STRESSED ASSETS STABILIZATION FUND vs. WEST BENGAL SMALL IND. DEVELOPMENT CORPORATION LTD. AND ANR.

1 REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.4139 OF 2008 STRESSED ASSETS STABILIZATION FUND   ...APPELLANT VERSUS WEST BENGAL SMALL IND. DEVELOPMENT  CORPORATION LTD. AND ANR.             ...RESPONDENTS                                                                                J U D G M E N T S. RAVINDRA BHAT, J. In this appeal by special leave, an affirming judgment of 1. the Calcutta High Court (dismissing the appeal, against an order allowing the respondent’s application under Section 535 of the   Companies  Act,  1956  (hereafter  “the  Act”) has  been questioned. Signature Not Verified 2. The appellant (hereafter “SASF”) is a trust, constituted as Digitally signed by NARENDRA PRASAD Date: 2020.02.11 12:14:39 IST Reason: a special purpose vehicle (SPV) by the Central Government for acquiring   by  transfer,  the   stressed   assets   of  the   Industrial 2 Development Bank of India (IDBI), to administer and manage the stressed assets and to recover amounts due, by framing schemes   of   restructuring,   settlement   etc.   with   borrowers. IDBI,   through   a   deed   of   assignment,   unconditionally transferred all loans and advances granted by it, to SASF, including the loans and securities in relation to the second respondent, the company in liquidation. 3. The   facts   are   that   Wellman   Smith   Owen   Engineering Corporation, a company incorporated in the United Kingdom leased immovable property, which it took possession of, on a st lease rent of Rs. 3600/­ with effect from 1  April, 1962. The assets and business of Wellman were taken over, through an th agreement dated 10  October, 1962 by Wellman Incandescent India   Ltd   (the   second   respondent,   hereafter   “Wellman”). Wellman   entered   into   a   fresh   lease   agreement   with   the Government of West Bengal, for a term of 99 years, in respect of one industrial property, i.e. Shed J­2 Howrah Industrial Estate,   measuring   30612   square   feet   with   effect   from st 1   September,   1968.   A   further   lease   was   granted   by   the st Government of West Bengal on 1   July, 1990 in respect of 3 th Shed J(i)/A measuring 260 square feet. On 6   May, 1992, Wellman borrowed Rs. 10 crores from the IDBI which entailed provision of security by way of hypothecation of movables and mortgage of the premises and properties leased to it, by the Government of West Bengal. A further advance of Rs.3 crores was obtained by Wellman towards working capital; this was again   on   the   strength   of   equitable   mortgage   of   the   same immovable   properties,   including   the   said   leased   premises, through deposit of title deeds. The memorandum of entry in th regard   to   this   was   carried   out   on   15   July,   1999.   In   the th   meanwhile,   on   5 December   1994,   the   premises   and properties in question along with several others, were assigned to   the   first   respondent.   Wellman’s   financial   woes   became acute;   it  approached  the   Board   for   Industrial  Finance   and Reconstruction (BIFR) under the Sick Industrial Companies (Special   Provisions   Act)   1985   (“SICA”).   The   proceedings attempting   rehabilitation   were   to   no   avail;   the   BIFR   on th 24   September,   2002   held   that   reconstruction   was   not possible and concluded that the company had to be wound up. A reference was accordingly made to the Calcutta High Court,   under   Section   20   of   SICA.   In   the   liquidation 4 proceedings, the High Court directed the appointment of an Official   Liquidator,   requiring   him   to   take   charge   of   the company's (Wellman’s) assets. 4. The first respondent (hereafter “WBSIDC”) to whom the West Bengal state had assigned the rights of lease, in the   meanwhile,   determined   the   lease   in   terms   of   the allotment and the grant (of the lease) invoking the power reserved to the lessor (under the terms of the lease) as Wellman, the original allottee/lessee had ceased to carry on manufacturing activity beyond a stipulated acceptable period. The determination went unchallenged.  WBSIDC approached the Calcutta High Court for restoration of possession of its properties which had been taken over by the Official Liquidator, in the meanwhile.    5. The   single   judge   by   an   elaborately   reasoned judgment, upheld WBSIDC’s argument that as lessor, it was entitled to possession in view of the lease condition, which automatically applied, because the original lessee had   ceased   to   use   the   properties   for   the   purpose originally contemplated, i.e. manufacturing activity. The 5 single judge also took notice of provisions of the West Bengal Government Premises (Tenancy Regulation) Act, 1976. It was further held that no manufacturing process had been carried out in the demised premises for over six months. The appeal preferred by SASF was rejected by the Division Bench by the impugned judgment.   6. Ms.   Jasmine   Damkewala   for   SASF,   relied   on provisions of the lease to contend that the lessee could have  validly  mortgaged  the property, as  it did, to the erstwhile   IDBI.   She   pointed   out   that   the   impugned judgment, if permitted to stand, would result in loss of public monies to the extent of substantial amounts, over Rs. 42 crores, which would not be in public interest. She also submitted that since the lease was for a substantial period   of   90   years,   the   so­called   violation   should   not have  resulted in  the  inference  of  a drastic  result,  i.e. forfeiture of valuable property.   7. Mr.   Bhaskar   Gupta,   learned   senior   counsel   for WBSIDC   ,   highlighted   that   the   reasoning   of   the   High Court is unexceptionable. He emphasized that the lease 6 forfeiture was never challenged by the lessee, through the official liquidator. Instead, the appellant SASF, which was   only   a   mortgagee   (of   the   leasehold   rights)   was seeking to question WBSIDC’s right to forfeit the lease; when the lessor had no grievance in that regard. Clearly, a   mortgagee   could   not   have   rights   superior   to   the mortgagor.   8. Learned   counsel   relied   on   the   decision   in   Phatu Rochiram   Mulchandani   v.   Karnataka   Industrial   Areas Development Board   (2015) 5 SCC 244 to say that the WBSIDC acted within the bounds of law in approaching the court seized of company liquidation proceedings, for release   of   property,   having   regard   to   the   forfeiture   of lease, which remained unchallenged, and had attained finality.   9. The above factual discussion would reveal that the company (since under liquidation) was allotted industrial premises on two different occasions. Acting in terms of the lease, it secured advances that it obtained from IDBI through equitable mortgages   of the leasehold property. 7 Wellman   went  into   liquidation,   since   its  sickness   was irremediable   despite   attempts   made   to   revive   its industrial  activities  under  SICA.  The  official  liquidator appointed   by   the   court   took   charge   of   the   assets. WBSIDC’s   application   seeking   possession   of   the leasehold properties was allowed concurrently. Both the learned   Single   Judge   and   the   Division   Bench,   upheld WBSIDC’s plea that since the conditions of lease had not been complied with, as far as cessation of industrial or manufacturing activity went, the leasehold rights were terminated. As a result, the properties were held to be excluded from the winding up process.   This court is of the opinion that the reasoning and 10. conclusion of the High Court do not call for interference. The   finding   that   since   the   exercise   by   the   lessor (WBSIDC)   of   its   right   to   determine   the   lease   attained finality,   the   mortgagee   (represented   by   the   appellant) could not claim rights superior to that of the lessee, is in consonance   with   settled   law.   In   Phatu   Rochiram Mulchandani   (supra)  it was held by this court as follows: 8 “29.   On   19­1­2002,   the   Board   passed   the orders   terminating   the   lease   in   respect   of both the plots. In this termination order, after giving the past history of events which have already   been   noted   above   and   mentioning that the Company had failed to construct the factory building and implement the industrial projects   on   the   main   land   within   the extended   period   and   to   execute   lease agreement   in   respect   of   additional   land, thereafter it was also stated that pursuant to the earlier resumption order, a writ petition was   filed   and   because   of   the   stay   orders passed therein the Board could not resume the land. This writ petition was dismissed on 14­9­1999   [Ralectronics   Ltd.   v.   Karnataka Industrial Area Development Board, WP No. 11957   of   1993,   order   dated   14­9­1999 (KAR)]   .   Though   the   Board   could   act thereafter, however in the meantime the High Court   of   Karnataka   had   passed   the   order dated   10­4­2001   in   Karnataka   Industrial Areas Development Board v. Electromobiles (I) Ltd. [ OSA No. 11 of 1999, order dated 10­ 4­2001   (KAR)]   holding   that   when   the allotment   is   on   lease­cum­sale   basis   and possession   is   delivered   to   the   allottee   in pursuance   of   the   allotment,   it   becomes   a lease irrespective of the fact that whether a lease deed is executed or not. For this reason the   Board   did   not   attempt   to   resume   the possession   merely   by   cancelling   the allotment   without   terminating   the   lease   or taking action in accordance with law. It was for this reason that the Board was formally terminating   the   lease   by   the   said   notice dated 19­1­2002. The termination notice also mentioned that this was being done under Section   34­B   of   the   Karnataka   Industrial Areas Development Act, 1966.  9                              *         30. We have already held that the Company had committed clear breach in not completing the project and setting up the factory within the time given on the lease agreement or the time   as   extended   by   the   Board.   In   such circumstances, the lease agreement gave a definite right to the Board to terminate the lease. We are, therefore, of the opinion that the Board was very well within its right to terminate the lease as provided in the lease agreement.                             *         38.   It   is   clear   from   the   above   that   prior permission of the Court is required in respect of any attachment, distress or execution put in force or for sale of the properties or effects of the Company. We are of the opinion that the serving of cancellation notice simpliciter would not come within the mischief of this section as that by itself does not amount to attachment,   distress   or   execution,   etc.   No doubt,   after   the   commencement   of   the winding up, possession of the land could not be   taken   without   the   leave   of   the   Court. Precisely for this reason the Board had filed the   application   seeking   permission.   But according to us no such prior permission was required before cancelling the lease. In fact, it is only after the cancellation of the lease that the Board would become entitled to file such an application under Section 537 of the Act. Had the Board gone ahead further and taken the   possession   after   the   cancellation   and then   approached   the   Company   Judge,   the 10 situation which occurred in Karnataka State Electronics   Development   Corpn.   Ltd.   v. Official   Liquidator   [   OSA   No.   31   of   2004, decided   on   21­6­2005   (KAR)]   would   have prevailed. On the other hand, it would have been premature on the part of the Board to approach the Company Judge for permission to   resume   the   land   without   cancelling   the lease in the first instance.                  *                41.In view of our elaborate discussion above, we   do   not   find   action   of   the   Board   to   be illegal or blemished. The land was allotted to the Company for a specified project which the   Company   failed   to   establish.   Let   us examine the scheme of the KIAD Act at this point   of   time.   The   KIAD   Act   is   enacted   to make   special   provisions   for   securing   the establishment of industrial areas in the State and generally to promote the establishment and   orderly   development   of   industries therein and for that purpose to establish an Industrial Areas Development Board, and for purposes   connected   with   such   matters. Chapter   II   deals   with   the   declaration   and alteration   of   industrial   areas.   Chapter   III deals with establishment and constitution of the Board. Chapter IV deals with functions and   powers   of   the   Board   and   Chapter   V deals with finance, accounts and audit of the Board. Chapter VI deals with application of the Public Premises Act and non­application of the Karnataka Rent Control Act, 1961 to the premises of the Board. Chapter VII deals with   acquisition   and   disposal   of   land. Chapter VIII contains the supplementary and miscellaneous   provisions.   Section   13   in 11 Chapter IV defines the functions of the Board as   generally   to   promote   and   assist   in   the rapid and orderly establishment, growth and development   of   industries   in   industrial areas; and in particular, to develop industrial areas declared by the State Government and make   them   available   for   undertakings,   to establish themselves; to establish, maintain, develop   and   manage   industrial   estates within   industrial   areas;   and   to   undertake such schemes of programmes of works for the furtherance of the purposes for which the Board   is   established   and   for   all   purposes connected therewith.                      *          42. Section 33 in Chapter VIII of KIAD Act provides that if the Board is satisfied that if a lessee of any land in an industrial area fails to provide any amenity or carry out any development of the land, the Board may after due notice in that behalf, may itself provide such amenity or carry out such development at   the   expense   of   the   lessee.   Section   34 provides for penalty for construction or use of land and building contrary to the terms of holding. Section 34­A provides for demolition or alteration of unauthorised construction or alteration. Section 35 of the Act enables a person   authorised   by   the   Board   to   enter upon any land for the purpose of inspection, survey, measurement, valuation or enquiry. Section 41 enables the Board by notification to make regulations consistent with the Act and   Rules   thereunder   to   carry   out   the purposes   of   the   Act   with   the   previous approval of the State Government.” 12 11. There can be no dispute, nor was it contended that a donee or a 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 the grantor. The mortgagee (whose shoes SASF has stepped into) of the lessee (Wellman) can have no right greater or better than that   of   the   lessee   in   terms   of   the   deed   of   lease.   The observations   in   Phatu   Rochiram   Mulchandani   (supra) apply to the facts of this case. The appeal, therefore fails and is dismissed, without order as to costs.  ........................................J.                                           [ARUN MISHRA]  ........................................J.                                           [VINEET SARAN]  ........................................J.                                           [S. RAVINDRA BHAT]  New Delhi, October  21, 2019.