Companies Act Case Law Industrial Credit And Investment Corporation Of India Ltd Vs M/S. Srinivas Agencies & Ors.

PETITIONER:
INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LTD.

Vs.

RESPONDENT:
M/S. SRINIVAS AGENCIES & ORS.

DATE OF JUDGMENT: 22/02/1996

BENCH:
HANSARIA B.L. (J)
BENCH:
HANSARIA B.L. (J)
AHMADI A.M. (CJ)

CITATION:
1996 SCC (4) 165 JT 1996 (5) 405
1996 SCALE (2)774
ACT:

 

HEADNOTE:

 

JUDGMENT:
[With T.C. (C) Nos. 44-46/91 & 1/92, C.A.Nos. 3820-22, 4253
& 4256 of 1996
(arising out of SLP(C) Nos. 13235/91, 14446/91, 15026/91,
10101/91, and 11055/95)]
J U D G M E N T
HANSARIA, J.
The extent of right cf secured creditors to realize
their debts from the assets of a company which is under
winding-up or has been wound up, by approaching fora other
than the company court, is required to be spelt out in these
appeals. We have also been called upon to decide as to then
a pending suit or proceeding relating to realization of the
debts by such a creditor should be transferred to itself by
a company court seized with the winding-up proceeding.
2. The foundational premise of the aforesaid points is that
position by now that a secured creditor stands outside the
winding-up proceeding and under the law he can proceed to
realize his security without the leave of the winding-up
court, if by the time he initiated the action the company
has not beer wound up. This view has been holding field ever
since a three-Judge bench decision of this Court in M.K.
Ranganathan vs. Government of Madras, 1955 (2) SCR 374. As
this legal position has not been assailed by any of the
parties, we need not advert to the reasons which led this
Court in Ranganathan’s case to hold as above. Despite this
being the legal position, there were some provisions in the
Indian Companies Act, 1913, which enactment preceded the
present Companies Act, 1956 (hereinafter the ‘Act’) in which
also a parallel provisions find place, which put some
restrictions on the aforesaid power.
3 It would be profitable to note these provisions of the
Act at the threshold itself. These are sections 446, 529(1)
and(2), 529A and 537, reading as below :
“446 (1) When a winding up order
has been made or the Official
Liquidator has been appointed as
provisional liquidator, no suit or
other legal proceeding shall be
commenced. or if pending at the
date of the winding up order, shall
be proceeded with, against the
company, except by leave of the
Court and subject to such terms as
the Court may impose.
(2) The Court which is winding up
the company shall, notwithstanding
anything contained in any other law
for the time being in force, have
jurisdiction to entertain, or
dispose of-
(a) any suit or proceeding by
or against the company;
(b) any claim made by or
against the company
(including claims) by or
against any of its
branches in India);
(c) any application made
under section 391 by or
in respect of the
company;
(d) any question of
priorities or any other
question whatsoever,
whether of law or fact,
which may relate to or
arise in course of the
winding up of the
company;
whether such suit or proceeding has
been instituted, or is instituted,
or such claim or question has
arisen or arises or such
application has been made or is
made before or after the order for
the winding up of the company, or
before or after the commencement of
the Companies (Amendment) Act,
1960.
(3) Any suit or proceeding by or
against the company which is
pending in any Court other than
that in which the winding up of the
company is proceeding may,
notwithstanding anything contained
in any other law for the time being
in force, be transferred to and
disposed of by that Court.
(4) Nothing in sub-section (1) or
sub section (3) shall apply to any
proceeding pending in appeal before
the Supreme Court or a High Court.
529. (1) In the winding up of an
insolvent company, the same rules
shall prevail and be observed with
regard to-
(a) debts provable ;
(b) the valuation of
annuities and future and
contingent liabilities;
and
(c) the respective rights of
secured and unsecured and
unsecured creditors:
as are in force for the time being
under the law of insolvency with
respect to the estates of persons
adjudged insolvent:
Provided that the security of
every secured creditor shall be
deemed to be subject to a pari
passu charge in favour of the
workmen to the extent of the
workmen’s portion therein, and.
where a secured creditor, instead
of relinquishing his security and
proving his debt, opts to realize
his security,-
(a) the liquidator shall be
entitled to represent the
workmen and enforce such
charge;
(b) any amount realized by the
liquidator by way of
enforcement of such
charge shall by applied
ratably for the discharge
of workmen’s dues; and
(c) so much of the debt due
to such secured creditor
as could not be realized
by him by virtue of the
foregoing provisions of
this proviso or the
amount of the workmen’s
portion in his security,
whichever is less. shall
rank pari passu with the
workmen’s dues for the
purposes of section 529A.
(2) All persons who in any such
case would be entitled to prove for
and receive dividends out of the
assets of the company, may come in
under the winding up, and make such
claims against the company as they
respectively are entitled to make
by virtue of this section:
Provided that it a secured creditor
instead of relinquishing his
security and proving for his debt
proceeds to realize his security,
he shall be liable to pay (his
portion of the expenses incurred by
the liquidator (including a
provisional liquidator, if any) for
the preservation of the security
before its realization by the
secured creditor).
Explanation : For the purposes of
this proviso, the portion of
expenses incurred by the liquidator
for the preservation of a security
which the secured creditor shall be
liable to pay shall be the whole of
the expensed less an amount which
bears to such expenses the same
portion as the workmen’s portion in
relation to the security bears to
the value of the security.
(3) * * * * * * * * *
529A. (1) Notwithstanding
anything contained in any other
provision of this Act or any other
law for the time being in force, in
the winding up of a company-
(a) workmen’s dues; and
(b) debts due to secured
creditors to the extent
such debts rank under
clause (c) of the proviso
to sub-section (1) of
section 529 pari passu
with dues,
shall be paid in priority to all
other debts.
(2) The debts payable under clause
(a) and clause (b) of sub-section
(1) shall be paid in full, unless
the assets are insufficient to meet
them, in which case they shall
abate in equal proportions.
537. (1) Where any company is
being wound up by or supervision of
the Court-
(a) any attachment, distress
or execution put in
force, without leave of
the Court, against the
estate or effects of the
company, after the
commencement of the
winding up; or
(b) any sale held without
leave of the Court, of
any of the properties or
effects of the company
after such commencement;
shall be void.
(2) Nothing in this section
applies to any proceedings for the
recovery of any tax or impost or
any dues payable to the
Government.”
4. A combined reading of the aforesaid provisions leads to
the following results :
(i) A winding-up court has jurisdiction, inter alia, to
entertain or dispose of any suit or proceeding by or against
the company, even if such suit or proceeding had been
instituted before an order for winding-up had been made.
This apart, the winding-up court has jurisdiction to
transfer such a suit or proceeding to itself and dispose of
the same. These follow from sub-sections (2) and (3) of
section 446.
(ii) When a winding-up order has been made or the official
liquidator has been appointed as provisional liquidator, no
suit or other legal proceeding, even if pending at the date
of the winding-up order, can proceed against the company,
except by Leave of the Company Court vide sub-section (1) of
section 446.
(iii) Any sale held without the Leave of the winding-up
court pursuant to order of a civil court on it being
approached by a secured creditor to realise its debt will
not ipso facto be void, in view of the holding in
Ranganathan’s case that section 537, dealing with voidness
of sale, operates when the sale is pursuant to attachment of
company court. This, however, would be the position where a
company has not been wound up, but is in the process of
being wound up.
5. None of the parties has assailed the aforesaid
propositions of law as well. The real bone of contention is
as to when (i) leave of the winding-up court should be
granted to a secured creditor to proceed with the suit after
an order of winding-up has been made; and (ii) when should a
winding-up court transfer to itself any suit or proceeding
by or against the company during the pendency of the
winding-up proceeding.
6. The aforesaid questions arise because a secured
creditor who has initiated a suit or proceeding in a civil
court is interested in realization of his debt only, whereas
the company court looks after the interest of all the
creditors; so too. the workmen’s dues, which rank pari passu
with debts due to secured creditors. This is brought home
not only by section 529A, which was inserted by the Company
(Amendment) Act, 1985, but also by the proviso to section
(1) of section 529 inserted by the same Amendment Act. The
winding-up court does these acts through a liquidator, who
has been given wide powers by section 457 of the Act. As
against this, a receiver appointed by a civil court on being
approached by secured creditor would basically look after
the interest of that creditor, whose interest may in many
cases he in conflict with that of liquidator, as was
acknowledged in In re Karamelli & Barnett, Limited. 1917 (1)
CH 203 We feel no difficulty in stating that in case of such
conflict, the interest of liquidator has to receive
precedence over that of the receiver inasmuch as the former
looks after the interest of a large segment of creditors
alongwith that of workmen, whereas the latter confined his
concern to the interest of the secured creditor on whose
approach the receiver had bean appointed. This view cannot
also be, and has indeed not been, contested by the learned
counsel appearing for the appellants.
7. The real controversy is as to when a winding-up court
should get transferred to itself a pending proceeding
initiated by secured creditor: and when a winding-up court
should grant leave to the secured creditor to pursue his
remedy in the civil court, despite winding-up order having
been passed. Shri Salve brought to our notice. on the first
aspect of the controversy, a decision of two-Judge bench
decision of this Court in Central Bank of India vs. M/s.
Elmot Engineering Company, 1994 (4) SCC 159. It was held
therein that the aim of section 446 is to safeguard the
assets of the company against wasteful or expensive
litigation as for as matters which could be expeditiously
and cheaply decided by the company court. It was also
observed that while granting leave under this section the
court always takes into consideration whether the company is
likely to be exposed to unnecessary litigation and cost.
8. In this context. lt would be apposite and useful to
note what was started by a three-Judge bench in Sudarsan
Chits (I) Ltd. vs. O.Sukumaran Pillai, 1984 (4) SCC which
has traced the historical evolution as well as the present
setting of Section 446(2). A need for such a provision was
felt because section 171 of the predecessor Act had only
provided for stay of suits and proceeding pending at the
commencement of winding-up proceeding, alongwith the embargo
against the commencement of any suit or other legal
proceeding, against the company except by the leave of the
court. That provision, with little modification, was re-
enacted in sub-section (1) of section 446. There was thus no
specific provision conferring jurisdiction to the court
winding-up the company analogous to the one conferred by
sub-Section (2), which was introduced to enlarge the
jurisdiction of the winding-up court so as to facilitate the
disposal of winding-up proceeding. This sub-section, as
originally enacted, did not meet with the requirement fully,
with the result that the Committee appointed for examining
comprehensive amendment to the Companies Act recommended
that “a suit by or against a company in winding-up should
notwithstanding any provision in law for the time being be
instituted in the court in which the winding-up proceedings
are pending”. The Committee made this recommendation having
noticed that on winding-up order being made and the official
liquidator being appointed, he has to take into his custody
company property as required by section 456. Then, secting
457 confers power on the liquidator to sell the properties
of the company and to realise the assets, The Committee felt
that at the stage when winding-up order is made, the company
may as well have subsisting claims and to realise these
claims the liquidator will have to file suits. To avoid this
eventuality and to keep all incidental proceeding in
winding-up before the court, its jurisdiction was required
to be enlarged to entertain petition, amongst others, for
recovering the claims of the company. To give effect to this
recommendation, sub-section (2) was suitably amended to
bring it to its present form by the Companies (Amendment)
Act. 1960. The amendment obviated the need filing of suits
by the liquidator (which are prolix and expensive) to
realise and recover the claims and subsisting debts owed to
the company; and instead, provided a cheap and summary
remedy by conferring the required jurisdiction on the
company court.
9. Shri Salve’s entire submission had been that a working
principle may be got evolved which would, on the one hand.
protect the substantive right of a secured creditor,
specially in view of large sums of money being advanced of
late of such creditors and, on the other hand, not
jeopardize the interest of other secured creditors,
according to the learned counsel, these twin objects can be
achieved if the company court were to grant leave wherever
required as a rule, subject to reasonable conditions. This
would preserve the integrity of the substantive right of the
secured creditor. The terms to be imposed which should
facilitate, rather than obstruct, the realization of
security. Further, wherever a receiver has been appointed
prior to the commencement of the winding-up proceedings, he
should be permitted to continue in general run of case as to
the suits to be filed after the winding-up proceeding has
commenced, the learned counsel urged that such a permission
should normally granted by the winding-up court. On this
being done, when the question of appointment of receiver
would arise, the civil court would on so if a case for same
were to be made out after hearing the liquidator, who would
be a defendant in the suit. As regards transfer of the
pending suit by the company court, the submission was that
convenience may not be the guiding factor; the preservation
of integrity of the substantive right of the creditor should
be the main consideration.
(10) To buttress his submissions, Shri Salve has
referred us to the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993, which was recently enacted
because of the considerable difficulty being experienced by
financial institutions in recovering loans and enforcement
securities charged with them. Earlier, recovery procedure
used to black a significant portion of their funds in
unproductive assets, the value of which deteriorates with
the passage of time. An urgent need was, therefore for
successful implementation of the financial through which
dues to these institutions could be realized without dely.
To achieve this purpose, the aforesaid Act visualizes
establishment of the Debts Recovery Tribunal(s) by the
Central Government, with its own procedure which is speedy
in nature. Section 18 of this Act has barred jurisdiction of
other courts, except the writ power of the higher courts, in
relation to the matters specified in section 17 – the same
being recovery of debts due to such institutions.
11. Shri Subba Rao who appeared for official liquidator in
many cases, however, urged that it is the liquidator who can
look after the interests of all the secured creditors. and
so, his actions should be allowed to prevail over that of
the receiver. He submitted that section 529 of the Act
contains many provisions to duly protect the interest of
secured creditors. Shri Grover, appearing for some of the
respondents, brought to our notice that part of subsection
(1) of section 446 which mentions about the grant of leave
on “such terms as the Court may impose”, which provision.
according to learned counsel, means that the terms have to
be reasonable. The underlying idea of this contention is
that there cannot he any uniform working principle, and the
question whether leave should be granted, if so, on what
terms and whether transfer should at all be ordered would
depend on the facts and circumstances of each case.
12. We have duly applied our mind to the rival contentions.
It is no doubt correct that the interest of the secured
creditor, who has taken recourse to an independent
proceeding to realise his debt has to be protected; but it
is apparent this cannot be done at the cost of other secured
creditors. To preserve the integrity of one secured
creditor, another secured creditor cannot be discredited –
his integrity has to be of equal concern. It may, however,
be that in a particular case the secured creditor who has
approached the civil court happens to be one who has lent
huge amount, or be one who is the main secured creditor. In
such a situation. on approach being made by such creditor,
we have no doubt that company court would duly take note of
this fact and should like to grant leave required by sub-
section (1) of section 446; and by the same token refuse to
transfer the proceeding to his court. This is not to say
that in all cases where the proceeds have been initiated by
the main secured creditor, the company court would grant
leave. such would depend on the circumstances of each case.
But, if the position be that the secured creditor who had
approached the civil court is one amongst many similar
creditors, lt may be that the company court feels that to
take care of the interest of other secured creditors. either
the relief of leave does not deserve to be granted or that
the proceeding is required to be transferred to it for
disposal. It may be pointed out that sections 529 and 529A
of the Act do contain provisions in so far as the priority
of secured creditor’s claim is concerned. Of course, the
company court would not transfer the proceeding to it merely
because of its convenience ignoring the difficulties which
may have to be faced by the secured creditor, who may be at
a place far away from the seat of the company court. The
need to protect the company from unnecessary litigation and
cost have, however, to be borne in mind by the company
court.
13. We are. therefore, of the view that the approach to be
adopted in this regard by the company court does not deserve
to be put in a straight jacket formula. The discretion to be
exercised in this regard has to depend on the facts and
circumstances of each case. While exercising this power we
have no doubt that the company court would also bear in mind
the rationale behind the enactment of Recovery of Debts Due
to the Banks and Financial Institutions Act, 1993, to which
reference has made above. We make the same observation
regarding the terms which a company court should like to
impose while granting leave. It need not be stated that the
terms to be imposed have to be reasonable, which would, of
course, vary from case to case According to us, such an
approach, would maintain the integrity of that secured
creditor who had approached the civil court or desires to do
so. and would take care of the interest of other secured
creditors as well which the company court is duty bound to
do. The company court shall also apprise itself about the
fact whether dues of workmen are outstanding; if so, extent
of the same It would be seen whether after the assets of the
company are allowed to be used to satisfy the debt of the
secured creditor, it would be possible to satisfy the
workmen’s dues pari passu.
14. The appeals and transfer cases stand disposed of with
these observations, leaving the company court to pass
appropriate orders in the concerned matters in the light of
what has been stated by us. No order as to cost.

 

 

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