CANARA BANK vs The Official Liquidator of IAEC Ltd on 5 August 2024

JUDGMENT

IN APPEAL NO.7 OF 2023 Dt.5^th August 2024

BEFORE DEBTS RECOVERY TRIBUNAL No.1, MUMBAI

Before Arun Kumar Singal, I/c. Presiding Officer DRT-III, Vashi, Navi Mumbai APPEAL No.7 OF 2023

Presented on : 29.04.2023

Registered on : 03.05.2023

Decided on : 05.08.2024

**Canara Bank, ET & T Section,** Financial Management Wing, in its capacity as Trustees for Debenture holders having address at 112, J.C. Road, Bangalore 560-002.

**APPELLANT** (Original Defendant No.10)

V/s.

**1. Canara Bank,**

A body corporate constituted under The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 having its Head Office and Bangalore and branch amongst other at Fort Bombay 400 001.

**...RESPONDENT No.1** (Original Certificate Holder/Applicant)

**2. The Official Liquidator, High Court, Bombay,**

Liquidator of LAEC Ltd., having its office at Bank of India Building, 5^th Floor, M.G. Road, Fort, Mumbai 400 023.

**3. Shri M. Ganpatram,**

Indian Inhabitant, residing at Dhaviadas, V.P. Road, Santacruz (East), Mumbai 4000 55.

**4. Shri B.K. Guruda Char,**

Indian Inhabitant, residing at 41, Mysore Colony, Chembur, Mumbai 400 074.

*Arun*

APPEAL No.7 of 2023**5. Shri T.S. Champaknath,**

Indian Inhabitant, residing at 5, 'Chitra' West Avenue, Santacruz (West), Mumbai 400 054.

**6. Shri V.D. Char,**

Indian Inhabitant, residing at 46, Mysore Colony, Chembur, Mumbai 400 074.

**7. Union Bank of India,**

a body corporate constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 having its Head Office at Bombay and a branch at Kishore Nagar, Shop No.6 & 7, Ground Floor, Kishore Nagar Building, Dr. C. Gidwani Road, Kopri Colony, Thane East.

**8. ICICI Bank,**

ICICI Bank Towers, Bandra-Kurla Complex, Mumbai 400 051. Also at ICICI Bank, Navsari Building, 240, Dr. D.N. Road, Fort, Mumbai 400 001.

**9. Metro Development Co.,**

Partnership firm, having registered address at The Ambience Court, Unit No.301, 302, 1001, Plot No.2, Sector 19-D, Vashi, Navi Mumbai 400 703.

...RESPONDENTS: (Original CH Debtors/Defendants)

...RESPONDENT No.9 (Intervener)

Argued By

Mr. K.A. Suryanarayan, Advocate for the Appellant.

Ms. Akanksha Sarpole, Advocate for the Respondent No.1.

Mr. Rajesh Nagori, Ms. Mallika Joshi and Ms. Soumya Brajmohani i/b/ M/s. Solomon & Co., Advocates for Respondent No.9.

Other Respondents absent.

Page 2 of 37Dharm05-08-2024

APPEAL No.7 of 2023JUDGMENT

1. In brief, the case of the Appellant is that the Appellant is the Debenture Trustees for two series of Debentures (a) 95,000-15% Secured Non Convertible Debentures of Rs.100/- each for an aggregate value of Rs.95,00,000/- (Rupees Ninety Five Lakhs only) and (b) 74,098-15% Secured Redeemable Convertible Debentures of Rs.250/- each for an aggregate value of Rs.1,85,24,500/- (Rupees One Crore Eighty Five Lakhs Twenty Four thousand Five hundred only). Thus the total value of both series of Debentures amounts to Rs.2,80,24,500/- (Rupees Two Crores Eighty Lakhs Twenty Four thousand Five hundred only) and that the Debenture Holders have appointed the Appellant as the Agent & Trustees for the Holders of the said 95,000- 15% Secured Non-Convertible Debentures of Rs.100/- each, pursuant to the Letter of Offer dated 6^th December 1984. Similarly, Debenture Holders of 74,098-15% Secured Redeemable Convertible Debentures of Rs.250/- each have also appointed the Appellant as the Agent & Trustee pursuant to the Letter of Offer dated 31^st May 1986. And, pursuant to the Letter of Offer dated 6^th December 1984, an Articles of Agreement dated 1^st September 1987 executed between IAEC India Ltd. (Respondent No. 2) as the Company. of the One Part and Appellant as the Trustees of the Other Part in respect of 15% 95,000 Debentures of Rs.100/- each and, another Articles of Agreement dated 19^th October 1987 was also executed between IAEC India Ltd. as the Company of the One Part and the Appellant as the Trustees of the Other Part in respect of 15% 74,098 Debentures of Rs.250/- each, as per the terms of the aforesaid two Letters of Offers dated 6^th December 1984 & 31^st May, 1986.

1. 2. The Appellant has further alleged that in order to secure due repayment and redemption of the Debentures and all costs, charges and expenses payable by the Respondent No 2 in respect of the aforesaid two series of Debentures, the Appellant secured the same by mortgaging four immovable properties belonging to Respondent No.2 in favour of the Appellant on 1^st September 1987 through Director Shri V. D. Char and deposited with the Appellant all original title deeds, documents and writings pertaining to four immovable properties, as detailed in the Memorandum of Entry dated 1^st September 1984 and by a Declaration & Undertaking by way of constructive delivery/deposit of Title Deeds dated 19^th October 1987.

2. 3. The Appellant further submitted that Canara Bank (Trustees & Investment Department) is the holders of 22,713 numbers of second series of Debenture holders and 51,385 individual Debenture Holders, collectively referred to as the second series debentures, whose interest has been secured pursuant to the Mortgage created by the Respondent No.2 Company in respect of four immovable properties and thus, the Canara Bank, T & I Department and individuals are also secured creditor and this fact has been totally ignored by the Learned Recovery Officer while passing the impugned Order.

1. 4. The Ld. Recovery Officer did not grant any amount while distributing the sale proceeds of the 4 immovable properties mortgaged in favour of the Appellant.

2. 5. It has been alleged by the Appellant that the Ld. Recovery Officer has failed to appreciate the fact that the Respondent No.2 Company was unable to redeem the Debentures and make payment to the Appellant, so, the Appellant in the capacity of Debenture Trustee filed a Suit bearing No.83 of 2004 before the Hon'ble High Court of Judicature at Bombay for recovery of the legitimate dues as on 30^th August 2003 payable by the Respondent No.2 for a sum of (a) Rs.11,81,12,839/- (Rupees Eleven Crores Eighty One Lakhs Twelve thousand Eight hundred Thirty Nine only) against 95,000-15% Secured Non Convertible Debentures of Rs.100/- each and (b) a sum of Rs.19,52,47,403/- (Rupees Nineteen Crores Fifty Two Lakhs Forty Seven thousand Four hundred Three only) due and

APPEAL.No.7 of 2023

payable by the Respondent No.2 in respect of 74,098 - 15% Secured Convertible Redeemable Debentures of Rs. 250/- each, thus making a total sum of Rs.31,33,60,242/- (Rupees Thirty One Crore, Thirty Three Lakhs, Sixty thousand Two hundred Forty Two only) as on 30^th August 2003 to be recovered by the Appellant from the Respondent No.2.

6. All original title deeds, documents, writings, etc. were submitted by the Respondent No.2 and relied upon by the Appellant in the said Suit No.83 of 2004 already filed before the Hon'ble Bombay High Court. The said Suit was subsequently converted into Commercial Suit and renumbered as Commercial Suit No.6 of 2004 which is still pending before the Hon'ble Bombay High Court for final disposal.

7. As per the Appellant, the CH Bank in Original Application No.349 of 2001 had clearly admitted in Para 23 of the OA/Plaint that there was prior charge on the immovable properties by way of mortgage by deposit of title deeds in favour of Defendant No.10 (i.e. the Appellant herein) to secure the payment to be made to the Debenture Holders of Respondent No.2. Further, in Para 32 of the said OA, the CH Bank also clearly stated and admitted the fact that "The Plaintiffs submit that in the event of Respondent No.2 committing default in payment of amounts mentioned in Para 29 above by a date that may be fixed for redemption by this Hon'ble Court the said immovable property described in Exhibit "A" to the Plaint together with structures, buildings and machinery thereon be ordered to be sold pursuant to the directions of this Hon'ble Court and the net sale proceeds be paid over to the Plaintiffs be subject to the prior charge in favour of Defendant No.10 (the Appellant herein) as Trustees for debenture holders of Respondent No.2. The Plaintiffs submit that requisite directions be given by this Hon'ble Court to ascertain the amounts due and payable by Respondent No.2 to Defendant No.10 as Trustees for Debenture holders of Respondent No.2".

8. The said O.A. No. 349 of 2001 was allowed on 27^th July 2015, wherein the Ld. Presiding Officer has clearly ordered "if the Defendants fails to pay the above amount, the same shall be recovered by selling the mortgaged and hypothecated properties and the sale proceeds received therefrom shall be paid to the Applicant Bank and Defendant Nos.8 to 10".

9. In pursuance of the said Order dated 27^th July 2015, the Recovery Certificate No.81 of 2015 came to be issued on 12^th August 2015 and in the said Recovery Certificate also clearly stated and admitted about the claim of the Defendant No.10 (Appellant)

and the claim of Appellant was very well protected. However, the Ld. Recovery Officer, totally erred in appreciating the said fact.

10. The Ld. Recovery Officer despite having full knowledge of the above facts that the Appellant is a Trustee Debenture Holder and having first charge in favour of the Defendant No.1 and *paripassu* charge in favour of the CH Bank in respect of the 4 immovable properties already sold for a sum of Rs.186,27,00,000/- but, while distributing the sale proceeds to the claimants, the Ld. Recovery Officer totally failed to appreciate the claim of T & I Department and the individual debenture holders and failed to allot any amount to the Appellant in respect of Second Series of Debentures.

11. The Appellant further alleged that the Ld. Recovery Officer has considered the claim of the Intervener whereas, the Appellant has already files its claim in the share of Debenture Holders of series One, i.e. 95,000 - 15% Secured Non Convertible Debentures of Rs.100/- each to an extent of 81% originally held by the Financial Institutions, which have been assigned in favour of Metro Development Company pursuant to various Assignment Deeds of Assignments against the total sum of Rs.80,15,09,726.61, the Ld. R.O. totally failed to appreciate and consider any amount against the claim of Rs.71,50,75,091.42 in respect of 22,713 Second Series Debentures of 15% Secured Convertible Redeemable Debentures of Rs.250/- each purchased by the said T & I Department of Canara Bank. Thus, the Ld. R.O. has erred in passing the said impugned order and a great injustice has been done against claim of the T & I Department of Canara Bank.

1. 12. According to the Appellant since Company was in liquidation, so, proceeds were to be distributed as per Section 529 and 529 A of the Companies Act.

2. 13. As per the Appellant, the Intervener cannot approach on his own and seek amount from sale proceeds without discharging the trustee and without withdrawing its claim from the liquidator. According to the Appellant, the Appellant has alleged that the dues of Intervener and other Banks are wrongly considered till date and they ought to have been restricted as per the claim adjudicated. The Intervener is neither a Bank nor a Financial Institution and if the money is disbursed, it can be brought back by the Court/Tribunal in the event of Appeal being allowed. The Ld. Recovery Officer has committed error in considering the Application of the Intervener and making payment directly to the Metro Development Company instead through the Page 9 of 37Chun

Debenture Trustee i.e. Appellant. So, the impugned Order is liable to be set aside.

14. The Appellant has denied that CH Bank is having priority over all other creditors as per the Section 31(B) of the RDB Act, 1993. The Ld. Recovery Officer has failed to appreciate the claim of the Appellant that the Appellant is a Secured Creditor as per Section 31 (B) of the RDB Act, 1993.

15. The Ld. Recovery Officer has admitted the fact that the Appellant is a Debenture Trustee for 2 series of Debentures and despite having admitted said fact, the Ld. Recovery Officer rejected the claim of T & I Department in toto which is not tenable in law and so, Order passed by Ld. Recovery Officer is liable to be set aside. The Ld. Recovery Officer admitted the claim of the Applicant in respect of claim of T & I Department in respect of the Second series of Debentures, which shall rank second and subservient to the mortgage/charge created and/or to be created by the Respondent No.2 Company in favour of the Appellant for the holders of First Series NCDs. However, the Ld. Recovery Officer totally failed to appreciate the fact that the Respondent No.2 Company had mortgaged/created charge in respect of the four immovable properties in favour of the CH Bank thereafter, which means that the CH Bank is having only third *pari passu*

charge and that only after satisfying the claim of the Appellant in respect of Second series of Debentures, the claim of the CH Bank should have been considered and not otherwise.

16. According to the Appellant, the Ld. Recovery Officer has wrongly came to the conclusion that CH Bank is having *pari passu* charge of other secured creditors having charge over the sale proceeds of the mortgaged properties of the Respondent No.1 Company and also subject workers' claim having *pari passu* charge over the said sale proceeds is totally incorrect and bad in law.

17. The Ld. Recovery Officer has rightly held that the Second Series Debentures shall rank second, and subservient to the mortgage/charge created and/or to be created by Defendant No.1 company in favour of Defendant No.10 for the holders of First Series NCDs. Thus the Ld. Recovery Officer find that between the two series of debentures (First Series NCDs holders and Second Series Debenture holders) the holders of first series NCDs have priority of right over the sale proceeds of mortgaged immovable properties of Defendant No.1 Company in comparison to the charge of Second Series Debentures, which is subject to *pari passu* claim of CH Bank as secured creditor in terms of RC and the workers' claim as adjudicated by the Ld. OL

having *pari passu* charge over the said sale proceeds subject to the provisions contained in Sections 529 and 529A of the Companies Act is not correct. However, the Ld. R.O failed to consider the fact that the Second Series Debenture Holders are having priority charge over the charge and on the Sale Proceeds over the CH Bank's charge over the immovable properties sold and on the sale proceeds.

18. The Appellant has further alleged that since Appellant is the Trustee of Debenture Holders including share of the Intervener, so, allowing the Application of the Intervener and allowing the claim of the Intervener and making payment direct to the Intervener instead through the Appellant is erroneous and bad in law. The second charge holder is in fact the Second Series of Debenture Holders and not CH Bank as held by the Ld. Recovery Officer. So, the impugned order is liable to be set aside. The Appellant has sought the relief that the Order dt.31.03.2023 passed by the Ld. Recovery Officer, DRT-1 Mumbai be set aside and to direct the Registry of DRT-1 Mumbai not to disburse the sale proceeds of Rs.132,59,23,482/- to any of the parties as per the Order dt.31.03.2023 till the disposal of this Appeal and in case, the distribution of payment of sale proceeds has already been made to the concerned parties as per the Order dt.31.03.2023 then, the Registry of DRT-1 Mumbai to direct the concerned parties to bring back the amount so distributed or collected by the concerned parties and deposit the same with the Registry within the time so specified by this Tribunal.

1. 19. Notice was issued to the other parties.

2. 20. Affidavit-in-Reply to Appeal was filed by the Respondent No.1 and Affidavit-in-Reply was also filed by the Respondent No.9.

3. 21. In its Reply, the Respondent No.1 (Original Applicant) has submitted that the mortgage rights of the Respondent No.1 over the properties belonging to the Company were sold by the Hon'ble Court but the Hon'ble Court has not declared that Appellant had any mortgage right over the same and there is no iota of evidence produced before the Ld. Recovery Officer that they have mortgage rights over the properties sold by the Hon'ble Court or any other Court of Law declared their mortgage rights over the properties. Also, according to the Respondent No.1, the Respondent No.9 was wrongly impleaded as party to the execution application. The Ld. Recovery Officer wrongly granted substantial sale proceeds to the Respondent No.9 who is the third party who is not a Bank or Financial Institution. According to the Respondent No.1 except him, no other claimant i.e. Original Defendant Nos.8 to 10 have claimed any mortgage rights over the properties. Neither the borrower nor other claimant opposed the claim of the Bank or disputed the mortgage rights with the Bank even after decree was passed on 27.07.2015 nor any Appeal is filed against the Order and Order dt.27.07.2015 has attained finality. The Respondent No.1 - Canara Bank, the Original Applicant, was entitled for entire decretal amount since decree is not challenged by any other parties. Even the Order dt.27.07.2015 passed by the DRT directs to share the sale proceeds with Respondent Nos.7, 8 and Appellant (Original Defendant Nos.8, 9 and 10) however, their claims have not been adjudicated by any Court. The claim of the Respondent No.1 is of Rs.39,58,91,475.14 as on 10.02.2023 but, the Ld. Recovery Officer has granted only a sum of Rs.24,95,16,294.76 and so, the Ld. Recovery Officer to be directed to pay the balance decretal amount to the Canara Bank, i.e. the Original Applicant.

22. In its report, the Official Liquidator, after sale of the 4 mortgaged properties, invited the claim of the workers/creditors of the Company and he adjudicated the workers' claim for an amount of Rs.64,13,04,513/-. Also, according to him, the workers will be having *pari passu* charge over the sale proceeds which has been realized out of sale of the assets. Also, there was a claim of Rs.30,75,933/- received from the Provident Fund and he has given his distribution scheme of sale proceeds which is 25.97%

Page 14 of 3705-08-2024

to Canara Bank Recovery Certificate Holder, 25.85% to Metro Development Company, 5.82% to Canara Bank, Debenture Executive Trustee and Taxation Section and 42.36% to Workers out of total sale proceeds and has prayed for following directions:

(a) In view of para (11) and (12) of this report Canara Bank ET and T (Executor, Trustee & Taxation) is not entitled to any reliefs whatsoever regarding their claim.

(b) In view of para (16) Hon'ble Debt Recovery Tribunal-I, Mumbai may be pleased to transfer the amount of Rs.30,75,933/- (Rs. Thirty Lakh Seventy-Five Thousand Nine Hundred Thirty-Three Only) towards claim of Provident Fund to the Official Liquidator for declaration of dividend in accordance with the Rule 290 of the Companies (Court) Rules, 1959.

(c) In view of para (18) of this report, whether this Hon'ble Debt Recovery Tribunal-I, Mumbai may be pleased to transfer the amount of Rs.100,65,29,697/- (One Hundred Crore Sixty Five Lakh Twenty Nine Thousand Six Hundred Ninety Seven only) towards payment of dues of the Metro Development Company, Canara Bank Debenture Series holder and Workers to the Official Liquidator for declaration dividend in accordance with the Rule 290 of the Companies (Court) Rules, 1959 and to dispense with undertaking as mentioned in the Order dated 31.03.2023 passed by Recovery Officer DRT-I Mumbai in R. P. No. 81 of 2015.

(d) In view of para (18) & (19) the ratio for distribution is calculated on the basis of net amount realized out of sale of the subject properties. However interest accumulated on fixed deposit of the sale proceed of subject properties may also be consider for distribution to the Creditors/ Workers as mentioned in the para (17).

23. The Respondent No.9 in his Reply has submitted that present Appeal is misconceived, bad in law, not maintainable and is nothing but abuse of process of law. The Respondent No.9 is assignee of 81% of the Series-I debentures issued by the Industrial and Agricultural Engineering Company (India) Ltd. and this Appeal has been filed by the Appellant to deny the legitimate claim of Debenture Holders of Series-I Debentures. According to the Respondent No.9, the Appellant is in fact in collusion with the Debenture Holders of Series-II debentures as well as the Certificate Holder, as the Series-II Debenture Holders and the Certificate Holders are all associates of the same body corporate Canara Bank Ltd. along with the Appellant and come under different divisions of the same Bank.

24. The Appellant in the present Appeal as well as in the pleadings filed by the Ld. Recovery Officer has admitted the claim of this Respondent No.9 as Series-I debenture holders having first charge over the immovable properties of the Company and there is no contest to the adjudication of the claim of the parties in the present proceedings and in fact, the monies that have been released in favour of the Respondent No.9 is on the basis of calculations provided by the Appellant to the Ld. Recovery Officer. According to the Respondent No.9 the claims of 2^nd charge holder and the 3^rd charge holder can only be satisfied after satisfying the claims of the 1^st charge holder who rank first and before the 2^nd charge holder as per Section 529-A of the Companies Act, 1956. Even debenture trustee agreements categorically states that the right of 2^nd charge holder are subsequent to the 1^st charge holder which can be exercised whenever the claim of the 1^st charge holders are satisfied. The Respondent No.9 has further alleged that debenture trustee i.e. Appellant vide its Advocate's Reply dt.11.01.2020 provided numerous exclusions towards non-performance of its obligations and directed this Respondent No.9 to lodge its independent claim before the Official Liquidator and so, the Page 17 of 3705-08-2024

Respondent persuade its independent remedy for recovery of its dues. No cause is made out by the Appellant for grant of stay on the Order in Appeal or on the disbursal of the amount thereunder and the Order in Appeal considers the fact that the third party can approach the Hon'ble Tribunal during the Recovery Proceeding after Original Application is allowed and put its claim before the Tribunal for consideration. According to the Respondent No.9, he is in apprehension that in the event the Respondent's claim is released, then the Appellant may siphon off his money to its sister concerns i.e. Respondent No.1 herein 2^nd Series debenture holder i.e. T & I Department of Canara Bank and accordingly, the Respondent No.9 has prayed for dismissal of this Appeal qua him.

25. This Tribunal has given dispassionate consideration to the arguments advanced by the counsel for the parties and has gone through the material brought on record.

26. It is an admitted fact that in April 1984, 95,000 Secured Non-Convertible Series-I Debentures for a face value of Rs.100/- each at par for an amount of Rs.95 Lakhs to be redeemed in full within 7 years from the date of allotment of debentures were issued by the Respondent No.9 Company and were allotted to 582 applicants including financial corporations and the general public and vide 6 registered assignment agreements dt.21.09.2007, the Respondent No.9 acquired the Series-I debentures of the Company from various financial corporations and upon the acquisition became 81% holder of Series-I debentures and became the largest 1^st charge holders of the immovable properties. Thereafter, in December 1984, the same Company issued 74,098 Series-II secured redeemable convertible debentures for a face value of Rs.250/- each at par for the aggregate value of Rs.1,85,24,500/- on the terms and conditions and they were allotted to various individuals and Respondent No.2 T & I Department. Vide Debenture Trustee Agreement dt.01.09.1987, the Appellant was appointed as Debenture Trustee for Series-I debenture holders and thereafter, vide Debenture Trustee Agreement dt.19.10.1987, the same Debenture Trustee was appointed for Series-II debenture holders. First charge was created by the Company over the 4 immovable properties by deposit of title deeds pursuant to Memorandum of Entry dt.01.09.1984 to secure due repayment and redemption of Series-I debentures and all cost and thereafter, 2^nd charge was created pursuant to a declaration and undertaking by way of constructive delivery/deposit of title deeds dt.09.10.1987 to secure due repayment and redemption of Series-II debentures of all costs. On 28.09.1989, CH Bank advanced Working Capital

Loan to the Respondent No.2 Company and also advanced various type of loans with Respondent Nos.8 & 9. The Respondent No.2 Company also created third charge over the aforesaid 4 immovable properties in favour of the CH Bank. Thus, the charge of CH Bank was after charge of Series-I debenture holders and Series-II debenture holders.

27. In 1987, BIFR proceedings were initiated and the Company had shown its failure in the year 2003. In Company Petition No.888 of 2003 in BIFR Case No.242 of 1987, the Official Liquidator, attached to the Hon'ble Bombay High Court, was appointed as provisional liquidator of M/s.IAEC Ltd. and subsequently vide Order dt.21.06.2007 passed by the Hon'ble Bombay High Court, the Company was ordered to be wound up and Official Liquidator was appointed as liquidator with usual powers under the Companies Act, 1956. Since the Respondent Company failed to redeem the debentures, so, the Appellant Trustee debenture filed Civil Suit No.83 of 2024 which was subsequently converted into Commercial Suit No.6 of 2024 which is still pending before the Hon'ble Bombay High Court for final disposal. Since the account of the Company became NPA, so, the Canara Bank filed a Suit in the Hon'ble Bombay High Court being Suit No.3157 of 1993. In the year 2001, the above Suit No.3157 of 1993 came to be transferred to DRT-1 Mumbai and numbered as Original

Application No.349 of 2001 and that Original Application was disposed of on 27.07.2015 and in that Original Application No.349 of 2001, the Certificate Holder Bank has clearly stated and admitted in Para 23 that there is prior charge on the immovable properties by way of mortgage by deposit of title deeds in favour of the Defendant No.10, i.e. Appellant herein, to secure the payment to be made to the debenture holders of Respondent No.2. Further, in Para 32 of the said O.A., the CH Bank has also clearly admitted the fact that "The Plaintiffs submit that in the event of Respondent No. 2 committing default in payment of amounts mentioned in para 29 above by a date that may be fixed for redemption by this Hon'ble Court the said immovable property described in Exhibit "A" to the Plaint together with structures, buildings and machinery thereon be ordered to be sold pursuant to the directions of this Hon'ble Court and the net sale proceeds be paid over to the Plaintiffs be subject to the prior charge in favour of Defendant No. 10 (the Appellant herein) as Trustees for debenture holders of Respondent No.2. The Plaintiffs submit that requisite directions be given by this Hon'ble Court to ascertain the amounts due and payable by Respondent No. 2 to Defendant No.10 as Trustees for Debenture holders of Respondent No 2".

28. In Original Application No.349 of 2001, decided on 27.07.2015, the Ld. Presiding Officer has clearly ordered "*if the Defendants fails to pay the above amount, the same shall be recovered by selling the mortgaged and hypothecated properties and the sale proceeds received therefrom shall be paid to the Applicant Bank and Defendant Nos.8 to 10*" and Recovery Certificate No.81 of 2015 was issued on 12.08.2015 and Recovery Proceeding commenced and in the Recovery Proceeding, the Official Liquidator assessed and adjudicated the claim of the workmen and similarly Debentures Trustee also assessed and adjudicated the claim of Series-I debenture holders and Series-II debenture holders and he assessed the claim to the tune of Rs.80,15,09,726.61 for Series-I debenture holders and for Series-II debenture holders, he assessed the claim of Rs.71,50,75,091.42 and submitted before the Ld. Recovery Officer. The Official Liquidator also submitted the assessed and adjudicated workers' claim for Rs.64,13,04,513/- The Company had already gone under liquidation, so, in view of Section 19(19) of RDB Act, when Sale Certificate for recovery is issued against a Company then, the sale proceeds of the secured assets are required to be distributed in the same manner as provided in Section 326 of the Companies Act 2013 (18 of 2015) (529-A of the Companies Act, 1956) and Section 31-B speaks that the rights of the secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority.

29. Now, let us consider the preferential payment rules as per Section 529 and 529-A of the Companies Act, 1956:

Section 529-A of the Companies Act, 1956 speaks of overriding preferential payment –

*"529. Application of insolvency rules in winding up of insolvent companies.*

*(1) In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to-*

*(a) debts provable;*

*(b) the valuation of annuities and future and contingent liabilities, and*

*(c) the respective rights of secured and unsecured creditors, as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent: 1 Provided that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen's*

portion therein, and, where a secured creditor, instead of relinquishing his security and proving his debt, opts to realise his security,- (a) the liquidator shall be entitled to represent the workmen and enforce such charge; (b) any amount realised by the liquidator by way of enforcement of such charge shall be applied rateably for the discharge of workmen's dues; and

(c) so much of the debt due to such secured creditor as could not be realised by him by virtue of the foregoing provisions of this proviso or the amount of the workmen's portion in his security, whichever is less, shall rank pari passu with the workmen's dues for the purposes of section 529A.]

(3) For the purposes of this section, section 529A and section 530- (a) "workmen", in relation to a company, means the employees of the company, being workmen within the meaning of the Industrial Disputes Act, 1947 (14 of 1947);

(c) "workmen's portion", in relation to the security of any secured creditor of a company, means the amount which bears to the value of the security the same proportion as the amount of the workmen's dues bears to the aggregate of-

- (i) the amount of workmen's dues; and

- (ii) the amounts of the debts due to the secured creditors.

*Illustration*

The value of the security of a secured creditor of a company is Rs.1,00,000. The total amount of the workmen's dues is Rs.1,00,000. The amount of the debts due from the company to its secured creditors is Rs.3,00,000. The aggregate of the amount of workmen's dues and of the amounts of debts due to secured creditors is Rs.4,00,000. The workmen's portion of the security is, therefore, one-fourth of the value of the security, that is Rs.25,000.

529A. Overriding preferential payment. Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force in the winding up of a company- (a) workmen's dues; and

(b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub- section (1) of section 529 pari passu with such dues, shall be paid in priority to all other debts.

(2) The debts payable under clause (a) and clause (b) of sub- section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.]"

*Arun*

30. From the aforementioned provisions enshrined in RDB Act and the Companies Act, it is abundantly clear that workmen's dues shall be paid first out of sale proceeds of the secured assets and thereafter, the payment shall be made to Series-I debenture holders 81% of which is held by Metro Development Company and thereafter, sale proceeds were to be distributed to Series-II debenture holders and CH i.e. Canara Bank will come in the last.

31. Plea of the learned counsel for the CH Bank that the mortgage rights of the debenture holders have not been declared by this Tribunal or any other Court whereas, mortgage rights of the Canara Bank has been established by the Ld. Presiding Officer in his decision dt.27.07.2015, so, he was entitled to the decretal amount which comes to Rs.39,58,91,475.14/- is not tenable as there is specific admission of the Applicant in his O.A. No.349 of 2001 in Para 23 and 32 that net proceeds of the sale to the plaintiff shall be subject to the prior charge in favour of the Defendant No.10 as Trustees for debenture holders of Respondent No.2, so, when there is admission of the Certificate Holder then, he cannot be permitted to say that mortgage claim of debenture holders has not been adjudicated by any Court or Authority rather, Ld. Presiding Officer in his Order dated 27.07.2015 has held that if the Defendants failed to pay the above amount of Rs.9,25,10,179.70, the same shall be recovered by selling the Page 26 of 37Akun 05-02-2024

mortgaged and hypothecated properties and sale proceeds received therefrom shall be paid to the Applicant Bank and Defendant Nos.8 to 10 and Defendant No.10 in this case is the Appellant debenture trustee. So, the distribution of sale proceeds of secured assets i.e. 4 immovable properties of the Company has rightly been done by the Ld. Recovery Officer in favour of Defendant No.10, the Appellant in the Appeal. So far as payment made to the Series-I debenture holders i.e. Metro Development Company, the Respondent No.9 is concerned the same has been assessed and adjudicated by the Appellant himself to the tune of Rs.80,15,09,726.61 which includes debenture trustee fee, etc. The Appellant also assessed and adjudicated the claim of 2^nd Series debenture holders to the tune of Rs.77,50,05,268.31. So, now the same cannot be called into question by the Appellant in any form.

32. Even original documents were handed over to the Series-I debenture holders when the mortgage was created for the 1^st time, the JAEIC India Ltd. in favour of debenture trustee in September 1987 which shows that the Series-I debenture holders had mortgage right having priority in distribution of sale proceeds vis-à-vis Series-II debenture holders and the Canara Bank i.e. CH in this case. Even no Appeal has been filed by the Respondent No.1 against the distribution of sale proceeds to

Metro Development Company who is having 81% share in Series-I non-convertible debentures.

33. It is the plea of the Appellant that 2^nd charge holder is in fact the Series-II debenture holders and 1^st charge holder is Series-I debenture holders and according to the Appellant, the claim of CH Bank is having only 3^rd *pari passu* charge. The only grievance of the Appellant is that Series-II debenture holders should also have been distributed some amount from the sale proceeds. The arguments of learned counsel for the Appellant merits consideration.

34. The Ld. Recovery Officer has rightly held that the contention of the Advocate for the CH Bank that except the CH Bank, no other party can claim its mortgage right over the properties is untenable and acceptable as correct but he failed to recognize the rights of 2^nd Series debenture holders.

35. In Para 22.27 of the Order dt.31.03.2023 passed by the Ld. Recover Officer, he has allowed a sum of Rs.77,50,05,268.31 as assessed and adjudicated and filed by Defendant No.10 for the Series-I non-convertible debentures and *pari passu* claim of Rs.2,37,79,461/- as assessed and adjudicated and filed by Defendant No.10 in respect of other individuals Series-I non-convertible debenture holders and claim of the Defendant No.10

as Debenture Trustee for Series-I NCDs holders for Rs.27,24,997.30 towards costs, charges and expenses and has rightly allotted the workers' claim for Rs.64,13,04,513/- as adjudicated by the Official Liquidator having *pari passu* charge over the said sale proceeds and the claim of Rs.30,75,933/- received from Provident Fund by the Official Liquidator but, he has wrongly classified the CH Bank's claim as adjudicated in the present Recovery Certificate. The Ld. Recovery Officer lost sight of the fact that Series-II debenture holders had *pari passu* charge with the CH Bank and after satisfaction of the workmen's charges and charge of 1^st Series debenture holders the left over amount of Rs.136,27,00,000/- should have been distributed amongst Series-II debenture holders and the CH Bank as Series-II debenture holder also has claim on the left over amount.

36. So, in the opinion of this Tribunal, Series-II debenture holders were entitled to their legitimate claim from a sum of Rs.24,95,16,294.76 which has been allotted by the Ld. Recovery Officer to CH Bank. It appears that the Ld. Recovery Officer was swayed by the fact that CH Bank filed O.A. which was allowed, so, he was entitled to receive the sale proceeds of secured assets but he failed to notice that awarded amount in O.A. was to be realised from sale of immovable and hypothecated properties of the Company and to be paid to the CH Bank, Defendant Nos.8,

9 and 10 and since it was a Company property under liquidation, so, the Ld. Recovery Officer was liable to distribute the sale proceeds as per the Section 529-A of the Companies Act, 1956 and the Ld. Recovery Officer has miserably failed in this regard while determining the share of Series-II debenture holders who are also secured creditors having *pari passu* charge with CH Bank whose mortgage rights came into existence after creation of mortgage rights of 2^nd Series debenture holder. The Ld. Recovery Officer has ignored the share of Series-II NCDs holders i.e. T & I Department who is 2^nd charge holder *pari passu* with the CH Bank. So, the Ld. Recovery Officer should decide the distribution of Rs.24,95,16,294.76 made to CH Bank afresh as per the Law. Since the Official Liquidators and Series-I debenture holders have been distributed the sale proceeds as per Section 529-A, so, there is no need to revisit their claims. Even the claim of the 1^st Series debenture holders and workmen have not been agitated by the Appellant in this Appeal.

37. Now, coming to the plea of the CH Bank that since Metro Development Company was a partnership firm and was not a Bank or Financial Institution, so, he could not be allowed to join as Intervener is without any force. The Ld. Recovery Officer has taken care of this aspect in Para 22 and 23. He has referred the Order dt.21.02.2013 passed by the Hon'ble DRAT, Mumbai in

05.08.2021

Appeal No.192 of 2007 filed by Canara Bank wherein the Hon'ble DRAT held that "the Incoam Tax Department can proceed to recover Government dues from the property belonging to the defendants, but for the purpose of deciding the O.A., the Intervener is neither a necessary party nor a proper party. The Intervener can approach the Recovery Officer during recovery proceedings after the O.A. is allowed against the defendants and move an application before him putting the claim of the income tax department for satisfaction of its dues from the sale proceeds when the mortgaged property of the Defendant No.1 is sold by him during recovery proceedings." From this Order, it is manifest that third party can approach the Ld. Recovery Officer during the Recovery Proceeding after the Original Application is allowed against the defendants.

38. Even in the case of Malabar Hill Vs. Union Bank of India, it has been observed that the decision of the Ld. Recovery Officer allowing or dismissing such claims or objections of third party, as the case may be, does not tantamount to re-opening of the Order passed by the Ld. Presiding Officer of DRT or going behind the decree/final order and beyond the Recovery Certificate. Rather, the decision of the Recovery Officer under Rule 11 of the Second Schedule to the IT Act read with Section 29 of the RDB Act implies recognition or dismissal of the claim of the third party with regard to the property in question, that may Page 31 of 37Arun be mortgaged property or identified property belonging to the defendants.

39. Even the Articles of Agreement dt.01.09.1987 does not prevent the holders of Series-I NCDs from approaching appropriate Forum to claim their dues and even no Appeal has been filed by the CH Bank to challenge the impleadment of Intervener as a party in the Recovery Proceeding. Even otherwise also, as per the Order of the Ld. Presiding Officer in O.A. No.349 of 2001, CH Bank and Defendant Nos.8, 9 and 10 were entitled to recover their dues from the sale proceeds received by selling the mortgaged and hypothecated properties. The Defendant Nos.8 and 9 have assigned their share to Metro Development Company which has not been disputed by the Appellant. Though the Defendant Nos.8 and 9 had no security interest in immovable property and only movable properties were hypothecated in favour of the Defendant Nos.8 and 9 but as per Order dt.27.07.2015 passed in O.A. No.349 of 2001, the CH Bank as well as Defendant Nos.8, 9 and 10 were to be satisfied by sale of movable as well as immovable properties. So, on assignment by Defendant Nos.8 and 9 of their share to Respondent No.9, i.e. Metro Development Company, the Metro Development Company could have recovered the dues in the sale proceeds by becoming a party as he has stepped into the shoes of Defendant Nos.8 and Page 32 of 37S. K. Jain

9 and Defendant Nos.8 and 9 could have applied to the Ld. Recovery Officer for satisfaction of their claim even on sale of mortgaged properties of the company alone.

40. Even in his Reply dt.14.07.2023 sent by counsel for the Appellant to the counsel for the Respondent No.9, which is part of Additional Affidavit by Respondent No.9, he has admitted that Metro Development Company is the assignee of 81% Series-I debenture holders and are having priority over Series-II debenture holders. However, Metro totally failed to appreciate the fact that the CH Bank is having only subsequent charge, in fact third *pari passu* charge on the mortgaged properties, which CH Bank had already admitted in their own OA/Plaint that the 'immovable properties referred to in the OA/Plaint have already been mortgaged in favour of Defendant No.10 as Trustees to the Debenture Holders to secure the payment to be made to the debenture holders of Defendant No.1. Also the counsel for the Appellant has alleged, despite the fact that the Series-II debenture holders are having second *pari passu* charge, it is their duty to protect the interest of all debenture holders and, since CH Bank is having only third *pari passu* charge, the Ld. Recovery Officer ought to have considered some portion to the Series-II debenture holders. In fact, without considering the second series debenture holders interest, the Ld. Recovery Officer has considered the interest of CH Bank in total violation of the principles of natural justice. Further, if the Ld. Recovery Officer had allotted some portion of the sale proceeds to the Series-II debenture holders instead of giving the huge amount to the CH Bank then, they would have been satisfied with the same, but the Ld. Recovery Officer failed to appreciate the rights of the said Series-II debenture holders over CH Bank. From this Reply dated 14.07.2023 sent to Metro Development Company, it is clear that the Appellant was concerned with the allotment of some amount to Series-II debenture holders and had no dispute regarding disbursement of the amount to the Respondent No.9.

41. Another grudge of the Appellant appears to be that the Ld. Recovery Officer should not have distributed the money directly to the Respondent No.9 rather, it should have been through the debenture trustee. The Intervener even otherwise cannot approach on his own to seek this amount without discharging the trustee and without withdrawing his claim from the Official Liquidator. But there is hardly any force in this contention as already observed the third party can join the Recovery Proceeding. Even otherwise, the Respondent No.9 has become assignee of Defendant Nos.8 and 9 on assignment of their interest to the Respondent No.9. Even in reply dated 11.01.2024, the Advocate for the Appellant Mr. K.A. Suryanarayan attached Page 34 of 37O.A. 1000

with reply of Respondent No.9 in Para 8(c), has stated that "Since your client became the Assignees of the debenture holders, your client ought to have impleaded as a party in the said O.A. No.349 of 2001 before DRT as well as in the Commercial Suit No.6 of 2004 pending before the Hon'ble High Court."

42. Since the Appellant had no objection if Respondent No.9 had become a party even in O.A. No.349 of 2001 being assignee, so, in that situation, the Appellant should not have any objection of filing of intervention application in the Recovery Proceeding which has been allowed by the Ld. Recovery Officer.

43. As per Respondent No.9, he had apprehension that the Appellant is associate concern of Canara Bank i.e. Certificate Holder and T & T Department of Canara Bank, the Series-II debenture holder, so the amount from the sale proceeds if given to the Appellant i.e. debenture trustee then, it may be siphoned off and the Respondent No.9 would not be able to get his legitimate claim which has been assessed and adjudicated by non-else than the Appellant himself. Even the Appellant failed to inform and consult the Respondent No.9 while filing this Appeal whereas, Appellant was under fiduciary duty to intimate the Respondent No.9 before filing the Appeal. Also, it is the plea of the Respondent No.9 that Commercial Suit is pending in the

05.08.2024

Hon'ble Bombay High Court since 2004 due to inaction of the debenture trustee. So, in these circumstances, no illegality has been committed by the Ld. Recovery Officer in releasing the amount of his share directly to the Respondent No.9. Even otherwise also, no prejudice has been caused to the Appellant as he has fairly admitted that Respondent No.9 is the first charge holder whereas, T & I Department i.e. Series-II debenture holders charge is subservient to the Respondent No.9. So, no injustice has been caused to the debenture trustees whose duty is to protect the right and interest of the debenture holders.

44. During the course of arguments, it has appeared that amount allowed to CH Bank and Metro Development Company has already been encashed, so that amount be not utilised by the parties and all the parties who have received the amount shall give undertaking before the Ld. Recovery Officer that they will not utilise the amount till the demarcation of shares of Series-II NCDs holders and CH Bank and they shall bring back the amounts so disbursed as and when directed by the Ld. Recovery Officer to do so.

ORDER

45. In the wake of foregoing discussion, the Appeal No.7 of 2023 is partly accepted and Order dt.31.03.2023 passed by the Ld.

05.08.2024

Recovery Officer in Recovery Proceeding No.81 of 2015 is set aside to the extent of share of Certificate Holder Bank only and the case is remanded back to the Ld. Recovery Officer who shall determine the share of Series-II NCDs and CH Bank from the amount allotted to CH Bank i.e. Rs.24,95,16,294.76 in the light of aforesaid observations.

46. Copies of this Judgment be sent to the parties free of cost and file be consigned to Record Room.

Given under my hand and the seal of this Tribunal on this date : 05.08.2024.

*Arun Kumar*

(ARUN KUMAR SINGAL) PRESIDING OFFICER DRT-III, VASHI, NAVI MUMBAI

Typed By - S.S. Dhawale, PS