Stressed Assets Stabilization Fund v. West Bengal Small Ind. Development Corporation Ltd. and Anr.

S. RAVINDRA BHAT, J. 1. In this appeal by special leave, an affirming judgment of 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. 2. The appellant (hereafter “SASF”) is a trust, constitute d as a special purpose vehicle (SPV) by the Central Government for acquiring by transfer, the stressed assets of the Industrial Develo pment 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, unco nditionally 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 Engineerin g Corporation, a company incorporated in the United Kingdom leas ed immovable property, which it took possession of, on a lease rent of Rs. 3600/- with effect from 1 stApril, 1962. The assets and business of Wellman 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 a greement with the Government of West Bengal, for a term of 99 years, in respect of one industrial property, i.e. Shed J-2 Howrah Indu strial Estate, measuring 30612 square feet with effect from 1 st September, 1968. A further lease was granted by the Government of West Bengal on 1st July, 1990 in respect of Shed J(i)/A measuring 260 square feet. On 6th May, 1992, Wellman borrowed Rs. 10 crores from the IDBI whi ch 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 o btained by Wellman towards working capital; this was again on the stre ngth of equitable mortgage of the same immovable properties, including the said leased premises, through deposit of title deeds. The memorandum of entry 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 alon g with several others, were assigned to the first respondent. Wellman’s STRESSED ASSETS STABILIZATION FUND v. WEST BENGAL SMALL IND. DEVELOPMENT CORPORATION LTD. financial woes became acute; it approached the Board for Indus trial Finance and Reconstruction (BIFR) under the Sick Industrial Companies (Special Provisions Act) 1985 (“SICA”). The proceedings att empting rehabilitation were to no avail; the BIFR on 24 th September, 2002 held that reconstruction was not possible and concluded that the c ompany had to be wound up. A reference was accordingly made to the Calcutta High Court, under Section 20 of SICA. In the liquidation 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 determin ation went unchallenged. WBSIDC approached the Calcutta High Co urt 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 purp ose originally contemplated, i.e. manufacturing activity. The 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 t he lease was for a substantial period of 90 years, the so-called violation should not have resulted in the inference of a drastic result, i.e. forfeitu re of valuable property. 1087 7. Mr. Bhaskar Gupta, learned senior counsel for WBSID C, highlighted that the reasoning of the High Court is unexceptionable. He emphasized that the lease 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 que stion 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 Developme nt 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. 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 Be nch, 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. 10. This court is of the opinion that the reasoning and conclusion of the High Court do not call for interference. The finding that since the exercise by the lessor (WBSIDC) of its right to determ ine 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: “29.On 19-1-2002, the Board passed the orders terminating the lease in respect of both the plots. In this termination orde r, after giving the past history of events which have already STRESSED ASSETS STABILIZATION FUND v. WEST BENGAL SMALL IND. DEVELOPMENT CORPORATION LTD. [S. RAVINDRA BHAT, J.] 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 an d to execute lease agreement in respect of additional la nd, 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 resu me the land. This writ petition was dismissed on 14-9-1999 [Ralectronics Ltd.v.Karnataka Industrial Area Devel opment Board, WP No. 11957 of 1993, order dated 14-9-1999 (KAR)]. Though the Board could act thereafter, however in t he meantime the High Court of Karnataka had passed the order dated 10-4-2001 in Karnataka Industrial Areas Development Board v. Electromobiles (I) Ltd.[ OSA No. 11 of 1999, or der dated 10-4-2001 (KAR)] holding that when the allotmen t is on lease-cum-sale 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 e xecuted or not. For this reason the Board did not attempt to res ume the possession merely by cancelling the allotment w ithout terminating the lease or taking action in accordance with la w. It was for this reason that the Board was formally terminating the lease by the said notice dated 19-1-2002. The termination notice also mentioned that this was being done under Section 34-B of the Karnataka Industrial Areas Development Act, 1966. **************** **************** 30. We have already held that the Company had commi tted 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 circumstance s, the lease agreement gave a definite right to the Board to terminat e the lease. We are, therefore, of the opinion that t he Board was very well within its right to terminate the lease as provide d in the lease agreement. **************** **************** 1089 38.It is clear from the above that prior permission of the Court is required in respect of any attachment, distress or exe cution put in force or for sale of the properties or effec ts of the Company. We are of the opinion that the serving of cancellation notice simpliciter would not come with in the mischief of this section as that by itself does not amount to attachment, distress or execution, etc. No doubt, a fter the commencement of the winding up, possession of the l and could not be taken without the leave of the Court. Preci sely 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 o f the Act. Had the Board gone ahead further and taken the possession after the cancellation and then approach ed the Company Judge, the situation which occurred in Karnata ka State Electronics Development Corpn. Ltd.v.Official Liquidator[ OSA No. 31 of 2004, decided on 21-6-200 5 (KAR)] would have prevailed. On the other hand, it would have been premature on the part of the Board to app roach 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 whi ch the Company failed to establish. Let us examine the sch eme of the KIAD Act at this point of time. The KIAD Act is enact ed to make special provisions for securing the establishm ent of industrial areas in the State and generally to promo te the establishment and orderly development of industries t herein and for that purpose to establish an Industrial Are as Development Board, and for purposes connected with such matters. Chapter II deals with the declaration and alterat ion of industrial areas. Chapter III deals with establishmen t and constitution of the Board. Chapter IV deals with fu nctions STRESSED ASSETS STABILIZATION FUND v. WEST BENGAL SMALL IND. DEVELOPMENT CORPORATION LTD. [S. RAVINDRA BHAT, J.] and powers of the Board and Chapter V deals with finance, accounts and audit of the Board. Chapter VI deals w ith application of the Public Premises Act and non-appli cation of the Karnataka Rent Control Act, 1961 to the premis es of the Board. Chapter VII deals with acquisition and di sposal of land. Chapter VIII contains the supplementary an d miscellaneous provisions. Section 13 in 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 establ ish themselves; to establish, maintain, develop and man age industrial estates within industrial areas; and to u ndertake such schemes of programmes of works for the furtherance of the purposes for which the Board is established and f or all purposes connected therewith. **************** **************** 42. Section 33 in Chapter VIII of KIAD Act provides t hat 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 notic e in that behalf, may itself provide such amenity or carry out su ch development at the expense of the lessee. Section 34 provi des for penalty for construction or use of land and bui lding contrary to the terms of holding. Section 34-A provid es for demolition or alteration of unauthorised constructi on 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. Sec tion 41 enables the Board by notification to make regula tions consistent with the Act and Rules thereunder to carry out the purposes of the Act with the previous approval of t he State Government.” 11.There can be no dispute, nor was it contended that a donee or a grantee (as the status of the lessee company in liquida tion as in this 1091 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 th an 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. Ankit Gyan Appeal dismissed. STRESSED ASSETS STABILIZATION FUND v. WEST BENGAL SMALL IND. DEVELOPMENT CORPORATION LTD. [S. RAVINDRA BHAT, J.]