@JUDGMENTTAG-ORDER
Sunil Ambwani, J.@mdashSri P.K. Jain learned Senior Advocate assisted by Sri'' Raj Kumar Tiwari appear for the applicant M/s. Chopra Fabricators and Manufacturers Pvt. Ltd. Sri Om Prakash Mishra, appears for the Petitioner -M/s. Kotak Mahindra Bank Ltd.
2. On 23.10.2009 the matter was directed to be listed for hearing on the question of maintainability of the company petition, in that, whether the debts of M/s. Chopra Fabricators and Manufacturers Pvt. Ltd (hereinafter referred to as ''the company'') could be validly assigned by State Bank of India to the Petitioner - M/s. Kotak Mahindra Bank Ltd and on the basis of such assignment, a winding up petition can be filed.
3. An interim order was passed by the court on 23.10.2009 restraining Respondent company and its Directors, Officers or Agents from transferring, alienating and or creating any third party interest on the mortgaged assets.
4. The applicant-Respondent company is alleged to be indebted to the State Bank of India a sum of Rs. 14,30,70,934/- against the cash credit facility, term loans and interest. The State Bank of India assigned the debts with all its rights, title, interest and benefits in relation to the above credit facility term loans etc. granted to the company to M/s. Kotak Mahindra Bank Ltd. (hereinafter referred to as the assignee bank) by a deed of assignment dated 29.3.2006.
5. A preliminary objection has been taken by the applicant-Respondent company on the basis of judgment of Gujarat High Court in Kotak Mahindra Bank Ltd. v. Official Liquidator of APS Star Industries Ltd. and Ors. 2009 (2) Bankers'' Journal 755 that the debts cannot be assigned by the State Bank of India to the assignee bank and thus the company petition at the instance of the assignee bank is not maintainable.
6. The Division Bench of the Gujarat High Court relied on Sections 5, 6 and 8 of the Banking Regulation Act 1949, and Section 130 of the Transfer of Property Act, 1882 to dismiss the appeal arising out of the order of the Company Judge, rejecting the application of the assignee bank to be substituted in proceeding,: but permitting it to participate in proceedings u/s 529A of the Companies Act 1956, that the banking, business and policy does not authorize the banking company to assign debts including Non-performing Asset (NPA). The reasons given by the Gujarat High Court are summed up in para 48 of the judgment as follows:
(a) neither the definition of the term "banking" as appearing in Section 5(b) of the B.R. Act, nor the extended meaning available in terms of provisions of Section 6 of the B.R. Act can take within its sweep the transaction in question;
(b) the provisions of the B.R. Act do not give any right to deal in securities acquired at the time of lending;
(c) the right to realize a security to ensure recovery of outstanding debt cannot be stretched to mean a right to deal in securities;
(d) the definition of "banking policy" u/s 5(ca) of the B.R. Act cannot permit framing of such a policy which permits trading in debts as the debts are not acquired as a part of banking activity but come into existence upon advancement of a loan. The requirements of Section 5(ca) of the B.R. Act cannot be said to have been met with by such an assignment;
(e) any guidelines formulated by RBI cannot be part of banking policy because u/s 35A of the B.R. Act RBI has powers to issue directions after recording satisfaction that it is necessary to issue directions to banking companies haying regard to the factors stated in Section 35A of the B.R. Act. The present transaction cannot fall within any of the four prescribed requirements so as to enable RBI to record satisfaction for the purposes of issuing directions. No directions are in fact issued and guidelines cannot be equated with directions;
(f) none of the Clauses (a), (c), (f), (g), (l), (m), (n) and (o) of Section 6(1) of the B.R. Act cover the transaction in question;
(g) the activities envisaged by Section 6(1)(a) of the B.R. Act make it clear that concept of buying and selling is available as part of additional business only for certain specified categories of activities;
(h) the activities relating to lending with or without security only permits such an activity when read in juxtaposition with other activities and the concept of buying and selling the debts with the underlying securities cannot be part of the activity of lending;
(i) when certain specified activities specifically permit the activity of buying and selling the said concept cannot be read into the activity of lending by resorting to provisions of general law. Once a special enactment is in existence reliance on provisions of the T.P. Act cannot be permitted, more so in light of provisions of Section 6(2) of the B.R. Act which prohibits any other form of business, other than those specified in Section 6(1) of the B.R. Act;
(j) the activity envisaged by Section 6(1)(g) of the B.R. Act is not an activity which can be termed to be a part of business of a banking;
(k) the activities envisaged by Section 6 of the B.R. Act are supplemental or additional forms of business, in addition to the business of banking and not independent thereof;
(l) Section 2 of the B.R. Act stipulates that the provisions of the B.R. Act are in addition to the provisions of other laws for the time being in force, save as expressly provided in the B.R. Act and, therefore, it cannot be stated that Section 6(1)(g) of the B.R. Act provides for the same form of permissible mode of business which is envisaged by general law;
(m) the concept of trading in debts is, by its very nature, abhorrent to the concept of banking in any form, either the form of primary business of banking or the additional activities envisaged by Section 6 of the B.R. Act;
(n) the entire transaction is based on a speculative form of activity which can never be a permissible mode of activities as part of, or in addition to, or incidental to or conducive to the promotion for advancement of the business of a banking company;
(o) the transaction in question is not a form of business which the Central Government has specified to be a form of business in which it would be lawful for a banking company to engage in, as notified in the official gazette;
(p) Section 6(2) of the B.R. Act read with Section 8 of the B.R. Act and the Explanation u/s 8 of the B.R. Act make it clear that the kind of activity reflected by the present transaction cannot be permitted under the provisions of the B.R. Act. From this it cannot be inferred that because of the prohibition in the B.R. Act recourse can be had to general law;
(q) the activity undertaken in the form of the transaction in question cannot be termed to be either in the interest of the bank or in the interest of the customer or in the interest of banking industry in general;
(r) to lump all outstanding loans and as a consequence the respective borrowers, in one basket by treating each one of them as one category would be doing injustice to the basic fabric of the trust reposed by the customer in the bank or the banker;
(s) when a property of a person is required to be taken over/acquired a meaningful and reasonable opportunity of hearing has to be granted and mere intimation, after the assignment is complete, cannot be treated as sufficient compliance of this requirement in law. The transaction in question cannot be equated with recovery of outstanding loan, even in the hands of the assignor bank and mere making of entries cannot be determinative of the respective rights of the parties;
(t) the pari passu charge envisaged by a conjoint reading of Sections 529 and 529A of the Companies Act is available only in relation to first charge holder and the second charge holder cannot be equated with the first charge holder. Therefore, clubbing of debts where the charges might be different does not give a right to the assignee to seek substitution in place of the first charge holder assignor bank;
(u) provisions of the Securitisation Act read with objects and reasons make it clear that if the transaction in question is upheld it would mean permitting an act, which is not directly permitted by the Securitisation Act, by referring to provisions of the T.P. Act;
(v) recovery of a loan can only be from the borrower while the transaction in question essentially amounts to trading in debts;
(w) the transaction in essence is transfer of NP As and thus the consideration received for transfer of assets cannot be termed to be towards recovery of outstanding loan;
(x) the transaction in question terminates the contract of the customer with the assignor bank and the assignee bank has not entered into any contract with the customer and thus involves the concept of novation;
(y) the proceedings before a Company Court cannot be equated with proceedings of a civil suit before a civil Court and the application for substitution cannot be considered and dealt with as if the dispute was between two private litigants;
(z) the provisions of the T.P. Act, even if available to the assignor and the assignee banks, cannot claim primacy over provisions of B.R. Act and the Companies Act.
7. Sri Om Prakash Mishra, learned Counsel for the Petitioner submits that the judgment of the Gujarat High Court in Kotak Mahindra Bank Ltd. case (supra) is under challenge in Special Leave to Appeal (Civil) No. 2240/2009 in which the Supreme Court has passed an interim order on 16.2.2009 as follows:
Pending hearing and final disposal of the Special Leave Petitions, on furnishing undertakings, both by the assignor banks and assignee banks, the assignee banks, shall be permitted to participate in proceedings held by Asstt. Sales Committee, as also proceedings before the Company Court, without prejudice to the rights and contentions of the parties before us. It is made clear that in the event of dismissal of these Special Leave petitions, the assignor banks and the assignee banks will reverse the transactions which they enter into during the interim period within the period to be stipulated by this Court at the final hearing of the matters. This order is required to be passed in order to see that the secured debts do not go unrepresented.
Pending hearing and final disposal of the Special Leave Petitions, we further direct that any disbursement to secured creditors shall, where the debt stands assigned, be made to the assignees. This order will not be construed as an acceptance of the assignments pending the present Special Leave Petitions.
Parties to complete their pleadings within three weeks from today.
Liberty to file documents, if so advised.
8. Sri Om Prakash Mishra has relied upon judgment of the Delhi High Court in
16. The argument of the Appellant to the effect that RBI Guidelines do not stipulate that NP As cannot be sold to entities other than Banks/F Is/NBF Cs is demolished on a bare perusal of the same as it clearly states that the said Guidelines on sale/purchase of NP As have been formulated to increase the options available to banks for resolving their NP As and to develop a healthy secondary market for NP As, where securitisation companies and reconstruction companies are not involved, and that the Guidelines have been issued to banks on purchase/sale of NP As which are required to be complied with by all entities so that the process of resolving NP As by sale and purchase of proceeds on smooth and sound lines. Clause 6.1 of the said Guidelines lays down its scope and provides that the same shall be applicable to banks, financial institutions and NBF Cs purchasing/selling NP As from/to other banks/F Is/NBF Cs (excluding the securitisation companies/reconstruction companies). Hence there is no merit in the claim of the Appellant that the Guidelines relied upon by the Respondent No. 1 nowhere mention that the financial institutions cannot sell the assets to entities other than banks/F Is/NBF Cs.
17. In this view of the matter, we are of the opinion that the Respondent No. 1 did not commit any illegality by not issuing prior notice to the Appellant before disposing of its NP As. The claim of the Appellant that the said NPA is its financial asset is also without any merit for the reason that NPA is nothing but a debt owed by the Appellant to Respondent No. 1. As the said debt is owed by Respondent No. 1, it is very well entitled to deal with the same as an asset for the purposes of resolving its NPA. It is fallacious on the part of the Appellant to claim that the said NPA can be termed a financial asset of the company.
18. While dealing with the connotation of the words "Nonperforming assets", in the Non-performing Asset Act, 2002, a Division Bench of the Uttaranchal High Court in the case of Unique Engineering Works (supra), speaking through S.H. Kapadia, J. (as his Lordship then was) held that the object of the NPA Act is to enable Banks and financial institutions to realize long term assets, management of liquidity, asset liability mismatches and reduction of non -performing assets by adopting measures for recovery/reconstruction. It was further held that just as any immovable property can become a subject-matter of security interest, so also an Account Receivable can be transferred, assigned or sold as the same constitutes an asset of a bank/financial institution and the said Act contemplates assignment of the Account Receivable when it becomes NPA. It is apparent that intention of the RBI by issuing the Guidelines is to ensure that large amount of public money which is blocked in NPA. can be resolved while at the same time helping in developing a healthy secondary market for sale and purchase of the same.
19. In our opinion, the Appellant has also failed to show as to how it stands to lose by the said NPA being sold by Respondent No. 1 in favour of Respondent No. 2 except for making an innocuous statement that the same would result in depressing the'' net worth of the Appellant. In any event as far as the Appellant is concerned, the sale of NPA by Respondent No. 1 to Respondent No. 2 Will only result in Respondent No. 2 stepping into the shoes of Respondent No. 1. The extent of NPA shall remain the same even upon transfer thereof, at an agreed price inter se Respondent No. 1 and Respondent No. 2.
9. In the present case, the Stale Bank of India has filed a mortgage suit for recovery of its dues in the Debt Recovery Tribunal (hereinafter referred to as DRT). A decree was passed by the Debt Recovery Tribunal. The appeal was dismissed by the Debts Recovery Appellate Tribunal. The assignee bank made an application before the Recovery Officer of the DRT to be substituted, as assignee of the debts and NP As in respect of the applicant-Respondent company with the State Bank of India. The application was allowed by the Recovery Officer of the DRT In appeal, the matter was remanded. The applicant-Respondent company filed writ petition No. 250 of 2009 in which following order has been passed by the learned single Judge on 7.4.2009:
Counter-affidavit has been on behalf of Respondent No. 2, but no counter-affidavit has been filed on behalf of Respondent No. 1.
The dispute in the present writ petition is whether any assignment can be made by the Respondent No. 1 in favour of Respondent No. 2.
Learned Counsel for the Petitioner submitted that the Gujarat High Court in O.J. Appeal No. 156 of 2007, Kotak Mahindra Bank Ltd, v. O. L. Of APS Star Ind. Ltd. and 19 Ors. held that debts cannot be assigned.
Sri. O.P. Mishra, learned Counsel appearing for Respondent No. 2 submits that the
Learned Counsel for the Petitioner submitted; that Kotak Mahindra has filed substitution application before the presiding Officer which is pending and on the facts and circumstances, the Presiding Officer be restrained from disposing of such substitution application otherwise the Petitioner shall Miller irreparable loss.
On the facts and circumstances, as an interim measure. Presiding Officer is restrained from disposing of the substitution application filed by Kotak Mahindra meanwhile till further order being passed by this Court.
List this matter on 4th May, 2009. However, it is made clear that the recovery proceedings on behalf of State Bank of India may proceed on accordance to law.
Dated 07.04.2009
10. Sri P.K. Jain has raised an objection that the assignment is not valid, and in any case the the applicant-Respondent company is entitled to receive notice before assigning the debts of the company to the assignee bank. Even otherwise the assignment would be invalid if the debtor is not aware about the assignment of debts. He would submit that FD Rs created with the bank together with interests would exceed the amount of debts and that winding up petition is liable to be dismissed.
11. I have considered the respective submissions.
12. I here is an apparent conflict in the view taken by the Division Bench Of the Gujarat High Court in Kotak Mahindra Bank Ltd. (supra) and the Delhi High Court in Haryana Steel & Alloys Ltd. (supra). With respect to the opinion of the Gujarat High Court, I do not agree with the reasons given in the judgment.
13. The Gujarat High Court has proceeded on the basis that assignment of debts and NP As is not part of the banking policy/business as provided u/s 6(1)(a) of the Banking Regulation Act 1949. It has not to take into account the opening words of Section 6(1)(a) of the Act, which gives a general authority to banks for carrying on banking business and further provides, that in addition to the business of banking, a banking company may engage in any one or more of the following forms of business enumerated thereafter. The enumeration of the functions or powers are in addition, to and do not take away the general functions and powers, which are much larger and expansive in nature.
14. The banking need not be confined only to the business as defined in Clauses (i) to (xi) of Section 6(1)(a) of the Act. The banking business necessarily includes ''recovery''. The recovery may be either by enforcement of security, in law, or enforcing security interest by filing a mortgage suit for redemption of mortgage and sale of mortgaged assets. If the bank is permitted to recover its dues from the mortgaged assets, the right of the bank for the purpose of recovery of the assignment or sale of such debts cannot be said to be barred impliedly.
15. The Gujarat High Court considered the effect of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the Act of 2002) in para 38 of the judgment. While referring to the object and reasons of Securitisation Act, it found that till the Securitisation Act was enacted there was no legal provision for facilitating securitisation of financial assets of Banks and financial institutions. The Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government recommended for enforcement of debts from the assets mortgaged to the bank without taking recourse to filing mortgage suit. The Act provides for empowering the Banks and financial institutions to take possession of the securities and to sell such securities without intervention of the Court. The Gujarat High Court found that until the Act of 2002 was enacted, the bank did not have authority to assign the debts. It was only on the basis of Special Act, the banks and financial institutions have been given authority to recover the dues following due procedure. The Gujarat High Court held that if the lender cannot directly undertake securitisation, the law cannot be twisted and read to mean that the activity of securitisation can be undertaken by assignment of debts.
16. Section 6(1) of the Banking Regulation Act. 1949 provides for the forms of business in which the banking companies may engage. Sub-section (1) starts with an inclusive clause and begins with the words "in addition to the business of banking, a banking company may engage in any one or more of the following forms of business, namely". Sub-section (2) of Section 6 provides that no banking company shall engage in any form of business other than those referred to in Sub-section (1).
17. Banking is an exhaustive term. With the economic growth the term banking has expanded to include variety of valid activities associated with banking. ''Banking'' and ''Banking and other financial service'' is defined in Concise Law Dictionary, P. Ramanatha Aiyar, Third Edition Reprint 2009 as follows:
"Banking. In this Act, unless the context otherwise requires-
"Banking" means the accepting for the purpose of lending or investment of deposits of money from the public repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. (Deposit Insurance and Credit Guarantee Corporation Act (47 of 1961), Section 2(a)
Banking is defined as "the business or employment of a banker, the business of establishing a common fund for lending money, discounting notes, issuing bills, receiving deposits, collecting the money or notes deposited, negotiating bills of exchange" pertaining to or conducted by a bank; as banking operations.
Accepting (for the purpose of lending or investment) deposits of money from the public repayable on demand or otherwise [S.5 (b) Banking Companies Act (1949)].
Banking and other financial service. "Banking and other Financial Services" means-
(a) The following services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate, or commercial concern namely:
(i) financial leasing services including equipment leasing and hire-purchase;
(ii) credit card services;
(iii) merchant banking seryices;
(iv) securities and foreign exchange (forex) broking;
(v) asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services, but does not include cash management;
(vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy; and
(vii) provision and transfer of information and data processing;
(viii) Other financial services, namely, lending; issue of pay order, demand draft, cheque, letter of credit and bill of exchange; providing bank guarantee, overdraft facility, bill discounting facility, safe deposit locker, safe vaults; operation of bank accounts.
(b) foreign exchange broking provided by a foreign exchange broker other than those covered under Sub-clause (a). [Finance Act (32 of 1994), Section 65(12) as amended by Act (23 of 2004), Section 90].
18. The principles of stare decisis are not strictly applicable amongst High Courts. The interpretation of the Central Act applicable to all the States, require a consistent view to be taken by the different High Courts, unless the High court, in which reliance has been placed upon the judgment of other High courts, has strong reasons to follow a contrary opinion taken by other High court. In the present case the Division Bench of the Delhi High Court has relying upon the judgment in Unique Engineering Works v. Union of India and Ors. (2004) 2 BC 241 (DB) (UTR), which is more appealing, logical and progressive. In Unique Engineering Works the Uttaranchal High Court speaking through Hon''ble S.H. Kapadia, J. (as His Lordship then was) held that just as any immovable property can become subject-matter of security interest so also an ''actionable receivable account'', can be transferred, assigned or sold as the same constitutes an asset of a bank/financial institutions. The SARFAESI Act, 2002 contemplates assignment of the account receivable, when it becomes non-performing assets.
19. The doctrine of ''noscitur a sociis (Lat.)'' means "an ambiguous term may be given more precise meaning drawn from the neighbouring words with which it is associated" can be applied here to include the business of assignment of debts as a legitimate banking business. The doctrine of ''noscitur a sociis'' was explained in
20. In my view, the Gujarat High Court has adopted a narrow approach in holding that until Act of 2002 was enacted, the bank could not have assigned the debts. The approach is restrictive to the growth of the banking industry, essential to the economic growth of the country. The object and purpose of SARFAESI Act 2002, was not only to provide speedy method of recovery but also to take possession of such securities and to sell it without approaching the court for recovery, from the mortgaged properties.
21. The assignment of debts by the bank company to another banking company or non- banking company is not a transfer of property. Section 130 of the Transfer of Property Act applies to a case where actionable claim (sic). In Khardah Company Ltd v. Raymon and Co. (India) Private Ltd. AIR 1962 SC 1810 , a Five Judges Bench of the Apex Court held in para 19 that: "an assignment of contract might result of transfer either of the rights or of the obligations thereunder. But there is a well recognized distinction between these two classes of assignments. As a rule obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in substitution of liabilities. On the other hand rights under a contract are assignable unless the contract is personal in its nature or the rights are incapable of assignment either under the law or under an agreement between the parties." In
22. The Act of 2002 only recognizes the right of the bank, to facilitate recovery and consequential losses. A prudent banker may like to assign security interest or debt, which is an ''account receivable'' of an estimated value taking into the cost involved in recovery of delayed debts, to avoid losses. The enabling provision in the Act of 2002, only recognises and does not confer any right of assignment of debt to the banker or banking company for the first time. A right to reduce losses and making the bank financially viable by assignment of debts cannot be said to be barred under the Banking Regulations Act. I find that activity of assignment of debt is neither violative of Section 6 of the Banking Regulation Act nor can be said to be abhorrent to the concept of banking.
23. Section 434(1)(a) of the Companies Act, 1956 raises presumption of the inability of the companies to pay its debts, if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the company, a notice requiring the company to pay the sum so due. The Companies Act, provides for a notice before filing winding up petition by a creditor and also a creditor by assignment. The Companies Act thus takes into account an event in which the debts may be assigned by the creditor.
24. The Petitioner - M/s. Kotak Mahindra Bank Ltd. is a banking company. The transfer of right to recover the debt from the secured assets by way of assignment, is a transfer of property. The assignee bank purchased the debts with rights of its sale. By such assignment, the assignee bank, as a banking company, has simply stepped into the shoes of the assignor bank to realise the security interest in the asset. The transaction does not suffer from any restriction in law, nor is the contract against public policy.
25. So far as the argument regarding notice to debtor is concerned, there is no statutory or contractual right of the debtor to be given a notice before assignment of the debt. The security interest in the mortgaged property can always be transferred under the Transfer of Property Act by the mortgagor, and thus assignment of debt along with a right to recover the debt from the mortgaged assets is by way to transfer of debt, to be realized from the mortgaged property. The Transfer of Property Act does not place any restriction on such contract.
26. The objections taken by Sri P.K. Jain on behalf of the Respondent Company are rejected. The assignment of debt/NPA with the right to recover debt of State Bank of India to the Petitioner - M/s. Kotak Mahindra Bank Ltd. is held to be valid transaction. The Company has given statutory notice u/s 434 of the Companies Act, 1956 and has right to file winding up petition.
27. List again on 1.10:2010 to consider objections of Respondent Company on merits of the winding up petition.
