Vikram Saboo and Others vs SICOM Ltd.

S.C. Gupte, J—These Notices of Motion are taken out by two judgment debtors, against whom an insolvency notice has been issued, for setting aside the notice. The motions involve common questions of law and are heard together and disposed of by this common order.

The insolvency notice is based on an order dated 1 July 2008 passed on the Judgment Creditor''s (SICOM''s) application under Section 31 of the State Financial Corporations Act ("SFC Act"), being Misc. Petition No. 2 of 2007. The application prayed for an order for payment of money against the Judgment Debtors, who are directors of Marvel Industries Ltd. ("the Industrial Company"), and guarantors of the latter. SICOM is a State Financial Corporation for certain purposes under the SFC Act and can apply inter alia under Section 31 of the SFC Act for recovery of its dues from guarantors of loans granted by it to industrial concerns. SICOM had admittedly granted a loan to the Industrial Company and the Judgment Debtors were guarantors for this loan. It is also not in dispute that the Industrial Company defaulted in repayment of the loan and SICOM invoked the guarantees given by the Judgment Debtors. The debt not having been discharged despite such invocation, SICOM filed an application under Section 31(1)(aa) of the SFC Act before this Court. A learned Single Judge of this Court allowed that application and passed an order directing the Judgment Debtors to pay Rs. 18.52 crores with interest to SICOM. The Judgment Debtors challenged this order in an appeal, which was dismissed by a Division Bench of this Court. There has been no further challenge to the order and it has become final. Based on this order, the execution whereof has not been stayed, SICOM has taken out the present insolvency notice under Section 9(2) of the Presidency-Towns Insolvency Act, 1909 ("Insolvency Act") against the Judgment Debtors. The Debtors have taken out these two Motions by way of applications under Sub-section (5) of Section 9 of the Insolvency Act for discharge of the insolvency notice on the ground that the order of this Court under Section 31(1) AA of the SFC Act does not amount to a decree or order within the meaning of Section 9(2) of the Insolvency Act and at any rate, is a nullity and not executable against the Judgment Debtors, and no insolvency notice can be based thereon.

At the hearing of the Motions, Mr. Jain, learned Counsel for the Judgment Debtors, made the following submissions :

"(i) The order of this Court dated 1 July 2008, on which the impugned insolvency notice is issued, is not a decree or order within the meaning of Section 9(2) of the Insolvency Act, since this Court, whilst passing an order under Section 31(1)(aa) of the SFC Act, does not act as a civil court. It is only a decree or order passed by a civil court governed by the Code of Civil Procedure which can be made a foundation for issuance of an insolvency notice.

(ii) The order of 1 July 2008 is a nullity since SICOM is not a State Financial Corporation under the SFC Act. Though SICOM is notified under Section 46 of the SFC Act by the Central Government for certain limited purposes, all the provisions of the SFC Act do not apply to SICOM. In particular, Section 46B of the SFC Act providing for the overriding effect of the SFC Act does not apply to SICOM. Since 2004, SICOM is notified as a ''financial institution'' by the Central Government for the purposes of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 ("RDDB Act"). By virtue of the bar of jurisdiction contained in Section 18 read with Section 17 of the RDDB Act, this Court, as the designated Court under the SFC Act (i.e. the Court of District Judge for the purposes of suits and proceedings of the value of over Rs. one crore in Mumbai), does not have jurisdiction over any application by SICOM for recovery of a debt, particularly since the non-obstante clause of Section 46B does not apply to SICOM. The order of 1 July 2008 is thus without jurisdiction and a nullity.

(iii) The order of this Court dated 1 July 2008, at any rate, is not executable and SICOM must approach the Debt Recovery Tribunal established under the RDDB Act for recovery of its dues covered under the order."

Mr. Setalwad, learned Senior Counsel for the Judgment Creditor - SICOM, counters these submissions. He submits that the order of 1 July 2008 is very much an order of a court, even a civil court for that matter, on which an insolvency notice can be founded. He submits that the provisions of the RDDB Act are in addition to, and not in derogation of, the SFC Act as provided in Section 34(2) of the RDDB Act and the order of 1 July 2008 is neither without jurisdiction nor unexecutable.

The provision of an insolvency notice in respect of a decree or order for payment of money was introduced first in the Insolvency Act by a Bombay Amendment of 1948 (Bombay Act 51 of 1948). Later on, the Parliament introduced sub-section (2) in Section 9 by Insolvency Law (Amendment) Act, 1978 with effect from 1.8.1979, providing for an act of insolvency on the part of a debtor, when a creditor, who has obtained a decree or order for payment of money against him, serves him an insolvency notice requiring him to pay and such notice is not complied with by him. The expressions ''decree'' and ''order'' used in Section 9(2) came up for the consideration of the Supreme Court in the case of Paramjeet Singh Patheja Vs. ICDS Ltd., AIR 2007 SC 168 : (2006) 4 ARBLR 202 : (2006) 6 CompLJ 425 : (2006) 5 CTC 357 : (2006) 10 JT 41 : (2006) 11 SCALE 459 : (2006) 8 SCR 178 Supp in the context of an award of an arbitrator which was held to be a ''decree'' for the purposes of Section 9 by a Division Bench of our Court. The Supreme Court in Patheja''s case disagreed with this view and held that an arbitration award was not a ''decree'' within the meaning of Section 9 of the Insolvency Act. The reasons discussed by the Court for arriving at this conclusion may be summarized as follows :

"(i) The Insolvency Act is a statute weighed down with grave consequence of "civil death" for the person sought to be adjudged an insolvent and therefore the Act has to be construed strictly.

(ii) The Insolvency Act makes a ''decree'' or an ''order'' as a foundation for an act of insolvency under Section 9(2). The Insolvency Act does not define the expressions "decree" or "order" for the simple reason that the meaning of these terms has been well settled since the Civil Procedure Code of 1859 and 1882 and again in the Code of Civil Procedure of 1908. Accordingly, for a decision or determination to amount to a decree or order, it must necessarily fall within the language of the definitions of "decree" or "order" under Sections 2(2) and 2(14), respectively, in the Code of Civil Procedure.

(iii) These definitions use the words "court", "adjudication", "suit" in Section 2(2), and "decision" and "civil court" in Section 2(14).

(iv) The expression ''court'' denotes a tribunal constituted by the State as part of the ordinary hierarchy of courts which are invested with the State''s inherent judicial powers. These courts are usually described as ordinary courts of civil judicature.

(v) The insolvency notice under the Act is, thus, intended to be issued only after a regularly constituted court, a component of the judicial organ of the State established for dispensation of justice, passes a decree or order for payment of money after formal adjudication in a suit or a civil proceeding.

(vi) An arbitration award is not a decree or order of such court rendered upon an adjudication in such suit or civil proceeding and no insolvency notice can be issued under Section 9(2) on the basis of such award."

Following the decision in Patheja''s case, a Division Bench of our Court in HDFC Bank Ltd. and Another Vs. Kishore K. Mehta and Others, (2008) 6 BomCR 340 held that no insolvency notice can be issued under Section 9(2) of the Insolvency Act on the basis of a recovery certificate issued by the Debt Recovery Tribunal under the RDDB Act. The Division Bench reasoned that the adjudicatory authority has to be a court and since the proceedings are required to be of civil nature, the court would obviously be a civil court. The tribunal may have many of the trappings of a Court and yet is not ''court'' in the strict sense, that is to say, a court exercising the judicial powers of the State. Even a decision of a civil court hearing the matter as a tribunal or persona designata cannot be termed as a decree or order.

Let us now examine the position of an order passed by a district judge in an application made under Section 31(1) of the SFC Act on the touchstone of the law discussed above. The central question to be considered is, whether the district judge acts as a civil court whilst adjudicating an application under Section 31(1). For if it does, any judicial determination by him would obviously be an ''order'' within the meaning of Section 9(2) of the Insolvency Act. It is conceded by learned Counsel for the Judgment Debtors that the district judge does not act as a persona designata. The submission is that the district judge is a tribunal designated under Section 31 of the SFC Act. Section 31 contains special provisions for enforcement of claims by Financial Corporations. In the event of any default in payment of any loan or advance, the Section inter alia provides for an application by the Financial Corporation for enforcing the liability of any surety under clause (aa) of Sub-section (1) thereof. Such application has to be made to the district judge within the limits of whose jurisdiction the industrial concern (whose repayment is guaranteed by the surety) carries the whole or substantial part of its business. There is no doubt that the district judge is part of the ordinary hierarchy of courts exercising the judicial powers of the State. It also cannot possibly be contended that the proceedings are not of a civil nature. Civil proceedings are generally understood as proceedings in which a party asserts the existence of a civil right conferred by the civil law or by statute and claims relief for breach thereof. Civil proceedings are usually contrasted with criminal proceedings or other proceedings which may be regarded as neither civil nor criminal, for instance, proceedings for contempt of court or for exercise of disciplinary jurisdiction of professional bodies such as bar councils or institutions of chartered accountants, etc. The CPC also recognizes a separate category of revenue proceedings as distinct from civil proceedings. In the present case, SICOM seeks to enforce its civil rights conferred by civil law and statutes; it seeks an order for payment against its debtors in enforcement of a guarantee. The proceedings it has taken for such enforcement are nothing but civil proceedings. The only question is, what is the nature of the judicial exercise carried out by the district judge for the purpose of deciding the proceedings. Is this inquiry in the nature of a trial governed by the Code of Civil Procedure or is it a post trial enforcement to which the provisions of CPC apply only to a limited extent, as submitted by the Judgment Debtors, and for that reason, not giving rise to any order within the meaning of that term under Section 9(2) of the Insolvency Act.

Learned Counsel for the Judgment Debtors contended that the procedure under Section 31 is something akin to execution, though not even strictly execution of a decree or order. He submitted that the procedure prescribed under Section 32 of the SFC Act clearly suggests so. He then referred to the Supreme Court decision in Maharashtra State Financial Corporation Vs. Ashok K. Agarwal and Others, AIR 2006 SC 1584 : (2006) 2 BC 225 : (2006) 131 CompCas 1 : (2006) 4 CTC 89 : (2006) 4 JT 197 : (2006) 143 PLR 349 : (2006) 3 SCALE 661 : (2006) 9 SCC 617 : (2006) 1 UJ 462 : (2006) AIRSCW 1794 : (2006) 3 Supreme 264 . In this decision, the Supreme Court held that Section 31 of the SFC Act contains special provisions for enforcement of claims by State Financial Corporations. The procedure akin to execution of decrees under the Code of Civil Procedure has been permitted to be invoked under Section 31, but that is, as observed by the Supreme Court, only by way of a legal fiction. The Court held that the legal fiction at best refers to a procedure to be followed, but it does not mean that a decree or order of a civil court is being executed. Thus, an application under Sections 31 and 32 of the SFC Act is not by way of execution of a decree or order of any civil court. On the other hand, learned Counsel for the Judgment Creditor referred to the judgment of the Supreme Court in Maharashtra State Financial Corporation Vs. Jaycee Drugs and Pharmaceuticals Pvt. Ltd. and Others, (1991) 1 JT 524 : (1991) 1 SCALE 276 : (1991) 2 SCC 637 : (1991) 1 SCR 480(1) : (1991) 1 UJ 505 and submitted that insofar as the enforcement of surety''s liability under Section 31(1)(aa) is concerned, the investigation and determination of the claim against the surety under Sub-section (6) of Section 32 in such a case is like exercising original civil jurisdiction, to which provisions of the Code of Civil Procedure apply as far as possible.

Before the nature of exercise involved in investigation and determination of surety''s liability under the SFC Act is examined any further some cobwebs need to be cleared. The SFC Act, as it stood before 21 August 1985, did not concern itself with liabilities owed by sureties of Financial Corporations. Section 31 as it then stood provided a speedy and summary remedy against the principal borrower alone. The relief provided for in clauses (a), (b) and (c) of Section 31(1) as well as the procedure prescribed for in Section 32(1) and (2), respectively, for the reliefs mentioned in clauses (a) and (c), and the other provisions of Section 32 made it clear that it was a remedy against the principal borrower and it was basically in the nature of execution, something akin to an application for attachment of property at a stage posterior to the passing of a decree. The decisions of the Supreme Court in Gujarat State Financial Corporation Vs. Natson Manufacturing Co. Pvt. Ltd. and Others, AIR 1978 SC 1765 : (1979) 49 CompCas 187 : (1979) 1 SCC 193 : (1979) 1 SCR 372 : (1978) 10 UJ 687 , Everest Industrial Corporation and Others Vs. Gujarat State Financial Corporation, AIR 1987 SC 1950 : (1987) 3 JT 113 : (1987) 2 SCALE 75 : (1987) 3 SCC 597 : (1987) 3 SCR 607 : (1987) 2 UJ 348 and Maganlal Vs. Jaiswal Industries, Neemach and Others, AIR 1989 SC 2113 : (1990) 1 BC 1 : (1989) 3 CompLJ 179 : (1989) 3 JT 415 : (1989) 2 SCALE 208 : (1989) 4 SCC 344 : (1989) 3 SCR 696 : (1990) 1 UJ 27 , dwelt on this aspect. In Natson Manufacturing Co., the Court observed that looking at the whole conspectus of provisions of Section 32 coupled with the nature of relief to be sought under Section 31, it becomes clear that reliefs under Section 31(1) could not be styled as substantive reliefs for repayment of mortgage money by sale of mortgaged property. It observed that the application cannot be said to be a proceeding to obtain substantive relief capable of being valued in terms of monetary gain or prevention of monetary loss. The Supreme Court, on this reasoning, held the High Court to be clearly in error in holding that the application should bear ad-valorem court fee. In Everest Industrial Corporation it was argued by the borrower before the Supreme Court that the order under Section 32 being a decree and being silent about the payment of interest for the period between the date of the decree and the date of payment, a question governed by Section 34 of the Code of Civil Procedure, the Corporation was not entitled to recover such interest. The Supreme Court rejected this contention, holding that Section 34 of the Code was not applicable. It held that the proceeding instituted under Section 31(1) of the SFC Act being something akin to an application for attachment of property in execution of a decree at a stage posterior to the passing of a decree, no question of passing any order under Section 34 of the Code would arise; Section 34 was applicable only at the stage of passing of a decree and not to any stage posterior to it. In Maganlal''s case, the Supreme Court, after referring to the decisions in the cases of Natson Manufacturing Co. and Everest Industrial Corporation, observed that in view of these two decisions the law seemed to be settled that an application under Section 31(1) of the SFC Act could not be put on par with a suit for enforcement of a mortgage nor could an order passed thereon under Section 32 of the Act be put on par of an order in a suit between a mortgagee and a mortgagor for sale of mortgaged property. The Court observed further that the substantive relief in such application was something akin to an application for attachment of property in execution of a decree at a stage posterior to the passing of a decree. The Supreme Court, whilst considering a case of enforcement of the surety''s liability introduced by the Amending Act 43 of 1985 in the case of Maharashtra State Financial Corporation v. Jaycee Drugs and Pharmaceuticals Pvt. Ltd. distinguished these three decisions. The Court held that these three were not cases relating to enforcement of a surety''s liability, which was introduced in the law subsequently. The Court noted that simultaneously with introduction of the relief of enforcing the surety''s liability under Clause (aa) in Section 31(1), a show cause notice to the surety in the form of sub-section (1A) in Section 32, an order for enforcement if no cause is shown in sub-section (4A) and investigation of claim under sub-section (6) if a cause was shown were introduced in the law. It is only thereafter, i.e. after investigation made under sub-section (6) that the enforcement of liability could be ordered against the surety. And such investigation has to be made in accordance with the provisions contained in the Code of Civil Procedure. After considering all these new provisions, the Supreme Court held in that case that the District Judge acting in the matter of such enforcement was a court of ordinary civil jurisdiction and the claim before it for enforcement of the surety''s liability was capable of being valued monetarily. The Supreme Court, accordingly, held that where the liability of the surety is upto Rs. 50,000, it is the Bombay City Civil Court which has jurisdiction (under the Bombay City Civil Court Act as it then stood) and otherwise it is the High Court in the presidency town of Bombay which alone has jurisdiction in the matter. It is clear from this discussion that the application against the surety for enforcement of his liability under Section 31(1)(aa) is an application made before a court of civil jurisdiction by way of an original proceeding for determination of liability, such court being a part of the jurisdictional hierarchy and the applicable procedure being the provisions of Code of Civil Procedure.

Seen in this light, there is no manner of doubt that the order passed against a surety under Section 31(1)(aa) of the SFC Act is an ''order'' within the meaning of Section 9(2) of the Insolvency Act, and an insolvency notice can be founded on it.

There is no merit in the contention that SICOM is not a State Financial Corporation under the SFC Act generally or that Section 46B of that Act does not apply to it. SICOM is notified under Section 46 of the SFC Act inter alia for the purposes of Sections 31 and 31 of that Act. These provisions of the SFC Act insofar as they apply to SICOM have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force, by reason of Section 46B of the Act. There is no question of making Section 46B particularly applicable to any particular Financial Corporation. Section 46B provides for the effect of every provision made applicable to a Financial Corporation. If a provision applies, its effect provided for in Section 46B will also apply. Besides, Sub-section (2) of Section 34 of the RDDB Act particularly provides that the provisions of that Act are in addition to, and not in derogation of, the SFC Act. Thus, even after SICOM is declared as a ''financial institution'' within the meaning of Section 2(h) of the RDDB Act, the District Judge continues to exercise jurisdiction under Section 31(1) of the SFC Act. There is no bar of jurisdiction under Sections 17 and 18 of the RDDB Act. Our Court in at least two decisions ( Maharashtra State Financial Corporation and etc. Vs. Devidas K. Virkar and Others etc., AIR 2004 Bom 323 : (2006) 1 BC 367 : (2005) 123 CompCas 423 and Maharashtra State Financial Corporation Vs. Magna Elastomeric Rollers Pvt. Ltd. and Others, (2005) 2 ALLMR 290 : (2005) 3 BC 224 : (2005) 4 BomCR 661 has clearly held so.

There is also no merit in the contention that the order under Section 31(1)(aa) is not directly executable and a Financial Corporation is required to approach the Debt Recovery Tribunal under the RDDB Act for recovery of the dues ordered by the District Judge under Section 31(1)(aa) of the SFC Act.

None of the objections of the Judgment Debtors, thus, has any merit. There is no case for discharge of the Insolvency Notice under Section 9(5) of the Insolvency Act.

In the premises, there is no merit in the Notices of Motion. Both Notices of Motion are, accordingly, dismissed. There shall be no order as to costs.

On the application of the Judgment Debtors, this order is stayed for a period of three weeks from today.