Telangana High Court Rules Against Union Bank’s Recovery Actions

The Telangana High Court has ruled against the Union Bank of India (UBI) for bypassing statutory regulations in its attempts to recover dues from BRG Energy Ltd. The court found that UBI initiated parallel recovery proceedings against the Hyderabad-based company despite ongoing winding-up processes, which included the appointment of an official liquidator to manage the company’s assets.

The legal dispute centers on a valuable asset—a 20,675-square-meter land parcel located in the Pashamylaram industrial park. As the official liquidator prepared to oversee the sale of this property, UBI set a reserve price of Rs. 21.18 crore for an auction, despite interested parties offering Rs. 32.29 crore. Notably, the bank conducted the auction without involving the official liquidator in the valuation and sale process, raising significant legal and ethical concerns.

Background of the Case

The case arose following the financial collapse of BRG Energy Ltd, a manufacturer of power distribution transformers. Proceedings were initiated before the Board for Industrial and Financial Reconstruction (BIFR), leading to winding-up petitions against the company. In a decisive ruling in 2018, the court ordered the company’s liquidation and appointed an official liquidator to oversee its assets and liabilities.

The official liquidator took control of the secured asset—Plot No. 40 in the Pashamylaram Industrial Park—yet UBI proceeded with its own independent auction, receiving 25 percent of the advance payment from the successful bidder without coordinating with the liquidator. This unilateral action prompted significant legal scrutiny.

The bank justified its actions by claiming it had obtained a recovery certificate from the Debt Recovery Tribunal-II in Hyderabad for Rs. 69.60 crore owed by BRG Energy and its directors. UBI argued that the directors had failed to meet the terms of a one-time settlement (OTS) amounting to Rs. 26.10 crore, resulting in the forfeiture of their upfront payment.

High Court’s Decision

The Company Court initially set aside UBI’s auction, a decision that the bank subsequently challenged in the High Court. In its ruling, the division bench, comprising Justice K. Lakshman and Justice V. Ramakrishna Reddy, upheld the Company Court’s order. The judges emphasized that recovery proceedings under the SARFAESI Act cannot be pursued independently once winding-up procedures are in progress.

The bench articulated that once a company is ordered to be liquidated, its assets fall under the jurisdiction of the Company Court, with the official liquidator designated as the lawful custodian responsible for safeguarding the interests of all stakeholders—this includes secured and unsecured creditors as well as employees.

This ruling underscores the necessity for financial institutions to adhere to legal protocols when dealing with companies in distress, particularly in contexts involving multiple stakeholders and ongoing legal proceedings. The decision serves as a reminder that regulatory compliance is paramount in safeguarding the rights of all parties involved in insolvency cases.