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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.4139 OF 2008

STRESSED ASSESTS STABILIZATION FUND   ...APPELLANT

VERSUS

WEST BENGAL SMALL IND. DEVELOPMENT  CORPORATION LTD. AND ANR.             ...RESPONDENTS

                                                                              J U D G M E N T

S. RAVINDRA BHAT, J.

1. In this appeal by special leave, an affirming judgment of

the  Calcutta High Court (dismissing  the appeal,  against  an

order allowing the respondent’s application under Section 535

of the  Companies  Act,  1956 (hereafter “the  Act”)  has  been

questioned.

2. The appellant (hereafter “SASF”) is a trust, constituted as

a special purpose vehicle (SPV) by the Central Government for

acquiring  by transfer, the stressed  assets of the Industrial

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Development Bank of India (IDBI), to administer and manage

the stressed assets and to recover amounts due, by framing

schemes of restructuring, settlement etc. with borrowers.

IDBI, through a deed of assignment, unconditionally

transferred  all loans  and advances  granted  by it, to  SASF,

including the  loans and securities  in relation to the second

respondent, the company in liquidation.

3. The facts are that Wellman Smith Owen Engineering

Corporation, a company incorporated in the United Kingdom

leased immovable property, which it took possession of, on a

lease rent of Rs. 3600/­ with effect from 1st April, 1962. The

assets and business of Wellman were taken over, through an

agreement dated 10th October, 1962 by Wellman Incandescent

India Ltd (the second respondent, hereafter “Wellman”).

Wellman entered into a fresh lease agreement with the

Government of West Bengal, for a term of 99 years, in respect

of  one industrial  property, i.e.  Shed  J­2  Howrah  Industrial

Estate, measuring 30612 square feet with effect from

1st  September, 1968. A further lease was granted by the

Government of  West  Bengal on 1st  July,  1990  in respect of

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Shed J(i)/A measuring  260 square feet.  On 6th  May,  1992,

Wellman borrowed Rs. 10 crores from the IDBI which entailed

provision of security by way of hypothecation of movables and

mortgage of the premises and properties leased to it, by the

Government of West Bengal. A further advance of Rs.3 crores

was obtained by Wellman towards working capital; this was

again on the strength of equitable mortgage of the same

immovable properties, including the said leased premises,

through deposit of title deeds. The memorandum of entry in

regard to this  was carried out on  15th  July, 1999. In the

meanwhile, on 5th  December 1994, the premises and

properties in question along with several others, were assigned

to the first respondent. Wellman’s financial woes became

acute; it approached the  Board for Industrial Finance  and

Reconstruction  (BIFR)  under the  Sick  Industrial  Companies

(Special Provisions Act) 1985 (“SICA”). The proceedings

attempting rehabilitation were to no avail; the BIFR on

24th  September, 2002 held that reconstruction was not

possible and concluded that the company had to be wound

up. A reference was accordingly made to the Calcutta High

Court, under Section 20 of SICA. In the liquidation

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proceedings, the High Court directed the appointment of an

Official Liquidator, requiring him to take charge of the

company's (Wellman’s) assets.

4. The first respondent (hereafter “WBSIDC”) to whom

the West Bengal state had assigned the rights of lease, in

the meanwhile, determined the lease in terms of the

allotment and the grant (of the lease) invoking the power

reserved to the lessor (under the terms of the lease) as

Wellman, the original allottee/lessee had ceased to carry

on manufacturing activity beyond a stipulated acceptable

period. The determination went unchallenged.   WBSIDC

approached  the  Calcutta  High Court for restoration of

possession of its properties which had been taken over

by the Official Liquidator, in the meanwhile.

  5. The single judge by an elaborately reasoned

judgment, upheld WBSIDC’s argument that as lessor, it

was entitled to possession in view of the lease condition,

which automatically applied, because the original lessee

had ceased to use the properties for the purpose

originally contemplated, i.e. manufacturing activity. The

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single  judge also  took notice  of  provisions of the West

Bengal Government Premises  (Tenancy Regulation) Act,

1976. It was further held that no manufacturing process

had been carried out in the demised premises for over six

months. The appeal preferred by SASF was rejected by

the Division Bench by the impugned judgment.

 6. Ms. Jasmine Damkewala for SASF, relied on

provisions of the lease to contend that the lessee could

have validly  mortgaged the  property, as it  did, to the

erstwhile IDBI. She pointed out that the impugned

judgment, if permitted to stand, would result in loss of

public monies to the extent of substantial amounts, over

Rs. 42 crores, which would not be in public interest. She

also submitted that since the lease was for a substantial

period of 90 years, the so­called violation should not

have resulted in the inference  of a  drastic result, i.e.

forfeiture of valuable property.

 7. Mr. Bhaskar Gupta, learned senior counsel for

WBSIDC ,  highlighted that the reasoning of the  High

Court is unexceptionable. He emphasized that the lease

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forfeiture  was  never  challenged by the lessee, through

the official liquidator. Instead, the appellant SASF, which

was only a mortgagee (of the leasehold rights) was

seeking to question WBSIDC’s right to forfeit the lease;

when the lessor had no grievance in that regard. Clearly,

a mortgagee could not have rights superior to the

mortgagor.   

8. Learned counsel relied on the decision in  Phatu

Rochiram Mulchandani v. Karnataka Industrial Areas

Development  Board  (2015)  5  SCC 244  to  say that the

WBSIDC acted within the bounds of law in approaching

the court seized of company liquidation proceedings, for

release of property, having regard to the forfeiture of

lease,  which remained unchallenged, and had attained

finality.

 9. The above factual discussion would reveal that the

company (since under liquidation) was allotted industrial

premises on two different occasions. Acting in terms of

the lease, it secured advances that it obtained from IDBI

through equitable mortgages   of the leasehold property.

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Wellman  went into liquidation, since its sickness  was

irremediable despite attempts made to revive its

industrial activities  under  SICA.  The  official liquidator

appointed by the court took charge of the assets.

WBSIDC’s application seeking possession of the

leasehold properties was allowed concurrently. Both the

learned  Single Judge and the  Division  Bench,  upheld

WBSIDC’s plea that since the conditions of lease had not

been complied with, as far as cessation of industrial or

manufacturing  activity  went, the leasehold  rights  were

terminated. As a result, the properties were held to be

excluded from the winding up process.   

10. This court is of the opinion that the reasoning and

conclusion of the High Court do not call for interference.

The finding that since the exercise by the lessor

(WBSIDC) of its right to determine the lease attained

finality, the mortgagee (represented by the appellant)

could not claim rights superior to that of the lessee, is in

consonance with settled law. In  Phatu Rochiram

Mulchandani (supra) it was held by this court as follows:

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“29. On 19­1­2002, the Board passed the orders terminating the lease in respect of both the plots. In this termination order, after giving the past history of events which have already been noted above and mentioning that the Company had failed to construct the factory building and implement the industrial projects on the main land within the extended period and to execute lease agreement in respect of additional land, thereafter it was also stated that pursuant to the earlier resumption order, a writ petition was filed and because of the stay orders passed therein the Board could not resume the land. This writ petition was dismissed on 14­9­1999 [Ralectronics Ltd. v. Karnataka Industrial Area Development Board, WP No. 11957 of 1993, order dated 14­9­1999 (KAR)] . Though the Board could act thereafter, however in the meantime the High Court of Karnataka had passed the order dated 10­4­2001 in Karnataka Industrial Areas Development Board v.  Electromobiles (I) Ltd. [ OSA No. 11 of 1999, order dated 10­ 4­2001 (KAR)] holding that when the allotment is on lease­cum­sale basis and possession is delivered to the allottee in pursuance of the allotment, it becomes a lease irrespective of the fact that whether a lease deed is executed or not. For this reason the Board did not attempt to resume the possession merely by cancelling the allotment without terminating the lease or taking action in accordance with law. It was for this reason that the Board was formally terminating the lease by the said notice dated 19­1­2002. The termination notice also mentioned  that this  was being done under Section 34­B of the Karnataka Industrial Areas Development Act, 1966.

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30. We have already held that the Company had committed clear breach in not completing the project and setting up the factory within the time given on the lease agreement or the time as extended by the Board. In such circumstances, the  lease agreement  gave a definite right to the  Board  to terminate the lease. We are, therefore, of the opinion that the Board was very well within its right to terminate the lease as provided in the lease agreement.                            ****************

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38. It is clear from the above that prior permission of the Court is required in respect of any attachment, distress or execution put in force or for sale of the properties or effects of the Company. We are of the opinion that the serving of cancellation notice simpliciter would not  come within  the mischief  of this section as that by itself does not amount to attachment, distress or execution, etc. No doubt, after the commencement of the winding up, possession of the land could not be taken without the leave of the Court. Precisely for this reason the Board had filed the application seeking permission. But according to us no such prior permission was required before cancelling the lease. In fact, it is only after the cancellation of the lease that the Board would become entitled to file such an application under Section 537 of the Act. Had the Board gone ahead further and taken the possession after the cancellation and then approached the Company Judge, the

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situation which occurred in Karnataka State Electronics Development Corpn. Ltd. v. Official Liquidator [ OSA No. 31 of 2004, decided on 21­6­2005 (KAR)] would have prevailed. On the other hand, it would have been premature on the part of the Board to approach the Company Judge for permission to resume the land without cancelling the lease in the first instance.

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41.In view of our elaborate discussion above, we do not find action of the Board to be illegal or blemished. The land was allotted to the  Company  for  a specified  project  which the Company failed to establish. Let us examine the scheme of the KIAD Act at this point of time. The KIAD Act is enacted to make special provisions for securing the establishment of industrial areas in the State and generally to promote the establishment and orderly development of industries therein and for that purpose to establish an Industrial Areas Development Board, and for purposes connected with such matters. Chapter II deals with the declaration and alteration of industrial areas. Chapter III deals with establishment and constitution of the Board. Chapter  IV deals with functions and powers of the Board and Chapter V deals with finance, accounts and audit of the Board. Chapter VI deals with application of the Public Premises Act and non­application of the Karnataka Rent Control Act, 1961 to the premises of the Board. Chapter VII deals with acquisition and disposal of land. Chapter VIII contains the supplementary and miscellaneous provisions. Section 13 in

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Chapter IV defines the functions of the Board as generally to promote and assist in the rapid and orderly establishment, growth and development of industries in industrial areas; and in particular, to develop industrial areas declared by the State Government and make them available for undertakings, to establish themselves; to establish, maintain, develop and manage industrial estates within industrial areas; and to undertake such  schemes  of  programmes of  works for the furtherance of the purposes for which the Board is established and for all purposes connected therewith.

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42.  Section 33  in Chapter  VIII  of  KIAD Act provides that if the Board is satisfied that if a lessee of  any  land  in  an  industrial  area fails to provide any amenity or carry out any development of the land, the Board may after due notice in that behalf, may itself provide such amenity or carry out such development at the expense of the lessee. Section 34 provides for penalty for construction or use of land and building  contrary to the terms of holding. Section 34­A provides for demolition or alteration of unauthorised construction or alteration.  Section  35  of the  Act  enables  a person authorised by the Board to enter upon any land for the purpose of inspection, survey,  measurement,  valuation or  enquiry. Section 41 enables the Board by notification to make regulations consistent with the Act and Rules thereunder to carry out the purposes of the Act with the previous approval of the State Government.”

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11. There can be no dispute, nor was it contended that

a donee or a grantee (as the status of the lessee company

in liquidation as in this case) can have no rights in

excess of that possessed by the donor or the grantor. The

mortgagee (whose shoes SASF has stepped into) of  the

lessee (Wellman) can have no right greater or better than

that of the lessee in terms  of the deed  of lease. The

observations in  Phatu Rochiram Mulchandani  (supra)

apply to the facts of this case. The appeal, therefore fails

and is dismissed, without order as to costs.  

........................................J.                                           [ARUN MISHRA]  

........................................J.                                           [VINEET SARAN]  

........................................J.                                           [S. RAVINDRA BHAT]  

New Delhi, October  21, 2019.