Srei Infrastructure Finance Ltd. vs Hotline Glass Ltd. and Others

Vipin Sanghi, J.

E.A. 482/2010

By this application, the judgment debtor No. 2, M/s. Hotline Display Devices Ltd. seeks a direction that the present execution petition be discontinued in view of the bar imposed u/s 22 of the Sick Industrial Companies (Special Provisions) Act (for short, SICA) and seeks adjournment of the proceedings sine die.

The applicant states that the Board of Directors of judgment debtor No. 2 in its meeting held on 05.02.2010 resolved that the net worth of the judgment debtor No. 2 company had been eroded, and therefore, a reference be made to the Board for Industrial and Financial Reconstruction (BIFR) u/s 15(1) of the SICA. The applicant states that accordingly, it made reference u/s 15(1) of SICA to BIFR. The said reference was registered before BIFR as case No. 6/2010. The applicant has placed on record a copy of the order dated 02.06.2010 passed by the BIFR.

Learned Counsel for the decree holder/non-applicant has opposed this application, without filing a reply. The submission of learned Counsel for the decree holder is that the bar u/s 22 of SICA cannot be invoked in the facts of the present case. The decree which is sought to be executed by the present execution petition is contained in a consent arbitral award dated 12.03.2007. The arbitral award is founded upon Terms of Settlement arrived at between the parties during the arbitral proceedings. To appreciate the submissions of the parties, it is necessary to set out some of the terms of the Terms of Settlement which forms part of the consent award-decree.

Under the said settlement, firstly, the liability of judgment debtor No. 1 towards the decree holder, to the tune of 25.50 crores was admitted by the judgment debtors. It had further been agreed that judgment debtor No. 2, in part consideration of the said outstanding liability, shall transfer to the claimant/decree holder, "the unexpired residual period of the leasehold interest under Indenture of Lease deed dated 26.03.1982" of judgment debtor No. 2 "in All that piece and parcel of land admeasuring 3870.60 sq. mtrs. Situate and lying at Block-D, Sector No. VIII, New Okhla Industrial Development Area, District-Ghaziabad, together with buildings and other constructions/structures whatsoever thereon, free from all encumbrances, liens, lispendense, attachments, acquisition". The decree holder was also placed in possession of the said property and judgment debtor No. 2 agreed to start moving its facility in the said property to vacate the same not later than 31.10.2009. (see Clauses B(i) and B(ii) of the Terms of Settlement)

Under Clause B(iii) of the Terms of Settlement, it was agreed that in the event of default committed by the judgment debtors in vacating the said property by 31.10.2009 and/or failure to obtain necessary consent from NOIDA and/or such other authority as may be required for absolute transfer of the said property in the name of the decree holder or its nominees/assignees, the judgment debtors jointly and severally shall pay 15 crores to the claimant as compensation together with interest @ 24% per annum at monthly rests commencing from 01.11.2009 till payment.

At the time of signing of the Terms of Settlement, the decree holder was placed in symbolic possession of the entire property aforesaid and in actual physical possession of one independent room on the ground floor of the said property and it was further provided that the decree holder "being the owner, shall use two number of car parking space and also use the all common facilities including ingress and egress". (See Clauses B(ii) and B(iv) of the Terms of Settlement).

Learned Counsel for the decree holder submits that by virtue of Section 53A of the Transfer of Property Act, as the consideration already stood paid/adjusted by way of partial adjustment of the admitted liability of judgment debtor No. 1 to the tune of 25.50 crores, the interest of the decree holder in the said property stands protected, and no action at the instance of the judgment debtors, and in particular, judgment debtor No. 2 can lie against the decree holder in respect of the said property, except as expressly provided in the Terms of Settlement. He submits that no right, whatsoever, were reserved by the judgment debtors in respect of the said property under the Terms of Settlement.

It is also submitted by learned Counsel for the decree holder that the property in question cannot be considered to be an asset of judgment debtor No. 2, and consequently the bar u/s 22 of SICA would not apply insofar as the decree holder is seeking personal compliance by the judgment debtors of their obligations for effecting the complete transfer of the said property in favour of the decree holder. It is also submitted by learned Counsel for the decree holder that the rights contained in Clause B(iii) of the Terms of Settlement, which entitle the decree holder to claim 15 crores as compensation along with interest from 01.11.2009 onwards, is not the subject matter of the present execution proceedings.

Mr. Makkar, learned Counsel for the applicant/judgment debtor No. 2 in support of the application has placed reliance on Real Value Appliances Ltd. Vs. Canara Bank and Others, He also submits that the judgment of the Supreme Court in Deputy Commercial Tax Officer and Others Vs. Corromandal Pharmaceuticals and Others, has been considered and explained by the Supreme Court in Tata Davy Ltd. Vs. State of Orissa and Others, .

He submits that in the light of the aforesaid judgment in Real Value Appliances (supra), once the reference has been registered before the BIFR, Section 22 of SICA would be triggered and all proceedings for recovery, execution against the properties of the industrial company are bound to be stayed. Mr. Makkar also places reliance on Morgan Securities and Credit Pvt. Ltd. Vs. Modi Rubber Ltd., to submit that the execution arising out of an arbitral award are also covered by the bar u/s 22 of SICA.

Having heard learned Counsels, as well as considered the provisions of SICA and the decisions of the courts cited above, I am of the view that there is no merit in this application and the same deserves to be dismissed. No doubt, the reference of judgment debtor No. 2 stands registered before the BIFR and the enquiry u/s 16 of SICA is underway. The judgment debtor No. 2 has been required to furnish certain details and answer various queries raised by the BIFR and the next date fixed for hearing before the BIFR is 09.09.2010. Therefore, at first blush, it would appear that the bar u/s 22 of SICA would operate in respect of the present execution proceedings against the judgment debtor No. 2. However, the said bar would not operate in the facts of this case, as, in my view, it cannot be said that these execution proceedings are "against any of the properties of the industrial company".

This is so because the decree which is the subject matter of execution is a decree, whereunder the judgment debtor No. 2 has already acknowledged receipt of consideration, namely, the partial satisfaction of debt of 25.50 crores owed by judgment debtor No. 1, and in consideration of the said debt being partially adjusted, the judgment debtor No. 2 agreed to transfer its rights in the aforesaid property in favour of the decree holder. Even the symbolic possession of the whole of the property, and actual physical possession of a portion of the said property stands delivered to the decree holder at the time of signing of the Terms of Settlement. The continuation in possession of judgment debtor No. 2 of the said property (except the portion that was actually delivered to the decree holder) is merely permissive, since symbolic possession stood delivered. The said possession ceased to be as that of an owner or a title holder. The beneficial interest of judgment debtor No. 2 in the aforesaid property, therefore, stood transferred on the date of execution of the Terms of Settlement, to the decree holder. No further consideration had to flow from the decree holder to judgment debtor No. 2 or to any other judgment debtors under the Terms of Settlement for transfer of the said property.

The decision of the Supreme Court in Real Value Appliances (supra), in my view, supports the aforesaid conclusion that the said property cannot be considered to be the property of judgment debtor No. 2 for the purpose of Section 22 of SICA. In paragraph 23 of its decision, the Supreme Court, inter alia, held that:

...Further, the Act is intended to revive and rehabilitate sick industries before they can be would up under the Companies Act, 1956. Whether the Company seeks a declaration that it is sick or some other body seeks to have it declared as a sick company, it is, in our opinion, necessary that the Company be heard before any final decision is taken under the Act. It is also the legislative intention to see that no proceedings against the assets are taken before any such decision is given by the BIFR for in case the Company�s assets are sold, or the Company wound up it may indeed become difficult later to restore the status quo ante....

(emphasis supplied)

So, is the said property, an asset of judgment debtor No. 2, which is available for being used to rehabilitate judgment debtor No. 2. In my view, No. The rights of the decree holder are steadfastly protected by Section 53A of the Transfer of Property Act. Moreover, the rights of the decree holder to seek the formal transfer of the said property in its favour has attained finality with the passing of the consent award/decree, which has attained finality.

The execution of this decree, whereby the decree holder seeks the enforcement of the consent award would not impinge upon the rehabilitation of judgment debtor No. 2, even if it is assumed that it is eventually declared to be a sick industry. The consideration already having flowed under the Terms of Settlement, and the decree holder having been placed in possession of the aforesaid property, the said property possibly cannot form part of any rehabilitation scheme that may be worked out by BIFR, even if judgment debtor No. 2 is eventually held to be a sick company. BIFR cannot, while preparing its scheme nullify the rights which have come to be vested in the decree holder, vis-�-vis the said property. Pertinently, it is nobody�s case that the consent award decree was a collusive award decree and it was obtained to deprive the shareholders and creditors of judgment debtor No. 2 of their legitimate claims. In this context, it is also pertinent to note that the said property was already mortgaged with the decree holder to secure the loan advanced by the decree holder to judgment debtor No. 1, when the consent award/decree was passed on the basis of the Terms of Settlement.

Reference made by Mr. Makkar to the two decisions in Corromandal Pharmaceuticals (supra) and Tata Davy (supra) is of no avail to the applicant. In Corromondal Pharmaceuticals (supra), the Supreme Court held that the embargo or bar u/s 22 of SICA would apply only to such of the dues, which are reckoned or included in the sanctioned scheme and, consequently, the recovery of amount like sales tax etc., which the sick industrial company collected after the date of sanction of the scheme, and which legitimately belong to the revenue, could not have been intended to be covered within the embargo of Section 22 of the Act. In the latter decision in Tata Davy (supra), the Supreme Court distinguished the earlier decision in Corromandal Pharmaceuticals (supra), since the tax liability pertained to the period prior to the registration of the reference before the BIFR.

The decision in Corromandal Pharmaceuticals (supra) is, in fact, against the applicant. In this decision, the Supreme Court extensively set out the submissions of the Appellants, i.e. the Revenue before accepting the same. Therefore, I would like to first set out those submissions, before I set out the observations of the Court.

...The main contention of the Revenue before the High Court and still in appeal before us is, that the arrears of sales tax in question for which proceedings are initiated against the petitioner company, relate to the period after the sanctioned scheme was brought under implementation and the legal bar or embargo u/s 22 of the Act can only be in respect of the sales tax dues included in a sanctioned scheme. According to the Revenue, the Section should be reasonably construed and understood or read down in the above light.

...Counsel submitted that when the scheme was sanctioned on 19.11.1990, there was no assessment for the sales tax for the years 1992-93 and 1993-94. The petitioner (assessee) itself could have collected sales tax for the said years only after the scheme was sanctioned. The tax so collected really belongs to the State. But, the amount is not remitted to the state. If the bar or embargo u/s 22(1) of the Act is held to cover such amount collected by the assessee, which really belong to the State, and enables it to retain the same, till the implementation is over or the appeal u/s 25 of the Act is disposed of, it will result in a state of affairs enabling the assessee to retain the amounts due to the State for no reason and indefinitely; the Revenue will have to obtain consent of the Board or as the Appellate Authority even for realising the legitimate amounts due to it and withheld by the assessee, unreasonably. There may be similar instances where the petitioner/assessee collects amounts due to the Revenue or other and is yet enabled to keep it back with itself unreasonably for a long lime if the immunity u/s 22(1) of the Act operates absolutely. According to the Revenue the bar u/s 22(1) of the Act should not lead to such an undesirable, state of affairs; and so the section should be understood or read down to act as a bar or embargo only for such of those pre-package dues reckoned or included in the scheme sanctioned.

The Supreme Court considered various earlier decisions on the aspect, and the finding of the Supreme Court is contained in paragraphs 10 and 11. The relevant extract thereof reads as follows:

On a fair reading of the provisions contained in Chapter III of Act 1/1986 and in particular Sections 15 - 22, we are of the opinion that the plea put forward by the Revenue is reasonable and fair in all circumstances of the case. Under the statute, the BIFR is to consider in what way various preventive or remedial measures should be afforded to a sick industrial company. In that behalf, BIFR is enabled to frame an appropriate scheme.

...It is in implementation of the scheme wherein various preventive remedial or other measures, are designed for the sick industrial company, steps by way of giving financial assistance etc. by Government, banks or other institutions, are contemplated. In other words, the scheme is implemented or given effect to, by affording financial assistance by way of loans, advances or guarantees or reliefs or concessions or sacrifices by Government, banks, public financial institutions and other authorities. In order to see that the scheme is successfully implemented and no impediment is caused for the successful carrying out of the scheme, the Board is enabled to have a say when the steps for recovery of the amounts or other coercive proceedings are taken against sick industrial company which, during the relevant time, acts under the guidance/control or supervision of the Board (BIFR). Any step for execution, distress or the like against the properties of the industrial company of other similar steps should not be pursued which will cause delay or impediment in the implementation of the sanctioned scheme. In order to safeguard such state of affairs, an embargo or bar is placed u/s 22 of the Act against any step for execution, distress or the like or other similar proceedings against the company without the consent of the Board or, as the case may be, the appellate authority. The language of Section 22 of the Act is certainly wide. But, in the totality of the circumstances, the safeguard is only against the impediment, that is likely to be caused in the implementation of the scheme. If that be so, only the liability or amounts covered by the scheme will be taken in, by Section 22 of the Act. So, we are of the view that though the language of Section 22 of the Act is of wide import regarding suspension of legal proceedings from the moment an inquiry is started, till after the implementation of the scheme or the disposal of an appeal u/s 25 of the Act, it will be reasonable to hold that the bar or embargo envisaged in Section 22(1) of the Act can apply only to such of those dues reckoned or included in the sanctioned scheme. Such amounts like sales tax, etc. which the sick industrial company is enabled to collect after the date of the sanctioned scheme legitimately belonging to the Revenue, cannot be and could not have been intended to be covered within Section 22 of the Act. Any other construction will be unreasonable and unfair and will lead to a state of affairs enabling the sick industrial unit to collect amounts due to the Revenue and withhold it indefinitely and unreasonably. Such a construction which is unfair, unreasonable and against spirit of the statutes in a business sense, should be avoided.

(emphasis supplied)

...the sick industrial unit was enabled to collect tax due to the Revenue from the customers after the "sanctioned scheme" but the sick unit simply folded its hands and declined to pay it over to the Revenue, for which proceedings for recovery, had to be taken. The two decisions of this Court as also the decisions of High Courts brought to our notice are, therefore, distinguishable. They will not apply to a situation as has arisen in this case. We are, therefore, of the opinion that Section 22(1) should be read down or understood as contended by the Revenue.

The observations made in the concurring judgment of Mr. Justice B.P. Jeevan Reddy may also be usefully noticed:

Looking at the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 [the Act], I was wondering how out of tune the Act has become with the economic policies being pursued now in this country. Since 1991-92, we are launched upon, what is being called, liberalisation of our economy.

...it is no longer thought advisable to keep alive inefficient and uneconomic industries by injecting public funds or in the name of safeguarding the employment of the workers. And here is this Act, a product of the era of protectionism, seeking to keep alive "sick" companies by pumping in funds - mostly public funds - and by providing various concessions. In the process, nobody inquires why a particular industrial company has become sick, viz., whether it is an induced one or whether it is on account of factors beyond their control. The object of the Act is undoubtedly laudatory but it must also provide for appropriate measures against persons responsible where it is found that sickness is caused by factors other than circumstances beyond the control of the management. It is also a well-known fact that the proceedings before the Board of Industrial and Financial Reconstruction take a long time to conclude and all the while the protective umbrella of Section 22 is held over the company which has reported sick. We have come across cases where unfair advantage is sought to be taken of the provisions of Section 22 by certain industrial companies - and the wide language employed in the section is providing them a cover. We are sure Section 22 was not meant to breed dishonesty nor can it be so operated as to encourage unfair practices. The ultimate prejudice to public monies should not be overlooked in the process of promoting industrial progress. We are quite sure that the Government is fully alive to the situation and are equally certain that they must be thinking of necessary modifications in the Act. These few observations are meant merely to record the need for changes in the Act.

(emphasis supplied)

Pertinently, as per the applicants/judgment debtor No. 2�s own showing, the said judgment debtor has, as recently as on 05.02.2010 resolved that its net worth has been eroded and has sought to make a reference to BIFR u/s 15(1) of SICA, i.e. during the pendency of these execution proceedings which have been pending since May 2008.

The transaction between the parties as contained in the Terms of Settlement, culminating in the award-decree in question, may, at best, lead to showing the decree holder as a creditor in respect of the liability arising out of Clause B(iii) of the Terms of Settlement. There is no question of showing the obligation of judgment debtor No. 2 under the Terms of Settlement to transfer its rights in the said property in favour of the decree holder as a liability in monetary terms in the accounts that may be filed by judgment debtor No. 2 before the BIFR. Therefore, this execution petition, wherein the decree holder seeks to pursue its remedy of requiring personal compliance by the judgment debtor No. 2 of its obligations under the Terms of Settlement, cannot be said to be covered by the bar of Section 22 of SICA.

It is well settled that proceedings for recovery of possession in respect of a property held by a sick company as a lessee or a licensee is not barred by Section 22 of SICA. In this regard, reference may be made to the decision in Shree Chamundi Mopeds Ltd. Vs. Church of South India Trust Association CSI Cinod Secretariat, Madras, Similarly, it has been held in L.G. Electronics Ltd. v. Usha (India) Ltd. and Anr. AIR 207 Del 231, that the security deposit held by a sick company could be recovered without the embargo u/s 22 SICA coming into play, as the security deposit could not be said to be an asset or property of the sick company.

I have already noticed herein above that symbolic possession of the said property stands transferred to the decree holder and the continuation of judgment debtor No. 2 in possession of the said property (except the portion, actual physical possession whereof was also delivered to the decree holder under the Terms of Settlement) could, at best, be as that of a licensee with no right to retain the same indefinitely.

In Syndicate Bank Vs. New Look Rubbers (P) Ltd. and Others, to ward of the recovery of its dues, the respondent sought to place reliance upon, inter alia, section 22 of SICA. The Supreme Court held that "in the light of the issues decided by the civil court in the various litigations which were allowed to become final and as the decree had already been executed inasmuch that the mortgaged property has been sold, the directions issued by the High Court are clearly not warranted. We are also of the opinion that there can be no objection to the revival of the respondent�s unit but that is a matter between the respondent and Kerala Financial Corporation or other governmental agencies and cannot in any manner affect the legal rights that have accrued to the appellant as a consequence of a series of orders/judgments".

(emphasis supplied)

Relying on Clause B(iii) of the Terms of Settlement, Mr. Makkar submits that since there has been a default committed by the judgment debtor in vacating the said property by 31.10.2009, and the failure to obtain necessary consent from NOIDA and/or from such other authorities required for absolute transfer of the said property in the name of the decree holder or its nominee, the only right that the decree holder is now possessed of is that the right to claim damages of 15 crores as compensation together with interest @ 24% p.a. at monthly rests commencing from 01.11.2009, till payment. He submits that there is no surviving right in the decree holder to seek the execution of the decree by requiring personal compliance of the judgment debtors for transfer of the said property in favour of the decree holder or for vacation thereof. He submits that even though the admitted debt owed to the decree holder was 25.50 crores, the compensation provided in Clause B(iii) was 15 crores, apart from interest thereon, since under Clause B(vii) 1,10,00,000 equity shares of judgment debtor No. 1 were also allowed to be sold for realization of the balance amount.

The aforesaid submission of Mr. Makkar, to my mind, cannot be accepted. What constitutes the bedrock of the agreement is the transfer of the said property by judgment debtor No. 2 to the decree holder. It, therefore, does not make sense to say that the judgment debtors had the option to voluntarily and willfully not fulfill their obligation to transfer the said property to the decree holder and to vacate the same, even by their own default, and instead require the decree holder to again chase the judgment debtors for recovery of 15 crores along with interest, as compensation. The purpose of the arbitral proceedings was to put a quietus to the disputes between the parties and satisfy the claims of the decree holder. The purpose was not to provide another avenue to the judgment debtors to again default in fulfillment of their obligation and to require the decree holder to once again initiate fresh proceedings for recovery of compensation. Clause B(iii) could have been invoked, if despite genuine and sincere efforts, for no fault of judgment debtor No. 3, the requisite consent from NOIDA or other requisite authorities did not come about for some insurmountable hurdles. It is not even the case of the judgment debtors that they had taken positive steps either to vacate the said property or to obtain necessary consent from NOIDA or other concerned authorities for the absolute transfer of the said property in favour of the decree holder.

For all the aforesaid reasons, I dismiss this application and hold that the present execution proceedings are liable to continue against the judgment debtors, and bar u/s 22 of SICA does not come in the way of these proceedings.

Ex. P. 225/2008

The arbitration award made in Terms of the Settlement executed between the parties contains agreement of the judgment debtors to sign such document as may be necessary for giving effect to the transfer of rights in the property in question, i.e. the unexpired residual period of the leasehold interest under indenture of lease deed dated 26.03.1982 of judgment debtor No. 2 in all that piece and parcel of land admeasuring 3870.60 sq. mtrs. situate and lying at Block-D, Sector No. VIII, New Okhla Industrial Development Area, District Ghaziabad, together with buildings and other constructions/structures whatsoever thereon. I am informed by learned Counsel for the decree holder that the specific number of the plot, which constitutes the said property is plot No. 2 situated in Block-D, Sector-8, NOIDA, District-Ghaziabad. Learned Counsel for the judgment debtors does not dispute the aforesaid position.

The entire consideration under the settlement already stands accounted for. The judgment debtors have not joined the decree holder to fulfill their obligations, as aforesaid. I, therefore, direct that Registrar General shall nominate a competent officer of this Court to act and on behalf of the judgment debtors for transfer of the aforesaid property in favour of the decree holder and to execute all relevant documents for obtaining permission from the concerned authorities, and once the requisite permissions are received, to finally execute the transfer document in favour of the decree holder in respect of the aforesaid property.

The decree holder shall render all necessary assistance and shall bear the expenses for the purpose of obtaining requisite permissions from the concerned authorities for execution of the transfer documents and for the registration of the transfer of the leasehold rights of judgment debtor No. 2 in its favour.

List the matter before the registrar for the said purpose on 27.09.2010.