M/s Bharat Steel
Tubes Ltd. etc. Vs. IFCI Ltd. & Ors.
J U D G M E N T
ALTAMAS KABIR, J.
1.
Permission
to file Special Leave Petitions is granted.
2.
In
these Special Leave Petitions, M/s Bharat Steel Tubes Ltd. has challenged the judgment
and order dated 9th July, 2010, passed by a Division Bench of the Delhi High Court
in WP(C) No.7097 of 2008, holding that the Respondent, Industrial Finance Corporation
of India Limited is a "financial institution" under Section 4A(2) of the
Companies Act, 1956, read with Section 2(1)(m) of the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002, (hereinafter
referred to as `the SARFAESI Act') and that, as a consequence, the Respondent IFCI
Ltd. would be entitled to take recourse to the provisions of the SARFAESI Act in
order to enforce a "security interest" which had accrued in its favour.
The Petitioner has also challenged an order passed by a Single Bench of the Delhi
High Court on 10th September, 2010, in I.A.No.12908/09 in CS(OS)No.1886 of 2009
vacating the injunction order earlier passed in the suit.
3.
Appearing
for the Petitioner, Mr. Rakesh Dwivedi, learned Senior Advocate, firstly drew our
attention to Section 4A of the Companies Act, 1956, which was introduced by way
of an amendment with effect from 1st February, 1975, defining "Public Financial
Institutions". It provides that the various financial institutions specified
in Sub-Section (1), including the Industrial Finance Corporation of India, established
under Section 3 of the Industrial Finance Corporation Act, 1948, is to be
regarded for the purposes of the said Act, as a public financial institution. Learned
counsel also pointed out that Sub-Section (2) of Section 4A also provides that subject
to the provisions of Sub-Section (1), the Central Government may, by notification
in the Official Gazette, specify such other institutions as it may think fit to
be a public financial institution. A limitation, however, has been imposed on
the said powers of the Central Government by the proviso to Sub-Section (2) which
provides that no institution is to be specified as a public financial institution
unless:- (i) It has been established or constituted by or under any Central
Act; or (ii) Not less than 51% of the paid-up share capital of such institution
is held or controlled by the Central Government.
4.
Mr.
Dwivedi submitted that while clause (i) of the proviso to Sub-Section (2) of
Section 4A of the above Act is not attracted to the facts of this case, the second
clause would have been attracted, but for the fact that at the relevant point
of time and even now the Central Government does not hold or control 51% or
more of the paid-up share capital of the institution concerned. Mr. Dwivedi
submitted that on account of disinvestment at regular intervals, the Central
Government does not hold any share in the Company and the day it ceased to hold
51% or more of the paid-up share capital, it ceased to enjoy the benefits of Section
4A(ii) and became a private company which could no longer be covered by the
definition of "public financial institution" in Section 4A of the
Companies Act, 1956. It was submitted that even if the Central Government continue
to hold shares in the Company, its status would be that of any other private shareholder
and the Corporation could no longer enjoy the status of a Public Financial Institution
given to it under Section 4A of the Companies Act, 1956.
5.
In
order to bolster his submissions, Mr. Dwivedi referred to the Industrial Finance
Corporation (Transfer of Undertaking and Repeal) Act, 1993, hereinafter referred
to as "the 1993 Act", whereunder the nature and character of the Industrial
Finance Corporation of India underwent a change and the Corporation was incorporated
as a Company as defined in Section 1(i)(b) of the aforesaid Act. Mr. Dwivedi pointed
out that under Section 3, the undertaking of the Corporation was to vest in the
Company on a date to be appointed by notification in the Official Gazette and on
the said date the undertaking of the Corporation would stand transferred and vested
in the newly- incorporated Company. It appears that the appointed date was
subsequently notified as 1st July, 1993.
6.
It
was also pointed out by Mr. Dwivedi that Section 4 of the 1993 Act mentions the
general effect of vesting of an undertaking in the Company to be so incorporated.
By virtue of Sub-Section (2) of Section 4, the undertaking of the Corporation, which
was transferred to and vests in the Company under Section 3, shall be deemed to
include all the various items set out in Sub-Section (2) of Section 4. In
addition, under Sub-Section (3) of Section 4, all contracts, deeds, bonds, guarantees,
powers of attorney, other instruments and working arrangements subsisting immediately
before the appointed date and affecting the Corporation would cease to have
effect or to be enforceable against the Corporation and would be of full force and
effect against or in favour of the Company, in which the undertaking of the Corporation
had vested.
7.
Reference
was then made to Sub-Section (5) of Section 4, whereunder with effect from the appointed
date, fiscal and other concessions, licences, benefits, privileges and exemptions
granted to the Corporation in connection with the affairs and business of the Corporation
under any law for the time being in force would be deemed to have been granted to
the Company. Mr. Dwivedi contended that under the said provision, it could not
be said that the status given to the Respondent Company was saved or continued under
Section 5 of the Act and, accordingly, once the Central Government ceased to
hold 51% or more of the paid-up share capital of the Company, it ceased to
enjoy the benefits under Section 5 of the 1993 Act.
8.
Mr.
Dwivedi submitted that since the Respondent No.1 Company no longer fulfilled the
criteria contained in Clause (ii) of the proviso to Sub-Section (2) of Section 4A
of the Companies Act, 1956, it had lost the status given to it under Clause (ii)
of Sub-Section (1) of Section 4A thereof and was not, therefore, entitled to invoke
the provisions of the SARFAESI Act, 2002, notwithstanding the provisions of Section
5 of the 1993 Act.
9.
Mr.
Dwivedi also pointed out that the fact that the Respondent No.1 Company was no longer
a public company under the control of the Central Government, had also been
admitted on behalf of the Respondent No.1 before the Delhi High Court in Writ Petition
(Civil)4596 of 2006, which would be reflected from the judgment delivered therein
on 17th August, 2010. Mr. Dwivedi pointed out that in paragraph 10 of the judgment
it had been mentioned by the learned Single Judge that a submission had been advanced
on behalf of the Respondent No.1 Company that it was neither substantially financed
by the Central Government nor did the Central Government hold any share whatsoever
in the Respondent No.1 Company.
10.
Mr.
K.K. Venugopal, learned Senior Advocate, appearing for the Respondent No.1 Company,
on the other hand, contended that Section 5 of the aforesaid Act was in the
nature of a saving clause, whereby all matters relating to the Corporation stood
wholly transferred in favour of the new Company after its incorporation, including,
the status which had been afforded to the Corporation under Clause (ii) of
Section 4A(1) of the Companies Act, 1956. Mr. Venugopal submitted that in
exercise of the powers conferred by Sub-Section (2) of Section 4A of the aforesaid
Act, the Central Government issued Notification No.S.O.98(E) dated 15th February,
1995, specifying the Industrial Finance Corporation of India Limited formed and
registered under the Companies Act, 1956, to be a financial institution and,
accordingly, amended the Notification issued by the Government of India, Ministry
of Law, Justice and Company Affairs (Department of Company Affairs) No.S.O.1329
dated 8th May, 1978, to include the Industrial Finance Corporation of India Limited
in the said notification.
11.
Mr.
Venugopal urged that the mere fact that the Respondent No.1 Company was no longer
under the control of the Central Government did not affect or alter its status under
Section 4A(1)(ii) of the Companies Act, 1956, as a public financial institution
and that, in effect, more than 4,000 cases filed by the Respondent No.1 Company
in its capacity as a public financial institution were pending and would be rendered
infructuous if the interpretation being sought to be given on behalf of the
Petitioner in relation to the status of the Respondent No.1 Company was to be
accepted.
12.
Having
regard to the large number of cases filed by the Respondent No.2 Company, in its
capacity as a public financial institution, which are said to be pending, we have
given our anxious consideration to the submissions advanced on behalf of the
respective parties and the provisions of the Companies Act, 1956, and the Industrial
Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993.
13.
Section
4A of the Companies Act, 1956, as far as the Industrial Finance Corporation of India
Limited is concerned, provides as follows :- 4A. Public financial
institutions.- (1) Each of the financial institutions specified in this sub-section
shall be regarded, for the purposes of this Act, as a public financial
institution, namely:-
i.
..........................................................................................
ii.
the
Industrial Finance Corporation of India, established under Section 3 of the Industrial
Finance Corporation Act, 1948 (7 of 1948);
iii.
..........................................................................................
iv.
..........................................................................................
v.
..........................................................................................
vi.
..........................................................................................
vii.
..........................................................................................
(2) Subject to the provisions
of sub-section (1) the Central Government may, by notification in the Official Gazette,
specify such other institution as it may think fit to be a public financial
institution: Provided that no institution shall be so specified unless-
(i) it has been established
or constituted by or under any Central Act, or (ii) not less than fifty-one per
cent, of the paid-up share capital of such institution is held or controlled by
the Central Government."
14.
In
our view, the provisions of Sub-Section (1) of Section 4A stand independent of Sub-Section
(2) and the financial institutions named in Sub-Section (1) of Section 4A recognize
the financial institutions mentioned therein to be public financial institutions
which are not covered by the embargo enforced by the proviso to Sub-Section (2)
of the said Section. The proviso controls the width of Sub-Section (2) which
refers to the powers of the Central Government to specify by notification in
the Official Gazette and subject to the provisions of Sub-Section (1), such other
institutions as it may think fit to be a public financial institution. It appears
to us that Sub-Section (2) of Section 4A is applicable only to institutions
which are not mentioned in Sub-Section 14(1). It is the latter category of financial
institutions to which the proviso applies. In view of Section 4 A(1)(ii) of the
Companies Act, 1956, the Industrial Finance Corporation of India was admittedly
regarded as a `public financial institution' for the purpose of the said Act. The
conversion of the Industrial Finance Corporation of India into a Company did
not alter its position and status as a financial institution in view of Section
5 of the Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act,
1993, which, as pointed out by Mr. K.K. Venugopal, was in the nature of a
saving clause, whereby all matters, including all benefits, relating to the Corporation,
stood wholly transferred in favour of the new Company.
15.
Mr.
Dwivedi has submitted that the Notification dated 15th February, 1995, had been
issued under Section 4A(2) of the Companies Act which will have to conform to
the proviso thereto. Mr. Dwivedi has contended that both the conditions in the proviso
would have to be fulfilled in order to be eligible for being specified as a public
financial institution. We are unable to accept such contention in view of the
fact that clauses (i) and (ii) are not conjunctive but disjunctive and even though
Clause (ii) may not have any application to the Respondent No.1 Company, it was
covered by clause (i), since it was constituted under the Companies Act, 1956,
which is a Central Act.
16.
We,
therefore, find no reason to interfere with the judgment and orders of the High
Court impugned in these Special Leave Petitions, which are, accordingly, dismissed.
17.
There
shall, however, be no order as to costs.
................................................J.
(ALTAMAS KABIR)
................................................J.
(CYRIAC JOSEPH)
New
Delhi
Dated:4.4.2011
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