Indusind Bank Ltd v. Iti Limited & Ors

judgment held that: 'We are, therefore, of the opinion that the judgment of the High Court cannot be sustained. We may furthermore notice that the decision of the learned single judge has been overruled by a Division Bench of the Bombay High Court in Ashok Organics Industries Ltd. v. Dena Bank (Company Petition No. 108 of 2006, disposed of on

25.1.2008). It is also not possible to harmonize the provisions of Sections 391 to 394 of the 1956 Act with the provisions of SICA. For the views we have taken, it is not necessary to consider the other contentions raised at the bar." Significantly, Tata Motors (supra) appears to have escaped the notice of this Court in Oman Bank (supra). Page 18

¶17There is another dimension to the issue. In the present case, the question has to be seen also from the perspective of terms spelt out in the Consortium Agreement.

¶18In the present case, the Consortium Agreement inter alia provided as follows: "3. Notwithstanding anything to the contrary contained in or arising out of or implied by the said Consortium Agreement and/* or the Joint Deed of Hypothecation and/or the Second Charge, it is hereby agreed and declared by and between the said Banks as follows: XXXXXX XXXXXX XXXXXX In the event of a member bank desiring to opt out of the consortium, it is hereby agreed to abide by the following:

(1) In the first instance, such member bank desiring to opt out and/or to reduce its share should offer its share to one or more amongst the other member banks in the consortium and/or to one or more new banks willing to join the consortium, and in the event of such share being taken up by either the existing members and/or new banks to be admitted into the consortium, such member bank will be permitted to either opt out or to reduce its share.

(2) In the case of a weak/sick unit, where a rehabilitation package is being formulated or has been formulated, a bank may opt out or reduce its share or may not take the enhanced share provided other member banks or one or more new banks to be admitted are willing to take up its share. Such member bank opting out may also offer to other member banks and/or new banks to be admitted its shares by discounting of its debt. However, in the event of existing members and/or new banks to be admitted are not willing to take up such share or such discounted debt, the concerned bank should continue in the consortium with its Page 19 existing facilities without demur and not delay the implementation of the package for revival/rehabilitation of such sick/weak units. Further, if a member bank does not take up its additional share for one reason or the other, the consortium of banks will have the right to defer the repayment, if any, due to that bank under the said package till such time as it takes up its due share or dues of the other member banks have been repaid in full. XXXXXX XXXXXX XXXXXX" From the above, it is clear that the Consortium Agreement itself provided for review/opting out by a member bank and the consequence of such decision. These peculiar circumstances were not in issue before the Court in Oman Bank SAOG (supra). There is a larger issue in question which again was not considered in Oman Bank SAOG (supra). Though a bank, a secured creditor, enters into a consortium agreement with the other creditors (which may entail sacrificing its rights to the extent of recovering amounts which are payable to it - a situation which is. by and large akin to the sacrifice which a secured creditor has to undertake under a scheme for compromise and arrangement under Section 391 of the Companies Act) in a DRS, something more fundamental is involved. Most rehabilitation packages cast an obligation upon the participating banks/creditors (who might be entitled to claim outstanding dues from the sick company) to not only forego some part of the interest liabilities or even accept a lumpsum settlement, but also to do something positive, i.e. to increase/enhance or continue with recurring funding of a venture which otherwise would be wound-up. The public interest in ensuring the revival and rehabilitation of industrial units, no Page 20 doubt, cannot be lost sight of; however, at the same time, the contractual rights of the participating creditors, such as a bank (which is also answerable to its shareholders and depositors) to take a commercial decision on whether to continue to extend funding cannot be undermined. As noticed in the decision of the Bombay High Court in Ashok Organic (supra) and confirmed in different matters by the Supreme Court, the nature of scheme under Section 391 which can override the views of a minority shareholder or creditor is fundamentally different from that of the scheme under the SICA where the creditor may be called upon to make further payments or continue with existing credit limits, thus exposing itself to the real contingency of loss. It is in such circumstances that contractual rights where the consortium participants spell-out their inter se obligations and the consequences thereof have to be recognized and given effect to and there cannot be a blanket recourse to the power under Section 19(4). Such power may be appropriately invoked in the given circumstances of a case.

¶20In view of the above discussion, in the present case, since the consequences of opting out from the Consortium Agreement were factored in by the participating secured creditors, this Court is of the opinion that neither the BIFR nor the AAIFR could have compelled the petitioner Bank to continue in the DRS. The result of its opting-out would mean that it would stand out in respect its rights to realize the outstanding dues from the sick company, which would be postponed in terms of the Consortium Agreement with the other secured Page 21 creditors. The impugned order is accordingly set aside. The writ petition has to succeed and is allowed without any order as to costs. S. RAVINDRA BHAT (JUDGE) VIBHU BAKHRU (JUDGE) JULY 11, 2014

Page 1 * IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on: 19.05.2014 Pronounced on : 11.07.2014 + W.P.(C) 4350/2013 & C.M. NO. 10067/2013 INDUSIND BANK LTD. …..Petitioners Through: Mr. Ravinder Sethi, Sr. Advocate with Mr. Ajay Monga, Mr. Ateev. K. Mathur, Mr. Amol Sharma and Mr. Devmani Bansal, Advocates. Versus ITI LIMITED AND ORS. ……..Respondents Through: Ms. Jayashree Shukla Dasgupta with Ms. Vinita Sasidharan, Advocates, for Resp. No.1. Mr. Suhail Malik, Dy. Advocate General, for Govt. of J&K, for Resp. Nos. 7, 38, 39 & 63. Mr. Sunil Kumar with Mr. T.P. Singh, Advocates, for Resp. No. 48/UOI. Dr. Ashwani Bhardwaj, Advocate, for Resp. No.56. Mr. Sanjay Kumar, proxy counsel, for Mr. Kamal Sawhney, Sr. Standing Counsel, for Income Tax Department. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE VIBHU BAKHRU MR. JUSTICE S. RAVINDRA BHAT % Page 2 1. By these proceedings under Article 226 of the Constitution, an order of the Appellate Authority for Industrial and Financial Reconstruction ("AAIFR") made under the Sick Industrial Companies (Special Provisions) Act, 1985 ("SICA") dated 27.05.2013 has been impugned. 2. The brief facts of the case are that the first respondent (hereafter referred to variously as "ITI" and "the company") approached the Board for Industrial and Financial Reconstruction ("BIFR") set up under SICA, on the basis of its having lost the net worth; this led to a reference, registered by the BIFR in which the cut-off date for preparation of the scheme was directed to be 31.12.2005. This was subsequently changed to 31.03.2009. Originally, the petitioner bank had sanctioned working capital limits to the tune of ₹ 40 crores (half of which was fund-based and the other, non fund-based limits) renewable annually. The BIFR had appointed the State Bank of India ("SBI") as the Operating Agency ("OA"). At the time of formulation of scheme itself, it is alleged that the petitioner had expressed reservations and decided to exit the consortium arrangement entered into between the participating banks and financial institutions. 3. The Consortium Agreement had been entered into by various banks, including the petitioner, all of whom were creditors of ITI, on 20.03.2002. The purpose and underlying objective of the Consortium Agreement was to enable the participating creditors to work in tandem towards the ultimate goal of realization of their dues from the ITI. On 19.08.2009, the Central Government sanctioned a grant of ₹ 28.20 Page 3 crores to the ITI to discharge its liability. Taking note of this, the petitioner claims that it reduced the fund-based limits to ₹ 1.3 crores, to the ITI. 4. Whilst the proceedings were pending before the BIFR for the finalization of the Draft Rehabilitation Scheme ("DRS") under the SICA, a direction was issued on 07.04.2011 to all banker members of the consortium to take expeditious action in releasing the credit limits that were envisioned in terms of the proposals made to it. Consequently, ITI requested the petitioner bank to release the limits/raise the credit limits to the originally sanctioned level on 28.04.2011. Responding to this, the petitioner bank, on 25.05.2011, expressed its intention to quit the consortium. In this letter, a reference was made to the previous letter of 04.10.2004 written to the OA where for the first time, the bank had expressed its intention to quit the consortium and the Scheme. It was pointed-out by the petitioner that the working capital limits were sanctioned annually and were to be renewed annually based on operational and financial performance. The bank further stated that no assessment of requirements had been made by the OA for several years. In the circumstances, in a meeting of the consortium members on 20.08.2011, the petitioner reiterated its decision to exit or quit the consortium arrangement. 5. In the light of these events, when the BIFR took on record the DRS dated 31.05.2012, it elicited objections by its order dated 29.06.2