@JUDGMENTTAG-ORDER
V.V.S. Rao, J.@mdashThe company petition is filed u/s 433(e), 434(1)(a)&(c) read with Section 439(1)(b) of the Companies Act, 1956 for winding up of respondent company on the ground that the latter is unable to pay its dues within three months from the date of receipt of delivering demand by petitioner for an amount of Rs. 5,35,99,090/-
2. In a nutshell, the case of petitioner is as follows. The petitioner, namely, M/s.LPL Infrastructures Limited (LPL, for brevity) is a public limited company engaged in the business of execution of civil construction contracts. The respondent, namely M/s.Kumar Metallurgical Corporation Limited (KMC, for brevity) is a public limited company registered under the Companies Act having its registered office at Vattimarty village, Chityal Mandal, Nalgonda District. It is engaged in the business of manufacturing sponge iron. The respondent engaged LPL for production of equipment and machinery for construction of sponge iron plant and ancillary buildings at Chityal and issued two work orders, dated 14.05.1991 and 04.03.1992. The total value of work is Rs. 4,07,00,000/-. The bills for the executed works are not paid. The matter was referred to an arbitrator - Retired High Court Judge, who passed awards for total amount of Rs. 5,35,17,380/-. The respondent moved applications u/s 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act, for brevity) being O.P. Nos. 700 and 702 of 2003 on the file of the Court of the XIV Additional Chief Judge, City Civil Court, Hyderabad, to set aside awards. They were allowed in part to the extent of interest. Aggrieved by the same, respondent filed C.M.A. Nos. 291 and 581 of 2006 before this Court. By order, dated 13.04.2006, this Court directed respondent to deposit a sum of Rs. 32,00,000/- within a period of eight weeks from the date of order. Subsequently, by another order, dated 27.07.2006 in C.M.A. No. 581 of 2006, this Court directed respondent to deposit half of the decretal amount within six weeks. The amount was not deposited. The total outstanding due is at Rs. 5,35,99,090/-. The petitioner filed execution petitions on the file of Court of the XIV Additional Chief Judge, City Civil Court, Hyderabad and the same are binding. The financial institutions who lent money to respondent declared loan account as non performing asset (NPA) and transferred account to Asset Reconstruction Company (India) Limited (ARCIL). They invoked Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, for brevity) and gave possession notice to take over assets of the company. Debts Recovery Tribunal (DRT), Hyderabad, set aside the same in S.A. No. 15 of 2005, dated 07.02.2005. ARCIL filed Appeal No. 10 of 2005 before Debts Recovery Appellate Tribunal (DRAT), Chennai, which by order, dated 28.02.2006 reversed the order of the DRT. Subsequently, DRT also appointed Receiver for respondent company. Deputy Commercial Tax Officer, Nalgonda, issued notice dated 10.10.2006, to respondent for committing willful default in paying statutory taxes to a tune of Rs. 1,35,30,048/-. The respondent also failed to comply with the provisions of Companies Act and therefore, Registrar of Companies filed complaints u/s 168 of Companies Act before the Court of Special Judge for Economic Offences. In these cases, being C.C. Nos. 55 to 63 of 2004, the Special Judge convicted the Managing Director of respondent company.
3. In the said background, LPL issued a statutory notice, dated 09.02.2007 calling upon respondent to pay an amount of Rs. 5,35,99,090/- in default of which company petition u/s 433(e) of Companies Act would be filed. The same was received by respondent, who gave a reply dated 26.02.2007 informing that ARCIL exercised its right as secured creditor and claimed possession of entire plant, machinery, land and buildings of company and that there is a litigation between ARCIL and a third party with reference to the assets of company and therefore, LPL cannot proceed against the assets of respondent company. It is therefore alleged that respondent company is not able to pay its debts and therefore, it would be in the interest of creditors, statutory authorities and public to wind up the respondent company.
4. Respondent filed counter opposing the company petition. The liability to pay any amount to LPL is denied. The award passed by arbitrator and the efforts of respondent to get it set aside, however, not denied. The action taken by ARCIL under SARFAESI Act is also not denied. It is further stated that on 20.01.2005, the District Magistrate passed an order u/s 14 of the SARFAESI Act authorizing Mandal Executive Magistrate (MRO), Chityal to take possession of the mortgaged properties and handover them to authorized agent of ARCIL. Thereafter, copies of possession notice that assets of respondent company have been taken over possession by ARCIL were reported in the newspapers, dated 24.01.2005. It is further stated that though this Court passed orders directing respondent to deposit amounts, it could not deposit the amounts due to the action taken by ARCIL.
5. The matter is listed before this Court for directions as to whether the petition should be advertised under Rule 99 of Companies (Court) Rules, 1959 (Rules, for brevity) in the manner provided by Rule 24 thereof. Therefore, at this stage, Court has to look to prima facie case as to whether creditor who alleges that respondent company owes certain amounts has prima facie proved allegation that respondent company is unable to pay its debts within three weeks after date of receipt of demand delivered at its registered office.
6. In this case, a look at the brief narration of unpleasant history of respondent company as above would show that the company is at the centre of action by financial institutions and secured creditors who have taken company before DRAT, and this Court, besides being subjecting it to the rigorous recovery methods under SARFAESI Act for enforcement of security. The respondent was not even able to comply with payment orders of this Court. This is admitted in the counter. The statutory notice u/s 434 of Companies Act is also served. This is not denied. Therefore, without anything else, the company petition can be admitted and the advertisement petition can be ordered.
7. The learned Counsel for r espondent, however, raised objection, which is as follows. When the management of a company is taken over by secured creditor, u/s 15(3)(c) of SARFAESI Act, no proceedings for winding up or for appointment of Receiver shall lie in any Court. This plea was not specifically taken in the counter. Learned Counsel was permitted to raise the plea having regard to Section 15 of SARFAESI Act, which enumerates eventualities when possession and/or management is taken over by secured creditor in exercise of powers under SARFAESI Act. Disputing the contention, learned Counsel for LPL submits that when the secured creditor obtains only possession from the debtor company, but does not take over the management, Section 15(3)(c) of SARFAESI Act does not bar winding up petition. The counsel brought to the notice of this Court, the decision of the Delhi High Court in the matter of
8. The learned company Judge overruling the objection of DFC held that jurisdiction of the company Court is not ousted. It is observed therein: I cannot accept the construction placed by Mr.Swatanter Kumar on the provisions of Sections 29 and 46B and 32E of the State Financial Corporations Act to mean total ouster of jurisdiction of the Company Court and that its provisions will always and in all circumstances prevail over all provisions of Companies Act even after winding up or provisional winding up. The legislature in its own wisdom amended the Companies Act and enacted provisions such as Section 529A and provisos to Section 529 in order to protect the wages of the workmen notwithstanding any law to the contrary, workmen''s wages have now been put on par with the claims of secured creditors and their claims now rank pari passu with the claims of secured creditors. Thus a new category of secured creditors has been created whose interests are to be represented and taken care of by the Official Liquidator.
9. The learned Judge also held that even when industrial unit is taken over by SFC, the ownership still remains with borrower and mere taking of possession of sick unit does not by itself oust jurisdiction of company Court. The relevant observations are as below.
10. In my view, in the taking over of the possession u/s 29 of the State Financial Corporations Act, the owner always retains the right of ownership of the property does not pass on to the financial corporation, but it is only for certain purposes of affecting recovery, of its dues by the sale and to remove any impediments in their way that the statute by a deeming provision has granted to the financial corporation powers of the owner for the limited purpose of realizing the security, to convey good marketable title to the purchaser, and to defend any legal action, but the property does not absolutely vest in it.
11. In Shivalik Agro Poly Products Limited (supra), Division Bench noticed that the appellant company - the successful bidder; was already given possession of the sick unit. A submission was made on behalf of the appellant that the concept of taking over possession is much larger than taking over of the management since a person in possession must necessarily be in management and that there would be no possession of taking over management on day to day basis and thus take over of the management is synonymous of taking over possession. This submission was countenanced by Division Bench with the following reasoning:
12. It has to be appreciated that present concern was not even a running concern and at the time when the possession was taken over and handed over to the appellant there could be no question of taking over the management of the company. Thus the expression ''management'' and ''possession'' would be synonymous, atleast for the purposes of the present case inasmuch as Disco was not a running concern at the relevant date. The Act is a special Act providing security to the Financial Corporation for purposes of recovery of its dues and the rights of a Financial Corporation thus must be protected. It is an undisputed position that amounts were owed to the DFC and after notices DFC did take over the possession of the land and assets of the company. Complete procedure was followed and it is only after that the sale was confirmed in favour of the appellant company. The Financial Corporation thus become owner of the assets in view of Section 29(5) of the Act prior to its sale.
13. Learned Counsel for respondent - KMC placed strong reliance on Division Bench Judgment referred to hereinabove. His submission is that Section 15(3) of SARFAESI Act being in pari materia with Section 32E of SFC Act, the view taken by Delhi High Court has strong persuasive value. He therefore commends same view.
14. In comparison, Section 15(3) of SARFAESI Act and Section 32E(1) of SFC Act read as below.
Section 15(3) of SARFAESI Act Section 32E(1) of SFC Act
15. Manner and effect of take over of 32E. Application of Act I of 1956:
management - (3) Where the management (1) Where the management of an
of the business of a borrower, being industrial concern, being a company
a company as defined in the Companies as defined in the Companies Act,
Act, 1956 (1 of 1956), is taken over 1956, is taken over by the financial
by the secured creditor, then, notwi- Corporation, then, notwithstanding
thstanding anything contained in the anything contained in the said Act
said Act or in the memorandum or or in the memorandum or articles of
articles of association of such association of such concern-
borrower,-
(a) it shall not be lawful for the (a) it shall not be lawful for the
shareholders of such company or any shareholders of such concern or any
other person to nominate or appoint other person to nominate or appoint
any person to be a director of the any person to be a director of the
company; concern;
(b) no resolution passed at any (b) no resolution passed at any
meeting of the shareholders of such meeting of the shareholders of such
company shall be given effect to concern shall be given effect to
unless approved by the secured credi- unless approved by the Financial
tor; Corporation;
(c) no proceeding for the winding up (c) no proceeding for the winding up
of such company or for the appointment of such concern or for the appointm-
of a receiver in respect thereof shall ent of a receiver in respect thereof
lie in any Court, except with the shall lie in any Court, except with
consent of the secured creditor. the consent of the Financial
Corporation.
15. It is no doubt true that both the provisions express the same content and meaning. But, there is a difference in their operation and enforcement in two distinct situations. Section 15(1) of SARFAESI Act lays down the manner and effect of taking over of management by (i) securitisation company or reconstruction company under Clause (a) of Section 9; and
(ii) secured creditor u/s 13(4)(b). It is done either by appointing directors or by appointment of an administrator of the business of the borrower. To understand this, it is necessary to refer to definition of ''securitization'', ''securitization company'', ''reconstruction company'' and ''secured creditor'' as defined in SARFAESI Act''s dictionary clause.
2(z) "securitization" means acquisition of financial assets by any securitization company or reconstruction company from any originator, whether by raising of funds by such securitization company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interest in such financial assets or otherwise;
2(za) "securitization company" means any company formed and registered under the Companies Act, 1956 (1 of 1956) for the purpose of securitization;
2(v) "reconstruction company" means a company formed and registered under the Companies Act, 1956 (1 of 1956) for the purpose of asset reconstruction;
2(zd) "secured creditor" means any bank or financial institution or any consortium or group of banks or financial institutions and includes-
(i) debenture trustee appointed by any bank or financial institution; or
(ii) securitization company or reconstruction company, whether acting as such or managing a trust set up by such securitization company or reconstruction company for the securitization or reconstruction, as the case may be; or
(iii) any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created for due repayment by any borrower of any financial assistance;
16. In this case, the financial institutions treated the account of respondent as NPA. Therefore, they transferred the mortgage to ARCIL, which is ex facie ''reconstruction company'' as defined in Section 2(v) of SARFAESI Act and also a ''secured creditor'' as defined in Section 2(zd) of SARFAESI Act. ARCIL has thus a dual role of being ''reconstruction company'' as well as ''secured creditor'' vis- -vis the respondent company. Be it noted that as claimed in their notice, dated 01.11.2004, u/s 13(2) of SARFAESI Act, issued to respondent, ARCIL is a reconstruction and securitisation company registered with Reserve Bank of India u/s 3 of SARFAESI Act. It is nobody''s case that ARCIL has appointed directors or administrator u/s 15(1) of SARFAESI Act. This is an important and relevant factor.
17. Coming to Section 15(3) of SARFAESI Act, it operates differently. u/s 15(3) of SARFAESI Act, certain eventualities are prohibited only when the management of the business of the borrower company is taken over by secured creditor. ARCIL as alleged in KMC''s counter affidavit, published in newspapers, dated 24.01.2005 that the assets of respondent company have been taken over. Does it mean or does it amount to ARCIL taking over the management of respondent?
18. As seen from Section 15(1) of SARFAESI Act, securitization company or reconstruction company is empowered and entitled to take over the management of borrower company u/s 9(a) and a secured creditor is empowered and entitled to take over management of the company u/s 13(4)(b) of SARFAESI Act, which reads as below.
13(4) In case the borrower fails to discharge his liability in full within the period specified in Sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:
(a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset;
(b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset:
Provided that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt:
Provided further that where the management of whole of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security for the debt.
(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor;
(d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.
19. The respondent along with his counter has annexed notice, dated 01.01.2004 u/s 13(4) of SARFAESI Act and the proceedings of District Collector, dated 20.01.2005 authorising Mandal Executive Magistrate, Chityal, to take possession of mortgaged properties of respondent and handover them to ARCIL. Possession notice issued by the authorised officer of ARCIL as published in Eenadu telugu daily, dated 24.01.2005 is also annexed. These notices would not amount to taking over management u/s 13(4)(b) read with Section 15(1) and (3) of SARFAESI Act. When the Act provides method and manner of taking over management u/s 15(1) of SARFAESI Act, there cannot be any other method of taking over management. The law contemplates take over of management by the securitisation company or reconstruction company and/or secured creditor by appointment of directors of borrower company or by appointment of an administrator of the business of the borrower. Both these are absent. Even if the respondent company is taken over possession u/s 15(3) of SARFAESI Act by ARCIL as secured creditor, unless the management is shown to have been taken over as per Section 15(1), Section 15(3)(c) of SARFAESI Act does not bar a winding up petition. This is also further supported by the fact that Section 13(4)(a) of SARFAESI Act speaks of taking possession of secured assets of the borrower and also take over of management of business of the borrower u/s 13(4)(b) of SARFAESI Act. Admittedly, respondent company stopped its business for various reasons and there is not even a whisper in the counter that it is ongoing company. In such a situation, there cannot be a take over of management of business of respondent company nor it is shown that management is taken over by ARCIL as provided u/s 15(1) of SARFAESI Act. The difference between the SFC Act and SARFAESI Act is Section 13(4)(a) and (b) and Section 15(1) of SARFAESI Act. Such provisions are absent in SFC Act. Therefore, the decision of Delhi High Court in Shivalik Agro Poly Products Limited (supra) is not an authority for the proposition that as and when possession is taken over by secured creditor or the securitisation company/reconstruction company u/s 15(3) or Section 13(4)(a) of SARFAESI Act, winding up petition is barred. Such an interpretation would render core provisions in SARFAESI Act redundant. Secondly, it is always presumed that Parliament was aware of the provisions of SFC Act and other cognate laws when Sections 13(4) and 15(1) and (3) were enacted in SARFAESI Act. The difference, therefore, is very glaring and the decisions under SFC Act cannot furnish any guidance for interpreting provisions of SARFAESI Act.
20. In the result, for the above reasons, the company petition is admitted. This Court directs that the petition shall be advertised in ''New Indian Express'' published from Hyderabad, and ''Eenadu'' telugu daily, Hyderabad Edition, having circulation in ''Nalgonda'' in the manner provided by Rule 24 of Companies (Court) Rules, 1959. The advertisement shall be made within a period of three weeks from the date of receipt of copy of this order.
