M/S Bharat Steel Tubes Ltd Etc vs Ifci Ltd & Ors

2 2. In these Special Leave Petitions, M/s Bharat

Steel Tubes Ltd. has challenged the judgment and

order dated 9th July, 2010, passed by a Division

Bench of the Delhi High Court in WP(C) No.7097 of

2008, holding that the Respondent, Industrial

Finance Corporation of India Limited is a

"financial institution" under Section 4A(2) of the

Companies Act, 1956, read with Section 2(1)(m) of

the Securitisation and Reconstruction of Financial

Assets and Enforcement of Security Interest Act,

2002, (hereinafter referred to as `the SARFAESI

Act') and that, as a consequence, the Respondent

IFCI Ltd. would be entitled to take recourse to the

provisions of the SARFAESI Act in order to enforce

a "security interest" which had accrued in its

favour. The Petitioner has also challenged an

order passed by a Single Bench of the Delhi High

Court on 10th September, 2010, in I.A.No.12908/09 in

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CS(OS)No.1886 of 2009 vacating the injunction order

earlier passed in the suit.

3. Appearing for the Petitioner, Mr. Rakesh

Dwivedi, learned Senior Advocate, firstly drew our

attention to Section 4A of the Companies Act, 1956,

which was introduced by way of an amendment with

effect from 1st February, 1975, defining "Public

Financial Institutions". It provides that the

various financial institutions specified in Sub-

Section (1), including the Industrial Finance

Corporation of India, established under Section 3

of the Industrial Finance Corporation Act, 1948, is

to be regarded for the purposes of the said Act, as

a public financial institution. Learned counsel

also pointed out that Sub-Section (2) of Section 4A

also provides that subject to the provisions of

Sub-Section (1), the Central Government may, by

notification in the Official Gazette, specify such

other institutions as it may think fit to be a

public financial institution. A limitation,

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however, has been imposed on the said powers of the

Central Government by the proviso to Sub-Section

(2) which provides that no institution is to be

specified as a public financial institution

unless:-

(i) It has been established or constituted by

or under any Central Act; or

(ii) Not less than 51% of the paid-up share

capital of such institution is held or

controlled by the Central Government.

4. Mr. Dwivedi submitted that while clause (i) of

the proviso to Sub-Section (2) of Section 4A of the

above Act is not attracted to the facts of this

case, the second clause would have been attracted,

but for the fact that at the relevant point of time

and even now the Central Government does not hold

or control 51% or more of the paid-up share capital

of the institution concerned. Mr. Dwivedi submitted

that on account of disinvestment at regular

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intervals, the Central Government does not hold any

share in the Company and the day it ceased to hold

51% or more of the paid-up share capital, it ceased

to enjoy the benefits of Section 4A(ii) and became

a private company which could no longer be covered

by the definition of "public financial institution"

in Section 4A of the Companies Act, 1956. It was

submitted that even if the Central Government

continue to hold shares in the Company, its status

would be that of any other private shareholder and

the Corporation could no longer enjoy the status of

a Public Financial Institution given to it under

Section 4A of the Companies Act, 1956.

5. In order to bolster his submissions, Mr.

Dwivedi referred to the Industrial Finance

Corporation (Transfer of Undertaking and Repeal)

Act, 1993, hereinafter referred to as "the 1993

Act", whereunder the nature and character of the

Industrial Finance Corporation of India underwent a

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change and the Corporation was incorporated as a

Company as defined in Section 1(i)(b) of the

aforesaid Act. Mr. Dwivedi pointed out that under

Section 3, the undertaking of the Corporation was

to vest in the Company on a date to be appointed by

notification in the Official Gazette and on the

said date the undertaking of the Corporation would

stand transferred and vested in the newly-

incorporated Company. It appears that the appointed

date was subsequently notified as 1st July, 1993.

6. It was also pointed out by Mr. Dwivedi that

Section 4 of the 1993 Act mentions the general

effect of vesting of an undertaking in the Company

to be so incorporated. By virtue of Sub-Section

(2) of Section 4, the undertaking of the

Corporation, which was transferred to and vests in

the Company under Section 3, shall be deemed to

include all the various items set out in Sub-

Section (2) of Section 4. In addition, under Sub-

7 Section (3) of Section 4, all contracts, deeds,

bonds, guarantees, powers of attorney, other

instruments and working arrangements subsisting

immediately before the appointed date and affecting

the Corporation would cease to have effect or to be

enforceable against the Corporation and would be of

full force and effect against or in favour of the

Company, in which the undertaking of the

Corporation had vested.

7. Reference was then made to Sub-Section (5) of

Section 4, whereunder with effect from the

appointed date, fiscal and other concessions,

licences, benefits, privileges and exemptions

granted to the Corporation in connection with the

affairs and business of the Corporation under any

law for the time being in force would be deemed to

have been granted to the Company. Mr. Dwivedi

contended that under the said provision, it could

not be said that the status given to the Respondent

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Company was saved or continued under Section 5 of

the Act and, accordingly, once the Central

Government ceased to hold 51% or more of the paid-

up share capital of the Company, it ceased to enjoy

the benefits under Section 5 of the 1993 Act.

8. Mr. Dwivedi submitted that since the Respondent

No.1 Company no longer fulfilled the criteria

contained in Clause (ii) of the proviso to Sub-

Section (2) of Section 4A of the Companies Act,

1956, it had lost the status given to it under

Clause (ii) of Sub-Section (1) of Section 4A

thereof and was not, therefore, entitled to invoke

the provisions of the SARFAESI Act, 2002,

notwithstanding the provisions of Section 5 of the

1993 Act.

9. Mr. Dwivedi also pointed out that the fact that

the Respondent No.1 Company was no longer a public

company under the control of the Central

Government, had also been admitted on behalf of the

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Respondent No.1 before the Delhi High Court in Writ

Petition (Civil)4596 of 2006, which would be

reflected from the judgment delivered therein on

17th August, 2010. Mr. Dwivedi pointed out that in

paragraph 10 of the judgment it had been mentioned

by the learned Single Judge that a submission had

been advanced on behalf of the Respondent No.1

Company that it was neither substantially financed

by the Central Government nor did the Central

Government hold any share whatsoever in the

Respondent No.1 Company.

10. Mr. K.K. Venugopal, learned Senior Advocate,

appearing for the Respondent No.1 Company, on the

other hand, contended that Section 5 of the

aforesaid Act was in the nature of a saving clause,

whereby all matters relating to the Corporation

stood wholly transferred in favour of the new

Company after its incorporation, including, the

status which had been afforded to the Corporation

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under Clause (ii) of Section 4A(1) of the Companies

Act, 1956. Mr. Venugopal submitted that in exercise

of the powers conferred by Sub-Section (2) of

Section 4A of the aforesaid Act, the Central

Government issued Notification No.S.O.98(E) dated

15th February, 1995, specifying the Industrial

Finance Corporation of India Limited formed and

registered under the Companies Act, 1956, to be a

financial institution and, accordingly, amended the

Notification issued by the Government of India,

Ministry of Law, Justice and Company Affairs

(Department of Company Affairs) No.S.O.1329 dated

8th May, 1978, to include the Industrial Finance

Corporation of India Limited in the said

notification.

11. Mr. Venugopal urged that the mere fact that the

Respondent No.1 Company was no longer under the

control of the Central Government did not affect or

alter its status under Section 4A(1)(ii) of the

11 Companies Act, 1956, as a public financial

institution and that, in effect, more than 4,000

cases filed by the Respondent No.1 Company in its

capacity as a public financial institution were

pending and would be rendered infructuous if the

interpretation being sought to be given on behalf

of the Petitioner in relation to the status of the

Respondent No.1 Company was to be accepted.

12. Having regard to the large number of cases

filed by the Respondent No.2 Company, in its

capacity as a public financial institution, which

are said to be pending, we have given our anxious

consideration to the submissions advanced on behalf

of the respective parties and the provisions of the

Companies Act, 1956, and the Industrial Finance

Corporation (Transfer of Undertaking and Repeal)

Act, 1993.

12 13. Section 4A of the Companies Act, 1956, as far

as the Industrial Finance Corporation of India

Limited is concerned, provides as follows :-

4A. Public financial institutions.-

(1) Each of the financial institutions

specified in this sub-section shall be

regarded, for the purposes of this Act, as a

public financial institution, namely:-

(i) ..........................................................................................

(ii) the Industrial Finance Corporation of

India, established under Section 3 of the

Industrial Finance Corporation Act, 1948 (7 of

1948);

(iii) ..........................................................................................

(iv) ..........................................................................................

(v) ..........................................................................................

(vi) ..........................................................................................

(vii) ..........................................................................................

(2) Subject to the provisions of sub-section

(1) the Central Government may, by notification

in the Official Gazette, specify such other

institution as it may think fit to be a public

financial institution:

Provided that no institution shall be so

specified unless-

13 (i) it has been established or constituted by

or under any Central Act, or

(ii) not less than fifty-one per cent, of the

paid-up share capital of such institution is

held or controlled by the Central Government."

14. In our view, the provisions of Sub-Section (1)

of Section 4A stand independent of Sub-Section (2)

and the financial institutions named in Sub-Section

(1) of Section 4A recognize the financial

institutions mentioned therein to be public

financial institutions which are not covered by the

embargo enforced by the proviso to Sub-Section (2)

of the said Section. The proviso controls the

width of Sub-Section (2) which refers to the powers

of the Central Government to specify by

notification in the Official Gazette and subject to

the provisions of Sub-Section (1), such other

institutions as it may think fit to be a public

financial institution. It appears to us that Sub-

Section (2) of Section 4A is applicable only to

institutions which are not mentioned in Sub-Section

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(1). It is the latter category of financial

institutions to which the proviso applies. In view

of Section 4 A(1)(ii) of the Companies Act, 1956,

the Industrial Finance Corporation of India was

admittedly regarded as a `public financial

institution' for the purpose of the said Act. The

conversion of the Industrial Finance Corporation of

India into a Company did not alter its position and

status as a financial institution in view of

Section 5 of the Industrial Finance Corporation

(Transfer of Undertaking and Repeal) Act, 1993,

which, as pointed out by Mr. K.K. Venugopal, was in

the nature of a saving clause, whereby all matters,

including all benefits, relating to the

Corporation, stood wholly transferred in favour of

the new Company.

15. Mr. Dwivedi has submitted that the Notification

dated 15th February, 1995, had been issued under

Section 4A(2) of the Companies Act which will have

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to conform to the proviso thereto. Mr. Dwivedi has

contended that both the conditions in the proviso

would have to be fulfilled in order to be eligible

for being specified as a public financial

institution. We are unable to accept such

contention in view of the fact that clauses (i) and

(ii) are not conjunctive but disjunctive and even

though Clause (ii) may not have any application to

the Respondent No.1 Company, it was covered by

clause (i), since it was constituted under the

Companies Act, 1956, which is a Central Act.

16. We, therefore, find no reason to interfere with

the judgment and orders of the High Court impugned

in these Special Leave Petitions, which are,

accordingly, dismissed.

17. There shall, however, be no order as to costs.

................................................J.

(ALTAMAS KABIR)

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................................................J.

(CYRIAC JOSEPH)

New Delhi

Dated:4.4.2011