Companies Act Case Law Central Bank Of India Vs Elmot Engineering Co.

PETITIONER:
CENTRAL BANK OF INDIA

Vs.

RESPONDENT:
ELMOT ENGINEERING CO.

DATE OF JUDGMENT27/04/1994

BENCH:
MOHAN, S. (J)
BENCH:
MOHAN, S. (J)
VENKATACHALLIAH, M.N.(CJ)

CITATION:
1994 AIR 2358 1994 SCC (4) 159
JT 1994 (7) 54 1994 SCALE (2)739
ACT:

 

HEADNOTE:

 

JUDGMENT:
The Judgment of the Court was delivered by
MOHAN, J.- Leave granted.
2. The appellant filed a suit bearing O.S. No. 7 of 1986
against Respondents 1, 3 and 4 in the Court of Subordinate
Judge, Rangareddy District at Saroor Nagar, Andhra Pradesh
for recovery of Rs 97,21,274.11 with interest thereon. The
further prayer was, in default of payment a final decree
might be passed directing the sale of mortgaged properties
and for ancillary reliefs. The averments in the plaint are
briefly as follows.
3. The first respondent is a limited company. Third and
fourth respondents are the Advisors and Directors
respectively of the first respondent Company. The first
respondent deposited with the appellant the documents of
title relating to its landed property at Industrial
Development Area, Nacharam Tehsil, District Hyderabad
(presently Rangareddy District) with an intention to create
an equitable mortgage of immoveable property covered by
those documents together with all structures and buildings
thereon.
4. On 6-10-1976, the third and fourth respondents executed
separate guarantees in respect of the facilities granted to
the first respondent guaranteeing repayment of amounts. On
20-1-1984, one of the Directors declared that equitable
mortgage by deposit of title deeds dated 6-10-1975 would
also form security for the letters of credit, fresh-funded
term loan, guarantee limited and other facilities allowed to
the first respondent, by the appellant. The necessary forms
in this regard were filed before the Registrar of Companies,
Maharashtra at Bombay for registering the charges.
5. In order to secure the amount under the various
heads/credit facilities the first respondent deposited on
17-8-1979 with the appellant’s Sundemagar Branch, Bombay, an
agreement for sale in respect of the first floor of the
building belonging to the first respondent. The first
respondent requested that its account be transferred from
Sundernagar Branch, Bombay to Hyderabad Main Branch of the
appellant.
6. O.S. No. 507 of 1989 came to be filed by the appellant
for recovery of a sum of Rs 58,783.25 being expenses
incurred from time to time in respect of these properties.
Both the suits are pending adjudication.
7. Premium Automobiles Limited filed a winding-up petition
against the first respondent in Company Petition No. 645 of
1988 before the High Court of Bombay. By an order dated 23-
6-1990 the first respondent was ordered to be wound up. An
Official Liquidator (Respondent 2) was appointed as
Liquidator of the Company. On 23-7-1990 a meeting was held
in the presence of the Official Liquidator. The appellant
brought to the notice of the Official Liquidator the
pendency of these two suits.
161
8. The appellant filed Company Application No. 229 of 1991
in the aforesaid company petition under Section 446 of the
Companies Act (hereinafter referred to as ‘the Act”). The
prayer in the application was for leave to prosecute the two
original suits bearing Nos. 7 of 1986 and 507 of 1989
pending on the file of the Additional Subordinate Judge,
Rangareddy District at Saroor Nagar. According to the
appellant since the properties were situate in Rangareddy
District it would be just and convenient to continue to
prosecute the suits in Hyderabad.
9. On 26-3-1992, the learned Single Judge passed an order
directing that the two suits be transferred to the Bombay
High Court. Aggrieved by that order Appeal No. 428 of 1992
was preferred by the appellant. That was dismissed
summarily by the impugned order dated 15-12-1992. Hence,
the special leave petition.
10. Mr Anil B. Divan, learned counsel for the appellant
submits that the courts below have not correctly appreciated
Section 446 of the Act. The appellant is aggrieved insofar
as the order of transfer of the suits from Hyderabad to
Bombay was made. The finding that for the Official
Liquidator to defend at a far distance in the Court of
Additional Subordinate Judge, Rangareddy District at Saroor
Nagar in Andhra Pradesh is going to be more expensive is not
correct. Equally, the finding that the wasteful expenditure
could be avoided by transfer. A secured creditor like the
appellant stands outside the winding-up proceedings as laid
down in M.K. Ranganathan v. Govt. of Madras’. After all
this is a suit for the enforcement of an equitable mortgage.
The properties are situate in Rangareddy District. It will
be not only just and convenient but also proper for the suit
to be conducted there. The convenience of the Official
Liquidator alone should not be the concern. Therefore, it
is prayed that part of the order may be set aside.
11. In opposition to this, Mr Arvind Kumar, learned counsel
would urge that it is true that the secured creditor stands
outside the winding-up proceedings. That does not mean the
company court loses its jurisdiction under Section 446(2)
and (3) of the Act. The law laid down in M.K. Ranganathan’
needs to be reviewed. As on today, the law is, the company
court is entitled to grant leave on such terms and
conditions as it may impose, as laid down in Sudarsan Chits
(1) Ltd. v. 0. Sukumaran Pillai2 the interest of the
Official Liquidator is of paramount consideration. Where,
therefore, the transfer of suits is necessary in the
interest of justice and equity the orders of the courts
below cannot be found fault with. Under subsection (3) of
Section 446 of the Act the winding-up court has the power to
transfer before it all proceedings pending against the
company at different places, because it is convenient for
the winding-up of the company’s affairs expeditiously that
all the suits are transferred to the winding-up court.
12. In order to appreciate these rival contentions we will
briefly set out the scope of Section 446.
1 AIR 1955 SC 604: (1955) 2 SCR 374
2 (1984) 4 SCC 657 : AIR 1984 SC 1579
162
13. Palmer’s Company Precedents, Part 11, 17th Edn., page
302 states:
“When a winding-up order is made, the Court,
acting by its officer the Official Receiver
lays its hand upon the assets and says, no
creditor or claimant must touch these assets
or take proceedings by way of action,
execution or attachment pending the
distribution by the Court in due course of
administration. This protection is
indispensable equally in winding-up and in
bankruptcy to prevent a scramble for the
assets, but it is not always enough. An even-
handed justice requires that the Court should
have power to intervene at an early stage for
the protection of the assets, and this power
is given by this section.”
14. This section aims at safeguarding the assets of a
company in winding-up against wasteful or expensive
litigation as far as matters which could be expeditiously
and cheaply decided by the company court are concerned. In
granting leave under this section, the court always takes
into consideration whether the company is likely to be
exposed to unnecessary litigation and cost. The position of
secured creditor came to be decided by this Court in M.K.
Ranganathan’. At AIR pp. 607 and 608, in paragraphs 15 and
16 it was held:
“The position of a secured creditor in the
winding up of a company has been thus stated
by Lord Wrenbury in ‘Food Controller v.
Cork3’:
‘The phrase “outside the winding up” is an
intelligible phrase if used, as it often is,
with reference to a secured creditor, say a
mortgagee. The mortgagee of a company in
liquidation is in a position to say “the
mortgaged property is to the extent of the
mortgage my property. It is immaterial to me
whether my mortgage is in winding up or not.
I remain outside the ‘winding up’ and shall
enforce my rights as mortgagee”. This is to
be contrasted with the case in which such a
creditor prefers to assert his right, not as a
mortgagee, but as a creditor. He may say ‘I
will prove in respect of my debt’. If so, he
comes into the winding up.’
It is also summarised in Palmer’s Company
Precedents, Vol. 11, p. 415:
‘Sometimes the mortgagee sells, with or
without the concurrence of the liquidator, in
exercise of a power of sale vested in him by
the mortgage. It is not necessary to obtain
liberty to exercise the power of sale,
although orders giving such liberty have
sometimes been made.’
The secured creditor is thus outside the winding up and can
realise his security without the leave of the winding-up
Court, though if he files a suit or takes other legal
proceedings for the realisation of his security he is bound
under Section 231 (corresponding with Section 171, Indian
Companies Act) to obtain the leave of the winding-up Court
before he can do so although such leave would almost
automatically be granted.
3 1923 AC 647 (A) : 39 TLR 699
163
Section 231 has been read together with
Section 228(1) and the attachment,
sequestration, distress or execution referred
to in the latter have reference to proceedings
taken through the Court and if the creditor
has resort to those proceedings he cannot put
them in force against the estate or effects of
the Company after the commencement of the
winding-up without the leave of the winding-up
Court.
The provisions in Section 317 are also
supplementary to the provisions of Section 231
and emphasise the position of the secured
creditor as one outside the winding up, the
second creditor being, in regard to the
exercise of those rights and privileges, in
the same position as he would be under the
Bankruptcy Act.
The corresponding provisions of the Indian
Companies Act have been almost bodily
incorporated from those of the English
Companies Act and if there was nothing more,
the position of the secured creditor here also
would be the same as that obtaining in England
and he would also be outside the winding up
and a sale by him without the intervention of
the Court would be valid and could not be
challenged as void under Section 232(1),
Indian Companies Act.”
That case no doubt dealt with the forerunner to, Section
446, namely,
Section 171 of the Indian Companies Act, 1913. But that
does matter.
15. In this case the appellant is admittedly
a secured creditor. It sues on a mortgage by
deposit of title deeds. Such a suit is not
likely to involve a long drawn out trial. On
the scope of Section 446(2) of the Act, this
Court had occasion to observe in Sudasan Chits
(1) Ltd.2 at page 1582, in paragraph 10: “Sub-
section (2) of Section 446 confers
jurisdiction on the Court which is winding up
the company to entertain and dispose of
proceedings set out in clauses (a) to (d).
The expression ‘Court which is winding up the
company’ will comprehend the court before
which a winding-up petition is pending or
which has made an order for winding up of the
company and further winding-up proceedings are
continued under its directions. Undoubtedly,
looking to the language of Section 446(1) and
(2) and its setting in Part VII which deals
with winding-up proceedings would clearly show
that the jurisdiction of the Court to
entertain and dispose of proceedings set out
in sub-clauses (a) to (d) of sub-section (2)
can be invoked in the Court which is winding
up the company.”
16. Without intending to lay down the law broadly but
confining only to the facts of this case, we feel that the
order of transfer of the suits to the High Court of Bombay
cannot be supported. We are unable to uphold the finding of
the High Court when it observed:
“On examination of facts and circumstances of
the case, I am of the opinion that defending
at a far distance in the Court of Additional
Subordinate Judge, Rangareddy District at
Saroor Nagar in Andhra Pradesh is going to be
more expensive than if the said suits are
164
continued and tried in this Court on the same
being transferred to this Court. It is
neither convenient nor proper that the
Official Liquidator appointed Liquidator of
the Respondent I should be asked to defend the
said suits in that Court since the wasteful
expenditure is to be avoided.”
17. This transfer will result in greater expenditure to the
appellant Bank which certainly is avoidable “than the
wasteful expenditure” to the Official Liquidator.
Accordingly that part of the order directing the transfer is
set aside. We make it clear we are not interfering with the
grant of leave in favour of the appellant. Civil appeal is
allowed in the above terms. No costs.

 

 

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