Dismissed

M/S Sangrur Milk Products Pvt. Ltd. v. Distt. Magistrate Cum Deputy Comm. Sgr & Ors.

Punjab & Haryana HC7 Apr 2011CWP/10434/2010

Case brief

AI extract

What is this about?

In this CWP, the consumer/industrial company sought quashing of a notice and order under the SARFAESI Act issued by a bank to take possession of exclusively mortgaged residential properties. The court dismissed the petition, ruling that Section 13(9) and SICA savings clauses do not apply to exclusively mortgaged assets and directing the bank to proceed under Section 14.

What did the court decide?

Writ petition dismissed; liberty granted to file an appeal under Section 17 of the Act regarding procedural irregularities.

M/S Sangrur Milk Products Pvt. Ltd. Vs Distt… — Banking and Recovery | Punjab & Haryana HC (2011)

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CWP No.10434 of 2010.doc

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HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH

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CWP No.10434 of 2010 (O&M) Date of Decision: 07.04.2011

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M/s. Sangrur Milk Products Pvt. Ltd. . . . . Petitioner

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VS.

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District Magistrate, Sangrur & Ors. . . . . Respondents

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CORAM : HON’BLE MR.JUSTICE SURYA KANT

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1. Whether Reporters of local papers may be allowed to see the judgment?

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2. To be referred to the Reporters or not?

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3. Whether the judgment should be reported in the Digest?

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Present: Mr. KD Aggarwal, Advocate for the petitioner

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Ms. Sudeepti Sharma, DAG Punjab

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Mr. Arun Palli, Senior Advocate with Mr. Sunil Garg, Advocate for respondents No.3&4

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SURYA KANT J. (ORAL)

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(1). The petitioner, in this Civil Writ Petition, seeks quashing of the notice dated 08.12.2009 (Annexure P5) issued by respondent No.4-Bank in purported exercise of its powers under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (in short, ‘the Act’). The petitioner also seeks quashing of the application (Annexure P9) under Section 14 of the Act moved by the Bank before

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CWP No.10434 of 2010.doc

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the District Magistrate, Sangrur as well as the notice dated 07.05.2010 (Annexure P10) passed thereupon.

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(2). The admitted facts, in exordium, are that the petitionerCompany availed the Cash Credit Limit facility from respondent No.4-Bank to the extent of Rs.60 lacs followed by another ad hoc limit of Rs.15 lacs and to secure the aforesaid credit facilities, two residential properties have been exclusively mortgaged in favour of respondent No.4Canara Bank. The petitioner-Company has also secured a Term Loan from the Punjab Financial Corporation (in short, ‘the PFC’) by way of joint mortgage of a separate property, namely, the factory premises; the land underneath as also the plant and machineries in favour of the PFC and the respondent-Bank. The PFC has the first charge whereas respondent No.4-Bank has the second charge on the properties jointly mortgaged. There are, thus, two sets of mortgaged properties, namely, the two residential houses which are exclusively mortgaged in favour of respondent No.4-Bank, and the other properties viz. the plant and machineries; the factory building and the land underneath jointly mortgaged in favour of the PFC and respondent No.4-Bank.

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CWP No.10434 of 2010.doc

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(3). Due to the petitioner’s failure to discharge its loan liability, its account was classified as Non-Performing Assets (NPA) on 01.07.2005 with the balance outstanding recoverable from the petitioner has now increased from Rs.78 lacs to Rs.169 lacs.

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(4). Admittedly, after the petitioner’s account was classified as NPA, the respondent-Bank issued a notice under Section 13 (2) of the Act on 06.08.2005 which was impugned by the petitioner-Company before this Court in CWP No.3333 of 2006. The above-stated writ petition was disposed of by a Division Bench of this Court vide order dated 11.12.2006 (Annexure P2) and there being a direct bearing on the present controversy, the said order is reproduced below:-

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“By filing this writ petition, petitioners have challenged the notice dated 06.08.2005 (Annexure P2) issued under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (herein after referred to as the ‘Act’). Further prays is to quash the order dated 24.05.2005 (Annexure P10) issued by the District Magistrate, Sangrur. It is grievance of the petitioners that before taking possession of the property, mortgaged in favour of the respondent Bank, requisite notice, for taking possession has not been

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CWP No.10434 of 2010.doc

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given to them. Further objection of the petitioners is that without consent of PFC, with regard to those properties which are jointly mortgaged with the Bank and the financial Corporation, Actual physical possession of those secured properties cannot be obtained by respondent No.1.

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At the time of hearing counsel for the respondent-Bank made a very fair statement that so far as the properties jointly mortgaged with the Bank and the financial corporation are concerned, Bank will take symbolic possession thereof and that too after getting consent of the PFC. So far as the other properties are concerned, which are exclusively mortgaged in favour of the respondent Bank, it will take up possession of all those properties after issuing notice under the Act. The statement made by counsel for the respondent satisfies, the counsel for the petitioner.

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In view of this, the Civil Writ Petition stands dismissed as infructuous.”

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(Emphasis applied)

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(5).

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The Assistant General Manager and the Authorised Officer of respondent No.4-Bank has thereafter issued another

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CWP No.10434 of 2010.doc

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notice dated 08.12.2009 (Annexure P5) under Section 13(2) of the Act calling upon the petitioner-Company to liquidate its loan liability failing which the Bank shall exercise its rights under Section 13(4) of the Act against the secured assets mentioned in Schedule ‘C’ appended thereto, which in turn, descripts the two residential houses exclusively mortgaged in favour of respondent No.4-Bank.

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(6).

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(7).

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The petitioner-Company submitted its reply under Section 13(3-A) of the Act on February 8, 2010 (Annexure P6) objecting against the proposed Action, inter alia on the grounds that – (i) the petitioner is a ‘sick company’ duly protected under Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 (in short, ‘the SICA’); (ii) the proposed Action is in contravention of Section 13(9) of the Act read with the third proviso to Section 15(1) of the SICA as no consent of Secured Creditors representing not less than three-fourth in value of the amount outstanding, was obtained; (iii) the proposed Action is contemptuous of the interim order passed by the Board of Industrial and Financial Reconstruction (BIFR).

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Notwithstanding those objections, the respondent-Bank moved an application under Section 14 of the Act before the District Magistrate, who has issued a notice dated

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CWP No.10434 of 2010.doc

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07.05.2010 (Annexure P10) and thereafter passed one of the impugned orders dated 21.05.2010/01.06.2010 (Annexure P15) directing the Tehsildar Sangrur to take over the assets mentioned in the application and to hand over the possession to the Secured Creditor, namely, respondent No.4-Bank.

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(8). The aggrieved petitioner has again approached this Court.

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(9). The respondent-Bank has filed its reply/affidavit to which the petitioner has also filed its rejoinder.

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(10). It is reiterated on behalf of the petitioner that respondent No.4-Bank represents only 45% of the value of the amount outstanding against the petitioner-Company and as such the impugned Action is in total contravention of Section 13 (9) of the Act read with the third proviso to Section 15(1) of the SICA.

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(11). It is further urged that in view of the self-speaking order dated 01.04.2010 (Annexure P4) passed by the BIFR “the secured and unsecured creditors are not permitted to file/pursue suits already filed at this stage” and hence the impugned notice as well as the order passed by the District Magistrate under Section 14 of the Act are per se illegal.

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CWP No.10434 of 2010.doc

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(12). It is also argued that the impugned notice under Section 13 (2) of the Act has been issued by the “Authorised Officer” who, as per the definition of the phrase “Authorised Officer” given in Rule 2(a) of the Security Interest (Enforcement) Rules, 2002 (in short, ‘the 2002 Rules’), enjoys upon a distinct legal status under the Act. It is asserted that keeping in view the likelihood of the conflict of interest in terms of Section 8(5) of the Act and Rule 4(2) of the 2002 Rules that the dual duties cannot be performed by the same Officer.

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(13).

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Counsel for respondent No.4-Bank, on the other hand, maintains that the writ petition is barred by the principles akin to res judicata as in sum and substance the same issues was raised by the petitioner in CWP No.3333 of 2006 decided by this Court on 11.12.2006 and the petitioner cannot re-agitate those very issues time and again. It is urged that the occasion to comply with Section 13(9) of the Act is yet to arrive, therefore, the objection regarding its non-compliance is wholly premature. It is also urged that in the light of two authoritative pronouncements of the Hon’ble Supreme Court in Transcore v. Union of India & Anr., (2008) 1 SCC 125 ; and United Bank of India v. Satyawati Tondon & Ors., (2010) 8 SCC 110 , the petitioner has got an efficacious alternative remedy to

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CWP No.10434 of 2010.doc

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approach the Debt Recovery Tribunal (DRT) under Section 17 of the Act, as soon as action under Section 13(4) of the Act is initiated.

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(14). It is maintained by the Bank that Section 13(9) operates in an area where the ‘secured assets’ are jointly mortgaged with more than one secured creditor(s) and it has no applicability when the secured assets are exclusively mortgaged in favour of only one secured creditor.

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(15).

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Having heard learned counsel for the parties at some length and on perusal of the material on record, I am of the considered view that the contentions raised on behalf of the petitioner are wholly devoid of any merit and the writ petition, at this stage, is liable to be turned down. I say so for the reason that the distinction between the two sets of ‘secured assets’, namely, (i) those which are jointly secured; or (ii) are exclusively mortgaged in favour of the secured creditor only, already stood drawn by this Court while deciding the petitioner’s earlier writ petition (CWP No.3333 of 2006) and that too by a consent order as the petitionerCompany accepted the stand taken by the respondent No.4Bank that it shall proceed only against those properties which are exclusively secured in its favour. Having consented to that the petitioner-Company cannot turn

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CWP No.10434 of 2010.doc

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around and bank upon Section 13(9) of the Act which otherwise cannot be attracted in the instant case as the two residential houses are exclusively secured in favour of respondent No.4-Bank. Nonetheless, on re-consideration of the contention, I find that the “object and import” of Section 13(9) of the Act is only to secure inter se interest of more than one ‘secured creditors’ and it does not confer any right on the borrower. Section 13(4) enables the Secured Creditors to take any of the prescribed measures to recover the secured debts. Section 13(9), however, limits those measures and it restrains the single secured creditor from appropriating the proceeds of the sale of the secured assets towards recovery of its own debt only even when there are other secured creditors in queue awaiting for the recovery of their debts as well. Section 13(9) of the Act is somewhat like an inter-pleader suit where the debtor does not have any right to be enforced like a plaintiff in a inter-pleader suit.

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(16). Since the immoveable properties comprising residential houses are exclusively secured in favour of respondent No.4-Bank and the other secured creditor, namely, PFC has no charge whatsoever on those properties, Section 13(9) of the Act is wholly inapplicable.

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CWP No.10434 of 2010.doc

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(17).

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(18).

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The two residential properties do not fall within the ambit of “Secured Assets” so far as the PFC is concerned. These are the secured assets of respondent No.4-Bank only who shall be well within its right to take any of the measures prescribed under Section 13(4) of the Act. It is only if the respondent-Bank is unable to recover the secured debts even after appropriation of the sale proceeds of those two properties and if it intends to have recourse to those measures against the plant & machineries and factory premises or the land underneath that sub-section (9) of Section 13 would come into play and restrain the respondent-Bank to proceed further unless the other secured creditor, namely, the PFC accords its consent/authorization for taking measures within the meaning of sub-section (4) of Section 13 of the Act qua those jointly-secured assets as well.

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The above distinction drawn between the two sets of ‘secured assets’ also completely answers the contention based upon the third proviso to Section 15 of the SICA inasmuch as the condition precedent of representation of not less than three-fourth in value of the amount outstanding against the financial assistance disbursed to the borrower of more than one secured creditors does not apply here.

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CWP No.10434 of 2010.doc

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(19). The plea that the “Authorised Officer” could not have assumed the role of “secured creditor” while issuing the main notice dated 08.12.2009 (Annexure P5) under Section 13(2) of the Act, is wholly frivolous, misconceived and contrary to what is permissible under Section13(2) & (12) of the Act, which read as follows:-

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“13. Enforcement of security interest.

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(1) xxxx xxxx

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(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4).

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(12) The rights of a secured creditor under this Act may be exercised by one or more of his officers authorized in this behalf in such manner as may be prescribed.”

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CWP No.10434 of 2010.doc

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(20). The apprehension of so-called conflict of interest is wholly premature and has no factual basis. It is not necessary that the Officer representing the Bank would also Act as the Authorised Officer. In any case, such like objection can be effectively raised or dealt with, at an appropriate stage, by the Tribunal on an appeal under Section 17 of the Act. In my considered view, the writ petition is nothing but a crude attempt by the petitioner to wriggle out of the consent order dated 11.12.2006 passed by this Court in CWP No.3333 of 2006. It is also an effort to stall the proceedings under the Act so that the petitioner is not relegated to the alternative recourse to file an appeal under Section 17 of the Act as ruled by the Apex Court in Transcore’s and United Bank’s cases (supra). The petitioner has not approached the Court with clean hands.

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(21).

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For the reasons afore-stated, I do not find any merit in this writ petition and the same is accordingly dismissed. However in case there is any procedural irregularity while taking measures under Section 13(4) of the Act or in disposal of the secured assets and/or appropriation of their proceeds which have any material bearing on the merits of the case, the petitioner-company shall be at liberty to file the statutory appeal under Section 17 of the Act before the DRT at an appropriate stage.

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CWP No.10434 of 2010.doc

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(22). With these observations and liberty, the writ petition

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stands dismissed.

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07.04.2011 (S u r y a K a n t) vishal shonkar Judge

M/S Sangrur Milk Products Pvt. Ltd. v. Distt. Magistrate Cum Deputy Comm. Sgr & Ors.

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M/S Sangrur Milk Products Pvt. Ltd. v. Distt. Magistrate Cum Deputy Comm. Sgr & Ors.

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