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CASE NO.: Appeal (civil)  5347 of 2007

PETITIONER: Zenith Steel Tubes & Industries Ltd & Anr.

RESPONDENT: SICOM Limited

DATE OF JUDGMENT: 21/11/2007

BENCH: Altamas Kabir & B.Sudershan Reddy

JUDGMENT: J U D G M E N T  Arising out of S.L.P. (CIVIL) NO.8486 OF 2007

Altamas Kabir, J.

1.      Leave granted. 2.      The appellant no.1 company was carrying on  business of manufacturing galvanised pipes. In  November, 1992 the appellant-company approached the  respondent for financial assistance amounting to  Rs.1,42,000/- to meet a part of the cost for setting  up a factory in village Madap, Taluq Kolhapur in the  District of Raigarh for the manufacture of  galvanised pipes.  The said amount was duly  sanctioned and the said sum of Rs.1,42,000/- was  advanced by the respondent to the appellant company.   An agreement was entered into for a term loan and  the appellant-company also created a security for  repayment of the amount by hypothecating its plant  and machinery and creating an equitable mortgage of  its factory premises situated in the above mentioned  village. A loan agreement was executed on 30.3.1993  for repayment of the loan in various instalments. On  the same day, the second appellant executed a  personal guarantee for repayment of the loan amount  in case of default by the appellant-company. 3.      The appellant-company committed several  defaults in repayment of the loan amount compelling  the respondent to issue a notice on 16.10.98 calling  upon the appellant-company to pay the overdue amount  within a stipulated period. Despite such notice, the  appellant-company failed to make payment and  accordingly, by a further notice dated 10.1.1999 the  respondent called upon the appellant-company to  repay the entire amount due and payable to the  respondent by 3.2.1999 failing which the possession  of the assets of the appellant-company would be  taken on 5.2.1999. 4.      Since, despite such notice the appellant- company failed and neglected to pay the entire  amount as demanded, the respondent issued a notice  to the appellant no.2 on 13.6.2000 calling upon him  to pay the entire amount by invoking the personal  guarantee given by the second appellant. As in the  case of the appellant-company, the second appellant  did not also make the payment as demanded, and

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consequently, the respondent filed a petition  against the second appellant under Section 31(1)(aa)  of the State Financial Corporations Act, 1951, on  10.10.2000 for enforcing the personal guarantee  given by the said appellant. 5.      In the meantime, the appellant-company applied  to the Board for Industrial and Financial  Reconstruction (BIFR) and was declared a sick  company by the BIFR under the provisions of the Sick  Industrial Companies (Special Provisions) Act, 1985,  (SICA), and the company is still under the said  Board. 6.      Taking advantage of the aforesaid position, the  second appellant contended before the single Judge  of the Bombay High Court that in view of Section 22  of the aforesaid Act, the personal guarantee given  by the second appellant could not be invoked. It was  also contended that the respondent could not enforce  the guarantee till such time as the assets which had  been mortgaged in its favour had not been realised.  Both the said contentions were rejected by the  learned single Judge upon holding that the liability  of the guarantor was independent of that of the  principal debtor, and accordingly, the guarantee  could be invoked and the amount could be recovered  from the guarantor. The guarantor was directed to  pay Rs.1,67,89,225/- with further interest on the  principal amount of Rs.92 lakhs from the date of the  petition till payment at the rate of 12%. The said  decision of the learned single Judge was challenged  by the appellants herein before the Division Bench  of the Bombay High Court in Appeal No.1/2007.  The  Division Bench on consideration of the different  decisions of this Court came to the conclusion that  the provisions of Section 22 of SICA, as amended in  1994, did not prohibit any proceeding, other than a  suit for enforcement of any security against the  guarantor. On such finding and also upon holding  that the liability of the guarantor was co-extensive  with the principal debtor and that the creditor was  not required to exercise his right as a mortgagee  before proceeding against the guarantor, the  Division Bench dismissed the appeal with costs on  29.1.2007.  It is the decision both of the learned  single Judge as also the Division Bench of the High  Court which is the subject matter of this appeal. 7.      Appearing in support of the appeal, Mr. Shekhar  Naphade, learned Senior Advocate, submitted that  both the learned single Judge and the Division Bench  of the High Court had erred in giving a narrow  meaning to the word \021suit\022 as used in Section 22 of  SICA.  He submitted that the context in which the  expression \021suit\022 had been used in Section 22 of the  aforesaid Act made such expression all pervasive to  include other proceedings as well before a court or  other authority empowered to recover debts and other  dues against the company.  It was urged that in the  case of Maharashtra Tubes Limited v. State  Industrial Corporation of Maharashtra Ltd. (1993) 2  SCC 144, it had been held that the expression  \023proceedings\024 in Section 22(1) of SICA must be  widely construed and could not be confined to legal  proceedings understood in the narrow sense of  proceeding in a court of law or a legal tribunal for  attachment and sale of the debtor\022s property.  

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However, since the said decision could be applied to  companies only and not to guarantors, the  legislature amended the provisions of Section 22(1)  so as to extend the protection given to companies to  guarantors also so that they too were given the  protection of Section 22 of the Act.  Mr. Naphade  submitted that the object with which the 1985 Act  was enacted was primarily to assist sick industries  which had failed to meet their financial  obligations. It was urged that in certain cases it  was the Directors of the company who themselves  stood guarantee for the loans advanced to the  company and the enforcement of such guarantee  against the Directors would cause obstructions in  the way of the BIFR to revive the said company,  which was also one of the objects of the 1985 Act. 8.      In this regard, Mr. Naphade also referred to  the decision of this Court in Patheja Bros. Forgings  & Stamping and anr. v. ICICI LTd. and others, 2000  (6) SCC 545, where the question involved was whether  Section 22 of the SICA would cover a suit against a  guarantor of a loan or advance that had been granted  to an industrial company.  Mr. Naphade pointed out  that upon holding that the words of Section 22 were  crystal clear and there was no ambiguity therein,  this Court had held that no suit for enforcement of  a guarantee in respect of a loan or advance granted  to the industrial company concerned would lie or  could be proceeded with without the consent of the  Board or the Appellate Authority under the Act. Mr.  Naphade also submitted that while dealing with the  aforesaid question, this Court had overruled the  decision of the Bombay High Court in Madalsa  International Ltd. v. Central Bank of India, AIR  1998 Bom 247, wherein it had been held that Section  22 would apply to companies only and not to  guarantors who would be affected personally and the  words \023of any guarantee in respect of any loan or  advance granted to the industrial company\024 would  have to be read as the guarantee given by the  industrial company itself and none else. 9.      To emphasise his aforesaid submission Mr.  Naphade laid particular emphasis on the decision of  this Court in Paramjit Singh Patheja vs. ICDS Ltd.  (JT 2006 (10) SC 41) where in connection with the  enforcement of an arbitral award and the issuance of  an insolvency notice under Section 9(2) of the  Presidency Towns Insolvency Act, 1909 this Court,  inter alia, held that it is a well established rule  that a provision must be construed in a manner which  would give effect to its purpose and to cure the  mischief in the light of which it was enacted. It  was further observed that the object of Section 22  of SICA in protecting guarantors from legal  proceedings pending a reference to BIFR by the  principal debtor was to ensure that a scheme for  rehabilitation would not be defeated by isolated  proceedings adopted against the guarantors of a sick  company.  In order to achieve such purpose, it was  imperative that the expression \023suit\024 in Section 22  be given its plain meaning, namely, any proceedings  adopted for realisation of a right vested in a party  by law. 10.     Mr. Naphade then submitted that the Bombay High  Court had wrongly relied upon the decision of this

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Court in Kailash Nath Agrawal & Ors. vs. Pradeshiya  Industrial & Investment Corporation of U.P. Ltd. &  Anr. (2003 (4) SCC 305), wherein the decision  rendered by this Court in the Maharashtra Tubes case  (supra) as also in Patheja Bros. Forging case  (supra) were distinguished and it was held that in  both the cases while considering the effects of the  amendment to Section 22(1) of SICA, the Courts were  concerned with \021suits\022 which had been dealt with in  the case of Patheja Bros, and not with \021proceedings\022  indicated in the first part of Section 22(1) of the  1985 Act. Mr. Naphade added that the decision in the  Maharashtra Tubes case (supra) had been rendered  prior to the amendment of Section 22(1) of SICA,  where as Patheja\022s case, as also the case of  Paramjit Patheja were rendered after the amendment  was effected, to extend the protection of Section 22  to guarantors as well. 11.     Mr. Naphade submitted that the decision in  Kailash Nath Agrawal\022s case had been rendered by  this Court in the context of interpretation of the  expressions \021suit\022 and \021proceedings\022 used in Section  22(1) of SICA, 1985.  In construing the said two  expressions this Court was of the view that while  the expression \021proceedings\022 used in Section 22(1)  would have to be confined to companies alone, the  expression \021suit\022 had been introduced by amendment  to extend the protective cover of Section 22 to  guarantors as well. It was submitted that the  purpose for which such amendment had been effected,  namely, to extend the protective cover of Section 22  to guarantors also, would be rendered meaningless if  coercive action continued to be taken against  guarantors who could even be the Directors of the  company in question. It was urged that the  continuing ambiguity was sought to be explained in  the Paramjit Singh Patheja case (supra) wherein it  was explained that the expression \021suit\022 would have  to be understood in a larger context to include  other proceedings as well before a legal forum. 12.     Mr. Naphade submitted that, in any event, the  liability of the appellant No. 2 under the guarantee  given could be enforced under Section 31((1)(aa) of  the State Financial Corporations Act, 1951, only if  and when the appellant made a default in repayment  of the loan.  Having regard to the fact that the  appellant No.1 had made a reference to the BIFR  under Section 15 of the 1985 Act, the liability of  the appellant-company stood suspended under Section  22 of the said Act.  As the liability of the  appellant-company stood suspended, there could be no  question of any default having been committed by the  appellant company towards repayment of the loan.  According to Mr. Naphade, since the respondent had  filed an application under Section 31(1)(aa) of the  above Act making only a monetary claim against the  appellant no.2, on a true construction of the above  provisions the said Section permits enforcement only  of the security given by the guarantor and since in  the instant case the respondent had filed an  application not for enforcement of any security but  for claiming only the amount of guarantee the same  could not be enforced against the appellant No.2.  According to Mr. Naphade the appellant No.2 has not  given any other security which could be proceeded

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against by the respondent. 13.     Mr. Naphade submitted that the Bombay High  Court had no jurisdiction to entertain the  application  made under Section 31(1)(aa) of the Act  and the order passed there above was a nugity. 14.     It was also submitted that I.A. No.1 of 2007  was filed in the special leave petition for leave to  place on record additional grounds as set out in the  application and prayed that the same be allowed to  be placed on record by way of additional grounds.  Inasmuch as, such prayer was objected to on behalf  of the respondent, Mr. Naphade referred to the  decision of this Court in the Management of State  Bank of Hyderabad vs. Vasudev Anant Bhide etc., 1969  (2) SCC 491, wherein while considering as to whether  a claim was barred under Article 137 of the  Limitation Act, an objection was taken that such  ground had not been raised either before the Labour  Court or even in the special leave petition filed in  this Court. In the said case, on an application made  to permit the appellant to raise the question of  limitation based upon Article 137 of the Limitation  Act, this Court permitted the appellant to raise  such plea as no fresh facts were required to be  investigated and the matter could be dealt with as a  pure question of law.  15.     Mr. Naphade also referred to the decision of  this Court in Pandurang Ramchandra Mandlik v.  Shantibai Ramchandra Ghatge and ors. (1989 Supp (2)  SCC 627) which was a case dealing with ousting of  jurisdiction of the Civil Court with regard to the  provisions of Section 80 and Section 85 of the  Bombay Tenancy and Agricultural Lands Act, 1948.  Referring to the decision of the Judicial Committee  in Secretary of State v. Mask and Company (AIR 1948  PC 105), where it was observed that the exclusion of  the jurisdiction of the Civil Court was not to be  readily inferred, but that such exclusion must  either be explicitly expressed or clearly implied,  it was held that there was nothing in the language  or context of Section 80 or Section 85 of the above  Act to suggest that the jurisdiction of the Civil  Court was expressly or by necessary implication  barred with regard to the question as to whether the  defendants have become statutory owners of the land. 16.     Mr. Naphade concluded his submissions by urging  that both the learned single Judge and the Division  Bench of the Bombay High Court had misconstrued the  provisions of Section 22 of the 1985 Act, as  amended, in holding that the amended provisions  granting protection to guarantors in suits for  enforcement, could not be stretched to include  proceedings for enforcement as well. 17.      Appearing for the respondent, Mr. Jay Savla,  learned advocate, contended that the controversy  regarding the protection given by Section 22 of SICA  to guarantors had been set at rest by this Court in  Kailash Nath Agrawal\022s case (supra).  He submitted  that while in the case of Patheja Bros. Forgings &  Stamping case (supra) this court had to consider  whether a suit against a guarantor would be covered  by the protection provided under Section 22(1) of  SICA, the question in Kailash Nath Agrawal\022s case  this Court was concerned not with a \023suit\024 but a  \023proceeding\024 for recovery of dues and in those

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circumstances this Court had examined the use of the  expressions \023proceeding\024 and \023suit\024 used in  different parts of Section 22(1) of SICA.  It was in  that context that this Court distinguished the  earlier decision in Patheja Bros. Forgings &  Stampings case and upon holding that since the  legislature had expressly chosen to make a  distinction between suits for recovery of money and  enforcement of guarantees and proceedings for the  recovery of money, such distinction had to be given  effect to.  It was held that even under the amended  provisions only a limited protection had been  afforded to guarantors with regard to the recovery  of dues by way of suit, but not by way of  proceedings, and, accordingly, a proceeding for  recovery of money against a guarantor would stand  outside the protection afforded under Section 22(1)  of the 1985 Act. 18.     It was urged that in the instant case, a  situation similar to that in Kailash Nath Agrawal\022s  case had arisen, since the proceeding had been  initiated against the guarantor under the relevant  provisions of the State Financial Corporations Act,  1951, which stood outside the purview of Section  22(1) of SICA. 19.     Mr. Savla submitted that although the decision  in Kailash Nath Agrawal\022s case was not referred to  by the Division Bench of the Bombay High Court, a  similar decision rendered by the Division Bench of  the Bombay High Court in Dewal Singhal vs. State of  Maharashtra (2001 (106) Company Cases 587) was  relied upon.  In the said decision it was held that  the protection conferred on guarantors under Section  22 of SICA is a limited protection and the bar is  restricted only to a suit and did not apply to any  other proceedings. 20.     Mr. Savla referred to the decision of this  Court in BSI Ltd. and Anr. v Gift Holdings Pvt. Ltd.  and Another, (2000 (2) SCC 737), which was rendered  in a slightly different situation involving a fine  imposed on a company in a criminal case against the  company and its Directors under Section 138 of the  Negotiable Instruments Act, 1881.  It was held in  that case that the ban envisaged in Section 22(1) of  SICA would not be attracted in case of punishment of  fine imposed on the company for such offence if it  was with the consent of the BIFR.  Furthermore, the  ban imposed under the said provision of SICA against  maintainability of a suit for recovery of money  would not cover prosecution proceedings for an  offence under Section 138 of the Negotiable  Instruments Act. This Court observed that as the  ambit of \023suit\024 has been clearly delineated in  Section 22(1) itself, it could not be stretched by  employing the maxim that contemporaneous exposition  is the best and strongest in law.  21.     Mr. Savla urged that a proceeding under the  State Financial Corporations Act could not be  equated with a suit as had been held by this Court  in Gujarat State Financial Corporation vs. M/s.  Natson Manufacturing Co.(P) Ltd. (1979 (1) SCR 372)  and having regard to the decision in Kailash Nath  Agrawal\022s case (supra) such a proceeding would not  be entitled to the protection envisaged under  Section 22(1) of SICA.

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22.     As to the second limb of Mr. Naphade\022s  submission regarding the right of the respondent to  proceed against the guarantor before realising its  securities, Mr. Savla reiterated the High Court\022s  view that the claim against the guarantor was  against him personally and was independent of the  sureties given in mortgage by the Principal Debtor.   Mr. Savla submitted that the decision rendered in  Kailash Nath Agrawal\022s case does not appear to have  been brought to the notice of the Hon\022ble Judges  deciding the Paramjeet Singh Patheja case (supra)  and same was decided on other earlier decisions of  this Court which dealt essentially with suits for  recovery of dues. 23.     It was submitted that since the Division Bench  of the High Court took a view which finds support in  Kailash Nath Agrawal\022s case, no case had been made  out for interference with the same. 24.     In the decisions of this Court cited before us,  two divergent views have been expressed in respect  of the same issue involved in this appeal.  In the  other decisions, this Court had no occasion to go  into the said issue which involved the  interpretation of the Section 22(1) of the SICA in  respect of either \021proceedings\022 or \021suits\022  respectively.  In Kailash Nath Agrawal\022s case  (supra) this Court has taken the view that the  legislature appears to have knowingly used two  different expressions in Section 22(1) of SICA,  namely, \021proceeding\022 in the first part and the  expression \021suit\022 in the second part and the  protection of Section 22 extended to guarantors in  respect of suits alone and the use of the expression  \021proceeding\022 could not be extended to include suits  as well nor could the expression \021suit\022 be extended  to include the expression \021proceeding\022 also.  On the  other hand, in Paramjeet Singh Patheja\022s case  (supra) it was held that the expression \021suit\022 which  extends the protection of Section 22(1) to  guarantors, would have to be interpreted to include  \021proceeding\022 also, in view of the intention of the  legislature to protect sick industrial companies  where references were pending before the BIFR. It is  also evident from the decision in Paramjeet Singh  Patheja\022s case (supra) that the views expressed in  Kailash Nath Agrawal\022s case (supra) had not been  brought to the notice of the learned Judges who  decided the matter.  Even if we are inclined to  agree with one of the two interpretations, the  anomalous situation will continue since the  decisions are that of coordinate Benches. 25.     In such circumstances, we consider it fit and  proper that the matter should be referred to a  larger Bench to resolve the existing anomaly  resulting from the different views expressed in the  two above-mentioned cases.

26.     Accordingly, the Registry is directed to place  this matter before the Hon\022ble the Chief Justice of  India for appropriate orders in the light of what  has been stated hereinbefore.