MANISH JITENDRABHAI THAKKAR V. UNION OF INDIA

SCA/2423/2014

AI Insights

The case involves a legal challenge by the petitioners, who are directors and guarantors of a company that defaulted on loans from the Gujarat State Financial Corporation (GSFC). The petitions contested the application of the Securitization Act to their loans, arguing that the SFC Act was unconstitutional and that the actions taken under the Securitization Act were invalid. The court examined the legislative competence of the Union to enact the SFC Act and the applicability of the Securitization Act to the financial transactions of the GSFC. The court found that the SFC Act was constitutionally valid and that the Securitization Act applied to the loans in question, allowing the GSFC to proceed with recovery actions under this Act.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 722212 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 29-09-2014
• Assessment Year: misc
• Other Referred Cases: Calcutta Gas Company (Proprietary) Ltd. vs. State of West Bengal, Shri Ramtanu Co-operative Housing Society Ltd. vs. State of Maharastra, A.P.State Financial Corporation vs. M/s. Gar Re-rolling Mills, M/s. Transcore vs. Union of India, Ionik Metalic and ors. vs. Union of India, Mamta Surgical Cotton Industries, Rajasthan vs. Assistant Commissioner (Anti Evasion), Bhilwara, Rajasthan, Maradia Chemicals Ltd. and ors. vs. Union of India and ors., The Director of Industries, U.P and ors. vs. Deep Chand Agarwal
• Laws Referred To: Secularization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, State Financial Corporation Act, 1951, Companies Act, 1956
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: MITUL SHELAT; N D GOHIL
• Assessee Lawyers: V K L SHAH; MASOOM SHAH
• Keywords: Financial Institution; Legislative Competence; Non-performing asset; Public financial institution; Securitization Act; SFC Act
• Section: 13(2); 29; 13(4)

Judgement Text

"C/SCA/9704/2013 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 9704 of 2013 with SPECIAL CIVIL APPLICATION NO. 2423 of 2014 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE J.B.PARDIWALA =========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ NILESHKUMAR N KOTAK & 4....Petitioner(s) Versus UNION OF INDIA & 1....Respondent(s) ================================================================ Appearance: MR V.K.LSHAH WITH MASOOM K SHAH, ADVOCATE for the Petitioners No. 1 - 5 MR MITUL K SHELAT, ADVOCATE for the Respondent(s) No. 2 MR ND GOHIL, ADVOCATE for the Respondent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE J.B.PARDIWALA Page 1 of 77 C/SCA/9704/2013 JUDGMENT Date : 22/29-09-2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) Page 2 of 77 C/SCA/9704/2013 JUDGMENT 1.These petitions involve the question of applicability of the Secularization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ('Securitization Act' for short) to the borrowers and guarantors of the Gujarat State Financial Corporation constituted under the State Financial Corporation Act, 1951 ('the SFC Act' for short). 2.Since facts are slightly different, we may briefly record them as arising in each petition. In Special Civil Application No. 9704 of 2013 virtually no facts have been stated. However, material facts are available from the affidavit­in­reply dated 13.08.2013 filed on behalf of the respondent No.2, the Gujarat State Financial Corporation. Such facts are that: (i) The petitioners are the Directors of the company, M/s. P Natubhai Tea Company Private Limited by name. The State Financial Corporation sanctioned a term loan of Rs. 40 lacs in favour of the said Page 3 of 77 C/SCA/9704/2013 JUDGMENT company in the year 2000. A sum of Rs. 35.83 lacs was actually disbursed in the early part of the year 2001. A further sum of Rs. 1.39 lac was disbursed on 31.03.2001. It appears that a further sum of Rs. 10.93 lacs was disbursed in favour of the said company on 06.08.2001. For obtaining such loans, the company had, in addition to offering its land, building and machinery as primary security, also offered certain collateral securities of immovable properties. Shri Nilesh Kotak and Prafull Kotak alongwith late Shri Natwarlal Kotak had executed personal guarantees and also offered collateral securities. (ii)When the company defaulted in making payments, the Corporation initiated steps under the SFC Act. Possession of the primary security was taken on 05.04.2005 and the same was also sold on 06.03.2010. Since much of the debt with accumulated interest was still not satisfied, the Corporation also proceeded against the collateral security. Possession thereof was taken under Section 29 of the SFC Act. Page 4 of 77 C/SCA/9704/2013 JUDGMENT However, as per the affidavit, the action was abandoned to take recourse under the Securitization Act. Notice under Section 13(2) of the Securitization Act was issued on 05.02.2013. Though the petitioner has challenged the action taken by the Corporation under the Securitization Act, notice under Section 13(2) of the Act is not produced on record. We, however, have on record a further notice issued under Section 13(4) of the Securitization Act dated 26.04.2013 which records that there were outstanding dues of Rs. 2,64,95,870/­ from the company towards the Gujarat State Financial Corporation. The Corporation thereafter issued a public advertisement on 18.05.2013 inviting offers from the prospective buyers. However, before any further steps could be taken, the petitioner No.3 who was not a guarantor filed a Civil Suit No. 48 of 2013 before the Civil Court at Dhrangadhra seeking a declaration that, the properties offered by way of collateral security are joint family properties and that, the same, therefore, could not be sold to realize the dues of the company. Sometime Page 5 of 77 C/SCA/9704/2013 JUDGMENT thereafter, the present petition came to be filed challenging various statutory provisions and the action taken by the Gujarat State Financial Corporation under the Securitization Act. In such petition, the petitioners have challenged the vires of the SFC Act and prayed that the Act be declared as unconstitutional. According to the petitioners, the Act suffers from lack of legislative competence of the Union Legislature. The petitioners have also challenged the vires of Section 4A of the Companies Act,1956 alongwith Section 2(1) (m)(i) of the Securitization Act. The petitioners have challenged a notification dated 17.10.1995, again without producing a copy, issued by the Government of India in exercise of powers under sub section (2) of Section 4A of the Companies Act, 1956 so far as it declares the Gujarat State Financial Corporation as one of the Public Financial Institutions. The petitioners have also challenged the action taken by the Gujarat State Financial Corporation under the Securitization Act on various grounds. Page 6 of 77 C/SCA/9704/2013 JUDGMENT 3. In Special Civil Application No. 2423 of 2014 also the petition gives rather sketchy facts. We have, therefore, gathered the facts stated in the affidavit in reply filed on behalf of the Corporation. Such facts are: (I) A loan was availed in the year 1991­92 by the principal borrower from the Corporation. The father of the petitioner stood as a guarantor. He had created equitable mortgage of the collateral security being landed property situated at Ward No.2, Survey No. 3749, Luhar Mohalla, Main Road, Navsari Bazar, Surat in favour of the Corporation. As per the Corporation, as on 31.12.2013, amounts of Rs. 15.65 lacs (rounded off) and Rs. 7.18 lacs (rounded off) were outstanding in the name of principal borrower and the guarantor. Though the petitioner claims to be in possession of the original title deed, as per the Corporation, his father had declared in the year 1992 that he had misplaced the original documents. Be that as it may, the Corporation, on the premise that the asset had become non­performing, Page 7 of 77 C/SCA/9704/2013 JUDGMENT took recourse to Section 13(2) of the Securitization Act by issuing notice on 22.01.2013. According to the petitioner, his father had expired on 02.10.1994. No reply to the said notice was, therefore, given by anyone. Fearing further action by the Corporation under the Securitization Act, the petitioner filed this petition. Like in the earlier petition, the petitioner has challenged various statutory provisions and also the action taken by the Corporation under the Securitization Act. 4. Briefly stated the case of the petitioners in both these petitions is that the Union Legislature lacks legislative competence to enact the SFC Act. The petitioners have also challenged Section 4A of the Companies Act under sub­ section (2) of which, as noted by the notification dated 17.10.1995, the Gujarat State Financial Corporation is included in list of the public financial institutions. Correspondingly, the petitioners challenge Section 2(1)(m)(i) of the Securitization Act, by virtue of which, a public Page 8 of 77 C/SCA/9704/2013 JUDGMENT financial institution within the meaning of Section 4A of the Companies Act,1956, would be the financial institution and consequently, the provisions of the Securitization Act would apply. It is for this reason, the petitioners have also challenged the very notification issued by the Central Government under sub­section (2) of Section 4A of the Companies Act,1956. 5. Learned counsel Mr. V.K.Shah, in support of the petitioners' challenge, raised following contentions: (i) The Union Legislature lacked the legislative competence to enact the SFC Act. According to the counsel, the subject of legislation does not fall within Entry 43 of list I to Seventh Schedule. If at all, the same may fall under Entry 44 of the said list but more appropriately, would fall under Entry 32 of the List II to the Seventh Schedule pertaining to Incorporation, Regulation and Winding up of Corporation other than those specified in List I. His twin contention, therefore, Page 9 of 77 C/SCA/9704/2013 JUDGMENT was that the subject did not fall in Entry 43. If it fell in Entry 44, the Act could not be confined to one state as was done in the present case. Consequently, since the subject is knocked out from Entry 43 as well as 44 of the Ist Schedule, it would be covered by Entry 32 of Schedule II to the Seventh Schedule. In this context, the counsel relied on the decision of the Supreme Court in case of Calcutta Gas Company (Proprietary) Ltd. vs. State of West Bengal and ors. reported in AIR 1962 SC 1044 wherein the context of interpreting Entries 24 and 25 of the List 2 of the Schedule II the Supreme Court observed that in case of apparent conflict between the two entries and when they overlap with each other in such a contingency doctrine of harmonious construction must be invoked. We would refer to this decision at a later stage. Counsel, alternatively, contended that the subject can also fall under Entry 24 List II Seventh Schedule. (ii) Counsel also relied on the decision of the Supreme Court in case of Shri Ramtanu Page 10 of 77 C/SCA/9704/2013 JUDGMENT Co­operative Housing Society Ltd. and anr. vs. State of Maharastra and ors. reported in 1970 (3) SCC page 323 to substantiate his argument that the respondent­financial corporation is not a trading corporation since the corporation is not in the business of buying and selling. According to the counsel, therefore, since the State Financial Corporation is not a trading corporation, the legislation would not fall in Entry 43 of List I to the Seventh Schedule. (iii) The counsel relied on the following decisions to substantiate his arguments that in order to judge within which entry the legislation would fall, the pith and substance of the Act should be considered: 1. The Second Gift Tax Officer, Mangalore etc. vs. D.H.Hazareth etc. reported in AIR 1970 SC 999 2. Commissioner of Income Tax West Bengal, Calcutta vs. Benoy Kumar Sahas Roy reported in AIR 1957 SC 768 Page 11 of 77 C/SCA/9704/2013 JUDGMENT 3. State of West Bengal and ors. vs. Committee for protection of Democratic Rights, West Bengal and ors. reported in (2010) 3 SCC 571 4. Sri Lakshmi Satyanarayana Rice Mill and ors. vs. The Agricultural Market Committee, Tenali and anr.reported in AIR 1975 Andhra Pradesh 58 5. Kartar Singh vs. State of Punjab reported in (1994) 3 SCC 569 (iv) Regarding the validity of Section 4A of the Companies Act,1956 and 2(1)(m) (i) of the Securitization Act as also the validity of the notification issued by the Central Government on 17.10.1995 under Section 4A(2) of the Companies Act, the counsel contended that the statutory provisions gave unguided and uncanalized powers to the delegated legislation. The Central Government could notify any institution as a public financial institution. Consequently, such an institution would be considered as a financial institution for the purpose of the Securitization Act. According to the counsel, therefore, the statutory provision as well as the notification Page 12 of 77 C/SCA/9704/2013 JUDGMENT issued under such statute were both arbitrary and ultra vires the Constitution. In this respect, he relied on the decision of the Supreme Court in case of A.N.Parasuraman Etc. vs. State of Tamil Nadu reported in AIR 1990 SC 40 in which the Supreme Court observed that Tamilnadu Institution (Regulation) Act was enacted to regulate the private institutions where it does not give any idea as to manner in which the control of the institution can be exercised. It was in this background, the Court was of the opinion that the authority concerned was left with unrestricted and unguided powers rendering the provisions unfair and discriminatory. (v) Coming to the challenge on the merits of the action initiated by the State Financial Corporation, the counsel contended that the Corporation could not have pursued the proceedings under the Securitization Act. As in case of Special Civil Application No. 9740 of 2013 action under the SFC Act was already initiated, the Corporation had to elect which remedy Page 13 of 77 C/SCA/9704/2013 JUDGMENT had to be pursued. Having chosen the remedy under the SFC Act, the Corporation could not have pursued the remedy under the Securitization Act. In this context, the counsel relied on the decision of the Supreme Court in case of A.P.State Fiancial Corporation vs. M/s. Gar Re­ rolling Mills and anr. reported in (1994) 2 SCC 647. Counsel also drew our attention to the decision of the Supreme Court in case of M/s. Transcore vs. Union of India and anr. reported in AIR 2007 SC 712. (vi) Mr.V.K.Shah further submitted that there are no parameters for categorizing an asset as a non­performing one. Relying on the decision of the Division Bench of this Court vide order dated 24.04.2013 in Special Civil Application No. 14908 of 2011 and connected petitions in case of Ionik Metalic and ors. vs. Union of India, only Reserve Bank of India can lay down the guidelines for declaring an asset as non­performing. In the present case, the RBI has not laid down any guidelines for the purpose of the State Financial Corporation. The very foundation for Page 14 of 77 C/SCA/9704/2013 JUDGMENT initiation of the action under the Securitization Act is, therefore, non­ existent. (vii) Insofar as Special Civil Application No. 9740 of 2013 is concerned, the counsel additionally submitted that as per the Corporation, possession of the immovable property was already taken over under Section 29 of the SFC Act. It was thereafter, notice under Section 13(2) of the Securitization Act was issued which was a redundant notice. Any further action under Section 13(4) of the Securitization Act on the basis of such notice under Section 13(2) would, therefore, also be invalid. (viii) In Special Civil Application No. 2423 of 2013, the counsel raised the additional contentions that: (a) The guarantor, father of the petitioner, expired in the year 1994. The notice under Section 13(2) of the Securitization Act was, thus, against the dead person; Page 15 of 77 C/SCA/9704/2013 JUDGMENT (b) That the action of the Corporation was hit by limitation. The Securitization Act would not revive limitation or permit recovery of debts which have become time barred. 6. On the other hand, learned Assistant Solicitor General Mr. Vyas for the Union of India opposed the petitions contending that the SFC Act does not suffer from any vice of lack of legislation power. The SFC Act was framed by the Union Legislature since the subject fell within its competence by virtue of Entry 43 of List I to Seventh Schedule. He further submitted that the Calcutta High Court in case of Engineers (Overseas) Corporation Pvt. Ltd. and anr vs. West Bengal Financial Corporation and anr. reported in AIR 1986 Calcutta 132 and the Gauhati High Court in case of Charsola Tea Co. Ltd. vs. The Assam Financial Corp. Shillong and ors. reported in AIR 1973 Gauhati 136 have upheld the vires of the said statute. 6.1 The counsel further submitted that Page 16 of 77 C/SCA/9704/2013 JUDGMENT Section 4A of the Companies Act does not confer unguided or unlimited powers to the Central Government for notifying an institution as a Public Financial Institution. Same has to be done for the purposes of the Companies Act. The counsel placed on record the guidelines laid down by the Government of India under communication dated 02.06.2011 for notifying a financial institution as a public financial institution. 6.2 With respect to the provisions of the Securitization Act, counsel contended that validity of the entire Act was upheld by the Supreme Court in case of Maradia Chemicals Ltd. and ors. vs. Union of India and ors. reported in (2004) 4 SCC 311. Vires to individual provision, therefore, now is not open to challenge. 7. Learned Counsel Mr. Shelat appearing in Special Civil Application No. 9740 of 2013 for the State Financial Corporation also opposed the petition contending that one who has taken benefit under a statute cannot question its validity. In any case, Page 17 of 77 C/SCA/9704/2013 JUDGMENT the State Financial Corporation Act does not suffer from any vice of unconstitutionality. He invited our attention to the decision of the Supreme Court in case of M/s. P.G.F.Ltd and ors. vs. Union of India and anr. reported in 2013 AIR SCW 2420 to contend that belated and frivolous challenge to the statutory provisions should be discouraged. The petitioners having obtained loan from the financial institution failed to repay large amounts. They cannot thwart the recovery on the pretext of challenging the vires of the Act itself. 7.1 The Counsel further submitted that Section 46B of the SFC Act provides that the provisions of the said Act shall be in addition to and not in derogation of, any other law for the time being applicable to an industrial concern in the context of the question of election of remedies. Therefore, counsel would contend that the Corporation had a choice of seeking recovery from the petitioners under the SFC Act or under the Securitization Act. In the present case, the recovery Page 18 of 77 C/SCA/9704/2013 JUDGMENT proceedings under Section 13(2) of the Securitization Act was issued after abandoning proceedings under the SFC Act. Further steps were taken since there was no reply from the petitioners in response to such notice. 7.3 Counsel submitted that the petitioners have suppressed material facts including the fact that the petitioner No.3 had already filed a civil suit contending that the properties offered as collateral securities were ancestral properties and therefore, could not have been mortgaged by other co­sharer. In the present petition all the petitioners have joined hands and challenged the very same action of the Corporation under the Securitization Act. 7.4 With respect to the contention of RBI guidelines, for declaring an asset as NPA, the counsel submitted that the petitioners have not made any payment of the past dues since several years. This is an admitted position. As per the notice under Section 13(2) of the Securitization Act, dues had Page 19 of 77 C/SCA/9704/2013 JUDGMENT swelled to more than two and half crores of rupees. Applying any of the guidelines laid down by the RBI for treating an asset as non­performing even going by the judgement of this Court in case of Ionik Metalic and ors. vs. Union of India(supra) the asset had become non­performing. 7.5 Counsel relied on the decision of the Supreme Court in case of Mamta Surgical Cotton Industries, Rajasthan vs. Assistant Commissioner (Anti Evasion), Bhilwara, Rajasthan reported in 2014 (4) SCC 87 wherein the term “includes” used in the statutory provision came up for interpretation. This decision was cited for the purpose of interpretation of Entry 43 of List I. 8. Mr. Gautam Joshi appearing for the Corporation in Special Civil Application No. 2423 of 2014 submitted that the decision of Orissa High Court in case of Sarthak Builders Pvt. Ltd., Cuttack and anr. vs. Orissa Rural Development Corporation Ltd., Bhubaneswar and ors. (supra), on the question of applicability Page 20 of 77 C/SCA/9704/2013 JUDGMENT of the notification under sub­section (2) of Section 4A of the Companies Act to the cases where the loan were raised prior to the date of the notification, has since been overruled by a Full bench judgement of the same High Court in case of Sarthak Builders Pvt. Ltd., Cuttack and anr. vs. Orissa Rural Development Corporation Ltd., Bhubaneswar and ors. reported in AIR 2014 Orissa 83 . With respect to the notice under Section 13(2) of the Securitization Act being issued to a dead person, the counsel submitted that such fact was never brought to the notice of the Corporation for several years by the legal heirs. Regarding the question of limitation, the counsel submitted that the action under Section 29 of the SFC Act was initiated in the year 2009 and thus, the period of limitation cannot be stated to have expired. 9. Having heard the learned counsel for the parties and having perused the documents on record, we may first settle the question of vires of the SFC Act. The background to this question is that in Page 21 of 77 C/SCA/9704/2013 JUDGMENT both cases, the petitioners were either the principal borrowers or guarantors as the case may be, of the loans disbursed by the State Financial Corporation. They availed such loans for the purpose of industrial activities and could make only part payments. Substantial amount of loan remained unpaid and with mounting interest swelled into sizeable amounts. When the State Financial Corporation initiated auction for recoveries either under the SFC Act or under the Securitization Act, they opposed the recovery proceedings. One of the contentions they have now raised is that the SFC Act itself is ultra vires the Constitution. In that context, the question would arise whether a person, who has taken benefit under an Act or a statutory provision, could be permitted to question the validity thereof. In case of Indra Singh and Sons Pvt. Ltd. vs. Sales Tax Officer, Raigarh and ors. reported in 1962 Madhya Pradesh 128, the petitioner had approached the High Court praying for a direction to the respondents for specification of certain goods in the Certificate of legislation issued to the Page 22 of 77 C/SCA/9704/2013 JUDGMENT petitioner under Section 17(3) of the Central Sales Tax Act,1956. The Petitioner also prayed for a declaration that Sections 7 and 8 (3) of the said Act were ultra vires. In this context, a Division Bench of Madhya Pradesh High Court held that it was not open for the petitioner to challenge the vires of the said statutory provisions. It was observed as under: “6. In our view, this petition must be dismissed. The contention that Section 7 and 8(3) are ultra vires the Constitution may be disposed of by saying that it is not open to the petitioner to attack the validity of those provisions in these proceedings. The reason is that the petitioner's prayer before the sales tax authority was for its registration as a dealer under Section 7 and specification of certain goods in its certificate of registration. Its contention has all along been that the class or classes of goods which it desires to be specified are those which fall under Section 8(#) and its prayer in this petition is that a direction be issued to the opponents for specification of the goods mentioned earlier which have been excluded from specification in the certificate of registration. That being so, the petitioner must accept the position that Sections 7(3) and 8(3) under Page 23 of 77 C/SCA/9704/2013 JUDGMENT which he is seeking the relief of specification of certain goods in the certificate of registration are valid. If he comes to the Court and attacks the validity of those provisions then clearly he cannot get the relief he is praying for. It seems to us elementary to say that a person seeking relief under a particular statutory provision must accept its validity. Then again at present there is no question of any assessment of sales tax having been made against the petitioner. If and when an assessment is made on the applicant and if he thinks that the provision under which it has been made is repugnant to article 14 or article 19(1)(f) and (g) or article 301 of the Constitution the petitioner would be at liberty to challenge the validity of that assessment on those and other grounds. The Court does not express academic opinion when nobody is aggrieved by any action on the part of the Legislature or the executive. It is therefore, unnecessary to consider the question of the validity of Secs. 7 and 8 of the Act.” 10. In case of Asiz Rawther vs. Kanjirapally Panchayat reported in 1961 Kerela 289 it was found that the petitioner had enjoyed his right to vend meat under auction for full term and thereafter challenged the validity of auction under Article 19(1)(g) of the Page 24 of 77 C/SCA/9704/2013 JUDGMENT Constitution in a writ petition. The Court was of the opinion that such a challenge was not permissible. In case of The State vs. Keshab Chandra Naskar reported in 1962 Calcutta 338 the Court observed that there is a wholesome principle of constitutional law that the constitutional point should not be decided on the complaint of one who fails to show that he is injured or aggrieved by its operation and at the instance of one who has availed of his benefits. It was observed as under: “15. Lastly, this submission of Mrs. Nag can also be supported for the reason that it is a wholesome principle of Constitutional law that a constitutional point should not be decided on the complaint of one who fails to show that he is injured or aggrieved by its operation and at the instance of one who has availed of its benefits. These two principles are well settled on the point as to the right to take a constitutional objection before a Court. These were two of the principles and inhibitions which the American Supreme Court laid down through the celebrated observations of Brandei J. in Aswander v. Tennessee Valley Authority (1935) 297 U.S. 288 at pages 346­48.” 11. In case of Brij Mohan Lal vs. Union of India and ors. reported in (2012) 6 SCC Page 25 of 77 C/SCA/9704/2013 JUDGMENT 502 the Supreme Court was considering the validity of scheme of Fast Track Court under Article 32 of the Constitution as also the challenge to Rules 4 and 6 of the Gujarat Rules. The Supreme Court turned down such challenge on the ground that the Rules, under which the petitioners are appointed, after 2001 were to be in force only till 2005. Till then, none of the appointees have challenged these Rules. For all these years, they took full advantage of their appointment and received the service benefits. It was observed asunder: “160. These petitioners have also raised a challenge to Rules 4 and 6 of the Gujarat Rules under which they were appointed, on the ground that the same are arbitrary and discriminatory. Firstly, the Rules under which the petitioners were appointed after 2001 themselves were to be in force only till 31.12.2005. Till 2005, none of the appointees challenged these Rules. For these four years, they in fact took full advantage of their appointment under these Rules and received different service benefits thereunder. We are unable to appreciate the contention that these Rules were arbitrary or discriminatory.” 12. In view of above legal position, in Page 26 of 77 C/SCA/9704/2013 JUDGMENT our opinion, the challenge to the SFC Act at the hands of the petitioners is simply not permissible. Rather incongruent situation would arise, if at the instance of the petitioners, the challenge is upheld. The petitioners as borrowers or as guarantors failed to pay principal with interest. They now question the validity of the SFC Act itself. Having obtained the loan and enjoyed the same, they now question the very Act and thus, the very Constitution of the State Financial Corporation. If the challenge is upheld, the petitioners, would return home with no liability to repay the debt which they admittedly incurred with the condition to repay with statutory interest and to cover the risk of the Corporation, offered their immovable properties as primary and collateral securities. Having obtained the loan from the Corporation, it is not open for them to question the Constitution of the Corporation itself. 13. We have, however, examined the petitioners' contention on the vires also. Entry 43 of List I, the Union List to Page 27 of 77 C/SCA/9704/2013 JUDGMENT Seventh Schedule reads as under: “43.Incorporation, regulation and winding up of trading corporations, including banking, insurance and financial corporations but not including co­ operative societies.” 14. Entry 44 of the said list reads as under: “44.Incorporation, regulation and winding up of trading corporations, whether trading or not, with objects not confined to one State, but not including universities.” 15. Entry 32 of the list II the said list to Schedule 7 reads as under: “Property or the Union and the revenue therefrom, but as regards property situated in a State subject to legislation by the State, save in so far as Parliament by law otherwise provides.” 16. Entry 24 of the list II reads as under: “Shipping and navigation on inland waterways, declared by Parliament by law to be national waterways, as regard mechanically propelled vessels; the rule of the road on such waterways.” 17. It is by now well settled that Page 28 of 77 C/SCA/9704/2013 JUDGMENT entries in the various lists in the Seventh Schedule are not the source of the power of legislation but they demarcate the legislative fields. Reference in this respect can be made to the decision in case of Indian Aluminium Company Ltd and anr vs. Karnataka Electricity Board and ors. reported in (1992) 3 SCC 580. It is equally well established that each entry must be given its widest interpretation and all entries include the ancillary and subsidiary powers [refer to AIR 1970 SC 1453, AIR 1960 SC 736]. Before declaring law as ultra vires all attempts must be made to reconcile any possible conflict between the entries [AIR 2004 SC 2647]. If there is any incidental encroachment the same must be ignored [2008 13 SCC 5]. 18. Entry 43, as noted, pertains to incorporation, regulation and winding up of trading corporations including banking, insurance and financial corporations but not including co operative societies. Entry 44, on the other hand, pertains to in corporation regulation and winding up of a corporation whether trading or not Page 29 of 77 C/SCA/9704/2013 JUDGMENT with objects not confined to one State but not including universities. It can thus straightaway be noticed that the limitation on exercise of the legislative powers of framing a law which is not confined to one State as is applicable to the subject falling of Entry 44 is conspicuous by its absence in entry 43. It was precisely therefore that the counsel for the petitioners urged that the subject­matter must fall under Entry 44 and not 43. A closer look, however, must rebut such interpretation. Entry 43 specifically pertains to incorporation, regulation and winding up of trading corporations. By using the term “including” the scope is expanded to include bank, insurance and financial corporation but excluding the co­operative societies. In plain terms therefore, Entry 43 includes regulation and winding up of trading corporations as also incorporation, regulation and winding up of banking, insurance and financial corporation excluding co­operative societies. Page 30 of 77 C/SCA/9704/2013 JUDGMENT 19. It is undisputable that the State Financial Corporation is not a trading corporation. It does not deal in buying and selling of commodities. As explained by the Supreme Court in case of Shri Ramtanu Co­operative Housing Society Ltd. and anr. vs. State of Maharastra and ors. (supra) the underlying concept of trading corporation is buying and selling. The SFC Act has been enacted in order to provide medium and long term credit to industrial undertakings, which falls outside the normal activities of commercial banks. Thus, admittedly, the State Financial Corporation constituted under the said Act is not dealing in buying and selling and therefore, not a trading corporation. However, we cannot limit the interpretation of Entry 43 to trading corporation only. The contention of the petitioners that, for a Corporation to fall in Entry 43 necessarily be a trading corporation, is completely devoid of merits. Entry 43 does start with the expression “incorporation regulation and winding up of trading corporation”. However, the expression used is “including Page 31 of 77 C/SCA/9704/2013 JUDGMENT banking, insurance and financial corporation”. Thus, the entry would also include incorporation, regulation and winding up of banking, insurance and financial corporations. When the legislature uses a term “includes” in preference to means and includes, it ordinarily aims to expand the term and include within its sweep ordinarily, concept may not cover. As rightly pointed out by counsel Shri Shelat in case of Mamta Surgical Cotton Industries, Rajasthan vs. Assistant Commissioner (Anti Evasion), Bhilwara, Rajasthan (supra), the Apex Court observed as under: “50.The meaning of the said expression has been considered by a three Judge bench of this Court in the case of the South Gujarat Roofing Tiles Manufacturers Association and anr. v. State of Gujarat and anr., (1976) 4 SCC 601, wherein this Court has observed: “Now it is true that 'includes” is generally used as a word extension, but the meaning of a word or phrase is extended when it is said to include things that would not properly fall within its ordinary connotation.” Page 32 of 77 C/SCA/9704/2013 JUDGMENT 51. Principles of Statutory Interpretation (12th Edn., 2010) by Justice G.P. Singh, at p. 181, has discussed in detail the connotations of the word “include” and emphasized on the exhaustive explanation of the word “inclusive” thus: “…The word “include” is very generally used in interpretation clauses in order to enlarge the meaning of words or phrases occurring in the body of the statute; and when it is so used those words or phrases must be construed as comprehending, not only such things, as they signify according to their natural import, but also those things which the interpretation clause declares that they shall include.” 52. In RBI v. Peerless General Finance & Investment Co. Ltd., (1987) 1 SCC 424 this Court has followed the observations in the Dilworth case (supra) and explained the purpose and expanse of the “inclusive definitions” as under: “32. We do not think it necessary to launch into a discussion of either Dilworth case or any of the other cases cited. All that is necessary for us to say is this: legislatures resort to inclusive definitions (1) to enlarge the meaning of words or phrases so as to take in the ordinary, popular and natural sense of the words and also the sense which the statute wishes to attribute to it; (2) to include meanings about which there might be some dispute; or (3) to bring under one nomenclature all transactions possessing certain similar features but going under different names. Depending on the context, Page 33 of 77 C/SCA/9704/2013 JUDGMENT in the process of enlarging, the definition may even become exhaustive.” 53. In Karnataka Power Transmission Corpn. v. Ashok Iron Works (P) Ltd., (2009) 3 SCC 240 this Court after analyzing the afore­ cited decisions has observed as follows: “17. It goes without saying that interpretation of a word or expression must depend on the text and the context. The resort to the word ‘includes’ by the legislature often shows the intention of the legislature that it wanted to give extensive and enlarged meaning to such expression. Sometimes, however, the context may suggest that word ‘includes’ may have been designed to mean ‘means’. The setting, context and object of an enactment may provide sufficient guidance for interpretation of the word ‘includes’ for the purposes of such enactment.” 54. The word “include” is generally used to enlarge the meaning of the words or phrases occurring in the body of the statute; and when it is so used those words or phrases must be construed as comprehending, not only such things, as they signify according to their natural import, but also those things which the interpretation clause declares that they shall include. That is to say that when the word “includes” is used in the definition, the legislature does not intend to restrict the definition: it makes the definition enumerative but not exhaustive. That is to say, the term defined will retain its ordinary meaning but its scope would be extended to bring Page 34 of 77 C/SCA/9704/2013 JUDGMENT within it matters, which in its ordinary meaning may or may not comprise. [vide Commr. of Customs v. Caryaire Equipment India (P) Ltd., (2012) 4 SCC 645; U.P. Power Corpn. Ltd. v. NTPC Ltd.,(2014) 1 SCC 371; Associated Indem Mechanical (P) Ltd. v. W.B. Small Industries Development Corpn. Ltd., (2007) 3 SCC 607; Dadaji v. Sukhdeobabu; Mahalakshmi Oil Mills v. State of A.P.; Bharat Coop. Bank (Mumbai) Ltd. v. Employees Union, (2007) 4 SCC 685) 54. By introducing the word “including” immediately after detailing the definition of cotton, the legislature has expanded the meaning of the expression “cotton” for the purposes of the Act. While the natural import suggests and prescribes only unmanufactured cotton in all forms, the commodities “absorbent cotton wool I.P.” and “cotton waste” manufactured out of “cotton” are intentionally and purposefully included in the relevant entries alongwith cotton in its ordinary meaning.” 20. If, therefore, the SFC Act can be stated to be an act for incorporation, regulation and winding up of financial corporation, its origin can be traced to Entry 43 of List I. It is true that Entry 44 of the same list covers wider area. It pertains to incorporation, regulation and winding of corporation whether trading or not. If the legislature were to trace its Page 35 of 77 C/SCA/9704/2013 JUDGMENT origin to this entry, the limitation of such legislation having objects not confined to one State must be recognized. Entries 43 and 44 when interpreted in their widest sense may present an overlap of the fields. For example, an insurance or a financial corporation would ordinarily also fall under Entry 44 when it refers to the Corporation whether trading or not. However, in view of the fact that Entry 43 is a specific entry and refers to banking, insurance and financial corporation, any such overlap must be reconciled by holding that in such cases, it would be the Entry 43, which would be applicable and not a general Entry 44 which occupies a wider field. In this context, we may refer to the decision of the Supreme Court in case of Calcutta Gas Company (Proprietary) Ltd. vs. State of West Bengal and ors. (surpa) cited by the counsel for the petitioners. In said case, the question of interpretation of Entries 24 and 25 of List II arose. Entry 24 pertains to industries subject to the provisions of entry 7 and 52 of the List I. Entry 25 relates to gas and gas­works. Page 36 of 77 C/SCA/9704/2013 JUDGMENT The Supreme Court was of the opinion that even if the term “industry” means only production or manufacture of gas Entry 24 in List II in its widest amplitude therefore would take in all industries including that of gas and gas­works. On the other hand, Entry 25 of the said Act comprising gas industry. There was, therefore, an apparent conflict between the two entries and in some areas overlap. The Court was of the opinion that in such contingency doctrine of harmonious construction must be invoked. It was, therefore, observed that: “ It is, therefore, clear that the scheme of harmonious construction suggested on behalf of the State gives’ full and effective scope of operation for both the entries in their respective fields, while that suggested by learned counsel for the appellant deprives entry 25 of all its content and even makes it redundant. The former interpretation must, therefore, be accepted in preference to the latter. In this view,’ gas and­gas works are within the exclusive field allotted to the States. On this interpretation the argument of the learned Attorney­ General that, under Art. 246 of the Constitution, the legislative power of State is subject to that of Parliament ceases to have any force, for the gas industry is outside the Page 37 of 77 C/SCA/9704/2013 JUDGMENT legislative field of Parliament and is within the exclusive field of the Legislature of the State. We, therefore, hold that the impugned Act was within the legislative competence of the West Bengal Legislature and was, therefore, validly made.” 21. It would thus emerge that the subject matter of the legislation falls within Entry 43 pertaining to incorporation, regulation and winding up of financial corporation. The fact, that the SFC Act is enacted for such purpose, is not seriously in dispute. The statement of objects and reasons for enactment of the Act provides that in order to provide medium and long term credit to industrial undertakings which falls outside the normal activities of commercial banks was set up under the Industrial Financial Corporation Act, 1948. The States wished that similar corporation should also be set up to supplement the work of the Industrial Financial Corporation. The intention was that the State Corporation will confine their activities to financing medium and small scale industries and would, as far as possible, consider only such cases as are outside the scope of the Page 38 of 77 C/SCA/9704/2013 JUDGMENT Industrial Financial Corporation. It was desired that the State Corporation should be established under the special Statute in order to make it possible to incorporate in the constitution necessary provisions in regard to majority control by the Government, guaranteed by the State Government in regard to the repayment of principal etc. With these objects in mind, the SFC Act makes various provisions such as for establishment of the State Financial Corporations under Section 3 of the Act, for share capital and shareholders of such corporation under Section 4. Detailed provisions have also been made permitting the State Financial Corporation to borrow funds and to accept the deposits. Section 25 of the SFC Act pertains to business which Financial Corporation may transact. Sub­section (1) provides that Financial Corporation may, subject to the provisions of the Act, carry on and transact any of the businesses namely guaranteeing, on such terms and conditions agreed upon, loans raised by industrial concerns, guarantying on such terms and conditions as may be Page 39 of 77 C/SCA/9704/2013 JUDGMENT agreed upon, deferred payments due from any industrial concern in connection with its purchase of capital goods, underwriting of the issue of stock, shares, bonds or debentures by industrial concerns etc. Term “industrial concern” is defined in Section 2(c) of the SFC Act as to mean any concern engaged or to be engaged in various activities mentioned in Clause (i) to (xxii) thereof which include the manufacture, preservation or processing of goods, mining or development of mines, the hotel industry, the transport of passengers or goods by road by water or by air or by rope­way or by lift. The generation or distribution of electricity or any other form of power etc. 22. If the proposition that the SFC traces its origin to Entry 43 and the limitation prescribed in Entry 44 would therefore not apply is accepted, the rest of the petitioners' contentions must automatically fail. The counsel for the petitioners had argued that the subject matter would fall under Entry 32 or 24 of Page 40 of 77 C/SCA/9704/2013 JUDGMENT List II Seventh Schedule which are the State subjects. Entry 32 pertains to incorporation, regulation and winding up of corporations, other than those specified in List I and universities; unincorporated trading, literary, scientific, religious and other societies and associations, co­operative societies. 23. We are not concerned with the later part of this entry since admittedly, the Act does not involve the university unincorporated trading, scientific, religious and other societies etc. or associations or co­operative societies etc. The first part of Entry 32 pertaines to incorporation, regulation and winding up of corporation comes with the specification that the same must be other than those specified in List I. The moment therefore we recognize that the subject­ matter falls within Entry 43 of List I, it automatically knocks out Entry 32 since it falls in the List I. Likewise, Entry 24 of List II pertains to Industries subject to the provisions of Entries 7 and 52 of List I. The SFC Act does not pertain to Page 41 of 77 C/SCA/9704/2013 JUDGMENT industries. It pertains to incorporation, regulation and winding up of a Financial Corporation. The financial corporation in turn may be granting intermediate or long term credit to industrial undertakings. However, the law in the State Financial Act cannot be stated to be one pertaining to industries. 24. For the reasons noted above, therefore, we are clearly of the opinion that the SFC Act does not suffer from lack of legislative competence. We may recall, two different High Courts of the country have taken similar view. In case of Engineers (Overseas) Corporation Pvt. Ltd. and anr vs. West Bengal Financial Corporation and anr. (supra) the Division Bench of Calcutta High Court upheld the vires of the Act rejecting similar challenge. It was held and observed as under: “14. After giving anxious consideration to the respective contentions of the parties, it appears to me that the State Act is not solely or primarily an Act for authorising money lending business by the State Page 42 of 77 C/SCA/9704/2013 JUDGMENT Financial Corporation. The State Act, in my view, has been enacted primarily for the purpose of ensuring development of medium and small scale industries and for the purpose of such development, financial aid has become a matter of necessity as and as such, provisions of financial aid by way of loan advance and recovery of such financial assistance have been provided for in the State Act. It appears that the West Bengal Financial Corporation has been authorized to take over management of the borrower unit in some cases. There is also provision for incorporation and liquidation of the State Financial Corporation. Accordingly, it cannot be held that the State Act is primarily an ambit of the State List concerning money lending as contended by Mr. Mitter. 15. I respectfully agree with the view expressed by the Assam High Court in Chargola Tea Company's Case (AIR 1973 Gauhati 136) (supra) and hold that there is no want of legislative competence so far as the State Act is concerned.” 25. Likewise, the Gauhati High Court in case of Charsola Tea Co. Ltd. vs. The Assam Financial Corporation, Shillong and ors. reported in AIR 1973 Gauhati 136 while upholding the vires of the Act observed as under: Page 43 of 77 C/SCA/9704/2013 JUDGMENT “6. It is contended that 'money­lending' is an item of the Entry which is exclusively within the competence of the State and therefore any legislation with regard to 'money­lending' must prevail if there is no provision therein repugnant to the Central Act We are. however, unable to accept this submission. The very fact that under Section 25 (1) (g), the Corporation may grant loans to industrial concerns, it is implicit that there is a power to charge interest as agreed upon between the parties. Besides, the provisions of Sections 27 and 30 (b) and regulations made under Section 48 (2) (g) clearly disclose a scheme permitting charging of interest and imposing of such terms as may be agreed upon between the parties at the time of advancement of the loan. Having made these provisions Parliament has taken care to insert Section 46­B, by Amendment of the Act in 1956, which reads; \"The provisions of this Act and of any rules or orders made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in the memorandum or articles of association of an industrial concern or in any other instrument having effect by virtue of any law other than this Act, but save as aforesaid, the provisions of this Act shall be in addition to and not in derogation of any other law for the time being applicable to an industrial concern.\" If there is any creeping doubt in the matter that is concluded by insertion of Section 46­B. Interest is heart of the matter in advancement of loans and that would be even incidental to the power given to the Corporation under the Act to advance loans Page 44 of 77 C/SCA/9704/2013 JUDGMENT and to enforce other terms as may be agreed upon. 7. Mr. Bhattacharjee drew our attention to a decision of the Privv Council in Prafulla Kumar Mukherjee v. Bank of Commerce Ltd.. AIR 1947 PC 60, which is referred with approval by the Supreme Court in Chaturbhai v. Union of India, AIR 1960 SC 424. We may, therefore quote the observations of the Supreme Court in the above decision. \"In every case where the legislative competence of a legislature in regard to a particular enactment is challenged with reference to the entries in the various lists it is necessary to examine the pith and substance of the Act and if the matter comes substantially within an item in the Central List it is not deemed to come within an entry in the Provincial list even though \"the classes of subjects looked at singly overlap in many respects\". It is within the competence of the Central legislature to provide for matters which may otherwise fall within the competence of the Provincial legislature if they are necessarily incidental to the effective legislation by the Central legislature on a subject of legislation expressly within its power\". X X X X X \" In the interpretation of the scope of these items the widest possible amplitude must be given to the words used and each general word must be held to extend to ancillary or subsidiary matters which can fairly be said to be comprehended in it.\" As has been observed by Sir Maurice Gwyer C.J. dealing with items in the Lists in Subrahmanvan Chettiar v. Muttuswami Goundan, Page 45 of 77 C/SCA/9704/2013 JUDGMENT AIR 1941 FC 47 at p. 51, \"It must inevitably happen from time to time that legislation, though purporting to deal with a subject in one list touches also on a subject in another list, and the different provisions of the enactment may be so closely intertwined that blind adherence to a strictly verbal interpretation would result in a large number of statutes being declared invalid because the Legislature enacting them may appear to have legislated in a forbidden sphere.\" The Supreme Court also observed in State of Rajasthan v. G. Chawla, AIR 1959 SC 544 at p. 546 as follows :­ \"It is equally well settled that the power to legislate on a topic of legislation carries with it the power to legislate on an ancillary matter which can be said to be reasonably included in the Power given.\" While legislating within its competence in terms of an entry, Parliament can touch the fringe of another entry and as the rule is of the pith and substance of the matter and calls for liberal interpretation, no constitutional objection can be advanced against the present Act which does authorise imposing of terms and conditions of advancement of loan which would clearly include charging of interest, simple or compound. The Assam Money­Lenders' Act cannot therefore, be called in aid to curtail that power which is conferred under the Corporation Act. 8. For the foregoing reasons and Page 46 of 77 C/SCA/9704/2013 JUDGMENT particularly in view of Sec. 46­B of the Act. Section 4 of the Assam Money­Lenders' Act cannot be advanced as a legal bar to the power of the Corporation to charge compound interest. Besides, the Corporation Act can be traced not only to Entry 43, but also to Entry 45 of List I of the Seventh Schedule, namely 'Banking.'. There is therefore, no substance in the contention that Parliament is not competent to enact the Corporation Act, permitting, as it does, charging of interest on the ground that it is a matter relating to money­lending and exclusively within the competence of the State Legislature under Entry 30 of List II of the Seventh Schedule. The submission of Mr. Bhattacharjee, therefore, is of no avail.” 27. We may now deal with the applicability of the Securitization Act to the petitioners. This challenge has two facets. First is with respect to the very applicability of the Securitization Act in the background of the vires of the Statutory provisions applicable and the notification issued by the Central Government under sub­section (2) of Section 4A of the Companies Act. The second is with respect to applicability of such notification to the loans advanced by the SFC before the date of issuance of the said notification. Page 47 of 77 C/SCA/9704/2013 JUDGMENT 28. With respect the first aspect, we may notice that Section 2(1)(m)(i) of the Securitization Act provides that the financial institution means a public financial institution within the meaning of Section 4A of the Companies Act, 1956. Section 4A of the Companies Act, on the other hand, reads as under: “4A. Public financial institutions:­(1) Each of the financial institutions specified in this sub­section shall be regarded, for the purposes of this Act, as a public financial institution, namely:­ (i) the Industrial Credit and Investment Corporation of India Limited, a company formed and registered under the Indian Companies Act, 1913 (7 of 1913) ; (ii)the Industrial Finance Corporation of India, established under section 3 of the Industrial Finance Corporation Act, 1948 ( 15 of 1948) ; (iii) the Industrial Development Bank of India, established under section 3 of the Industrial Development Bank of India Act, 1964 (18 of 1964) ; (iv)the Life Insurance Corporation of India, established under section 3 of the Life Insurance Corporation Act, 1956 (31 of 1956) ; Page 48 of 77 C/SCA/9704/2013 JUDGMENT (v) the Unit Trust of India, established under section 3 of the Unit Trust of India Act, 1963 (52 of 1963). (vi) the Infrastructure Development finance Company Limited, a company formed and registered under this Act. (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, (i) it has been established or constituted by or under any Central Act, or (ii) not less than fifty­one per cent of the paid­up share capital of such institution is held or controlled by the Central Government.” 29. In exercise of powers under sub­ section (2) of Section 4A of the Companies Act, the Central Government has issued a notification dated 17.10.1995 specifying various institutions to be public financial institutions for the purpose of Page 49 of 77 C/SCA/9704/2013 JUDGMENT Section 4A(2) one of them being Gujarat State Financial Corporation. 30. Section 2(1)(m) of the Securitization Act contains the definition of 'financial institution' as to mean those institutions specified in Clauses (i) to (iv) thereof. One being a public financial institution within the meaning of Section 4A of the Companies Act, 1956. We may recall that the Securitization Act was enacted in the year 2002. Long before that the Companies Act contained the definition of a public financial institution under Section 4A of the said Act introduced with effect from 01.02.1975. Quite apart from an institution being categorized as a public financial institution under Section 4A of the Companies Act 1956 being considered a financial institution for the purpose of the Securitization Act, there were many provisions in the Companies Act, 1956 which applied to such a financial institution. It is not necessary to note all such provisions. However, by way of examples, we may notice that the Page 50 of 77 C/SCA/9704/2013 JUDGMENT restrictions contained in Section 108A 108B, 108C and 108D of the Companies Act, 1956 relating to acquisition or transfer of shares would not apply to the transfer of shares to or by a public financial institution. Likewise, appointment of an auditor in a company, in which, not less than 25% of the subscribed capital is held by a financial institution in terms of Section 224A of the Companies Act would require special resolution. In terms of Section 94A of the Companies Act where a public financial institution proposes to convert in debenture taken form or loan given to a company into shares of that company the central government can lease nomination capital of the company by an order to facilitate such conversion. Under sub­section 3(a) of Section 67 of the Companies Act, the Security and Exchange Board of India in consultation with the Reserve Bank of India, by notification in the official gazette, specify the guidelines in respect of offer or invitation made to the published by a public financial institution. Thus, a public financial institution under Section Page 51 of 77 C/SCA/9704/2013 JUDGMENT 4A of the Companies Act, 1956 being considered a financial institution under Section 2(1)(m) of the Securitization Act is just one of the incidences of such categorization. It is in this background, we need to examine the contention of the counsel for the petitioners that Section 4A(2) does not lay down any guidelines for notifying a financial institution as a public financial institution by the Central Government. Quite apart from the different fall outs of a financial institution being treated as a public financial institution under Section 4A of the Companies Act 1956 which would govern as a guideline before the Central Government would declare an institution as such, there are several inbuilt guidelines contained in the statutory provisions itself. For example, sub­section (1) of Section 4A of the Companies Act specifies several institutions as public financial institutions which include the Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India and the Industrial Development Bank of India etc. Sub­section (2) of Section Page 52 of 77 C/SCA/9704/2013 JUDGMENT 4A of the Companies Act provides that subject to the provisions of sub­section (1), the Central Government may, by notification in official gazette, specify such other institution as it may think fit to be a public financial institution. The exercise of powers under sub­section (2) of Section 4A is thus subject to the provisions contained in sub­section (1). More particularly, the proviso to section (2) of Section 4A provides that no institution shall be so specified 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. Thus, even to enable the Central Government, to exercise powers under sub­section (2) of Section 4A with respect to any financial institution, such an institution must specify one of the two conditions viz. it is established or constituted by or under any Central Act or not less than 51% of the paid up share capital of the institution is held or controlled by the Central Government. Essentially, therefore, the said provision Page 53 of 77 C/SCA/9704/2013 JUDGMENT enables the Central Government to notify a financial institution as a public financial institution in cases where it is established or constituted by a Central Government or where the paid up share capital of the Central Government is more than 51%. In such cases, an institution could be so specified as a public financial institution and would derive the benefit of the special treatment given to such institution several provisions of the Companies Act. 31. Long after Section 4A was introduced in the Companies Act, 1956 w.e.f. 01.02.1975, the Securitization Act was enacted in the year 2002. Such act would apply to financial institution as defined under Section 2(1)(m) of the Securitiztion Act. One of them, as noted, being the public financial institution within the meaning of Section 4A of the Companies Act. It, therefore, cannot be stated that the powers of the Central Government under sub­section (ii) of Section 4A of the Companies Act, 1956 are unguided or unchanellized. Such powers and Page 54 of 77 C/SCA/9704/2013 JUDGMENT exercise of such powers would be guided by various provisions contained in the Companies Act, 1956 giving special treatment to a public financial institution. Only in a case, where the Central Government is of the opinion that a financial institution which otherwise fulfills the requirement of the proviso to sub­section (ii) of Section 4A should be granted such special treatment as provided in the Companies Act, that the notification would be issued. 32. As pointed out by the counsel for the Union of India, the Government of India has now issued guidelines on 02.06.2011 for considering cases of financial institutions for being declared as public financial institutions. Relevant portion thereof reads as under: “2. In the past, the Ministry was declaring an institution as PFI if it meets any one of clause (I) and (ii) of sub section(2) of section 4A of the Act. Now, the Central Government has framed following criteria for declaring any financial institution as PFI under Section 4A of the Companies Act,1956. Page 55 of 77 C/SCA/9704/2013 JUDGMENT (a) A company or corporation should be established under a special Act or the companies Act being Central Act; (b) Main business of the company should be industrial/infrastructural financing; (c) The company must be in existence for at least 3 years and their financial statement should show that their income from industrial/infrastructural financing exceeds 50% of their income; (d) The net­worth of the company should be Rs one thousand crore; (e) Company is registered as infrastructure Finance Company(IFC) with RBI or as an Housing Finance Company (HFC) with National Housing Bank; (f) In case of CPSUs/SPSUs no restriction shall apply with respect to financing specific sector(s) and net worth. 3. In view of above, any financial institution applying for declaration as PFI shall fulfill the aforesaid criteria.” 33. It is true that these guidelines have been issued recently and would govern cases of financial institutions prospectively. However, this is only to notice that further internal guidelines have been issued for the said purpose. Page 56 of 77 C/SCA/9704/2013 JUDGMENT 34. Contention of the counsel for the petitioner, that notifying a financial institution as a public financial institution, must have prospective effect and cannot apply retrospectively need to be appreciated in light of the facts on record. We may recall that the Gujarat State Financial Corporation was declared as a public financial institution in terms of Section 4A of the Companies Act, 1956 under a notification dated 17.10.1995. In case of Special Civil Application No. 2423 of 2014, the loan was taken by the principal borrowers in the year 2001 i.e. after the said notification. Whereas, in case of Special Civil Application No. 9704 of 2014, such loan was obtained some time in the year 1992 i.e. prior to the notification. This issue would, therefore, be germane insofar as Special Civil Application No. 2423 of 2014 is concerned. As we have noted, Section 4A was introduced in the Companies Act, 1956 w.e.f. 01.02.1975. In the year 1995, when the said financial corporation was declared as a public financial institution Page 57 of 77 C/SCA/9704/2013 JUDGMENT in terms of Section 4A, it had effect as provided in the various provisions contained in the Companies Act, 1956. The Securitization Act was nowhere in picture. Securitization Act was enacted in the year 2002 creating special remedy for recovery of outstanding dues of financial institutions which were categorized as non­performing assets. If we therefore accept the contention of the counsel for the petitioners that for the loans raised prior to the Gujarat State Financial Corporation being declared as a public financial institution under Section 4A of the Companies Act,1956, would not be covered under the Securitization Act, virtually, the entire mechanism under the Securitization Act would fail with respect to the lendings which took place before the Act was enacted. In a slightly different context, somewhat similar situation was examined by the Supreme Court in case of Maradia Chemicals Ltd. and ors. v.s Union of India and ors. (supra) where vires of provisions of the Securitization Act contained in Section 13 and 17 of the said Act were challenged. Page 58 of 77 C/SCA/9704/2013 JUDGMENT One of the contentions of the challengers was that even by way of an enactment, the existing rights and liabilities between the parties flowing from contractual agreements cannot be modified. The basis of this argument was that several loans and advances were made by the banks and financial institutions before the Securitization Act was enacted. These were under agreements between the lenders and the borrowers. The Securitization Act which made special provisions for recoveries of outstanding dues of the borrowers would essentially supersede the contractual terms and would, therefore, not be permissible. In this context, the Supreme Court, while turning down the contention, held and observed as under: “66. On behalf of the petitioners one of the contentions which has been forcefully raised is that existing rights of private parties under a contract cannot be interfered with, more particularly putting one party to an advantageous position over the other. For example, in the present case, in a matter of private contract between the borrower and the financing bank or institution through impugned legislation rights of the borrowers have been curtailed and enforcement of secured assets has been provided for without intervention of the court and above all Page 59 of 77 C/SCA/9704/2013 JUDGMENT depriving them the remedy available under the law by approaching to the civil court. Such a law, it is submitted, is not envisaged in any civilized society governed by rule of law. As discussed earlier as well, it may be observed that though the transaction may have a character of a private contract yet the question of great importance behind such transactions as a whole having far reaching effect on the economy of the country cannot be ignored, purely restricting it to individual transactions more particularly when financing is through banks and financial institutions utilizing the money of the people in general namely, the depositors in the banks and public money at the disposal of the financial institutions. Therefore, wherever public interest to such a large extent is involved and it may become necessary to achieve an object which serves the public purposes, individual rights may have to give way. Public interest has always been considered to be above the private interest. Interest of air individual may, to some extent, be affected but it cannot have the potential of taking over the public interest having an impact in the socio­ economic drive of the country. The two aspects are inter­twined which are difficult to be separated. There have been many instances where existing rights of the individuals have been affected by legislative measures taken in public interest. Certain decisions which have been relied on behalf of the respondents, on the point are Ramaswamy Aiyengar v. Kailasa Thevar 1951 SCR 292. In that case by enacting the Madras Agriculturalists Relief Act, relief was given to the debtors who were agriculturists as a class, by sealing down their debts. The validity of the Act was upheld though it affected the individual Page 60 of 77 C/SCA/9704/2013 JUDGMENT interest of creditors. In Dahya Lal v. Rasul Mohd. Abdul Rahim (1963) 3 SCR 1, the tenants under the Provisions of the Bombay Tenancy Act, 1939 were given protection against eviction and they were granted the status of protected tenant, who had cultivated the land personally six years prior to the prescribed date. It was found that the legislation was with the object of improving the economic condition of the peasants and for ensuring full and efficient use of land for agricultural purpose. By a statutory provision special benefit was conferred upon the tenants in Madras city where they had put up a building for residential or non­residential purposes and were saved from eviction, it did though affect the existing rights of the landlords. See also Swami Motor Transports (P) Ltd v. Shri Sankraswamigal Mutt 1963 (Suppl) 1 SCR 282, and Raval & Co. v. KC Ramachandran (1974) 1 SCC 424. Similarly it is also to be found that in the case of Kanshi Ram v. Lachhman (2001) 5 SCC 546 the law granting relief to the debtors protecting their property was upheld. Also see Pathumma v. State of Kerala (1978) 2 SCC 1, Fatehchand Himmatlal v. State of Maharashtra (1977) 2 SCC 670, Ramdhandas v. State of Punjab (1962) 1 SCR 852. 67. It is well known that in different states Rent Control legislations were enacted providing safeguards to the sitting tenants as against the existing rights of the landlords, which before coming into force of such law were governed by contract between the private parties. Therefore, it is clear that it has always been held to be lawful, whenever it was necessary in the Page 61 of 77 C/SCA/9704/2013 JUDGMENT public interest to legislate irrespective of the fact that it may affect some individuals enjoying certain rights. in the present we find that case the unrealized dues of banking companies and financial institutions utilizing public money for advances were mounting and it was considered imperative in view of recommendations of experts committees to have such law which may provide speedier remedy before any major fiscal set back occurs and for improvement of general financial flow of money necessary for the economy of the country that the impugned Act was enacted. Undoubtedly such a legislation would be in the public interest and the individual interest shall be subservient to it. Even if a few borrowers are affected here and there, that would not impinge upon the validity of the Act which otherwise serves the larger interest. 35. There is another way of looking at this contention. If Securitization Act can be seen to be creating new rights and liabilities, it would be possible to contend that the same would not apply retrospectively. However, if it can be held that the Securitization Act provides for a remedy and not a right, as is a settled position, would apply to all pending cases. This would not amount to application of a statute with retrospective effect. In this context, we may recall the decision of Supreme Court Page 62 of 77 C/SCA/9704/2013 JUDGMENT in case of The Director of Industries, U.P and ors. vs. Deep Chand Agarwal reported in AIR 1980 SC 801, which was a case where the question of applicability of U.P. Public Monies (Recovery of Dues) Act, 1965 came up for consideration. The Supreme Court observed that the said Act provides for a speedier remedy to the State Government to realise the loans advanced by it or by the Uttar Pradesh Financial Corporation. It was observed as under: “6. At the outset, it has to be stated that the decision of this Court in Northern India Caterers Private Ltd., & Anr. (supra) is overruled by this Court in Maganlal Chhagganlal (P) Ltd. v. Municipal Corporation of Greater Bombay & Ors.(1) The question for determination in this case is whether section 3 of the impugned Act violates Article 14 of the Constitution. In order to decide this question, it is necessary to determine the object of the Act and whether the classification made between the State on the one hand and others who have also advanced moneys under mortgage deeds bears any reasonable relation to the object of the statute. The Act is passed with the object of providing a speedier remedy to the State Government to realize the loans advanced by it or by the Uttar Pradesh Financial Corporation. The State Government while advancing loans does not Page 63 of 77 C/SCA/9704/2013 JUDGMENT act as an ordinary banker with a view to earning interest. Ordinarily it advances loans in order to assist the people financially in establishing an industry in the State or for the development of agriculture, animal husbandry and for such other purposes which would advance the economic well­being of the people. The amounts so advanced are repayable in easy installments with interest which would ordinarily be lower than the rate of interest payable on loans advanced by banking institutions which are run on commercial lines. The loans are advanced from out of the funds of the State in which all the people of the State are vitally interested. Moneys advanced by the State Government have got to be recovered expeditiously so that fresh advances may be made to others who have not yet received financial assistance from the State Government. If the State Government should resort to a remedy by way of a suit on the mortgage deeds or bonds executed in its favour, the realization of the amounts due to the Government is bound to be delayed resulting in non­availability of sufficient funds in the hands of the State Government for advancing fresh loans. It is with the object of avoiding the usual delay involved in the disposal of suits in civil courts and providing for an expeditious remedy, the Act has been enacted. In the instant case, the mortgage deed provided that the amount due thereunder could be realised as if it were an arrear of land revenue. It cannot, therefore, be said that there is no reasonable basis for the classification made by the statute and that the Page 64 of 77 C/SCA/9704/2013 JUDGMENT classification does not have a reasonable relation to the object of the statute.” 36. We may notice that similar view has been taken by various other High Courts as well. Uttranchal Pradesh High Court in case of Unique Engineering Works vs. Union of India and ors reported in II (2004) Banking Cases page 241 had taken a similar view. The Allahabad High Court also in case of Pradeep Kumar Gupta and anr vs. State of U.P. And ors reported in and AIR 2010 SC 3 has taken a similar view. It is true that the Orissa High Court, as pointed out by the Counsel for the petitioner, in case of Soni Dineshbhai Manilal & ors. vs. Jagjivan Mulchand Chokshi reported in AIR 2008 SC 887, had taken a contrary view. However, it is now pointed out to us that such decision was overruled by the Full Bench of the same court in case of Sarthak Builders Pvt. Ltd., Cuttak and anr. vs. Orissa Rural Development Corporation Limited, Bhubaneswar and ors. (supra). The Full Bench held and observed as under: Page 65 of 77 C/SCA/9704/2013 JUDGMENT “18. The above dicta clearly reveal : (i) Presumption against retrospectivity is not applicable to enactments which merely affect procedure or change forum or are declaratory; (ii) Retroactive/retrospective operation can be implicit in a provision construed in the context where it occurs; (iii) Given the context, a provision can be held to apply to cause of action after such provision comes into force, even though the claim on which the action may be based may be of an anterior date; and (iv) A remedial statute applies to pending proceedings and such application may not be taken to be retrospective if application is to be in future with reference to a pending cause of action; (v) SARFAESI Act is a remedial statute intended to deal with problem of pre­ existing loan transactions which need speedy recovery. 19. We are of view that a notification under Section 2(m) in respect of a financial institution brings such institution at par with statutory institutions covered by Section 2(m) prior to such notifications. From the date such notification is issued, remedies under the Act become available even if loan was advanced earlier. 20. Applying the above established propositions to the present context, it is clear that the statute intends to remedy a situation where recovery of loans of Page 66 of 77 C/SCA/9704/2013 JUDGMENT specified financial institutions were held up and are intended to be speedily recovered, without reference to procedure of the Court, by way of Securitization, by a substituted procedure and forum. Such statute applies to pre existing rights and may not be held to be retrospective so as to be hit by presumption of prospectivity. Moreover, presumption in respect of a procedural statute is that such statute is retrospective and can apply to existing cause of action even if it has reference to past transactions. Present context is very similar to the situation in Dwarka Nath Bhargava and also covered by principles of law laid down in other judgments extracted above. 21. Accordingly, we answer the question in the affirmative and hold that the provisions of the SARFAESI Act apply to existing debts even if loan was advanced earlier. Similarly, as soon as by a notification of Central Government, a financial institution is notified for purposes of Section 2(m), the machinery of the Act becomes available to recover any outstanding and legally recoverable debt even if such loan was advanced earlier. The view taken in Subash Chandra Panda is overruled. We express our agreement with the view taken in Unique Engineering Works and Pradeep Kumar Gupta.” 37. Coming to the argument of election of remedies, we may recall that such a situation does not arise in Special Civil Application No. 2423 of 2012. The State Financial Corporation had not resorted to Page 67 of 77 C/SCA/9704/2013 JUDGMENT any other recovery proceedings except for notice under Section 13(2) of the Securitiezation Act. In case of Special Civil Application No. 9704 of 2013 in the reply, the Corporation has clarified that the possession of the collateral security was obtained under Section 29 of the State Financial Corporation Act. However, the Corporation abandoned such proceedings and decided to effect recovery under the Securitization Act and, therefore, issued notice under Section 13(2) on 05.02.2013. Thus, even if the State Financial Corporation had to make the election between the two parallel remedies, in the present case, it has been so done. It is not a case where the Corporation is following two parallel simultaneous remedies for recovery. In fact, the petitioner's contention that the remedy of recovery under Section 29 of the Securitization Act would not lie against guarantor would be incongruent with the contention that the Corporation had two remedies and therefore had to choose one of them. Be that as it may, the Corporation having abandoned the Page 68 of 77 C/SCA/9704/2013 JUDGMENT proceedings under the State Financial Corporation Act, cannot be prevented from pursuing its remedies under the Securitiezation Act on the ground of election. 38. The last contention remaining is of the assets being specified as non­ performing. We may recall, the argument was that there are no norms governing the loans given by the Gujarat State Financial Corporation on the basis of which the asset can be categorized as non­ performing. Counsel for the petitioners would contend that under Section 2 (1)(o) of the Securitization Act it is only the RBI which can lay down such guidelines. Drawing our attention to the decision of Division Bench of this Court, he had contended that this Court, in case of Ionik Metalic and ors. vs. Union of India (supra) the provisions of Section 2 (1) (o) in the amended form has been held ultra vires the Constitution and is restored to its original position where only the RBI would have the power to issue such guidelines and since in the present Page 69 of 77 C/SCA/9704/2013 JUDGMENT case, according to him, no such guidelines have been issued by the RBI, there is no mechanism for ascertaining whether an assets has become non­performing or not. 39. Firstly, the judgement of this Court in case of Ionik Metalic and ors. vs. Union of India (supra) is carried further in appeal and the Supreme Court has issued an order directing the parties to maintain status quo qua the properties. The question of validity of Section 2(1) (m) of the Securitization Act therefore, has not achieved finality. The judgement of this Court nevertheless binds us. If we, therefore, proceed on the basis of the restoration of the unamended Section 2(1) (O) of the Securitization Act, it would imply that in the matter of fixing the norms for NPA or financial institution would be guided by RBI policy. This is what the Division Bench in case of Ionik Metalic and ors. vs. Union of India, held and observed: “45.On consideration of the entire materials on record, we, therefore, hold Page 70 of 77 C/SCA/9704/2013 JUDGMENT that clause (a) of the amended Section 2(1)(o) of the Securitisation Act violates Article 14 of the Constitution of India by discriminating against other financial institutions covered under clause (b) of Section 2(1)(o) of the Securitisation Act. 46. We are of the view that the definition is couched in such a fashion that if clause (a) is held to be ultra vires, then the entire provision will also be ineffective. In such circumstances, we propose to follow the principle adopted by the Supreme Court in the case of Harbilas Rai Bansal (supra) by declaring the provisions of the amendments made in Section 2(1) (o) of the Securitisation Act constitutionally invalid and as a consequence, restoring the original provisions of Section 2(1) (o) of the Securitisation Act which were operating before coming into force of the amendment and as a result hold that in the matter of fixing the norms/guidelines for NPA, all the financial institutions should be guided by the RBI policy as the same is the specific object of the Securitisation Act. 40. The question, therefore, is can the petitioners avoid the liability of facing the proceedings under the Securitization Act on the premise that the RBI guidelines would not apply to them. In our opinion, the answer has to be in the negative. It is an undisputed position that since years no repayment is made Page 71 of 77 C/SCA/9704/2013 JUDGMENT either by the principal borrower or the guarantor to the State Financial Corporation towards the dues. The RBI guidelines laid down a period of 90 days for the banks to treat an assets as non­ performing. In fact, the entire decision of this Court in case of Ionik Metalic and ors. vs. Union of India (supra),was based on a dichotomy where the RBI guidelines laid down a period of 90 days or 180 days, as the case may be, for financial institution to treat their asset as non­ performing. Whereas, the other financial institutions which were not governed by the RBI guidelines as per Section 2(1)(O) of the Act, provided different periods. It was in this background that the borrowres of nationalized banks challenged the provision complaining of unequal treatment. It was in this background, the Court rendered its verdict and restored the original provision of Section 2 (1)(o) to bring in parity for categorization of assets as non performing. Looked from any angle the present petitioners cannot take advantage of such a situation to argue that after years together of non­payment Page 72 of 77 C/SCA/9704/2013 JUDGMENT whatsoever they were still required a specific directive from the Reserve Bank of India to treat their asset as non­ performing. Any such view would be super technical and would defeat the very purpose of the Securitization Act. A small issue remains to be disposed of in case of Special Civil Application No. 9704 of 2013 wherein the State Financial Corporation had taken possession of the collateral security under Section 29 of the SFC Act. The notice under Section 13(2) of the Securitization Act proceeded from that stage onwards. It was, therefore, that the counsel for the petitioner argued that without restoring the possession of the property the State Government finally could not have issued notice under Section 13(2) of the Securitization Act. We may, however, notice that Section 13(2) provides for a situation where a borrower who makes any default in payment of secured debt and his account has been classified as non­performing, the secured creditor may require the borrower in writing to discharge his liabilities within 60 days from the date of notice Page 73 of 77 C/SCA/9704/2013 JUDGMENT failing which, the secured creditor shall be entitled to exercise all or any of the rights under sub­section (4) of Section 13. Sub­section (4) of Section 13 ofcourse envisages taking possession of the secured assets but it does not stop there. It envisages taking possession including the right to transfer by way of lease, assignment or sale for leasing the secured assets. It also authorizes the secured creditor to take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured assets, the appointment of any person to manage the secured asset, the possession of which has been taken over by the secured creditor or to require by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower to pay to the secured creditor so much of the money as is sufficient to pay secured debt. 41. Sub­section (4) of Section 13 thus Page 74 of 77 C/SCA/9704/2013 JUDGMENT comes with range of rights which the secured creditor can exercise in cases the borrower whose account has become none performing assets. 42. Thus, even if the possession of the property was taken over under the State Financial Corporation Act, the further steps envisages under sub­section (4) of Section 13 of the Securitization Act still remained to be taken. It was at that stage that the borrowers were given notice in 60 days time period for repayment of the loan failing which the creditor would take any of the steps in terms of sub­section (4) of Section 13. The notice was thus, not an empty formality nor was the creditor obliged to restore the possession before issuing the notice. 43. Coming to Special Civil Application No. 2423 of 2014 the petitioner's additional contention may be presently dealt with. The contention that the debt itself was time barred, need not be gone into while examining the validity Page 75 of 77 C/SCA/9704/2013 JUDGMENT of the recovery proceedings initiated by the Corporation. The borrower or his successor would have sufficient opportunity to raise all contentions firstly before the Corporation and thereafter in further proceedings as envisaged under the Securitization Act. In a writ petition directly filed before the High Court where the entire mechanism is provided under the Act and further statutory remedies including the appeal are available, we do not find it necessary to examine this contention. If however the notice under Section 13(2) of the Securitization Act was issued against a dead person, obviously the corporation cannot proceed further without a valid notice to his legal heirs/successor in title. It would be for the corporation to take further steps as may be adviced and available in the law. 44. Subject to above observations Special Civil Application No. 2423 of 2014 is disposed of and Special Civil Application No. 9704 of 2013 is dismissed. Page 76 of 77 C/SCA/9704/2013 JUDGMENT 45. At this stage counsel for the petitioners prayed for extension of the interim relief already granted for a reasonable period to enable the petitioners to approach the Supreme Court. This judgement shall stand stayed till 17.10.2014. (AKIL KURESHI, J.) (J.B.PARDIWALA, J.) Jyoti Page 77 of 77 "