Case BriefsSupreme Court

Supreme Court: The bench of MR Shah* and BV Nagarathna, JJ has held that the right available to the judgment debtor under Rule 60 of the Second Schedule of the Income Tax Act, 1961 is a valuable right and the last resort/opportunity to the judgment debtor to save his property and should not be affected on the technical ground and/or for the mistake and/or the bona fide mistake for which he was not at all responsible.

“It is a right available to the judgment debtor after his property is sold in a court auction. Therefore, such a valuable right available to the judgment debtor to save his property should not be affected on the technical ground and/or for the mistake and/or the bona fide mistake for which he was not at all responsible.”

Background

In the case at hand, Recovery Certificate bearing RP No.153/2006 was issued in favour of the IndusInd Bank for recovery of an amount of Rs.71,88,819.87/- recoverable from the original borrowers – respondent Nos. 3 to 5 with further interest payable at the rate of 12% p.a. from 27.12.1999 till realization and the costs, charges and expenses of the proceedings for recovery thereof.

A proclamation of sale of the properties was issued by the Recovery Officer, DRT on 28.11.2006 fixing the public auction on 08.01.2007. The amount due and payable was Rs.1,27,30,527/- including interests as on 30.06.2006. In the auction held on 08.01.2007, the bid of respondent Nos. 1 and 2 herein (original writ petitioners) being the highest offer being Rs.1.35 crores came to be accepted by the Recovery Officer. The successful bidders – respondent Nos. 1 and 2 deposited the bid amount on 22.01.2007.

The original borrowers thereafter filed an application under Rule 60 of the Second Schedule of the Income Tax Act, 1961 read with Sections 25 to 29 of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 for setting aside the auction vide application dated 25.01.2007 and submitted a Demand Draft for an amount of Rs.1,27,30,527/- as specified in the sale proclamation.

The Recovery Officer adjourned the matter to 06.02.2007 directing the respondents to serve a copy of the order and the application on the Bank and the auction purchaser. The Bank filed its reply on 06.02.2007 before the Recovery Officer in response to the application of the respondent No.5 (on the 29th day from the date of auction). In its reply, the Bank claimed that there was some shortfall in the amount deposited by the borrower but no calculation sheet was attached to the reply.

The Recovery Officer thereafter passed an order dated 15.02.2007 allowing the application submitted by the borrower by holding that the borrower had deposited the requisite amount for setting aside the sale under Rule 60 of the Second Schedule of the Income Tax Act. Accordingly, the sale of the properties in question came to be set aside. The Recovery Officer also directed the Bank to hand over all the original documents pertaining to the immovable properties in question to the borrower immediately.

The Gujarat High Court, however, set aside the order passed by the DRAT and confirmed the sale in favour of auction purchasers by dismissing the application submitted by the judgment debtor under Rule 60 of the Second Schedule of the Income Tax Act, 1961 by observing that as there was a shortfall in the deposit of the amount while exercising the right under Rule 60 and hence, there was non-compliance of the provisions of Rule 60.

Analysis

The Supreme Court, however, disagreed with the opinion of the High Court and held that as such it was the duty cast upon the Recovery Officer to mention the exact amount in the sale certificate. The Recovery Officer mentioned the amount in the Sale Certificate of Rs.1,27,30,527/- including the interest as on 30.06.2006, however, did not specify any further amount towards the interest for the period between 30.06.2006 till the date of the sale proclamation, i.e., 08.01.2007, which the Recovery Officer ought to have mentioned specifically. The aforesaid mistake and/or inaccuracy on the part of the Recovery Officer led to the shortfall in the deposit of the amount, which was towards the interest for the period between 30.06.2006 to 08.01.2007, otherwise, the judgment debtor had substantially complied with Rule 60.

“The shortfall was Rs.3,57,647/-. When the judgment debtor deposited the substantial amount of Rs. 1,27,30,527/- and other amounts due and payable under Rule 60 including the penalty and the interest, there was no reason for the judgment debtor not to deposit Rs. 3,57,647/- which is a very small amount as against the amount deposited.”

Though the Bank filed its reply before the Recovery Officer in response to the application made by the judgment debtor – borrower made under Rule 60 and in which it was stated that there was some shortfall in the amount deposited, but according to the judgment debtor, no calculation sheet was attached to the reply and/or supplied to the judgment debtor. Hence,

“If the Recovery Officer would have been accurate in submitting the exact amount in the sale proclamation due and payable on the date of sale proclamation then the eventuality which has arisen in the present case would not have arisen. There was an absurd misconduct on the part of the Recovery Officer for which the judgment debtor should not be made to suffer.”

The Court observed that if the Bank would have submitted the calculation sheet earlier alongwith the reply on 06.02.2007, which was 29th day from the date of auction, the judgment debtor would have deposited the balance shortfall amount. Therefore, there was a substantial compliance/ compliance of Rule 60. If the Recovery Officer would have been accurate in submitting the exact amount in the sale proclamation due and payable on the date of sale proclamation then the eventuality which has arisen in the present case would not have arisen. There was an absurd misconduct on the part of the Recovery Officer for which the judgment debtor should not be made to suffer.

The Court explained that the legislative intent of Rule 60 is to give the defaulter as much latitude as possible till the end and he can, under Rule 60, without assigning any cause but after depositing the sum therein mentioned as mentioned in the sale proclamation within the stipulated time, avoid the auction and protect his property. Thus, the right which is available to the judgment debtor under Rule 60 is a most valuable right available and the same shall not be permitted to be affected on the technical ground and/or bona fide mistake for which he cannot be said to be at fault.

[RS Infra-Transmission Ltd v. Saurinindubhai Patel, 2022 SCC OnLine SC 854, decided on 11.07.2022]


*Judgment by: Justice MR Shah

Rajasthan High Court
Case BriefsHigh Courts

Rajasthan High Court: In a case where the secured creditors like Unit Trust of India (‘UTI’) and a workman have preferred their petitions way back in the year 2000 and 2014 respectively, and are awaiting result of the winding up, Pushpendra Bhati, J. held that they cannot be allowed to suffer merely because some subsequent proceedings in the DRT would consume all the assets of the company and give away the auction proceeds to Kotak Mahindra Bank which is a late entrant to the dispute.

Factual Background

A company named Derby Textiles Limited (‘respondent company’) was incorporated on 22-05-1980 as a Public Limited Company, limited by shares. It requested the UTI (petitioner in Company Petition 07 of 2000) to subscribe for Secured Redeemable Non-Convertible Debentures (‘SRNCD’) of the face value of Rs.4.00 crores, which was thereby agreed and disbursed. On deviation from payments agreed recall notices were issued for payment of outstanding debt along with interest.

Company Petition 07/ 2000

A winding up petition was preferred under Sections 433, 434 and 439, Companies Act, 1956, seeking winding up of the company and appointment of an official liquidator regarding all the assets and properties of the respondent-Company, since the respondent-Company was unable to pay the outstanding debt amount. As the proceedings were pending, the respondent-Company meanwhile made an application that it has been registered as sick company with Board of Industrial and Financial Reconstruction. The company kept dilly-dallying on some or the other issues thereafter in the Court and the matter kept on getting adjourned, even when the Court cautioned the parties that no further adjournments would be given.

Application No.2 of 15 in Company Petition No.9 of 2014

The Company petition was filed for liquidation proceedings to begin and while such adjudication was going on, an application was filed by a workman, i.e. Application No. 2 of 2015 in company petition No. 9 of 2014, contending, as the auction proceedings had already taken place, and unless an official liquidator is appointed to secure the debts of the petitioner, the petitioner’s rights shall be permanently prejudiced being a prioritized creditor.

As no one appeared for the respondent company an interim order was passed by the Court on 28-03-2022, “Despite service, none appears for the respondent-Company. In the interest of justice, further proceedings in case No.144/2004 before the Debt Recovery Tribunal, Jaipur shall remain stayed.”

Challenging the aforesaid order, an SLP was filed before Supreme Court which upheld the stay order. Consequently, vide another application Kotak Mahindra Bank Limited was impleaded as party respondent. Thus, application No.01 of 2022 (in company petition No.7 of 2000) was filed on behalf of Kotak Mahindra Bank Limited seeking vacation of the interim order dated 28-03-2022 and one another application No. 4 of 2022 (in company petition No.9 of 2014) was filed by Mr. Anil Vyas, Advocate (on behalf of the auction purchaser- M/s. Noble Art & Craft House, Jodhpur) seeking modification of the aforementioned interim order dated 28-03-2022.

It was contended by Kotak Mahindra Bank Limited as well as the auction purchaser, that their proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (‘RDDB Act’) is on a stronger footing, and that, leave of the Company Court is not necessary under Sections 537 or 446 of the Companies Act, 1956 is a settled proposition and there cannot be any second thought in the mind of the Court.

The Court noted that the jurisdiction of the Tribunal and the Recovery Officer, in terms of the RDDB Act, is exclusive, in respect of the debts payable to Banks and Financial Institutions, and the Company Court cannot use its powers under Section 442 read with Section 537 or under Section 446 of the Companies Act, 1956, against the Tribunal/recovery officer, and thus, Sections 442, 446 and 537 cannot be applied against the Tribunal, is a settled proposition.

The Court further observed that merely because the company was not cooperating and the adjudication of the matter took a long time, the company petitioner cannot be rendered remediless by this Court on account of the complete assets being disbursed by the DRT in a separate proceeding under the RDDB Act. Thus, in the present case, one of the secured creditors UTI and workman have preferred their petitions way back in the year 2000 and 2014 respectively, and are awaiting result of the winding up and the protection of their respective interests, and thus, they cannot be allowed to suffer merely because some subsequent proceedings in the DRT would consume all the assets of the company and give away the auction proceeds to the Kotak Mahindra Bank Limited and the auction purchaser, who are subsequent entrants in the dispute.

Placing heavy reliance on Bank of Nova Scotia v. RPG Transmission Limited, 2004 SCC OnLine Del 1048, the Court did not allow application No.1 of 2022 in company petition No.7 of 2000 filed on behalf of the Kotak Mahindra Bank Limited seeking vacation of the interim order dated 28-03-2022 and application No. 4 of 2022 in company petition No.9 of 2014 filed on behalf of the auction purchaser seeking modification of the said interim order.

[The Specified Undertaking Of the UTI v. Derby Textiles Limited, SB Company Petition 7 of 2000, decided on 27-07-2022]


Advocates who appeared in this case :

Mr. Manoj Bhandari Sr. Advocate assisted by Mr. Aniket Tater. Mr. Siddarth Tatiya and Mr. Shailendra Gwala, Advocates, for the Petitioner(s);

Mr. Sanjay Jhanwar Sr. Advocate assisted by Mr. Rajat Sharma & Mr. Pranav Bafna. Mr. Sanjay Nahar Mr. Anil Vyas Mr. Sanjeet Purohit with Mr. Surendra Thanvi Mr. Naman Mohnot Mr. Pushkar Taimini, Advocates, for the Respondent(s).


*Arunima Bose, Editorial Assistant has reported this brief.

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of L. Nageswara Rao, Hemant Gupta* and Ajay Rastogi, JJ has upheld Kerala High Court’s decision holding that Section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) mandating the District Magistrate to deliver possession of a secured asset within 30 days, extendable to an aggregate of 60 days upon reasons recorded in writing, is a directory provision.

Object of SARFAESI Act

It was noticed that the SARFAESI Act was enacted to provide a machinery for empowering banks and financial institutions, so that they may have the power to take possession of secured assets and to sell them. This was done after Recovery of Debts due to Banks and Financial Institutions Act, 1993, which was first enacted to streamline the recovery of public dues, did not give desirous results.

Does inability to take possession of secured assets within time limit renders the District Magistrate Functus Officio?

Taking note of this objective of the SARFAESI Act in mind, the Court noticed that the time limit to take action by the District Magistrate has been fixed to impress upon the authority to take possession of the secured assets. However, inability to take possession within time limit does not render the District Magistrate Functus Officio.

Interpreting Section 14 of the SARFAESI Act, the Court said that

“… the secured creditor has no control over the District Magistrate who is exercising jurisdiction under Section 14 of the Act for public good to facilitate recovery of public dues. Therefore, Section 14 of the Act is not to be interpreted literally without considering the object and purpose of the Act. If any other interpretation is placed upon the language of Section 14, it would be contrary to the purpose of the Act.”

The Court noticed that the time limit is to instill a confidence in creditors that the District Magistrate will make an attempt to deliver possession as well as to impose a duty on the District Magistrate to make an earnest effort to comply with the mandate of the statute to deliver the possession within 30 days and for reasons to be recorded within 60 days. Hence, the remedy under Section 14 of the Act is not rendered redundant if the District Magistrate is unable to handover the possession. The District Magistrate will still be enjoined upon, the duty to facilitate delivery of possession at the earliest.

Limitations on power of High Courts to pass interim orders

On the issue of borrowers and other aggrieved persons invoking the jurisdiction of the High Court under Articles 226 or 227 of the Constitution of India without availing the alternative statutory remedy, the Court said that though the High Courts are well aware of the limitations in exercising their jurisdiction when affective alternative remedies are available, but a word of caution would still be necessary for the High Courts that

“… interim orders should generally not be passed without hearing the secured creditor as interim orders defeat the very purpose of expeditious recovery of public money.”

[C. Bright v. District Collector, 2020 SCC OnLine SC 909, decided on 05.11.2020]


*Justice Hemant Gupta has penned this judgment

Case BriefsSupreme Court

Supreme Court: In a case dealing with companies defaulting a loan of Rs. 48 Crores including interest from Kotak Mahindra Bank, the question relating to the right of a secured creditor to file a winding up petition after such secured creditor has obtained a decree from the Debts Recovery Tribunal [DRT] and a recovery certificate based thereon arose before the bench of RF Nariman and Navin Sinha, JJ. On the issue, the bench said:

“cases like the present one have to be decided by balancing the interest of creditors to whom money is owing, with a debtor company which will now go in the red since a winding up petition is admitted against it. It is not open for persons like the appellant to resist a winding up petition which is otherwise maintainable without there being any bona fide defence to the same.”

The Court said that when it comes to a winding up proceeding under the Companies Act, 1956, since such a proceeding is not “for recovery of debts” due to banks, the bar to jurisdiction contained in Section 18 read with Section 34 of the Recovery of Debts Act would not apply to winding up proceedings under the Companies Act, 1956. It further added:

“As a matter of fact, sub-paragraphs (i) and (iv) of paragraph 18 would show that proceedings before the DRT, and winding up proceedings under the Companies Act, 1956, can carry on in parallel streams. That is why paragraph 18(i) states that a Debts Recovery Tribunal, acting under the Recovery of Debts Act, would be entitled to order sale, and sell the properties of the debtor, even of a company in liquidation, but only after giving notice to the Official Liquidator, or to the Liquidator appointed by the Company Court, and after hearing him.”

Citing Lord Atkin’s judgment in Lissenden v. C.A.V. Bosch, Ltd., [1940] 1 All E.R. 425 at 436-437, where he said that one has not lost one’s right to a second helping because one has taken the first, the Court said that the Bank cannot be said to be blowing hot and cold in pursuing a remedy under the Recovery of Debts Act and a winding up proceeding under the Companies Act, 1956 simultaneously, in fact:

“When secured creditors like the respondent are driven from pillar to post to recover what is legitimately due to them, in attempting to avail of more than one remedy at the same time, they do not “blow hot and cold”, but they blow hot and hotter.”

[Swaraj Infrastructure Pvt. Ltd. v. Kotak Mahindra Bank Ltd., 2019 SCC OnLine SC 92, decided on 29.01.2019]

Case BriefsSupreme Court

Supreme Court: Finding Vijay Mallya guilty of contempt of court, the Bench of A.K. Goel and U.U. Lalit, JJ directed him to appear before the Court on 10.07.2017 in order to give him an opportunity to be heard before deciding the quantum of punishment. The Court said that Vijay Mallya is guilty of disobeying the Orders passed by this Court in not disclosing full particulars of the assets.

A consortium of banks sought relief from the Court after Vijay Mallya, who owes more than Rs. 9000 crores to the banks, instead of repaying his debts, transferred a huge sum of $40 million to his children. It was alleged by the banks that said transfer was not only in contempt of the Orders passed by the Karnataka High Court but was also an attempt to subvert the Course of Justice by diverting the funds to shield them from ongoing recovery proceedings.

The High Court of Karnataka had passed an interim order restraining the respondent from transferring, alienating, disposing or creating third party rights in respect of movable as well as immovable properties belonging to them until further. Hence, in the light of the transfer of a huge sum to the children of Vijay Mallya, the Court also held him guilty of violating the express Orders of Restraint passed by the High Court of Karnataka.

The Court said that though Vijay Mallya has not filed any reply to the Contempt Petition nor had he appeared in person but it necessary to give him one more opportunity and also hear him on the proposed punishment and hence, he should personally appear before the Court on 10.07.2017. [State Bank of India v. Kingfisher Airlines, 2017 SCC OnLine SC 554, order dated 09.05.2017]

Case BriefsSupreme Court

Supreme Court: In the matter where the Housing & Urban Development Corporation Ltd (HUDCO) had initiated proceedings against the Maharaji Educational Trust for repayment of loan of approximately Rs. 75 crores, the Court said that it is not only startling but also shocking to note that a giant institution which is imparting education to about 3000 students involving manpower of about 700 personnel is finding it difficult to pay the loaned amount. Holding the Educational Trust to be a wilful defaulter, the Court noticed that the Trust has built the property, colleges, hospitals from the money borrowed from HUDCO. It was the bounden duty of the Educational Trust to pay back the money to HUDCO. Thus, no equitable principle comes to their rescue as despite running the institutions for the last 22 years, they have not paid back the amount.

The Court, hence, directed the Educational Trust to settle scheme of repayment with HUDCO within one month and to start payment of dues w.e.f. month of June, 2017. It was clarified that on non-complaince, it would be open to HUDCO to sale approximately 43 acres of the land which was mortgaged with it to realize its dues in the legally permissible manner. It was further directed that if the proceeds from sale of approximately 43 acres of land are not sufficient to satisfy the dues of HUDCO, it would be open to sell 5 out of the 6 mortgaged properties or its part which may be necessary for realization of the outstanding dues.

The Court also took note of the fact that though the land was under mortgage with HUDCO, the Trust had exchanged 21 acres of the mortgaged property out of property No.6 with U.P. Avas Evam Vikas Parishad and that an agreement to sell had been entered into by the Educational Trust in favour of SGS Construction and Development (P) Ltd.  the property comprising 63.45 acres which also included 21 acres of the property obtained in exchange from Avas Parishad. Regarding the said land, the Court directed that it can be sold only if Arbitrator disallows the claim of SGS Constructions for purchase of 21 acres of said property and that too if the dues are not recovered by the abovementioned sales.

The Bench of Arun Mishra and S. Abdul Nazeer, JJ warned the Educational Trust that if it wants to run institutions, they are bound to make payment and as they are liable to pay, they should pay in all fairness all sums which they have borrowed sans any ifs and buts. [ Maharaji Educational Trust v. Housing & Urban Development Corporation Ltd. , 2017 SCC OnLine SC 552, decided on 08.05.2017]

Case BriefsSupreme Court

Supreme Court: Deciding the question as to the fate of the deposit on the disposal of the appeal in case of an appeal under Section 18 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) before the Debt Recovery Appellate Tribunal(DRAT), the bench of Kurian Joseph and R.F. Nariman, JJ held that the partial deposit before the DRAT as a pre-condition for considering the appeal on merits in terms of Section 18 of the Act, is not a secured asset.

It was further held that It is not a secured debt either, since the borrower or the aggrieved person has not created any security interest on such pre-deposit in favour of the secured creditor. If that be so, on disposal of the appeal, either on merits or on withdrawal, or on being rendered infructuous, in case, the appellant makes a prayer for refund of the pre-deposit, the same has to be allowed and the pre-deposit has to be returned to the appellant, unless the Appellate Tribunal, on the request of the secured creditor but with the consent of the depositors, had already appropriated the pre-deposit towards the liability of the borrower, or with the consent, had adjusted the amount towards the dues, or if there be any attachment on the pre-deposit in any proceedings under Section 13(10) of the Act read with Rule 11 of The Security Interest (Enforcement) Rules, 2002, or if there be any attachment in any other proceedings known to law.

As per Section 18 of SARFAESI Act, an appeal before the DRAT can be entertained only if the borrower deposits fifty per cent of the amount in terms of the order passed by the DRT under Section 17 of the Act or fifty per cent of the amount due from the borrower as claimed by the secured creditor, whichever is less. The said amount can be reduced to 25% by DRAT. [Axis Bank v. Sbs Organics Pvt. Ltd., 2016 SCC OnLine SC 353decided on 22.04.2016]