Companies Act Case Law Icici Bank Ltd Vs Sidco Leathers Ltd. & Ors

CASE NO.:
Appeal (civil) 2332 of 2006

PETITIONER:
ICICI BANK LTD.

RESPONDENT:
SIDCO LEATHERS LTD. & ORS.

DATE OF JUDGMENT: 28/04/2006

BENCH:
S.B. Sinha & P.K. Balasubramanyan

JUDGMENT:
J U D G M E N T
(Arising out of S.L.P. (C) No.23360/2004)

 

S.B. SINHA, J :
Leave granted.

Interpretation of Sections 529 and 529-A of the Companies Act, 1956
is involved in this appeal, which arises out of a judgment and order dated
4.8.2004 passed by the High Court of Judicature at Allahabad in Special
Appeal No.698 of 2002 affirming the judgment and order dated 24.5.2002
passed by a learned Singh Judge of the said Court.

The appellant herein is a Banking Company. It, along with Industrial
Finance Corporation of India (IFCI) and Industrial Development Bank of
India (IDBI), advanced the following amounts by way of loan to Respondent
No.1 with a view to give financial assistance to it in setting up a plant for
manufacture of leather boards:

a) IDBI Rupee Term Loans of Rs.193.2 lacs and
Foreign Currency loan of Italian Lira 1380900,000.

b) IFCI Rupee Term Loans of Rs.196.74 lacs,
Central Investment subsidy of Rs.25 lacs and Foreign
Currency loan of DM 2127,565.

c) ICICI Rupee Term Loans of Rs.96.61 lacs and
Foreign Currency loan of Italian Lira 1380900,000.
The Punjab National Bank (PNB) also advanced a loan to the said
Respondent for providing working capital funds. The 1st Respondent, in
order to secure the amounts lent to it, created a first charge in favour of the
appellant along with other financial institutions, i.e., Respondent Nos.3
(IFCI) and Respondent No.4 (IDBI) herein by way of equitable mortgage by
deposit of title deeds of its immovable property. A second charge was
created in favour of PNB by way of constructive delivery of title deeds
remaining in deposit with Respondent No.3 herein, clearly indicating that
the charge in favour of the latter was subject and subservient to charges in
favour of IFCI, IDBI and ICICI.

On an application for winding up of the 1st Respondent made before
the High Court of Judicature at Allahabad, an order was passed on
16.12.1993 directing its winding up whereupon an Official Liquidator was
appointed. The borrowing facilities of the said Respondent had been
terminated. A suit for recovery of the credited sum was filed by the
appellant along with the Respondent Nos.3 and 4 herein against the 1st
Respondent in the High court of Judicature at Bombay, which was numbered
as Suit No.2789/1995. The said suit was thereafter transferred to the Debt
Recovery Tribunal, Bombay. Recovery proceedings are admittedly pending
adjudication.

The Official Liquidator was one of the defendants. Liberty was
granted by the Debt Recovery Tribunal to the appellant herein and the other
respondents to obtain permission of the Company Court, i.e., High Court of
Judicature at Allahabad to continue the prosecution of the said suit.
Thereupon, an application under Section 446 of the Companies Act, 1956
was filed by the plaintiffs in the said suit stating that they were Secured
Creditors and had decided to remain outside the winding up proceedings
being desirous of realizing the Security in the suit. The permission to
continue the proceedings in the said Suit No.2789/95 was granted by the
High Court of Judicature at Allahabad on 30.8.1995. In the said suit,
however, the Respondent No.2 herein, PNB, was not impleaded as a party.

PNB filed a Civil Suit in the Court of Civil Judge, Fatehpur (U.P.) on
15.10.1998, which was numbered as Suit No.2/98, for recovery of money
payable to it by the 1st Respondent. In its plaint it was, inter alia, averred:

“That the defendant No.1 company had secured
various other financial facilities from the Defendant
Nos.4, 5 and 6 in whose favour the Defendant No.1
company had created Equitable mortgage as Collateral
Security by deposit of original title deeds in respect of
land, building and plant and machineries situated at
Village Kauriya, Tehsil Binkdi, District Fatehpur (U.P.),
but, then the Defendant No.1 company agreed to secure
the second charge on the said mortgaged property in
favour of the plaintiff Bank, after the defendant Nos.4, 5
and 6 gave their consent to the effect that the title deeds
in respect of the aforesaid properties shall remain with
the Defendant No.4, for and on behalf of the Joint First
charge holders, viz. Defendant No.4, 5 and 6 and the said
title deeds shall also be retained by the Defendant No.4,
as agents, for and on behalf of the plaintiff Bank as a
Second charge holder in respect of the aforesaid
properties.

xxx xxx xxx
12. That the said Charge of the Plaintiff Bank
regarding the grant of cash credit hypothecation limit and
creation of Second Charge in respect of immoveable
properties of the Defendant No.1 company in favour of
the Plaintiff Bank, was duly registered with the Registrar
of Companies (U.P.) at Kanpur, on the basis of
submission of the Defendant No.1 company with the
Registrar of Companies (U.P.) Kanpur.”
It is, however, not in dispute that in the meantime the assets of the
Company were sold and the Official Liquidator, against the said assets,
received a sum of Rs.65,72,311/-. As on 31.10.2001, the Official Liquidator
had a sum of Rs.71,00,351/- available with him for distribution to the
creditors of the Company. An advertisement was issued by the said Official
Liquidator being Notice in Form No.63 prescribed under Rule 148(1) of the
Companies (Court) Rules, 1959, inter alia, stating:

“Any creditor so fails to submit his affidavit of
proof within the time limited as aforesaid will be
excluded from the benefit of any distribution of dividend
before the debt is proved or as the case may be from
objecting to such distribution.
Any creditor who has sent in his proof, if so
required by notice in writing from the Official Liquidator
shall either in person or by his advocate, attend the
investigation of such debt or claim at such time and place
as shall be specified in such notice and shall produce
such further evidence of his debt or claim as may be
required.”
In response to the said notice, the appellant herein lodged a claim
stating as under:

S.No. Name of Secured Creditor Amount Claimed To be disbursed
1.6 paise

1. xx xx xx

2. ICICI 26,18,44,044.00 41.89,506.00

Although, before us the factual aspect of the matter that Respondent
No.2 was the second charge holder, whereas the appellant and IFCI and
IDBI were the first charge holders is not in dispute, we may, however, notice
that Respondent No.2, in its letter dated 20.11.1989, addressed to the
appellant and Respondent Nos. 3 and 4 categorically stated:

“We, Punjab National Bank, hereby confirm that
notwithstanding anything to the contrary contained in or
by virtue of the various securities created/to be created by
M/s. Sidco Leathers Ltd. (hereinafter referred to as the
Company) in favour of Punjab National Bank on the
immovable and movable properties (save and except
book debts) of the Company, the charges created to be
credited by the Company in favour of Punjab National
Bank for its working capital facilities being Cash Credit
limit of Rs.80 lac and bills discounting of Rs.54 (Fifty
four lac only) shall be subject and subservient to the
charges created/to be created by the Company in favour
of:

(1)(a) rupee term loan of Rs.277.00 lac in
Participation with IDBI and ICICI to the
extent mentioned below:

IFCI  Rs.112.00 lac
IDBI  Rs.110.00 lac
ICICI  Rs. 55.00 lac
xx xx xx
We further agree and confirm as follows:

i) We shall not be entitled to call upon
IFCI/IDBI/ICICI and other pari passu charge holders, if
any, (hereinafter referred to as ‘the first charge holders’)
to exercise or enforce any of the rights under their
securities or otherwise.

ii) We shall not resort to any legal proceedings for the
sale of the mortgaged properties or for the exercise of our
any other right (a) against the Company unless  (a) we
exhaust our remedies as a first charge holders on the
current assets of the Company, (b) we give to the first
charge holders a notice of minimum period of 60 days of
our intention in this regard and (c) we obtain prior
written approval of IFCI/IDBI/ICICI and other first
charge holders in this regard.

iii) We, in our capacity as a second charge holder, take
steps to enforce the security for realization of our dues
consequent on default or breach committed by the
Company after giving notice to and obtaining prior
approval of the first charge holders as at (ii) above, the
first charge holders, shall also be at liberty (but without
obligation) to call upon the Company to repay forthwith
their respective loans and advances as if they have
become due under their respective loan documents and
shall also be at liberty to exercise and/or all the right and
remedies available to them as first mortgages or under
any law for the time being in force.”
In the Memorandum of Entry, acting also on behalf of the Respondent
No.1, the Bank stated:

“2. The said Shri M. Zafrulla stated that the
documents of title, evidences, deeds and writings more
particularly described in the First Schedule hereunder
written (hereinafter called “the said deeds”) in respect of
the Company’s all immovable properties situated at
Village Klauriya Mustaquil, Tehsil Binki, District
Fatehpur in the State of Uttar Pradesh were deposited on
the 11th day of August, 1988 and further deposited by
way of constructive delivery on the 8th day of November,
1989 by the Company with IFCI and IFCI acting for
itself and as agent of

Industrial Development Bank of India

The Industrial Credit & Investment
Corporation of India Ltd.

in order to create security, by way of joint mortgage by
deposit of title deeds, on the Company’s all immovable
properties together with the buildings and other
structures, fixed plant and machinery, fixtures and
fittings, constructed or erected or installed thereon or to
be constructed, erected or installed thereon, for securing
the due repayment, discharge and redemption by the
Company.”

It is not in dispute that the suit filed by Respondent No.2 has been
decreed; whereas the proceedings before the Debt Recovery Tribunal (DRT)
initiated by the appellant and others is still pending. It is furthermore not in
dispute that the appellant along with Respondent Nos. 3 and 4 filed a
Company Application before the learned Company Judge of the High Court
of Judicature at Allahabad, inter alia, praying for that their claim for a sum
of Rs.4,56,06,736 as on 16.12.1993 should be considered on pro-rata basis
and further prayed that the claim of PNB be excluded from the movable and
immovable assets of the Company.

By an order dated 9.1.2002, the first prayer of the appellant was
allowed. However, as regards the second prayer, order was reserved. By an
order dated 24.5.2002, relying on or on the basis of the decision of this Court
in Allahabad Bank vs. Canara Bank & Anr. [AIR 2000 SC 1535] it was
held:

“The test in law, as emerges from the aforesaid
discussion is that where the secured creditors even if it
has first charge over mortgaged assets, in preference to
other secured creditors, having second charge over the
same assets, opts to prove his debts before Official
Liquidator and claim dividend by joining winding up
proceedings, relinquishes his claim over the assets and
ranks equal to other secured creditors, including those
who have second charge over the assets and shall be
entitled to pro rata share out of the sale proceeds subject
to the claim of workmen to be determined as provided
under Section 529-A of the Companies Act, 1956.

I may add here that IFCI, IDBI and ICICI had
given foreign currency loan and term loans to the
company (in liquidation) by connotation, the rate of
interest and liquidated damages were claimed. Punjab
National Bank had second charge over the fixed assets of
the company for working capital of Rs.134 lacs by
deposit of title deeds created by the company in favour of
Punjab National Bank on 21st November 1989 at IFCI
office. The second charge in favour of Punjab National
Bank was subject to first charge of IFCI, IDBI and ICICI.
It is admitted to the applicant that Punjab National Bank
might have first charge on the current assets of the
company but that claim of Punjab National Bank as
second charge holder of Rs.1,32,22,539/- has to be
excluded and that the Punjab National Bank may get its
share out of the sale proceeds of current assets. Since the
applicants  IFCI and IDBI have joined the winding up
proceedings and have submitted proof of their debts
before the Official Liquidator, as held above, they shall
be taken to have given up their securities and thus they
can not claim any priority over the assets of Punjab
National Bank on the fixed assets.”
An intra-court appeal known as Special Appeal thereagainst was filed
by the appellant before the Division Bench of the High Court. Having
regard to the provisions contained in Section 47 of the Provincial Insolvency
Act, 1920, it was held that the appellant having opted to remain outside the
liquidation proceedings by expressing its desire to continue with its suit, in
respect of the second claim of beneficial right, Section 48 of the Transfer of
Property Act will have no application in the instant case. It was further
opined that in view of the terminology used in Section 529-A of the
Companies Act, the right of Secured Creditors being a contingent right, the
appellant shall rank with unsecured creditors and has to take his dividend as
provided under Section 529(2) of the Act.

The High Court relying upon Allahabad Bank (supra) further held:

“The second class of secured creditors are those
who come under section 529(1)(b) read with proviso (c).
These are those who opt to stand outside the winding up
to realize their security. Section 19(19) of the RDB Act,
1993 permits distribution to secured creditors only in
accordance with Section 529-A of the Companies Act,
1956 which includes the creditors who stand outside the
winding up. These secured creditors in certain
circumstances can come before the Company Court and
claim priority over all other creditors to realize the
amounts out of other moneys lying in the Company
Court. This limited priority is declared in Section 529-A
(1). It is however restricted only to the extent specified
in clause (b) of Section 529-A(1). The Canara Bank had
laid claims against realizations by other creditors. The
Supreme Court found that it has not exercised its option
to remain outside the winding up proceedings and thus it
was held that the question of such claim can be raised
only if the Canara Bank had stood outside the winding up
and had realized the amount and if it shows that out of
the amounts privately realized by it, some portion has
been rateably taken away by the liquidator under sub-
clause (a) and (b) of the proviso to Section 529(1). It is
only then that it can claim that it should be reimbursed at
the same level as a secured creditor with priority over the
realizations of other creditors lying the Tribunal.”

On the aforementioned findings, the said special appeal was
dismissed.

Mr. Rajiv Shakdher, learned Senior Counsel appearing on behalf of
the appellant would submit that:

(i) The High Court misread and misinterpreted the judgment of
this Court in Allahabad Bank (supra), as therein this Court was primarily
concerned with interpretation of Section 446 of the Companies Act vis-`-vis
the provisions of the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 (‘RDB Act’, for short), i.e., as to whether for
instituting or continuing proceedings under RDB Act interference of the
Company Court was required under Section 446 thereof, as would appear
from the subsequent decision of this Court in Rajasthan State Financial
Corporation vs. Official Liquidator reported in (2005) 8 SCC 190. It
even failed to consider the observations made in paragraph 37 of judgment
in Allahabad Bank (supra).

(ii) The High Court failed to appreciate the true and correct scope
and purport of Section 47 of the Provincial Insolvency Act, 1920 which
comes into play by reason of the provisions of Chapter V of the Companies
Act, 1956.

(iii) The High Court committed a serious error in relying upon Sub-
section (2) of Section 47 of the Provincial Insolvency Act and ignoring the
other provisions thereof.

(iv) The first charge holders and second charge holders could not
have been equated having regard to the fact situation obtaining herein:

(v) PNB, also having filed a claim before the Official Liquidator, it
should not have been given any preferential treatment;

(vi) Right of the Secured Creditor, in terms of Section 48 of the
Transfer of Property Act which is a specific provision dealing with the
priority against mortgage and there being no such specific provision in the
Companies Act dealing with a similar matter, does not get obliterated only
because the appellant responded to the public notice;

(vii) Section 48 of the transfer of Property Act would override the
provisions of Section 529 of the Companies Act.

Mr. M.T. George, learned counsel appearing on behalf of Punjab
National Bank, on the other hand, would submit:

(a) Having regard to the fact that Section 529-A of the Companies
Act provides for a non-obstante clause and no distinction having been made
therein as regard the priority over the claim amongst the secured creditors
inter se, the Appellant cannot have a priority over the claim of the Second
Respondent.

(b) Proviso appended to sub-section (1) of Section 529 of the
Companies Act and Section 529-A having been enacted by the Parliament
subsequent to the enactment of the Transfer of Property Act, Section 48
thereof must be held to be subservient thereto.

(c) The claim of the Appellant shall rank pari passu only with all
other secured creditors and, thus, it cannot claim a preferential right over
other secured creditors.

(d) Section 47 of the Provincial Insolvency Act shall apply to the
instant case in terms whereof the Appellant had three options:

(i) He can realize his security and if there is something left due to
him, then come and prove its claim for the balance; or

(ii) He has to give up his security and to come into liquidation
ranking with other creditors and take share in the distribution of the
dividends; or

(iii) To value his security and to come into liquidation and prove for
any dues that according to him remain outstanding in respect of his debt on
the valuation of his security.

Having regard to the fact that the Appellant had not exercised his
option in regard to the same, its claim was extinguished.

The learned counsel appearing on behalf of the Official Liquidator
submitted that having regard to the provisions of sub-section (2) of Section
47 of the Provincial Insolvency Act, the Appellant would be deemed to have
relinquished its rights.
The questions therefor which arise for our consideration are:

(a) Whether significance is lost in respect of inter se
right of priority between two sets of secured
creditors in view of Section 529-A of the
Companies Act?

(b) Whether Section 48 of the Transfer of Property
Act stands over-ridden by Section 529-A of the
Companies Act.

(c) Whether the Appellant can be said to have
relinquished his right to claim as a secured creditor
as it had not opted in terms of Section 47 of the
Provincial Insolvency Act.
Some legal propositions, which are not in controversy, may also be
noticed at this stage.

There are two categories of secured creditors, namely, (i) those who
are desirous of going before the Company Court and; (ii) those who stand
outside the winding up proceeding.

Corporate insolvency procedures serve a variety of functions which
include collective execution by unsecured creditors, facilitation of corporate
rescue and the enforcement of security which would include certain public
goals as for example, corporate morality. In an insolvency proceeding, the
fundamental questions, which go to the root of the procedure, are:

(i) which parties are involved;
(ii) which assets are to be included; and
(iii) how proceedings are to be funded.

Liquidation proceeding although is a collective enforcement
mechanism for the benefit of unsecured creditors, the question which
invariably arises is what would be the meaning of the asset of the company
in the Indian context. For the said purpose, the court has to be bear in mind
that the liquidation is also the occasion for the termination of the company’s
affairs. Assets of the company would include debentures holder assets, free
hold assets and sometimes floating assets.

Applying pari passu principles, creditors’ claim are to be treated alike,
a single point of time at which the assets are liable to be quantified must be
pinpointed, but then, subsequent events are also required to be considered.

For those who desire to go before the Company Court for dividend by
relinquishing their security, in accordance with the Insolvency Rules,
Section 529 of the Companies Act would be attracted.
The relevant portion of Section 47 of the Provincial Insolvency Act
reads as under:

“47. Secured creditors.-(1) where a secured creditor
realises his security, he may prove for the balance due to
him; after deducting the net amount realized.

(2) Where a secured creditor relinquishes his security for
the general benefit of the creditors, he may prove for his
whole debt.

(3) Where a secured creditor does not either realise or
relinquish his security, he shall, before being entitled to
have his debt entered in the Schedule, state in his proof
the particulars of his security and the value at which he
assesses it and shall be entitled to receive a dividend only
in respect of the balance due to him after deducting the
value so assessed.

(4) 

(5) 

(6) Where a secured creditor does not comply with the
provision of this section, he shall be excluded from all
shares in any dividend.”

The second class of the secured creditors are those who come under
Section 529-A (1)(b) of the Companies Act, i.e., those who opt to stand
outside the winding up to realize their security. They also can, in certain
circumstances, go before the Company Court.

In Allahabad Bank (supra), Jagannadha Rao, J., referring to the
Tiwari Committee Report, 1981 as regard framing of the Recovery of Debts
due to Banks and Financial Institutions Act, 1993 Act (for short “RDB
Act”), stated the law in the following terms:

“Even in regard to “priorities” among creditors, the said
Committee stated in Annexure I as follows:

“The Adjudication Officer will have such
power to distribute the sale proceeds to the
banks and financial institutions being
secured creditors, in accordance with inter
se agreement/arrangement between them
and to the other persons entitled thereto in
accordance with the priorities in the law.”
The above recommendations as to working out “priorities” have now
been brought into the Act with greater clarity under Section 19(19) as
substituted by Ordinance 1 of 2000, inter alia, whereof Priorities, so far as
the amounts realized under the RDB Act are concerned, are to be worked out
only by the Tribunal under the RDB Act. Section 19(19) of the RDB Act
reads as follows:

“19. (19) Where a certificate of recovery is issued against
a company registered under the Companies Act, 1956,
the Tribunal may order the sale proceeds of such
company to be distributed among its secured creditors in
accordance with the provisions of Section 529-A of the
Companies Act, 1956 and to pay the surplus, if any, to
the company.” (Emphasis supplied)

Section 19(19) is clearly inconsistent with Section
446 and other provisions of the Companies Act. Only
Section 529-A is attracted to the proceedings before the
Tribunal. Thus, on questions of adjudication, execution
and working out priorities, the special provisions made in
the RDB Act have to be applied.”

In that case, this Court was not called upon to decide the question as
to whether having regard to the provisions contained in Section 529-A of the
Companies Act those who stand outside the winding up proceedings will
have to proceed with the proceedings initiated by them. Therein, the court
was concerned with the interpretation of Section 446 of the Companies Act,
1956 vis-`-vis the provisions of the RDB Act, namely, as to whether for
instituting or continuing proceedings thereunder, permission of the Company
Court was required to be obtained. Having regard to the finding that the
RDB Act was a special statute enacted by the Parliament much after the
Companies Act came into force, it was opined that no permission was
required since the Debt Recovery Tribunal had exclusive jurisdiction with
respect to matters concerning recovery of dues by banks and financial
institutions.

This legal position was considered by a Bench of this Court in
Rajasthan State Financial Corpn. & Anr. v. Official Liquidator & Anr.
[(2005) 8 SCC 190] wherein one of us (Balasubramanyan, J.) was a
member. It was stated:

“In Allahabad Bank v. Canara Bank the
question of jurisdiction of the Debts Recovery
Tribunal under the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993, vis-`-
vis the Company Court arose for decision. This
Court held that even where a winding-up petition
is pending, or a winding-up order has been passed
against the debtor company, the adjudication of
liability and execution of the certificate in respect
of debts payable to banks and financial institutions,
are respectively within the exclusive jurisdiction of
the Debts Recovery Tribunal and the Recovery
Officer under that Act and in such a case, the
Company Court’s jurisdiction under Sections 442,
537 and 446 of the Companies Act stood ousted.
Hence, no leave of the Company Court was
necessary for initiating proceedings under the
Recovery of Debts Act. Even the priorities among
various creditors, could be decided only by the
Debts Recovery Tribunal in accordance with
Section 19(19) of the Recovery of Debts Act read
with Section 529-A of the Companies Act and in
no other manner. The Court took into account the
fact that the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993 was a legislation
subsequent in point of time to the introduction of
Section 529-A of the Companies Act by Act 35 of
1985 and it had overriding effect. But it noticed
that by virtue of Section 19(19) of the Recovery of
Debts Act, the priorities among various creditors
had to be decided by the Recovery Tribunal only
in terms of Section 529-A of the Companies Act
and Section 19(19) did not give priority to all
secured creditors. Hence, it was necessary to
identify the limited class of secured creditors who
have priority over all others in accordance with
Section 529-A of the Companies Act. The Court
also held that the occasion for a claim by a secured
creditor against the realisation by other creditors of
the debtor under Section 529-A read with proviso
(c) to Section 529(1) of the Companies Act could
arise before the Debts Recovery Tribunal only if
the creditor concerned had stood outside the
winding up and realised amounts and if it is shown
that out of the amounts privately realised by it,
some portion had been rateably taken away by the
Liquidator under clauses (a) and (b) of the proviso
to Section 529(1). The Court has not held that
Section 529-A of the Companies Act will have no
application in a case where a proceeding under the
Recovery of Debts Act has been set in motion by a
financial institution. The Court there was
essentially dealing with the jurisdiction of the
Debts Recovery Tribunal in the face of Sections
442, 537 and 466 of the Companies Act.”

Allahabad Bank (supra), therefore, is not an authority for the
proposition that in terms of Section 529-A of the Companies Act the
distinction between two classes of secured creditors does no longer survive.
The High Court, thus, in our considered opinion, was not correct in that
behalf.

In fact in Allahabad Bank (supra), it was categorically held that the
Adjudication Officer would have such powers to distribute the sale proceeds
to the banks and financial institutions, being secured creditors, in accordance
with inter se agreement/ arrangement between them and to the other persons
entitled thereto in accordance with the priority in law.

Section 529-A of the Companies Act no doubt contains a non-obstante
clause but in construing the provisions thereof, it is necessary to determine
the purport and object for which the same was enacted.

In terms of Section 529 of the Companies Act, as it stood prior to its
amendment, the dues of the workmen were not treated pari passu with the
secured creditors as a result whereof innumerable instances came to the
notice of the court that the workers may not get anything after discharging
the debts of the secured creditors. It is only with a view to bring the
workman’s dues pari passu with the secured creditors, Section 529-A was
enacted.

The non-obstante nature of a provision although may be of wide
amplitude, the interpretative process thereof must be kept confined to the
legislative policy. Only because the dues of the workmen and the debt due
to the secured creditors are treated pari passu with each other, the same by
itself, in our considered view, would not lead to the conclusion that the
concept of inter se priorities amongst the secured creditors had thereby been
intended to be given a total go-by.

A non-obstante clause must be given effect to, to the extent the
Parliament intended and not beyond the same.

Section 529-A of the Companies Act does not ex facie contain a
provision (on the aspect of priority) amongst the secured creditors and,
hence, it would not be proper to read thereinto things, which the Parliament
did not comprehend. The subject of mortgage, apart from having been dealt
with under the common law, is governed by the provisions of the Transfer of
Property Act. It is also governed by the terms of the contract.

The Punjab National Bank granted loan to the 1st Respondent herein
knowing fully well that, over the assets of the mortgagor, the Appellant held
the first charge. It in no uncertain terms stated that the charges created by
reason of the loan agreement entered into by and between itself and the 1st
Respondent was subservient to the charges of the appellant as also the
Respondent Nos. 3 and 4. The admission of the PNB in this behalf is
absolutely clear and explicit. Even in the suit filed by it for recovery of the
mortgage money as against the 1st Respondent, it not only in no uncertain
terms stated that the Appellant and Respondent Nos. 3 and 4 herein were the
first charge holders in respect of movable and immovable properties of the
1st Respondent, but its prayers in regard thereto were also limited, as would
appear from prayer (f) made in the suit.

While enacting a statute, the Parliament cannot be presumed to have
taken away a right in property. Right to property is a constitutional right.
Right to recover the money lent by enforcing a mortgage would also be a
right to enforce an interest in the property. The provisions of the Transfer of
Property Act provide for different types of charges. In terms of Section 48
of the Transfer of Property Act claim of the first charge holder shall prevail
over the claim of the second charge holder and in a given case where the
debts due to both, the first charge holder and the second charge holder, are to
be realized from the property belonging to the mortgagor, the first charge
holder will have to be repaid first. There is no dispute as regards the said
legal position.

Such a valuable right, having regard to the legal position as obtaining
in common law as also under the provisions of the Transfer of Property Act,
must be deemed to have been known to the Parliament. Thus, while
enacting the Companies Act, the Parliament cannot be held to have intended
to deprive the first charge holder of the said right. Such a valuable right,
therefore, must be held to have been kept preserved. [See Workmen of M/s
Firestone Tyre and Rubber Co. of India (P.) Ltd. vs. Management &
Ors. (1973) 1 SCC 813]

If the Parliament while amending the provisions of the Companies Act
intended to take away such a valuable right of the first charge holder, we see
no reason why it could not have stated so explicitly. Deprivation of legal
right existing in favour of a person cannot be presumed in construing the
statute. It is in fact the other way round and thus, a contrary presumption
shall have to be raised.

Section 529(1)(c) of the Companies Act speaks about the respective
rights of the secured creditors which would mean the respective rights of
secured creditors vis-`-vis unsecured creditors. It does not envisage
respective rights amongst the secured creditors. Merely because Section 529
does not specifically provide for the rights of priorities over the mortgaged
assets, that, in our opinion, would not mean that the provisions of Section 48
of the Transfer of Property Act in relation to a company, which has
undergone liquidation, shall stand obliterated.

If we were to accept that inter se priority of secured creditors gets
obliterated by merely responding to a public notice wherein it is specifically
stated that on his failure to do so, he will be excluded from the benefits of
the Dividends that may be distributed by the Official Liquidator, the same
would lead to deprivation of the secured creditor of his right over the
security and would bring him at par with an unsecured creditor. The logical
sequitor of such an inference would be that even unsecured creditors would
be placed at par with the secured creditors. This could not have been the
intendment of the legislation.

The provisions of the Companies Act may be a special statute but if
the special statute does not contain any specific provision dealing with the
contractual and other statutory rights between different kinds of the secured
creditors, the specific provisions contained in the general statute shall
prevail.

In Maru Ram vs. Union of India and Others [(1981) 1 SCC 107],
this Court distinguished between a specific provision and a special law
holding that a specific provision dealing with a particular situation would
override even a special law, which is inconsistent therewith.

Section 9 of the Companies Act only states that provisions thereof
would override the Memorandum or Articles of Association of the company
or any other agreement executed or resolution passed by the company.
There does not exist any provision in the Companies Act which provides
that the provisions of Section 48 of the Transfer of Property Act would not
be applicable in relation to the affairs of a company. Unless, expressly or by
necessary implication, such a provision contrary to or inconsistent therewith
carrying a different intent can be found in the Companies Act, Section 48 of
the Transfer of Property Act, cannot be held to be inapplicable.

Section 48 of the Transfer of Property Act reads as under:
“48. Priority of rights created by transfer  Where
person purports to create by transfer at different times
rights in or over the same immovable property, and such
rights cannot all exist or be exercised to their full extent
together, each later created right shall, in the absence of a
special contract or reservation binding the earlier
transferees, be subject to the rights previously created.”
The said provision, as noticed hereinbefore, deals with a specific
situation. The exceptions to the provisions of Section 48 are as under:

(i) where parties execute a Registered Deed at any point in time which is
subsequent to a prior but an unregistered deed. This is also subject to the
doctrine of notice, i.e., that parties to the Registered Deed executed after the
Unregistered Deed did not have notice of the same;

(ii) where there are exceptions carved out by a statute  for example,
Section 98 of the Bengal Tenancy Act.

(iii) a mortgage executed on the directions of the Court to preserve a
property;

(iv) where a ‘salvage lien’ is created, i.e., where lien is created for moneys
advanced for the purposes of saving the property from destruction or
forfeiture. The salvage lien is confined in English Law to maritime lien.

In Mulla’s Transfer of Property Act, 9th edition, page 346-347, it is
stated:

“Again, when a court for the purpose of preserving
the property in suit, directs the receiver to execute a
mortgage, it has jurisdiction to order that the mortgage
shall take precedence over prior charges. This is an
application of the equity which gives salvage liens, ie
liens for money advanced for the purpose of saving the
property from destruction of forfeiture, priority over all
their encumbrances. With regard to such liens the
general rule is reversed and they are entitled to priority in
inverse order to their dates. Salvage liens are confined in
English law to maritime liens. A salvage lien was
claimed in an old Calcutta case in respect of an advance
made for the purpose of carrying on an indigo factory,
and again in another case in respect of an advance made
to enable the mortgagor to pay the rent of the premises
mortgaged, but in both cases the claim was repelled.

The lien of a co-sharer for owelty money on
partition is entitled to precedence over prior mortgages of
property allotted to the co-sharer who is liable to pay
owelty.”

Section 47 of the Provincial Insolvency Act is attracted by virtue of
Section 529(1) of the Companies Act. Sub-section (2) of Section 47 would
become applicable where a secured creditor voluntarily relinquishes his
security for the general benefit of the creditors.

The expression “relinquish” has a different connotation. In P.
Ramanatha Aiyar’s Advanced Law Lexicon at page 4047, it is stated:

“Relinquish: To give over possession or control of; to
leave off.”
It envisages a conscious act, i.e., an act where a person was aware of
his right and then relinquishes the same. The same must be for the general
benefit of the creditors. His action must lead to a conclusion that he, for one
reason or the other, intended to stand in the queue for receiving money owed
to him. It, however, does not stand obliterated only by the filing of an
affidavit or proof of claim with the official liquidator. Such a claim had
been filed pursuant to a notice issued by the official liquidator. If the
creditor does not respond to the said notice, he would not be in a position to
bring to the notice of the official liquidator, the existence of his right.

Sub-section (3) of Section 47 clearly envisages the position where he
does not either realise or relinquish his security. He, in such a situation, may
state in his Affidavit of Proof, the particulars of the security and value at
which he assesses the same. The consequences therefor would ensue. If the
Official Receiver proceeds to sell the security, the Court first has to pay the
amount at which the security was valued to the secured creditor out of the
sale proceeds.

In Mahindra and Mahindra Ltd. v. Union of India & Anr. [(1979)
2 SCC 529], it was stated:

“That has to be determined on an interpretation of
Section 13(2) in the light of the context or setting in
which it occurs and having regard to the object and
purpose of its enactment. Now, one thing is clear that the
power conferred under Section 13(2) is a corrective or
rectificatory power and it is conferred in terms of widest
amplitude. It is left to the discretion of the
Commission whether the power should be exercised in a
given case and if so, to what extent. But it must be
remembered that this discretion being a judicial or in any
event a quasi judicial discretion, cannot be “arbitrary,
vague or fanciful” : it must be guided by relevant
considerations. It is not possible to enumerate
exhaustively the various relevant considerations which
may legitimately weigh with the Commission in
exercising its discretion, nor would it be prudent or wise
to do so, since the teeming multiplicity of circumstances
and situations which may arise from time to time in this
kaleidoscopic world cannot be cast in any definite or
rigid mould or be imprisoned in any strait-jacket
formula”
The question came up for consideration before a learned Single Judge
of Karnataka High Court in State Bank of Mysore v. Official Liquidator
& Ors. [1985 (58) Company Cases 609], wherein the law was stated in the
following terms:

“It will be thus plain that what section 47 provides
is only for the benefit of the mortgagee and not to his
detriment. He can follow any one of the three procedures
suggested in the section. In this case, I do not think it can
be validly argued that the mortgagee has relinquished his
security. Exhibit B-1 makes it clear that he had no
objection if the property is sold free of mortgage but a
lien is kept in so far as the value he had assessed is
concerned and is preferentially paid out of the sale
proceeds. There are no words in Exhibit B-1 which
warrant any conclusion that the mortgagee had
relinquished his security

In fact, sub-section (3) of section 47 lends support
to this method of payment to the mortgagee. If the
official receiver proceeds to sell the security, the court
first has to pay the amount at which the security was
valued to the secured creditor out of the sale proceeds.
Whatever may be the position in regard to the balance, in
so far as the value of his assessment is concerned, he can
be preferentially paid out of the sale proceeds.

If the sale was valid, I fail to see how the
mortgagee could be deprived of his security, particularly
when he had not relinquished. The property was sold
with a clear understanding that the mortgagee will be
paid firm from the sale proceeds. This mode of
realization of security is not, in my view, derogatory
either to section 47 or to section 59 of the Act.”
It was further held:

“Sub-s. (3) of s. 47 of the Act does not come in
the way of the official liquidator entertaining the
application of the bank for payment of secured loans in
accordance with the hypothecation agreement and the
mortgage by deposit of title deeds, as proved by the bank.
In the result, the bank is entitled to realize that amount on
a preferential basis as a secured creditor notwithstanding
the fact that it filed the affidavit indicating that it stands
within liquidation but subject to the reservation of its
security being continued.”
A Division bench of the Gujarat High Court in Gujarat Steel Tube
Employees Union & Anr. v. O.L. of Gujarat Steel Tubes Ltd. & Ors.
[disposed of on 9.1.2006], held:

“ The Court is also of the view that simply because the
secured creditors participate in the sale proceedings
undertaken by the Court and they also became the
members of the Sale Committee constituted pursuant to
the directions issued by the Court does not mean that
they have exercised their option of remaining outside the
winding up and they have relinquished their security. As
a matter of fact, relinquishment of security by the secured
creditors require a positive action on the part of the
secured creditors. They have never stated in any of the
proceedings that they are relinquishing their securities.
On the contrary, they have made it clear that they remain
outside the winding up and they participate in the sale
proceeds only with a view to facilitate the sale proceeds
so as to get the auction proceedings completed as
expeditiously as possible. There is also substance in the
say of the secured creditors that as soon as the assets of
the companies are sold and realization is taken place,
their securities are converted from the specified assets
into cash and they have equal right in cash which is
realized on sale of the assets of the Company in
liquidation”

We agree with the said view.

For the aforesaid reasons, we are of the view that the High Court has
overlooked salient aspects of the provisions of the relevant Acts including
that of the Provincial Insolvency Act. Hence, the impugned judgment
cannot be sustained. It is set aside accordingly. The appeal is allowed. The
1st Respondent shall bear the costs of the Appellant throughout.

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