimbatore on 03.2.1991. After
the Debt Recovery Tribunal was constituted in Coimbatore City, the said suit was transferred to the Debt Recovery Tribunal and renumbered as
T.A. No. 2038 of 2002 and the same is pending. The said application pending before the Debt Recovery Tribunal relates to the claim of the first
respondent Bank against both the companies as stated above.
It is the further case of the petitioner that the petitioner''s group company, namely, Llasar was referred to BIFR and ultimately, the AIFR has
recommended winding up of the said company and the assets have been sold by M/s. Tamil Nadu Industrial Investment Corporation Ltd., in
respect of the amount due to them. Therefore, according to the petitioner, the security, which has been given to the first respondent Bank by the
said Llasar Flow Controls Private Limited as a second charge becomes inoperative by the action taken by TIIC. It is the further case of the
petitioner, the petitioner has approached the first respondent Bank for one time settlement and based on the agreement, the petitioner has paid a
sum of Rs. 2.50 lakhs to the first respondent Bank on 15.3.2005. According to the petitioner, the first respondent Bank has accepted for Rs. 50
lakhs as repayment under one time settlement scheme. The petitioner to show his bonafide, has paid the sum of Rs. 2.50 lakhs as part payment of
the one time settlement. It is not in dispute that the first respondent has returned the said amount on 18.11.2005. The case of the petitioner is that
even though the proposal of one time settlement was pending between the petitioner the first respondent Bank, the first respondent has passed the
impugned resolution by which the rights of the first respondent Bank has been assigned to the second respondent, namely, The Asset
Reconstruction company (India) Limited as per Section 5 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 (hereinafter referred to as ''SARFAESI Act'').
The petitioner''s case is that the impugned resolution by which the rights of the first respondent Bank was assigned to the second respondent is
malafide and according to the petitioner when once the dispute is pending before the Debt Recovery Tribunal, which is initiated by the first
respondent Bank itself, in all fairness the first respondent Bank ought to have approached the Debt Recovery Tribunal before entering into such an
agreement with the second respondent on 2.12.2005. It is also not in dispute that as per the resolution passed on 2.12.2005, the second
respondent had stepped into the shoes of the first respondent by acquiring the rights of the first respondent against the petitioner. In that stage, the
present writ petition has been filed along with an interim application seeking stay of the impugned resolution.
Learned single Judge of this Court by an order dated 16.3.2007 in WPMP No. 44088 of 2005 has granted interim stay on the basis that the
property mentioned as item Nos. 11 and 12 were sold by the first respondent Bank for a sum of Rs. 40 lakhs, while the petitioner himself was
willing to pay a sum of Rs. 54 lakhs. As against the said interim order, the first respondent Bank has filed an appeal in Writ Appeal No. 662 of
2007. The Honourable First Bench of this Court disposed the said writ appeal by an order dated 27.4.2007 by relying upon the judgment of the
Supreme Court in the case of Transcore Vs. Union of India (UOI) and Another, wherein the Supreme Court has held that Section 5 as well as
Section 9 of the SARFAESI Act empowers the Bank to enter into such an agreement with securitisation bank because the basis of the Act itself is
for recovery of the amount in a quick manner. In that judgment, the Supreme Court held as follows:
The NPA Act proceeds on the basis that security interest vests in the Bank/FI. Sections 5 and 9 of the NPA Act is also important for preservation
of the value of the assets of the Banks/FIs. Quick recovery of debt is important. It is the object of the DRT Act as well as NPA Act. But under
NPA Act, authority is given to the Banks/FIs, which is not there in the DRT Act, to assign the security interest to securitisation Company/asset
reconstruction company. In cases where the borrower has bought an asset with the finance of the Bank/FI, the latter is treated as a lender and on
assignment the securitisation Company/asset reconstruction Company steps into the shoes of the lender Bank/FI and it can recover the lent
amounts from the borrower.
The Division Bench has also referred to Section 13 of the SARFAESI Act holding that the purpose of Section 13 is for recovery of amount by
non-adjudicatory process and also held that the Act deal with the rights of the secured creditors like that of the first respondent Bank. Accordingly,
the Division Bench of this Court has upheld the resolution passed by the first respondent Bank and set aside the order of interim stay granted by
this Court by a learned single Judge.
on further appeal filed by the petitioner before the Supreme Court in C.C. No. 9861 of 2007, the Supreme Court by an order dated
12.10.2007 while dismissing the petition, has however observed that the Division Bench while disposing of the matter has not decided the fate of
the pending writ petition and directed the matter to be sent to the learned single Judge for a decision. The order of the Supreme Court dated
12.10.2007 reads as follows:
Delay condoned.
We find no merit in the Special Leave Petition. It stands dismissed. There is no error in the reasoning of the impugned order. However, in this case,
a peculiar situation has arisen. The Division Bench of the High Court has disposed of the matter on merits without indicating the effect of its order
on the pending writ petition. The writ petition remains pending. We make it clear that dismissal of this SLP will not preclude the learned single
Judge from proceeding with the hearing of the writ petition on merits.
It is by virtue of the said direction of the Supreme Court, the matter is before this Court.
As I have elicited above, learned Counsel for the petitioner submits that while the one time settlement proposal was pending between the
petitioner and the first respondent Bank and pursuant to the one time settlement agreement, the petitioner to show his bonafide has paid a sum of
Rs. 2.50 lakhs to the first respondent bank on 15.3.2005, the first respondent having kept the amount till 18.11.2005, ought not have passed the
impugned resolution on 2.12.2005. It is also his further contention, as I have stated above, that when the first respondent Bank itself has gone to
the Debt Recovery Tribunal, it is the duty on the part of the Bank to approach the Debt Recovery Tribunal and obtain proper permission before
entering into such an agreement with the second respondent.
On the other hand, learned Counsel for the first respondent Bank submits that the agreement entered pursuant to the impugned resolution by
the Executive Committee of the Bank on 2.12.2005 with the second respondent is perfectly in order and in accordance with the power given to
the Bank u/s 5 of the SARFAESI Act. He also submits that once such an agreement is entered into with the second respondent, it is not necessary
for the Bank to inform the same to the petitioner at all. It is only after the agreement entered into, such an information can be passed on to the
debtor, since Section 5 of the SARFAESI Act enables the first respondent Bank to enter into such an agreement with the second respondent, by
which the Bank''s rights has been assigned to the second respondent by which the petitioner is not affected in any manner. It is his further
contention that even Section 6 of the SARFAESI Act shows that if the Bank has received payment from the debtor, the Bank will receive payment
only as a trust and not as a creditor.
Learned Counsel for the second respondent, who has been subsequently impleaded would submit that the second respondent has already
taken action to implead themselves as a party in the proceedings pending before the Debt Recovery Tribunal, Coimbatore and they are yet to take
any further action.
I have considered the submissions made by the learned Counsel for the petitioner and the respondents and perused the materials placed on
record.
On facts, it is clear that the amount of Rs. 2.50 lakhs stated to have been paid by the petitioner to the first respondent Bank based on one time
settlement has been returned by the Bank to the petitioner on 18.11.2005, even though it is true that the Bank has been keeping the amount with it
from 15.3.2005. The fact remains that the conduct of the first respondent in returning the said amount reveals that the one time settlement is not
fructified before the impugned resolution has been passed by the Executive Committee of the first respondent Bank and it is not open to the
petitioner to rely upon such one time settlement, since the one time settlement has not come into effect at all. As far as the powers of the first
respondent Bank to enter into such an agreement with the second respondent is concerned, the first respondent Bank has power to enter into such
an agreement u/s 5 of the SARFAESI Act, which reads as follows:
Acquisition of rights or interest in financial assets- (1) Notwithstanding anything contained in any agreement or any other law for the time being in
force, any securitisation company or reconstruction company may acquire financial assets of any bank or financial institution:
(a) by issuing a debenture or bond or any other security in the nature of the debenture, for consideration agreed upon between such company and
the bank or financial institution, incorporating therein such terms and conditions as may be agreed upon between them; or
(b) by entering into an agreement with such bank or financial institution for the transfer of such financial assets to such company on such terms and
conditions as may be agreed upon between them.
(2) If the bank or financial institution is a lender in relation to any financial assets acquired under Sub-section (1) by the securitisation company or
the reconstruction company, such securitisation company or reconstruction company shall, on such acquisition, be deemed to be the lender and all
the rights of such bank or financial institution shall vest in such company in relation to such financial assets.
(3) Unless otherwise expressly provided by this Act, all contracts, deeds, bonds, agreements, powers-of-attorney, grants of legal representation,
permissions, approvals, consents or no-objections under any law or otherwise and other instruments of whatever nature which relate to the said
financial asset and which are subsisting or having effect immediately before the acquisition of financial asset under Sub-section (1) and to which the
concerned bank or financial institution is a party or which are in favour of such bank or financial institution shall, after the acquisition of the financial
assets, be of as full force and effect against or in favour of the securitisation company or reconstruction company, as the case may be, and may be
enforced or acted upon as fully and effectually as if, in the place of the said bank or financial institution, securitisation company or reconstruction
company, as the case may be, had been a party thereto or as if they had been issued in favour of securitisation company or reconstruction
company, as the case may be.
(4) If, on the date of acquisition of financial asset under Sub-section (1), any suit, appeal or other proceeding of whatever nature relating to the said
financial asset is pending by or against the bank or financial institution, save as provided in the third proviso to Sub-section (1) of Section 15 of the
Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) the same shall not abate, or be discontinued or be, in any way, prejudicially
affected by reason of the acquisition of financial asset by the securitisation company or reconstruction company, as the case may be, but the suit,
appeal or other proceeding may be continued, prosecuted and enforced by or against the securitisation company or reconstruction company, as
the case may be.
Section 5(1)(b) of the SARFAESI Act in categoric terms enable the creditor Bank to enter into any agreement with any other bank or any
other financial institution for transfer of such financial assets to such company on such terms and conditions as may be agreed upon between them.
Section 6 of the SARFAESI Act deals with the issuance of notice to the debtor, which reads as follows:
Notice to obligor and discharge of obligation of such obligor-(1) The bank or financial institution may, if it considers appropriate, give a notice of
acquisition of financial assets by any securitisation company or reconstruction company, to the concerned obligor and any other concerned person
and to the concerned registering authority (including Registrar of Companies) in whose jurisdiction the mortgage, charge, hypothecation,
assignment or other interest created on the financial assets had been registered.
(2) Where a notice of acquisition of financial asset under Sub-section (1) is given by a bank or financial institution, the obligor, on receipt of such
notice, such make payment to the concerned securitisation company or reconstruction company, as the case may be, and payment made to such
company in discharge of any of the obligations in relation to the financial asset specified in the notice shall be a full discharge to the obligor making
the payment from all liability in respect of such payment.
(3) Where no notice of acquisition of financial asset under Sub-section (1) is given by any bank or financial institution, any money or other
properties subsequently received by the bank or financial institution, shall constitute monies or properties held in trust for the benefit of and on
behalf of the securitisation company or reconstruction company, as the case may be, and such bank or financial institution shall hold such payment
or property which shall forthwith be made over or delivered to such securitisation company or reconstruction company, as the case may be, or its
agent duly authorised in this behalf.
The above section makes it very clear that obligor namely, the principal debtor has to be informed only after such agreement is entered into
between the Bank and the Securitisation Company as per Section 5 of the SARFAESI Act.
Therefore, a combined reading of Sections 5 and 6 of the SARFAESI Act show that any contract entered into between the Bank being a
secured creditor and the Securitisation company for assigning the rights of the Bank to the securitisation company, there is no necessity for the
Bank or the securitisation company to inform the original debtor and that agreement has been entered by way of the statutory rights.
The law laid down by the Supreme Court in Transcore Vs. Union of India (UOI) and Another, makes it clear that the agreement entered into
between the Bank and the securitisation company is only for quick recovery of dues. In view of the same, it cannot be said that the impugned
resolution dated 2.12.2005 in which an agreement entered into between the first respondent Bank and the second respondent is perverse or illegal.
The further contention of the petitioner that when the proceedings are pending before the Debt Recovery Tribunal, the first respondent ought to
have approached the Debt Recovery Tribunal is not sustainable. Section 5 of the SARFAESI Act does not contemplate such a prior approval or
intimation to the Debt Recovery Tribunal.
A reading of the judgment of the Supreme Court shows that these are all parallel proceedings which are not contradictory to each other. One
is by way of non-adjudicatory process and another is by adjudicatory process.
In view of the above legal position and on the facts and circumstances of the case, I am of the considered view that the petitioner is not entitled
for any relief as sought for in this writ petition and it cannot be said that the impugned resolution is either perverse or illegal. Accordingly, the writ
petition fails and the same is dismissed. However, learned Counsel for the second respondent has fairly submitted that he is taking steps to implead
themselves as a party in the pending proceedings before the Debt Recovery Tribunal. If the second respondent approaches the Debt Recovery
Tribunal, it is always open to the petitioner to raise whatever legal rights that are available to the petitioner against the second respondent. No
costs. Consequently, WPMP No. 44088 of 2005 and 8955 of 2006 are also dismissed and WVMP No. 91 of 2007 is closed.