Full Text
HIGH COURT OF DELHI
W.P.(C) 3271/2024 & CM APPL.13500/2024
MS PERFECT INFRAENGINEERS LIMITED THROUGH ITS
PROMOTER AND GUARANTOR & ANR. ..... Petitioners
Through: Mr. Mathews J. Nedumpara, Advocate.
Through: Ms. Shiva Laxmi, CGSC
14/UOI.
HON'BLE MS. JUSTICE MANMEET PRITAM SINGH ARORA
JUDGMENT
1. Present petition filed under Article 226 of the Constitution of India impugns the vires of the following provisions: - (1)Section 14 and Section 34 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). (2)Section 19 and Section 34 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDB Act). (3)Section 7 and Section 231 of the Insolvency and Bankruptcy Code, 2016 (IBC).
2. The Petitioner Company further prays for quashing of the proceedings initiated by Technology Development Board (TDB) i.e., Respondent No.1 under Section 7 of the IBC before the National Company Law Tribunal i.e., NCLT-I, Mumbai, in Company Petition No. 322 (MB) of 2023.
3. The Petitioner has filed CM APPL. No. 13500/2024 for interim relief and is seeking stay of the proceedings pending before the NCLT-I, Mumbai and the action initiated by Respondent ICICI Bank under Sections 13(2), 13(4) and 14 of the SARFAESI Act, during the pendency of this petition. Brief Facts
4. It is stated that the Petitioner Company, which is a Micro, Small and Medium Enterprise (MSME), availed credit facilities from the Respondent, ICICI Bank. 4.[1] In addition, a loan of Rs. 7.[5] Crores was sanctioned in favour of Petitioner Company by the TDB, out of which an amount of Rs. 4.[5] Crores was released to it. It is stated that due to the Petitioner Company’s strained relations with the Respondent ICICI Bank with respect to charging of excess interest, TDB unreasonably did not release the remaining amount of Rs. 3 Crores.
5. It is stated that the Respondent ICICI Bank issued a demand notice under Section 13(2) of SARFAESI Act and took over the possession of the mortgaged property under Section 14 of the said Act.
6. It is stated that Petitioner Company has filed a Commercial Suit No. COMS (L) No. 27512/2023 in Mumbai Civil Court, claiming damages to the tune of Rs. 23.05 Crores against the Respondents ICICI Bank and TDB. Further, the Petitioner Company has filed a WP(L) No. 27528/2022 before the High Court of Bombay under Section 36AA of the Banking Regulation Act, 1949 for removal of the officers of the Respondent ICICI Bank for their wrongful conduct. 6.[1] The Petitioner Company conceded that it has instituted multifarious proceedings against both the Respondents, TDB and ICICI Bank, before the Courts at Mumbai and the details of the 20 such proceedings are enlisted in ‘Annexure P-4’ of present writ petition. In fact, one of the writ petitions i.e., WP(L) 35792/2022 already stands dismissed by the High Court of Bombay and SLP (C) 2112/2024, assailing the order of the High Court, as well has been dismissed.
7. It is stated that presently the Petitioner Company is aggrieved by Respondent TDB’s action of filing a Company Petition No. 322 of 2023 under Section 7 of the IBC, for initiating Corporate Insolvency Resolution Process (CIRP) against the Petitioner Company, in NCLT-I, Mumbai.
8. The Petitioner Company seeks the quashing of the aforesaid proceedings initiated by both the Respondents, ICICI Bank and TDB, in this writ petition; as it contended that all the issues amongst the Petitioner, TDB and ICICI Bank ought to be decided in the pending civil suit at Mumbai; and no other forum except Civil Court is competent to decide the issues raised by the Petitioner Company. Arguments on behalf of the Petitioner Company
9. Learned counsel for the Petitioner Company stated that with the enactments of statutes such as the SARFAESI Act, RDB Act and IBC, the jurisdiction of the Civil Court has been barred and the said bar has the effect of denying access to justice for the borrowers against the breaches committed by the banks and financial institutions. 9.[1] He stated that bar in the said statutes is contrary to the established principle of law that if any banking institution/party violates the terms of the contract, a cause of action arises in favour of the borrower; and the borrower should be allowed to enforce its rights against the banking institution in the Civil Court. 9.[2] He stated that protecting the rights of the borrowers are in public interest and, therefore, the borrower should be made available a suitable judicial redressal mechanism, to espouse their grievance against the unfair and unjust act of banks and financial institutions, which as per the Petitioner Company is not provided for in the existing statutory scheme of aforesaid enactments. He stated the Petitioner Company challenges the vires of the provisions barring the jurisdiction of the Civil Court on the said pleas. Analysis and Findings
10. We have heard the learned counsel for the Petitioner and perused the record. Section 14 and Section 34 of the SARFAESI Act
11. As regards the constitutionality of Sections 14 and 34 of the SARFAESI Act, it would be apposite to refer to the judgment of a Division Bench of this Court in the case of M. Sons Gems and Jewellery Pvt. Ltd. v. RBI[1] wherein a writ petition was filed for striking down the Chapter II of the SARFAESI Act for not providing a judicial redressal for borrowers, against Asset Reconstruction Company (‘ARC’). After noting the judgments of the Supreme Court, the said Writ Petition was dismissed by the Division Bench and it was held that Chapter II of the SARFAESI Act is not manifestly arbitrary and is not in violation of Article 14 of the Constitution of India. It was further held that a borrower has an appropriate remedy under Section 17 of the SARFAESI Act against the bank and ARCs. The relevant observation of the Division Bench reads as under:
“17 ….. Any action by an instrumentality of State is subject to judicial scrutiny under Article 226 of the Constitution of India. It is always open for any borrower to approach the High Court under Article 226 of the Constitution of India contending that the Reserve Bank of India is not exercising due and adequate control over any Asset Reconstruction Company and that the provisions of Chapter II of the SARFAESI Act is being violated. …..
22. The contention of the Petitioners that that the scope of the remedy available under Section 17 of the SARFAESI Act is restricted only to disputes pertaining to Chapter III of the SARFAESI Act and it does not cover Chapter II of the SARFAESI Act cannot be accepted. The borrower is entitled to file an application under Section 17 of the SARFAESI Act challenging the actions of the Asset Reconstruction Company/Bank on the ground that it is not in accordance with the SARFAESI Act….
23. The Hon'ble Supreme Court in the case of Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311, while dealing with a constitutional challenge to the validity of Section 17 of the SARFAESI Act recognized that the borrowers cannot be left remediless in case they have been wronged by a secured creditor, bank or financial institutions and that borrowers have a right to approach the DRT after measures are taken against the borrower under Section 13(4) of the SARFAESI Act and the same provides reasonable protection to the borrower…. ….
24. The Apex Court in its decision in Indian Overseas Bank v. Ashok Saw Mill, (2009) 8 SCC 366, discussed the jurisdiction of DRT under Section 17 of the SARFAESI Act. The Court noted that certain checks and balances have been introduced through Section 17 of the SARFAESI Act in order to prevent misuse of the wide powers conferred upon banks and financial institutions under the SARFAESI Act. The Apex Court held that Section 17 of the SARFAESI Act permits the borrower, who is aggrieved by measures taken against him under Section 13(4) to approach the DRT and the DRT has been vested with the power to declare any such action as invalid. It notes that Section 17 (3) of the SARFAESI Act vests with the DRT, the authority to question the action taken by a secured creditor….
25. In United Bank of India v. Satyawati Tondon, (2010) 8 SCC 110, the Apex Court noted that the SARFAESI Act is a code in itself and the remedy provided under Section 17 is an expeditious and effective remedy available to an aggrieved person.
26. It is well settled that the remedy u/s 17(1) of the SARFAESI Act allows the borrower to challenge the actions of the secured creditor on all such grounds which would render the action of the secured creditor illegal. The DRT while exercising its powers under Section 17 of the SARFAESI Act is not restricted to the compliance of provisions of the Act alone and can get into violations of other provisions such as mandatory guidelines of RBI and other incidental questions.
27. The aforestated decisions of the Hon'ble Supreme Court make it clear that a borrower aggrieved by the actions of the secured creditor can approach the DRT under Section 17 of the SARFAESI Act. The SARFAESI Act is a code in itself and the remedy provided for under Section 17 of the SARFAESI Act is an expeditious and effective remedy available to borrowers and the same provides reasonable protection to the interest of the borrowers. The DRT under Section 17(3) of the SARFAESI Act has the power to examine whether the actions of the secured creditor are in accordance with the provisions of the SARFAESI Act and the rules made thereunder. The remedy under Section 17 of the SARFAESI Act is not restricted to Chapter III of the SARFAESI Act and the DRT has power to look into the compliance of the secured creditor with other provisions of law, and not just provisions of the SARFAESI Act and rules framed thereunder. ….
30. Further, the bar on jurisdiction of civil courts under Section 34 has been upheld by the Hon'ble Supreme Court in Mardia Chemicals Ltd. (supra) and the reason for providing “protection of actions taken under good faith” under Section 32 has been explained in Priyanka Srivastava v. State of U.P., (2015) 6 SCC 287 wherein the Hon'ble Supreme Court has discussed the intention of the legislature to provide for the same under the SARFAESI Act…. (Emphasis supplied) 11.[1] In view of the said judgments of the Supreme Court and this Court, the challenge to Section 14 and Section 34 of the SARFAESI Act, therefore, does not arise for consideration. Section 19 and Section 34 of the RDB Act
12. Similarly, the constitutional validity of the RDB Act was challenged before the Supreme Court in the case of Union of India & Anr. v. Delhi High Court Bar Association & Ors.[2] on the ground that the Act is unreasonable and is violative of Article 14 of the Constitution of India. The Supreme Court in the said judgment has authoritatively held that the RDB Act is a valid piece of legislation. The Supreme Court [at paragraph 24 therein] further held that a party cannot be vested with an absolute right to claim that his/her dispute is to be adjudicated upon only by a Civil Court. The relevant finding of the Supreme Court reads as under: “15. The learned counsel has drawn our attention to the provisions of the Act and we are unable to agree with the Delhi High Court that the Act or any other provision thereof is in any way arbitrary or bad in law. During the pendency of these appeals, the Act has been amended and whatever lacunae or infirmities existed have now been removed by the said amending Act and with the framing of more rules….
16. The aforesaid section prescribes the manner in which an application to the Tribunal filed by a bank or a financial institution is to be dealt with. Section 22 provides that the Tribunal and the Appellate Tribunal shall not be bound by the procedure laid down by the Code of Civil Procedure, but shall be guided by the principles of natural justice and, subject to the Rules framed. They shall have powers to regulate their own procedure as given to them. The Tribunal and the Appellate Tribunal under Section 22(2) are given the same powers as are vested in a civil court with regard to the matters specified in the said sub-section, which include the power of summoning and enforcing the attendance of any person and examining him on oath.
17. The very purpose of establishing the Tribunal being to expedite the disposal of the Tribunal and the Appellate Tribunal are required to deal with the applications in an expeditious manner. It is precisely for this reason that Section 22(1) stipulates that the Tribunal and the Appellate Tribunal shall not be bound by the procedure laid down by the Code of Civil Procedure. Therefore, even though the Tribunal can regulate its own procedure, the Act requires that any procedure laid down by it must be guided by the principles of natural justice while, at the same time, it should not regard itself as being bound by the provisions of the Code of Civil Procedure. ….
21. As a result of the amendments made in the Act and the Rules, the position which would emerge is that Section 19(1) of the Act requires the filing of an application by a bank or a financial institution for the recovery of debt to be made before a Tribunal having territorial jurisdiction. On receipt of the application, summons are issued to the defendant who has to show cause within the stipulated period as to why the relief prayed for should not be granted. A right is now given by sub-section (6) of Section 19 to the defendant to claim a set-off against the applicant's demand and the said written statement is to have the same effect as a plaint in a crosssuit. Under sub-section (8) of Section 19, the defendant is also entitled to set up a counter- claim in addition to his right of claiming a set-off. Subsection (20) of Section 19 provides that after giving the applicant and the defendant an opportunity of being heard, the Tribunal may pass such interim or final order as it thinks fit to meet the ends of justice…. ….
24. The manner in which a dispute is to be adjudicated upon is decided by the procedural laws which are enacted from time to time. It is because of the enactment of the Code of Civil Procedure that normally all disputes between the parties of a civil nature would be adjudicated upon by the civil courts. There is no absolute right in anyone to demand that his dispute is to be adjudicated upon only by a civil court. The decision of the Delhi High Court proceeds on the assumption that there is such a right. As we have already observed, it is by reason of the provisions of the Code of Civil Procedure that the civil courts had the right, prior to the enactment of the Debts Recovery Act, to decide the suits for recovery filed by the banks and financial institutions. This forum, namely, that of a civil court, now stands replaced by a Banking Tribunal in respect of the debts due to the bank. When in the Constitution Articles 323-A and 323-B contemplate establishment of a Tribunal and that does not erode the independence of the judiciary, there is no reason to presume that the Banking Tribunals and the Appellate Tribunals so constituted would not be independent, or that justice would be denied to the defendants or that the independence of the judiciary would stand eroded. ….
31. For the aforesaid reasons, while allowing the appeals of the Union of India and the Banks, we hold that the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 is a valid piece of legislation. As a result, thereof, the writ petitions or appeals filed by various parties challenging the validity of the said Act or some of the provisions thereof, are dismissed….” 12.[1] Thus, the Petitioner Company’s challenge to the vires of Sections 19 and 34 of the RDB Act, therefore, does not survive for consideration. Section 7 and Section 231 of the IBC.
13. With respect to the challenge against Section 7 and Section 231 of the IBC, the said issue is no longer res integra in view of the judgment of the Supreme Court in the case of Swiss Ribbons Private Limited & Anr. v. Union of India & Ors.[3] wherein while upholding the constitutional validity of the IBC, the Supreme Court observed, among other things, in light of existing law as well as the objects and reasons of the IBC, that the focus of the IBC was to ensure the revival and continuation of the corporate debtor, with liquidation being used only as a last resort. The Supreme Court held that, in terms of scheme and framework, IBC is a helpful legislation designed to help corporate debtors get back on their feet, rather than a mere recovery legislation in favour of the creditors. The relevant paras read as under:
1. The present petitions assail the constitutional validity of various provisions of the Insolvency and Bankruptcy Code, 2016 (“the Insolvency Code” or “the Code”). Since we are deciding only questions relating to the constitutional validity of the Code, we are not going into the individual facts of any case…………..? ………..
58. Rules 11, 34 and 37 of the National Company Law Tribunal Rules, 2016 (NCLT Rules) state as follows:
proceed ex parte to dispose of the application. (3) If the respondent contests to the notice received under sub-rule (1), it may, either in person or through an authorised representative, file a reply accompanied with an affidavit and along with copies of such documents on which it relies, with an advance service to the petitioner or applicant, to the Registry before the date of hearing and such reply and copies of documents shall form part of the record.” A conjoint reading of all these Rules makes it clear that at the stage of the adjudicating authority's satisfaction under Section 7(5) of the Code, the corporate debtor is served with a copy of the application filed with the adjudicating authority and has the opportunity to file a reply before the said authority and be heard by the said authority before an order is made admitting the said application.
59. What is also of relevance is that in order to protect the corporate debtor from being dragged into the corporate insolvency resolution process mala fide, the Code prescribes penalties. Thus, Section 65 of the Code reads as follows: “65. Fraudulent or malicious initiation of proceedings.—(1) If, any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, as the case may be, the adjudicating authority may impose upon such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees. (2) If, any person initiates voluntary liquidation proceedings with the intent to defraud any person, the adjudicating authority may impose upon such person a penalty which shall not be less than one lakh rupees but may extend to one crore rupees.”
60. Also, punishment is prescribed under Section 75 for furnishing false information in an application made by a financial creditor which further deters a financial creditor from wrongly invoking the provisions of Section
7. Section 75 reads as under: “75. Punishment for false information furnished in application.—Where any person furnishes information in the application made under Section 7, which is false in material particulars, knowing it to be false or omits any material fact, knowing it to be material, such person shall be punishable with fine which shall not be less than one lakh rupees, but may extend to one crore rupees.”
120. The Insolvency Code is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole. Earlier experiments, as we have seen, in terms of legislations having failed, “trial” having led to repeated “errors”, ultimately led to the enactment of the Code. The experiment contained in the Code, judged by the generality of its provisions and not by so-called crudities and inequities that have been pointed out by the petitioners, passes constitutional muster. To stay experimentation in things economic is a grave responsibility, and denial of the right to experiment is fraught with serious consequences to the nation. We have also seen that the working of the Code is being monitored by the Central Government by Expert Committees that have been set up in this behalf. Amendments have been made in the short period in which the Code has operated, both to the Code itself as well as to subordinate legislation made under it. This process is an ongoing process which involves all stakeholders, including the petitioners.
121. ….These figures show that the experiment conducted in enacting the Code is proving to be largely successful. The defaulter's paradise is lost. In its place, the economy's rightful position has been regained. The result is that all the petitions will now be disposed of in terms of this judgment. There will be no order as to costs. 13.[1] Therefore, the Petitioner Company’s challenge to the vires of the Sections 7 and 231 of the IBC does not survive for consideration.
14. Learned counsel for the Petitioner stated that though he is aware about the aforesaid judgments of the Supreme Court, however, he does not agree with the law laid down in the said judgment. We can only record that the submission of the learned counsel for Petitioner is untenable and misconceived in law; and indicates frivolous nature of this petition. Thus, in view of the authoritative judgments of the Supreme Court and this Court, the prayers (a) and (b) challenging the vires of various statutory provisions are without any merits.
15. The grounds in the writ petition are limited to challenging the vires of the statutory provisions as prayed for in prayers (a) and (b), which as held above are without any merits. There are no grounds in the writ petition for the reliefs sought in prayers (c) to (f). Thus, reliefs sought in prayers (c) to (f) do not survive for consideration in these proceedings.
16. We may further note that in the said prayer clauses (c) to (f), the Petitioner Company is seeking relief of quashing and/or stay of legal proceedings instituted by Respondents, ICICI Bank and TDB, before the Courts and Tribunals in Mumbai. The Petitioner Company carries on business in Mumbai and the legal proceedings between the parties are all pending in Mumbai. The cause of action has, therefore, arisen in Mumbai and the High Court in Bombay is already in seisin of several proceedings initiated by the Petitioner Company. The writ petition is bereft of any facts, which would show that the cause of action has arisen within the territorial jurisdiction of this Court. Assuming any miniscule part of the cause of action has been arisen within Delhi, in view of the judgment of the Full Bench of this Court in Sterling Agro Industries Ltd. v. Union of India[4], we are of the opinion that it would not be appropriate to entertain this writ petition and the Petitioner should approach the appropriate High Court for the said reliefs, though we have grave doubts if the said reliefs are even otherwise maintainable in law.?
17. In view of the aforesaid findings, the writ petition along with pending applications is dismissed.
MANMEET PRITAM SINGH ARORA, J ACTING CHIEF JUSTICE APRIL 16, 2024/rhc/sk