STRESSED ASSETS STABILIZATION FUND versus WEST BENGAL SMALL IND. DEVELOPMENT CORPORATION LTD. AND ANR. on 21 October 2019

1. In this appeal by special leave, an affirming judgment of theCalcutta High Court (dismissing the appeal, against an order allowingthe respondent’s application under Section 535 of the Companies Act,1956 (hereafter “the Act”) has been questioned.

2. The appellant (hereafter “SASF”) is a trust, constituted as aspecial purpose vehicle (SPV) by the Central Government for acquiringby transfer, the stressed assets of the Industrial Development Bank ofIndia (IDBI), to administer and manage the stressed assets and to recoveramounts due, by framing schemes of restructuring, settlement etc. withborrowers. IDBI, through a deed of assignment, unconditionallytransferred all loans and advances granted by it, to SASF, including theloans and securities in relation to the second respondent, the company inliquidation.

3. The facts are that Wellman Smith Owen EngineeringCorporation, a company incorporated in the United Kingdom leasedimmovable property, which it took possession of, on a lease rent ofRs. 3600/- with effect from 1[st]April, 1962. The assets and business ofWellman were taken over, through an agreement dated 10[th] October,1962 by Wellman Incandescent India Ltd (the second respondent,hereafter “Wellman”). Wellman entered into a fresh lease agreementwith the Government of West Bengal, for a term of 99 years, in respectof one industrial property, i.e. Shed J-2 Howrah Industrial Estate,measuring 30612 square feet with effect from 1[st] September, 1968. Afurther lease was granted by the Government of West Bengal on1[st] July, 1990 in respect of Shed J(i)/A measuring 260 square feet. On6[th]May, 1992, Wellman borrowed Rs. 10 crores from the IDBI whichentailed provision of security by way of hypothecation of movables andmortgage of the premises and properties leased to it, by the Governmentof West Bengal. A further advance of Rs.3 crores was obtained byWellman towards working capital; this was again on the strength ofequitable mortgage of the same immovable properties, including the saidleased premises, through deposit of title deeds. The memorandum ofentry in regard to this was carried out on 15[th] July, 1999. In the meanwhile,on 5[th ]December 1994, the premises and properties in question alongwith several others, were assigned to the first respondent. Wellman’s A

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Afinancial woes became acute; it approached the Board for IndustrialFinance and Reconstruction (BIFR) under the Sick Industrial Companies(Special Provisions Act) 1985 (“SICA”). The proceedings attemptingrehabilitation were to no avail; the BIFR on 24[th] September, 2002 heldthat reconstruction was not possible and concluded that the companyhad to be wound up. A reference was accordingly made to the CalcuttaBHigh Court, under Section 20 of SICA. In the liquidation proceedings,the High Court directed the appointment of an Official Liquidator, requiringhim to take charge of the company’s (Wellman’s) assets.

4. The first respondent (hereafter “WBSIDC”) to whom the WestBengal state had assigned the rights of lease, in the meanwhile, determinedCthe lease in terms of the allotment and the grant (of the lease) invokingthe power reserved to the lessor (under the terms of the lease) as Wellman,the original allottee/lessee had ceased to carry on manufacturing activitybeyond a stipulated acceptable period. The determination wentunchallenged. WBSIDC approached the Calcutta High Court forDrestoration of possession of its properties which had been taken over bythe Official Liquidator, in the meanwhile.

5. The single judge by an elaborately reasoned judgment, upheldWBSIDC’s argument that as lessor, it was entitled to possession in viewof the lease condition, which automatically applied, because the originalElessee had ceased to use the properties for the purpose originallycontemplated, i.e. manufacturing activity. The single judge also took noticeof provisions of the West Bengal Government Premises (TenancyRegulation) Act, 1976. It was further held that no manufacturing processhad been carried out in the demised premises for over six months. Theappeal preferred by SASF was rejected by the Division Bench by theFimpugned judgment.

6. Ms. Jasmine Damkewala for SASF, relied on provisions of thelease to contend that the lessee could have validly mortgaged the property,as it did, to the erstwhile IDBI. She pointed out that the impugnedjudgment, if permitted to stand, would result in loss of public monies toGthe extent of substantial amounts, over Rs. 42 crores, which would notbe in public interest. She also submitted that since the lease was for asubstantial period of 90 years, the so-called violation should not haveresulted in the inference of a drastic result, i.e. forfeiture of valuableproperty.

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7. Mr. Bhaskar Gupta, learned senior counsel for WBSIDC,highlighted that the reasoning of the High Court is unexceptionable. Heemphasized that the lease forfeiture was never challenged by the lessee,through the official liquidator. Instead, the appellant SASF, which wasonly a mortgagee (of the leasehold rights) was seeking to questionWBSIDC’s right to forfeit the lease; when the lessor had no grievancein that regard. Clearly, a mortgagee could not have rights superior to themortgagor.

8. Learned counsel relied on the decision in Phatu RochiramMulchandani v. Karnataka Industrial Areas Development Board(2015) 5 SCC 244 to say that the WBSIDC acted within the bounds oflaw in approaching the court seized of company liquidation proceedings,for release of property, having regard to the forfeiture of lease, whichremained unchallenged, and had attained finality.

9. The above factual discussion would reveal that the company(since under liquidation) was allotted industrial premises on two differentoccasions. Acting in terms of the lease, it secured advances that it obtainedfrom IDBI through equitable mortgages of the leasehold property.Wellman went into liquidation, since its sickness was irremediable despiteattempts made to revive its industrial activities under SICA. The officialliquidator appointed by the court took charge of the assets. WBSIDC’sapplication seeking possession of the leasehold properties was allowedconcurrently. Both the learned Single Judge and the Division Bench,upheld WBSIDC’s plea that since the conditions of lease had not beencomplied with, as far as cessation of industrial or manufacturing activitywent, the leasehold rights were terminated. As a result, the propertieswere held to be excluded from the winding up process.

10. This court is of the opinion that the reasoning and conclusionof the High Court do not call for interference. The finding that since theexercise by the lessor (WBSIDC) of its right to determine the leaseattained finality, the mortgagee (represented by the appellant) could notclaim rights superior to that of the lessee, is in consonance with settledlaw. In Phatu Rochiram Mulchandani(supra) it was held by this courtas follows:

“29.On 19-1-2002, the Board passed the orders terminatingthe lease in respect of both the plots. In this termination order,after giving the past history of events which have already A

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been noted above and mentioning that the Company had failedto construct the factory building and implement the industrialprojects on the main land within the extended period and toexecute lease agreement in respect of additional land,thereafter it was also stated that pursuant to the earlierresumption order, a writ petition was filed and because of thestay orders passed therein the Board could not resume theland. This writ petition was dismissed on 14-9-1999[Ralectronics Ltd.v.Karnataka Industrial Area DevelopmentBoard, WP No. 11957 of 1993, order dated 14-9-1999 (KAR)].Though the Board could act thereafter, however in themeantime the High Court of Karnataka had passed the orderdated 10-4-2001 in Karnataka Industrial Areas DevelopmentBoard v. Electromobiles (I) Ltd.[ OSA No. 11 of 1999, orderdated 10-4-2001 (KAR)] holding that when the allotment ison lease-cum-sale basis and possession is delivered to theallottee in pursuance of the allotment, it becomes a leaseirrespective of the fact that whether a lease deed is executedor not. For this reason the Board did not attempt to resumethe possession merely by cancelling the allotment withoutterminating the lease or taking action in accordance with law.It was for this reason that the Board was formally terminatingthe lease by the said notice dated 19-1-2002. The terminationnotice also mentioned that this was being done under Section34-B of the Karnataka Industrial Areas Development Act,1966.

30. We have already held that the Company had committedclear breach in not completing the project and setting up thefactory within the time given on the lease agreement or thetime as extended by the Board. In such circumstances, thelease agreement gave a definite right to the Board to terminatethe lease. We are, therefore, of the opinion that the Boardwas very well within its right to terminate the lease as providedin the lease agreement.

STRESSED ASSETS STABILIZATION FUND v. WEST BENGAL SMALLIND. DEVELOPMENT CORPORATION LTD. [S. RAVINDRA BHAT, J.]

38. It is clear from the above that prior permission of the Courtis required in respect of any attachment, distress or executionput in force or for sale of the properties or effects of theCompany. We are of the opinion that the serving ofcancellation notice simpliciter would not come within themischief of this section as that by itself does not amount toattachment, distress or execution, etc. No doubt, after thecommencement of the winding up, possession of the landcould not be taken without the leave of the Court. Preciselyfor this reason the Board had filed the application seekingpermission. But according to us no such prior permission wasrequired before cancelling the lease. In fact, it is only afterthe cancellation of the lease that the Board would becomeentitled to file such an application under Section 537 of theAct. Had the Board gone ahead further and taken thepossession after the cancellation and then approached theCompany Judge, the situation which occurred in KarnatakaState Electronics Development Corpn. Ltd.v.OfficialLiquidator[ OSA No. 31 of 2004, decided on 21-6-2005(KAR)] would have prevailed. On the other hand, it wouldhave been premature on the part of the Board to approachthe Company Judge for permission to resume the land withoutcancelling the lease in the first instance.

41. In view of our elaborate discussion above, we do not findaction of the Board to be illegal or blemished. The land wasallotted to the Company for a specified project which theCompany failed to establish. Let us examine the scheme ofthe KIAD Act at this point of time. The KIAD Act is enacted tomake special provisions for securing the establishment ofindustrial areas in the State and generally to promote theestablishment and orderly development of industries thereinand for that purpose to establish an Industrial AreasDevelopment Board, and for purposes connected with suchmatters. Chapter II deals with the declaration and alterationof industrial areas. Chapter III deals with establishment andconstitution of the Board. Chapter IV deals with functions A

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SUPREME COURT REPORTS

and powers of the Board and Chapter V deals with finance,accounts and audit of the Board. Chapter VI deals withapplication of the Public Premises Act and non-applicationof the Karnataka Rent Control Act, 1961 to the premises ofthe Board. Chapter VII deals with acquisition and disposalof land. Chapter VIII contains the supplementary andmiscellaneous provisions. Section 13 in Chapter IV definesthe functions of the Board as generally to promote and assistin the rapid and orderly establishment, growth anddevelopment of industries in industrial areas; and in particular,to develop industrial areas declared by the State Governmentand make them available for undertakings, to establishthemselves; to establish, maintain, develop and manageindustrial estates within industrial areas; and to undertakesuch schemes of programmes of works for the furtherance ofthe purposes for which the Board is established and for allpurposes connected therewith.

42. Section 33 in Chapter VIII of KIAD Act provides that ifthe Board is satisfied that if a lessee of any land in anindustrial area fails to provide any amenity or carry out anydevelopment of the land, the Board may after due notice inthat behalf, may itself provide such amenity or carry out suchdevelopment at the expense of the lessee. Section 34 providesfor penalty for construction or use of land and buildingcontrary to the terms of holding. Section 34-A provides fordemolition or alteration of unauthorised construction oralteration. Section 35 of the Act enables a person authorisedby the Board to enter upon any land for the purpose ofinspection, survey, measurement, valuation or enquiry. Section41 enables the Board by notification to make regulationsconsistent with the Act and Rules thereunder to carry out thepurposes of the Act with the previous approval of the StateGovernment.”

11. There can be no dispute, nor was it contended that a donee ora grantee (as the status of the lessee company in liquidation as in this case) can have no rights in excess of that possessed by the donor or thegrantor. The mortgagee (whose shoes SASF has stepped into) of thelessee (Wellman) can have no right greater or better than that of thelessee in terms of the deed of lease. The observations in Phatu RochiramMulchandani(supra) apply to the facts of this case. The appeal,therefore fails and is dismissed, without order as to costs.

Ankit Gyan

Appeal dismissed.

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