Citation Codes

Equivalent Citations

citation codes

Case Number

O.M.P No. 323 of 1999

Judges

Mukul Mudgul, J.

Acts

SECTION 22 A SICK INDUSTRIAL COMPANIES SPECIAL PROVISIONS ACT 1985
Industrial Companies (Special Provisions) Amendment Act, 1993, section 22(1)
SECTION 9 ARBITRATION AND CONCILIATION ACT 1996
provisions of the Karnataka Rent Control Act.
SECTION 20 ARBITRATION ACT
SECTION 446 COMPANIES ACT
section 22 of the SICA Act.7.

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Smart Summary

Structured Summary of the Opinion (Mukul Mudgal, J.)

Factual and Procedural Background

The petitioner filed a petition under section 9 of the Arbitration and Conciliation Act, 1996 seeking interim relief: (a) restraining the respondents from selling, parting with possession or transferring a waste heat recovery system equipment that had been leased to the respondents; and (b) appointment of a receiver to take possession of that leased equipment because of the respondents' defaults in repayment under the lease agreement dated February 24, 1993. The respondents resisted the application, contending that appointment of a receiver was barred by section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). The respondents relied principally on the Supreme Court judgment in Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association ([1992] 3 SCC 1). The petitioner relied on several High Court decisions (including M/S Credit Capital Finance Corporation v. M/S Foremost Industries Ltd. and Ge Capital Transportation Financial Services Ltd. v. Dee Pharma Limited) to contend that where ownership of equipment remains with the lessor, section 22 of SICA does not apply. The Court considered these authorities, examined the lease agreement terms regarding ownership, and issued directions including permitting the receiver to take possession as per the court's order dated November 15, 1999, and directing timelines for commencement and completion of arbitration proceedings.

Legal Issues Presented

Whether the appointment of a receiver to take possession of leased equipment is barred by section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 when the equipment is in the possession of a sick industrial company as lessee.
Whether a lessee company's leasehold interest in leased equipment (where the lease agreement expressly preserves ownership in the lessor) constitutes "property of the industrial company" for the purposes of section 22 of SICA.

Arguments of the Parties

Respondents' Arguments

The respondents contended that appointment of a receiver is barred by section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985.
They relied on the Supreme Court decision in Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association ([1992] 3 SCC 1), particularly paragraph 13, to argue that leasehold interests can amount to property of the company and therefore fall within the ambit of section 22.

Petitioner's Arguments

The petitioner argued that the leased equipment remained the property of the lessor (the petitioner) under the lease agreement, and therefore the equipment was not "property of the industrial company" within the meaning of section 22 of SICA.
The petitioner relied on the decisions of the Delhi High Court and other courts (including M/S Credit Capital Finance Corporation v. M/S Foremost Industries Ltd.; Ge Capital Transportation Financial Services Ltd. v. Dee Pharma Limited; and Kotak Mahendra Finance Ltd. v. Deve Paints Ltd.) to support the proposition that where ownership remains with the lessor/financier, section 22 is not attracted and a receiver may be appointed in respect of the leased equipment.
The petitioner also submitted that the observations in Shree Chamundi were made in the context of leasehold interests in immovable property and statutory tenancies under rent law, and thus are not applicable to financed/leased movable equipment where ownership is expressly retained by the lessor.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association, [1992] 3 SCC 1 (AIR 1992 SC 1439)	Held that leasehold interest in premises may be regarded as property of a company in a certain sense; paragraph 13 discussed statutory tenancy under relevant rent law and how such tenancy creates an interest protected from eviction, impacting whether leasehold interest falls within section 22.	The Court distinguished this authority: it observed that the Supreme Court's observations were made in the context of immovable property and statutory tenancy, and therefore the paragraph relied upon by the respondents did not warrant extending section 22 to leased equipment where ownership remains with the lessor.
Gian Devi Anand (Smt.) v. Jeevan Kumar, [1985] Supp. 1 SCR 1	Principle that termination of contractual tenancy does not change the tenant's status if the Rent Act confers protection; tenant may continue to enjoy an estate or interest despite termination.	Referenced within the Shree Chamundi discussion; the Court noted that these authorities formed the context of Shree Chamundi and that the protection discussed there was related to statutory tenancy of immovable property.
M/S Credit Capital Finance Corporation v. M/S Foremost Industries Ltd., [1996] 87 Comp Cas 251; AIR 1996 Delhi 310	Interpreted SICA section 22 as attracted only when proceedings are in respect of properties of the industrial company; where a lease agreement expressly keeps ownership with the lessor, the leased equipment is not property of the company.	The Court relied on this decision as supportive of the petitioner's position and accepted that the learned single judge's finding — that ownership remained with the lessor — was sufficient to show section 22 would not apply.
Ge Capital Transportation Financial Services Ltd. v. Dee Pharma Limited, [1998] 76 DLT 273; [1999] 96 Comp Cas 192	Held that where ownership of machinery vested with the financing company, mere possession by the lessee does not make ownership vest in the lessee; thus section 22 would not apply to such machinery.	The Court treated this decision as supportive of the view that ownership remained with the lessor/financier and that section 22 does not bar remedies (including appointment of receiver) in respect of equipment that is not the property of the sick company.
Kotak Mahendra Finance Ltd. v. Deve Paints Ltd., AIR 1997 Bom 401	Held that financed vehicles not owned by the sick industrial undertaking do not fall within the purview of section 22(1) of SICA; section 22(1) refers to proceedings against properties of the industrial company.	The Court cited this decision to reinforce the proposition that section 22 applies to properties of the sick industrial company and does not defeat the financier's rights in assets it owns and has leased out.
Sundaram Finance Ltd. v. Nepc India Ltd., (1999) 2 SCC 479; AIR 1999 SC 565	Held that courts should ensure effective steps are taken to commence arbitral proceedings; under section 9 courts may pass conditional orders to put applicants to terms ensuring arbitration is pursued.	The Court invoked this principle to direct that the arbitrator must commence proceedings within two weeks, parties to complete pleadings within six weeks of commencement, and the arbitrator to give award within four months from commencement pursuant to the Court's order.

Court's Reasoning and Analysis

The Court proceeded through the following analytical steps, based on the materials and arguments placed before it:

Identification of the core contention: respondents argued that section 22 of SICA barred appointment of a receiver over the leased equipment; they relied chiefly on the Supreme Court's observations in Shree Chamundi (paragraph 13) to support the contention that leasehold interest could be regarded as property of the company.
Examination of Shree Chamundi: the Court carefully read paragraph 13 of Shree Chamundi and noted that the Supreme Court's observations were made in the context of leasehold interests in immovable property and, specifically, statutory tenancy governed by rent protection laws (the Karnataka Rent Control Act in that case). The Court observed that the examples and reasoning in Shree Chamundi were tied to that context.
Distinguishing immovable/statutory tenancy context from the present facts: the Court held that nothing in paragraph 13 of Shree Chamundi could be read to extend section 22 to cover leased equipment (movable property) that remains the ownership of the lessor under the lease agreement.
Reliance on factual contractual terms: the Court emphasised that the lease agreement between the parties in the present case clearly stipulated that ownership of the equipment remained with the lessor (the petitioner). The Court accepted the learned single judge's approach in earlier Delhi High Court decisions which found that where ownership of the subject equipment remains with the lessor, section 22 is not attracted.
Consideration of prior High Court decisions: the Court reviewed and relied upon M/S Credit Capital Finance Corporation v. M/S Foremost Industries Ltd., Ge Capital Transportation Financial Services Ltd. v. Dee Pharma Limited, and Kotak Mahendra Finance Ltd. v. Deve Paints Ltd. to support the proposition that section 22 applies only to properties of the industrial company and does not bar actions by lessors/financiers over assets they own.
Policy/constructive consideration: the Court observed that accepting the respondents' construction would defeat the purpose of leasing equipment (and would unfairly impact the rights of an owner-lessor/financier who had purchased and leased the equipment), by depriving the lessor of remedies to recover or secure its own equipment.
Conclusion from analysis: in view of the contractual retention of ownership by the petitioner and the distinctions drawn from the authorities, the Court concluded that section 22 of SICA did not apply in the present case and therefore respondents could not resist appointment of a receiver on that ground.
Directions relating to arbitration: having noted the respondents' reliance on Sundaram Finance v. Nepc India Ltd. and the fact that the arbitrator appointed had not yet commenced proceedings, the Court made specific directions to ensure the arbitration proceeds: arbitrator to commence proceedings within two weeks; parties to complete pleadings within six weeks of commencement; and arbitrator to give award within four months from commencement pursuant to the Court's order.

Holding and Implications

Core Holding: The Court held that section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 does not apply to the leased equipment in the present case because the lease agreement expressly preserved ownership of the equipment in the lessor (the petitioner); consequently, the appointment of a receiver to secure the leased equipment is permissible.

Direct consequences and orders:

The receiver is permitted to take possession of the leased equipment as per the Court's earlier order dated November 15, 1999.
The arbitrator appointed by the petitioner is directed to commence arbitral proceedings within two weeks from the date of this order.
The parties are directed to complete their pleadings within six weeks of the arbitrator commencing proceedings.
The arbitrator is directed to render the award within four months from the commencement of the proceedings pursuant to this order.

Broader implications:

The opinion's reasoning is applied to the facts before the Court — namely, a lease where ownership is expressly retained by the lessor — and the Court distinguished the Supreme Court's observations in Shree Chamundi as being in the context of immovable property and statutory tenancy. The opinion does not articulate a broader rule beyond the circumstances of the case; its effect is the direct relief and procedural directions given to the parties in this matter.

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Jindal Menthol & Investments Ltd. (Formerly Jindal Menthol India Ltd.) v. Prakash Industries Ltd. And Another

Mukul Mudgal, J.:— This petition has been filed by the petitioner under section 9 of the Arbitration and Conciliation Act, 1996. The petitioner has prayed that interim orders be passed restraining the respondents from selling”, parting with possession or transferring the waste heat recovery system equipment, leased by the petitioner to the respondents and has further sought relief due to the defaults of the respondents in repayment and, therefore, sought permission for the receiver to be appointed by this court to take over the possession of the said equipment which was given on lease to the respondents under lease agreement dated February 24, 1993. This application has been resisted by the respondents/lessees by contending that the appointment of a receiver is hit by the provisions of section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as the said Act). The respondent in particular has relied upon a judgment of the Supreme Court in Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association, [1992] 75 Comp Cas 440; (1992) 3 SCC 1. Learned counsel has stressed upon paragraph 13 of the said judgment wherein the Supreme Court has held as follows (page 451):

“We are also unable to agree with the contention of the learned counsel for the appellant-company that the leasehold interest of the appellant-company in the premises leased out to it is property for the purpose of section 22(1). It is no doubt true that the leasehold interest of the lessee in the premises leased out to him is property which can be transferred and the said interest can also be attached and sold by way of execution in satisfaction of a decree against the lessee. In that sense, it can be said that the leasehold interest of a company is its property. But the question is whether the same is true in respect of the interest of a company which is in occupation of the premises as a statutory tenant by virtue of the protection conferred by the relevant rent law because, in the instant case on the date of reference to the board, the proceedings for eviction of the appellant-company were pending and the appellant-company was in occupation of the premises only as a statutory tenant governed by the provisions of the Karnataka Rent Control Act. In Gian Devi Anand (Smt.) v. Jeevan Kumar, [1985] Supp. 1 SCR 1, this court has laid down that the termination of a contractual tenancy does not bring about a change in the status and legal position of the tenant unless there are contrary provisions in the relevant Rent Act and the tenant, notwithstanding the termination of tenancy, does enjoy an estate or interest in the tenanted premises. It is further laid down that this interest or estate which the tenant continues to enjoy despite termination of the contractual tenancy creates a heritable interest in the absence of any provision to the contrary. This court has also held that the Legislature which, by the Rent Act, seeks to confer the benefit on the tenants and to afford protection against eviction, is perfectly competent to make appropriate provision regulating the nature of protection and the manner and extent of enjoyment of such tenancy rights after the termination of contractual tenancy of the tenant including the rights and the nature of protection of the heirs on the death of the tenant.” Learned counsel for the petitioner has submitted that the Supreme Court had made the above observations in the context of a statutory tenancy of a company by virtue of a lease and these observations could not apply to the facts of the present case in favour of the respondent. The plea of the respondent thus is that the following observations of the Supreme Court (p. 451) “it is no doubt true that leasehold interest of the lessee in the premises leased out to him is property which can be transferred and the said interest can also be attached and sold by way of execution in satisfaction of a decree against a lessee. In that sense, it can be said that the leasehold interest of a company is its property” to contend that since the respondents had leasehold interest in the leased equipment, it is the company's property and hence covered by the ambit of section 22 of the said Act.

2. Learned counsel for the petitioner on the other hand has relied upon a judgment of the learned single judge of this court in M/S. Credit Capital Finance Corporation… v. M/S. Foremost Industries Ltd.…., [1996] 87 Comp Cas 251; AIR 1996 Delhi 310. Construing the judgment of Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association, [1992] 75 Comp Cas 440; (1992) 3 SCC 1, the learned single judge of this court held (p. 255 of 87 Comp Cas): “This provision shows that it is attracted only when the proceedings are with respect to any of the properties of the industrial company. In the present case, the leased equipment cannot be said to be the property of the company. The lease agreement between the parties shows that the ownership of the equipment, the subject-matter of lease throughout remains with the lessor, in the present case the plaintiff. When the ownership of the equipment, the subject-matter of the lease agreement remains vested with the plaintiff, it cannot be said that the present proceedings relate to property of the industrial company.”

3. The learned single judge further held as follows (p. 255):

“In taking this view, I find support from a decision of the Supreme Court in Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association, [1992] 75 Comp Cas 440; (1992) 3 SCC 1 : AIR 1992 SC 1439. This was a case of lease of a property in favour of a company which was under the SICA. It was held that leasehold rights in a property cannot be said to be a property of the sick industrial company. The application is dismissed.”

4. The principal contention before me is that the view of the learned single judge in relying upon the Supreme Court judgment in Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association, [1992] 75 Comp Cas 440; (1992) 3 SCC 1 : AIR 1992 SC 1439, is not the correct view in law particularly when the Supreme Court had made the observations in Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association, [1992] 75 Comp Cas 440; (1992) 3 SCC 1 : AIR 1992 SC 1439, in the context of a statutory tenancy of a lease property. In my view, without going into the plea that reliance on Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association, [1992] 75 Comp Cas 440; (1992) 3 SCC 1 : AIR 1992 SC 1439, by learned single judge was justified or not, the finding of the learned single judge that the lease agreement between the parties clearly shows that the ownership of the equipment remained with the lessor, is sufficient to show that section 22 would not apply in respect of an equipment which was leased. In the present case also there is no dispute between the parties that the agreement between the parties clearly stipulates that the equipment leased remained the property of the lessor/petitioner here.

5. Learned counsel for the petitioner has further relied upon a judgment of the learned single judge of this court in Ge Capital Transportation Financial Services Ltd. v. Dee Pharma Limited., [1998] 76 DLT 273; [1999] 96 Comp Cas 192 to contend that in the case of ownership of machinery which vested with the financial company by which the equipment has been leased out, the provisions of section 22 would not apply because such provisions only apply to the property of the lessee company and the equipment which was leased could not be said to be the property of the company. The learned single judge has after construing the clauses of the lease of the equipment held as follows (page 196):

“A perusal of these clauses shows that the ownership of the machinery vested with the petitioner though possession of the same was with the respondent, merely putting the possession of the machinery at the disposal of the respondent by no stretch of imagination would mean that the ownership of the property vested in the respondent-company. Since the respondent-company is not the owner of the machinery in question, therefore, mere registering of the case by the BIFR would not disentitle this court to pass an order as prayed for by the petitioner because the property does not belong to the respondent-company. In this regard, I am supported by the decision of this court in M/S. Credit Capital Finance Corporation… v. M/S. Foremost Industries Ltd.…., [1996] 87 Comp Cas 251; AIR 1996 Delhi 310. In that case, the plaintiff had entered into an agreement of lease of certain equipment in favour of the defendant-company and filed a petition under section 20 of the Arbitration Act for appointment of an arbitrator. The receiver was appointed in respect of the leased equipment. The defendant-company filed two applications, one was a petition under section 446 of the Companies Act and the second was an application contending that under section 22 of the SICA, the receiver could not have been appointed. This court, after interpreting section 22 of the SICA came to the conclusion that the provisions of section 22 would be attracted only when the proceedings were in respect of any of the properties of the industrial company. Since ownership of the equipment, the subject-matter of lease throughout remained with the petitioner in that case, therefore, appointment of the receiver was upheld because section 22 was not attracted.” Learned counsel for the petitioner has submitted that these observations which were upheld by the learned Division Bench in Company Appeal No. 29 of 1998, by order dated October 9, 1998, apply with full force to the facts of the present case. The petitioner has also relied upon the judgment of the learned single judge in the case of Kotak Mahendra Finance Ltd. v. Deve Paints Ltd., AIR 1997 Bom 401, to contend that section 22 would not apply to the facts of the present case. The Bombay High Court held that financed vehicles which are not owned by the sick company do not fall within the purview of section 22. The learned single judge held as follows (page 404): “The answerable question, therefore, is whether the properties which are not owned by the sick industrial undertaking, are covered under section 22(1) of the Act of 1985? If the finance company resorts to recovery of its properties viz., its vehicles which have been given on lease to the lessee company, it cannot be said that it is property of the lessee company (sick industrial undertakings) or it is covered under section 22(1) or such recourse can be equated with the kind of proceeding's contemplated under section 22(1). The expression ‘against the properties’ occurring in section 22(1) is not without significance because it implies that action of winding up or for execution, distress or such like proceeding must be against the property of the sick industrial company. It is true that by the Sick Industrial Companies (Special Provisions) Amendment Act, 1993, section 22(1) was amended and, ‘and no suit for the recovery of money or for the instrument of any security, against the industrial company or guarantee in respect of any loans or advances granted to the industrial company’ was inserted after, ‘no proceedings for the winding up of the industrial company or for the execution, distress or the like against any of the properties of the industrial company or for the appointment of receiver in respect thereof, but the said amendment cannot be of any help to the lessee company because as observed above, so far as finance company is concerned it has not filed any suit against the lessee company for recovery of money against the industrial company or for enforcement of any security against the lessee company or for enforcement of guarantee in respect of any loans given to the lessee company or for any advance granted to the lessee company.”

6. Upon perusing the aforesaid judgments I am satisfied that the reliance by learned counsel for the respondents on the judgment of Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association, [1992] 75 Comp Cas 440; (1992) 3 SCC 1 : AIR 1992 SC 1439 of the Supreme Court and in particular the observations in paragraph 13 of the said judgment extracted hereinabove is not justified. The Supreme Court had made the above observations qua a leasehold interest in immovable property. However, there is nothing in the observations in paragraph 13 of Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association, [1992] 75 Comp Cas 440; (1992) 3 SCC 1 : AIR 1992 SC 1439, judgment which could warrant a proposition that the leased equipment would also fall within the purview of section 22 of the SICA Act.

7. The Supreme Court while holding that the leasehold interest of a property was not covered by section 22 held that the tenancy was statutory by virtue of the protection of the relevant rent law but the aforesaid observations of the Supreme Court cannot-be construed to justify the plea that section 22 of the said Act relates to the leased equipment. The observations of the Supreme Court that the leasehold interest of a company was in a sense property of the company were made in the context of the lease of an immovable property and cannot be said to apply to the lease of an equipment financed by the lessor company where the agreement clearly stipulated that the leased equipment would continue to remain the property of the lessor company. The bar contemplated by the relevant portion of section 22 of the Act reads as under:

“… no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof.”

8. Thus, even section 22 of the Act in terms refers only to the properties of the company.

9. This plea of learned counsel for the respondent, if accepted, would defeat the very purpose of leasing out the equipment by the petitioner as the leased equipment was purchased initially by the petitioner-company from its own funds and was then leased out to the respondent-company. Such a construction would affect unfairly the rights of a company which is the owner of the leased equipment. Such a construction is, therefore, not warranted as the lessee company would in such an event not merely deprive the lessor company from receiving the instalments due, but also deprive it from taking steps to secure/possess its own equipment in respect of which the sick company has defaulted in making the payments.

10. In this view of the matter I am satisfied that the ownership of the leased equipment in the present case in accordance with the agreement between the parties clearly remained with the petitioner financing company. The provisions of section 22 would, therefore, not apply to the facts of the present case. In this view of the matter the appointment of the receiver to secure the leased equipment cannot be resisted by the respondents and it is therefore, directed that the receiver will take possession of the said leased equipment as per the order of this court dated November 15, 1999. Learned counsel for the respondent has relied upon the judgment in Sundaram Finance Ltd. v. Nepc India Ltd., (1999) 2 SCC 479 : AIR 1999 SC 565; JT 1 (SC) 49, wherein the Supreme Court has held in para. 20 that the court should ensure that effective steps are taken to commence the arbitral proceedings and the court while exercising jurisdiction under section 9 may pass conditional orders to put the applicant to such terms as it may deem fit with a view to see that effective steps are taken by the applicant for commencing the arbitral proceedings. In the present case it is stated that the arbitrator appointed by the petitioner has not yet started the proceedings.

11. It is, therefore, directed that the arbitrator shall immediately commence proceedings within two weeks from today. The parties to complete their pleadings within six weeks of the arbitrator commencing the proceedings and the arbitrator to give his award within four months from commencement of the proceedings pursuant to this order.

Jindal Menthol & Inv... v. Prakash Industries L...