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Karnataka High Court · body

2009 DIGILAW 95 (KAR)

M. S. Shivashankar v. State of Karnataka

2009-02-03

N.KUMAR

body2009
Judgment : The petitioners in all these writ petitions have challenged the notification issue by the Government bringing property for sale under the provisions of Karnataka Protection of Interest of Depositors in Financial Establishments Act, 2004 (for short, hereinafter referred to as the Ace). The question involved is purely question of law. Therefore, they are taken up for consideration together and disposed of by this common order. 2. The petitioner in W.P.No.2292 of 2009 Sri M.S. Shivashankar contends that his mother Smt. M.S. Saraswathamma purchased the schedule property, a BDA vacant site bearing No. 28 situated at H.S.R. Layout, Sector-I, Begur Hobli, Bangalore, under a registered sale deed dated 27-3-2006 for a consideration of Rs. 17.00 lakhs as per Annexure-B. Her name was entered in the encumbrance certificate, she was put in possession, katha was transferred in her name and she was paying the property tax till her death. She had put up a construction on the schedule property after obtaining sanctioned plan and licence from the BDA. She died on 30-11-2007, leaving behind the petitioner, his elder brother M.S. Rajendra Prasad, elder sister KS. Ramalakshmamma and younger sister M.S. Geetamani as legal representatives. Thereafter among them a registered release deed came to be executed in pursuance of which the petitioner has become the absolute owner. The said property is now notified for sale under the Act. 3. The petitioner in W.P.No.2428 of 2009, Mr. V.R. Ramesh contends that he purchased the schedule property, a vacant site bearing No. 3579, Domlur, BBMP, Jeevanbheemanagar Sub-Division (Ward No. 72) from M/s. N. Suresh Krishnamurthy and others under a registered sale deed dated 23-12-2005 for a consideration of Rs. 50,00,000/-. Subsequently, katha has been made out in his name, he has been paying tax, his name was entered in the encumbrance certificate and he is in peaceful possession and enjoyment of the said property as absolute owner thereof. His property is now brought to sale by virtue of the impugned notification. 4. The petitioner in W.P.No.12519 of 2008 Smt. Savitha contends that she has purchased the property bearing No.178/A situated at 6th Sector, HSR Layout, Bangalore, under a registered sale deed dated 18-7-2003 from its previous owner Doddeeraiah as per Annexure-A for a valuable consideration. Subsequently, katha was transferred in her favour, her name was entered in the encumbrance certificate and she has been paying tax. Subsequently, katha was transferred in her favour, her name was entered in the encumbrance certificate and she has been paying tax. Now the said property is brought to sale by the impugned notification. 5. The petitioner in W.P.No.2704 of 2009 Sri S.H. Chakravarthy contends that he has purchased the vacant site bearing No.1889 formed by the BDA, situated at 9th Main Road, Banashankari II Stage, Corporation Ward No.56, in a Court sale held on 31-5-2007 for a sum of Rs. 1,59,72,000/-. The said sale has been duly confirmed by the Bangalore City Civil Court on 14-8-2007 and a sale certificate came to be issued as per Annexure-A. Subsequently, katha was made out in his name. He has been paying tax, his name finds a place in the encumbrance certificate, he is in peaceful possession and enjoyment of the said property. The said property is now notified for public auction under the impugned notification. 6. The petitioner in W.P.No.2849 of 2009 Dr. Talawani Krishna contends that he has entered into an agreement of sale with respondent 4 in respect of site bearing No.1083, 12th Main, 5th Cross, HAL II Stage, Bangalore, for purchasing the same for a sum of Rs. 2,10,00,000/-. The agreement of sale is reduced into writing on 12-2-2005. A sum of Rs. 1,71,30,000/- lying with the purchaser is adjusted towards sale consideration. Thereafter, he has paid a sum of Rs. 77,75,000/-. On account of construction of the building, the- balance amount of Rs. 38,70,000/-was also paid, thus he has paid in all a sum of Rs. 2,10,00,000/- for purchase of the said site. In fact, he has already filed a suit for specific performance in O.S.No.1777 of 2006 on 1-3-2006 and the same is pending before the City Civil Court, Bangalore. There is also an order of temporary injunction restraining the respondents 4 to 6 from alienating the property. As the said property is now brought to sale, he is constrained to approach this Court. 7. The petitioner in W.P.No.3032 of 2009 Sri B.S. Mallikarjun contends that he has entered into an agreement of sale in respect of property bearing No.1083 situated at 12th Main, 5th Cross, HAL II Stage Extension, Indiranagar, Bangalore, agreeing to purchase the said site from respondents 5, 6 and 7 for a consideration of Rs. 3,40,00,000/-. In fact, he and his family members have invested a sum of Rs. 3,40,00,000/-. In fact, he and his family members have invested a sum of Rs. 8,02,00,000/- with the 5th respondent. Therefore, out of the said deposit the amount of Rs. 3,40,00,000/- is to be adjusted towards sale consideration. He has also filed a suit O.S.No.726 of 2009 on the file of Additional City Civil Judge, Bangalore City, for specific performance of the agreement of sale and it is pending consideration. In the meanwhile, the said property is brought to sale by the impugned notification. 8. It is not in dispute that the petitioners in the first five writ petitions are the owners of the property which are now notified for sale. The petitioners in the other two writ petitions are agreement holders. These properties are brought to sale on the ground that they belong to a Financial Establishment by name M/s. Invest Tech and Invest Tech Builders and Developers Private Limited. These proceedings are initiated at the instance of the depositors of the said company to recover the amounts which are deposited by them. In the notification issued the property is shown as belonging to one Suresh Krishna Murthy his family members. None of the names of the petitioners in whose are the property stands as on the date of the notification is mentioned in the writ petition. No notice is sent to the petitioners. It is on their back the said properties were sought to be brought for sale. The order sheet produced in some of the cases show that no order making the order of attachment absolute is passed in respect of these properties. The order to sell the property is made before making the order of the attachment absolute and without hearing the owners of the property. 9. The petitioners in all these writ petitions contend that the impugned notifications in these writ petitions are issued by the Special Land Acquisition Officer, Bangalore, purporting to be in pursuance of the order passed by the Principal City Civil Judge, Bangalore, under the provisions of the Act on 4-2-2009 and 5-2-2009 under two separate notifications for sale of their properties which is illegal, contrary to law and the provisions of the Act, and therefore liable to be quashed. 10. Learned Government Advocate appearing for the respondents submit that the impugned action taken by the respondents is strictly in accordance with law and in terms of the Act. 10. Learned Government Advocate appearing for the respondents submit that the impugned action taken by the respondents is strictly in accordance with law and in terms of the Act. In order to protect the interest of public who are the depositors coming from middle class and poor class the impugned notification is issued and therefore he submits that even if there are any irregularities, having regard to the object with which the Act is passed and action taken a case for interference under Article 226 is not made out. It is open to the petitioners to approach the Court which is seized of the matter and urge all the grounds which are urged in these proceedings so that the said Court will adjudicate their rights and therefore he submits that there is no merit in these writ petitions. 11. The question that arises for consideration in all these writ petitions is. “Whether the action of the respondents in bringing the properties claimed by the petitioners for sale by public auction is valid and is in accordance with the Act?” 12. The Financial Establishments not covered by the Reserve Bank of India Act, 1934 were receiving deposits from the public, mostly middle class and poor classes on the promise of high rates of interest. After collecting huge amount on such representations they defaulted to return to the public, the deposits on maturity and thereby cheating the depositors of their legitimate amounts. On representations made by such depositors association and public, to have a legal mechanism to protect the interest of depositors and also the Reserve Bank of India to regulate such establishments primarily to protect the interest of the depositors, the Karnataka (Protection of Interest of Depositors in Financial Establishments) Bill, 2000, was introduced in the State Legislature and both the Houses approved the same. The President of India withheld his assent to the Bill on the ground that the amendments suggested by the Ministry of Finance Company Affairs (Banking Division) could not be carried out, as the Bill had already been passed by the State Legislature. It took nearly six years to comply with the aforesaid requirements and ultimately it received the assent of the President of India on 14th December, 2005. It was published in the Karnataka Gazette, Extraordinary on 22nd December, 2005, which came into force from 17-5-2006. It took nearly six years to comply with the aforesaid requirements and ultimately it received the assent of the President of India on 14th December, 2005. It was published in the Karnataka Gazette, Extraordinary on 22nd December, 2005, which came into force from 17-5-2006. It provides safe measures for protecting the interest of the depositors and investigation of a complaint or a fraudulent transaction by such financial establishments. Section 3 of the Act, confers power on the District Magistrates to entertain complaints, make investigation and then submit a report to the Government. The Government has been vested with the power to attach the money or the property belonging to such financial establishments in order to protect the interest of the depositors. Section 3 which confers such power reads as under: "Attachment of properties on default of return of deposits.— (1) The Government or the District Magistrates in their respective jurisdiction, suo motu or on receipt of any complaint may cause investigation of a complaint or fraudulent transaction referred to in this section. The District Magistrate shall forward his report together with the complaint to the Government at the earliest. (2) Notwithstanding anything contained in any other law for the time being in force. (i) where, upon complaint received from any depositors or otherwise, the Government is satisfied that any financial establishment has failed. The District Magistrate shall forward his report together with the complaint to the Government at the earliest. (2) Notwithstanding anything contained in any other law for the time being in force. (i) where, upon complaint received from any depositors or otherwise, the Government is satisfied that any financial establishment has failed. (a) to return the deposit after maturity or on demand by depositor; or (b) to pay interest or other assured benefit; or (c) to provide the service against such deposit; or (ii) where the Government has reason to believe that any financial establishment is acting in and detrimental to the interest of the depositors with an intention to defraud them; or (iii) where the Government satisfied that such financial establishment is not likely to return the deposits or make payment of interest or other benefits assured or to provide the services against which the deposit is received, the Government may, in order to protect the interests of the depositors of such financial establishments, after recording reasons in writing, issue an order by publishing it in the Official Gazette, attaching the money or property believed to have been acquired by such financial establishment either in its own name or in the name of any other person from and out of their deposits collected by the financial establishments, and why it transpires that such money or other property is not available for attachment or not sufficient for the repayment of the deposits, such other property of the said financial establishments, or the personal assets of the promoters, partners, directors, Managers or members or any other person of the said financial establishments. (3) The Government shall also notify the ad interim order made under sub-section (2) in the Official Gazette and two newspapers having wide circulation and shall also cause to be affixed a copy of such order on some conspicuous place of the property so attached. (4) On the publication of the order made under sub-section (2), all the properties and assets of the Financial Establishment and the persons mentioned therein shall forthwith vest in the Competent Authority appointed by the Government, pending further order from the Special Court". 13. A perusal of the aforesaid provision makes it clear that the Government or the District Magistrate, suo motu or on a complaint may cause investigation of a complaint or fraudulent transaction. 13. A perusal of the aforesaid provision makes it clear that the Government or the District Magistrate, suo motu or on a complaint may cause investigation of a complaint or fraudulent transaction. After such investigation the District Magistrate shall forward his report together with the complaint to the Government. If the Government is satisfied that any Financial Establishment, as defined under the Act, has failed in its obligation to the depositor, or is acting detrimental to the interest of the depositor with an intention to defraud them, or Is not likely to return the deposits or make payment of interest to the depositors, may issue an order attaching the money or property believed to be that of the financial institution. The order of attachment passed under sub-section (2) of Section 3 of the Act to have a legal effect should satisfy the following requirements. (a) The order of attachment should be in writing. (b) It should contain reasons for passing such an order of attachment. (c) It should be published in the Official Gazette. (d) It should be published in two newspapers having wide circulation. (e) A copy of the order should be affixed on some conspicuous place of the property, so attached if it is immovable property. The properties which could be so attached under this provision are.- (1) The property acquired by financial institutions out of the deposits collected by the financial establishment, (2) Property standing in its name; (3) Property believed to be acquired by such financial establishment in the name of any other person out of the deposits collected by the financial establishment; (4) Any other property standing in the name of the financial establishment though not acquired out of the deposits collected by the financial establishment; (5) Personal asserts of the: (a) Promoters; (b) Partners; (c) Directors; (d) Managers; or members or any other person of the said financial establishment. 14. This order of attachment is in the nature of an ex parte ad interim order of attachment. Normally, the effect of an order of attachment is to convert an unsecured debt into a secured debt or to prevent alienation of the property attached during the pendency of the proceedings. However, the order of attachment contemplated under this provision has the effect of divesting the owner of his property and consequently it vests in the Competent Authority appointed by the Government. However, the order of attachment contemplated under this provision has the effect of divesting the owner of his property and consequently it vests in the Competent Authority appointed by the Government. Therefore, this order of attachment results in serious consequences. Article 300-A of the Constitution of India mandates that no person shall be deprived of his property save by authority of law. As the effect of such an order of attachment has a serious consequence of depriving the right of the owner in the said property, it is imperative that the procedure prescribed under law has to be strictly followed. Any violation of the procedure prescribed would render the order void and consequently there would not be any vesting of the property in the Competent Authority by virtue of such void order. 15. Section 5 of the Act, provides for appointment of an officer not below the rank of an Assistant Commissioner to be the Competent Authority, for the purpose of this Act through notification, by the Government. After the passing of an order under Section 3 by the Government and its publication in the two newspapers, the Competent Authority shall within thirty days from the date of receipt of the order, apply to the Special Court for order of attachment to be made absolute. The application to be made under subsection (2) of Section 5 shall be accompanied by an affidavit setting out the grounds of particulars as stipulated therein. The Competent Authority also may make an application for adjudication of any issue or subject-matter pertaining to money or property attached. The duties and powers of the Competent Authority are clearly set out in Section 6 of the Act. 16. Section 10 of the Act, provides for constitution of Special Court by the Government with the concurrence of the Chief Justice of the High Court of Karnataka through notification. One such Special Court consisting of Single Judge not below the rank of District and Sessions Judge is appointed for such area or areas. No other course shall have jurisdiction to entertain any matter to which the provisions of the Act is attracted. Thus there is an express exclusion of jurisdiction of all Courts and conferring exclusive jurisdiction on such Special Courts to adjudicate all disputes arising under the Act. 17. Section 11 of the Act, deals with powers of Special Court regarding realisation of assets and payment to depositors. Thus there is an express exclusion of jurisdiction of all Courts and conferring exclusive jurisdiction on such Special Courts to adjudicate all disputes arising under the Act. 17. Section 11 of the Act, deals with powers of Special Court regarding realisation of assets and payment to depositors. It confers on the Special Court all the powers for giving effect to the provisions of the Act. One such power conferred on the Special Court is that, it may direct the Competent Authority to take possession of any assets belonging to or in the control of the Financial Establishment and transfer of realise the attached assets or sell the attached assets by public auction or by private sale as it deems fit. Such a direction can be issued by the Special Court only after the order of attachment is made absolute under Section 12 of the Act. In other words after an order of attachment has been made, in order to give effect to the provision of the Act, the Special Court has been vested with the power to order for sale of the attached assets by public auction or by private sale and realise the attached assets for the purpose of repayment to the depositors of the Financial Establishment. 18. Section 12 specifically provides for powers of Special Court regarding attachment. The said provision reads as under: “Powers of Special Court regarding attachment.-(1) Upon receipt of an application under Section 5, the Special Court shall issue to the Financial Establishment and to any other person if any, whose property is attached by the designated authority under Section 3, a notice accompanied by the copies of the placation and affidavits and of the record of evidence, if any, calling upon them to show cause on or before a date to be specified in the notice why the order of attachment should not be made absolute. (2) The Special Court shall also issue such notice, to all other persons represented to it as having or being likely to claim, any interest or title in the property of the Financial Establishment or the person to whom the notice is issued under sub-section (1), calling upon all such persons to appear on the same date as that specified in the notice and make objection if they so desire to the attachment of the property or any portion thereof on the ground that they have interest in such property or portion thereof. (3) Any person claiming an interest in the property attached or any portion thereof may, notwithstanding that no notice has been served upon him under this section, make an objection as aforesaid to the Special Court at any time before an order is passed under sub-section (4) or sub-section (6). (4) The Special Court shall if no cause is shown and no objections are made on or before the specified date, forthwith pass an order making the order of attachment absolute, and issue such direction as may be necessary for realisation of the assets attached and for the equitable distribution among the depositors of the money realised from out of the property attached. (5) If cause is shown or any objection is made as aforesaid, the Special Court shall proceed to investigate the same and in so doing, as regards the examination of parties and in all other respects, the Special Court shall subject to the provisions of this Act, follow the summary procedure as contemplated under Order 37 of the Civil Procedure Code, 1908 and exercise all the powers of a Court in hearing a suit under the said Code and any person making an objection shall be required to adduce evidence to show that on the date of attachment he had some interest in the property attached. (6) After investigation under sub-section (5), the Special Court shall pass an order as far as may be within one year from the date of receipt of application under sub-section (1), either making the ad interim order of attachment absolute or varying it by releasing a portion of the property from attachment or cancelling the ad interim order of attachment: Provided that Special Court shall not release from attachment any interest which it is satisfied that the Financial Establishment or the person referred to in sub-section (1) has in the property, unless it is also satisfied that there will remain under attachment an amount or property of value not less than the value that is required for repayment to the depositors of such Financial Establishment. (7) Where the Special Court passes an order under sub-section (6), making the order of attachment absolute or varying the order of attachment by releasing a portion of the property From attachment it may, issue such direction as may be necessary for realisation of the assets attached and for the equitable distribution amongst the depositors of the money realised from and out of the assets so attached. (8) Where an application is made by any person duly authorised or constituted or specified by any other State Government under similar enactment empowering him to exercise control over any money or property or assets attached by that State Government, the Special Court shall exercise all its powers, as if, such an application were made under this Act and pass appropriate order or direction on such application so as to give effect to the provisions of such enactment”. 19. The aforesaid provision provides for a comprehensive machinery for adjudication of all disputes arising out of an attachment of the property under Section 3 of the Act. Once the Competent Authority appointed under Section 5 of the Act makes an application to the Special Court seeking for the order of attachment to be made absolute, the proceedings before the Special Court commences. It is a judicial proceeding. The Special Court has to follow the following procedure. Once the Competent Authority appointed under Section 5 of the Act makes an application to the Special Court seeking for the order of attachment to be made absolute, the proceedings before the Special Court commences. It is a judicial proceeding. The Special Court has to follow the following procedure. (a) It shall issue notice to the financial establishment; (b) It shall issue notice to any other person, if any, whose property is attached by the designated authority under Section 3; (c) It shall also issue such notices to all other persons represented to it as having or being likely to claim, any interest or title to the property attached by the designated authority under Section 3; (d) Any person claiming an interest in the property attached or any portion thereof may notwithstanding that no notice has been served upon him under the Section can make an objection to the attachment at any time before an order is passed under sub-section (4) or sub-section (6). The notices should accompany copies of the application, affidavits and the record of evidence, if any. The notices should call upon such person to show cause on or before a date to be specified in the notice why the order of attachment should not be made absolute. In pursuance of such notices issued, or otherwise if no objections are filed, no cause is shown before the specified date, the Special Court shall forthwith pass an order making the order of attachment absolute. If cause is shown or an objection is made the Special Court shall proceed to investigate the same. The procedure to be followed in any investigation/enquiry is the summary procedure contemplated under Order 37 of the CPC, 1908. The Court shall exercise all the powers of a Court hearing a suit under the CPC. It is for the objector to adduce evidence to show that on the date of attachment he had some interest in the property attached. After investigation under subsection (5), the Special Court shall pass an order within one year from the date of receipt of the application under sub-section (1) making the attachment absolute or release the property from attachment by cancelling ad interim order of attachment. 20. After investigation under subsection (5), the Special Court shall pass an order within one year from the date of receipt of the application under sub-section (1) making the attachment absolute or release the property from attachment by cancelling ad interim order of attachment. 20. It is only after such order of attachment of the property is passed by the Special Court, it may further direct under Section 11 of the Act, the Competent Authority to take possession of the property attached and sell the attached assets by public auction or by private sale as it deems fit. Therefore, unless the order of attachment is made absolute by the Special Court the Competent Authority gets no jurisdiction to bring the property attached for sale. 21. In the instant case, admittedly, the Government has not published the order of attachment in the Official Gazette. It is not published in two daily newspapers. It is not affixed to the properties which are attached. Even the Competent Authority has not filed application before the Special Court as contemplated under the Act. Unfortunately, the Special Court without proper application of mind, without issuing notices to the financial establishments or to the persons in whose name the property stands and without making the order of attachment absolute has permitted the Competent Authority to bring the properties attached by the Government for sale. The entire procedure followed by the Government, the Competent Authority and the Special Court is illegal, contrary to law and are wholly without jurisdiction and therefore their acts and the notifications issued which are impugned in these writ petitions cannot be sustained. Hence, I pass the following order. (a) All the writ petitions are allowed. (b) The impugned notifications are hereby quashed. (c) Liberty is reserved to the respondents to act in accordance with Section 3 of the Act and to protect the interest of the depositors. (d) The petitioners herein, even if they are not served with notice by the Special Court, have a right to appear before the Special Court and object to any request by the Competent Authority for making an order of attachment absolute. (d) The petitioners herein, even if they are not served with notice by the Special Court, have a right to appear before the Special Court and object to any request by the Competent Authority for making an order of attachment absolute. (e) It is open to all the petitioners herein to urge all the grounds which they have urged on merits including the ground that the Act is not applicable to the sale or, agreement of sale in question in their favour and Special Court has jurisdiction to adjudicate these claims. Ordered accordingly.