Companies Act Case Law International Coach Builders Ltd Vs Karnataka State Financial Corpn.

Companies Act Case Law

International Coach Builders Ltd Vs Karnataka State Financial Corpn.

 

CASE NO.:
Appeal (civil) 4702 of 1994

PETITIONER:
INTERNATIONAL COACH BUILDERS LTD.

RESPONDENT:
KARNATAKA STATE FINANCIAL CORPN.

DATE OF JUDGMENT: 05/03/2003

BENCH:
RUMA PAL & B.N.SRIKRISHNA

JUDGMENT:
JUDGMENT

2003 (2) SCR 631

The Judgment of the Court was delivered by

SRIKRISHNA, J. These appeals arising under different factual background
raise the same question of law and can, therefore, conveniently be disposed
of by a common judgment.

Facts

Civil Appeal Nos. 4702 and 4703 of 1994

On 23rd May, 1988 a winding up petition was filed under Section 433 of the
Companies Act, 1956 seeking to wind up the company known as International
Coach Builders Ltd. Another petition by another creditor was also filed on
2.11.88. On 10.11.89, during the pendency of the above petitions before the
High Court of Karnataka, the respondent, a Corporation established under
the State Financial Corporation Act. 1951 (SFC Act), which was the second
charge holder on the assets of the said company, took possession of the
mortgaged assets of the said company in purported exercise of its power
under Section 29 of the SFC Act. On 30.11.1990 the High Court of Karnataka
in Company Petition No. 131 of 1988 made an order of winding up of
International Coach Builders Ltd. and appointed the Official Liquidator as
the Liquidator to take charge of the assets of the said company. On
30.11.90 the respondent-Corporation accepted a bid of Rs. 85 lakhs made by
Raheja Development Corporation for sale of the mortgaged assets of the said
company, although, to its knowledge, the assets charged were totally valued
at an estimated value of Rs.97 lakhs. Neither the Official Liquidator, nor
the Company Court, was in any way involved with the negotiations held by
the respondent-Corporation with the prospective purchaser. On 4.3.1991 the
respondent filed an application under Section 446 (2) (b) read with Section
537 of the Companies Act, 1956 before the High Court of Karnataka praying
for leave to stand outside the winding up proceedings and realize its
securities by selling the assets mortgaged to it. As per the resolution
passed in its Board meeting held on 30.11.1990, it was resolved to accept
the bid of M/s Raheja Development Corporation. On 8.10.1991 the Company
Court allowed the application of the respondent-Corporation for standing
outside the liquidation proceeding to work out its remedies under Section
29 of the SFC Act subject to an undertaking to discharge the workmen’s
dues. The Official Liquidator appealed against the order of the Company
Judge praying that the sale of the assets of the company under liquidation
should only be done by the Official Liquidator under the supervision of the
Company Court. The appeal of the Official liquidator (OSA No. 26/91) was
dismissed by a Division Bench of the High Court of Karnataka. An
application for review, Review, Application No. 118/93, was also dismissed
by the High Court of Karnataka. The Official Liquidator filed two Special
Leave Petitions before this Court challenging the order of the Division
Bench dated 23rd January, 1992 dismissing the appeal OSA No.26/91, and the
order dated 17th June, 1993 dismissing the Review Application No. 118/93.
These are respectively Civil Appeal Nos. 4702 & 4703 of 1994.

When the Special Leave Petitions came up for admission this Court made the
following order.

“Special Leave Petition granted.

Meanwhile, it appears appropriate that the Respondent KSFC should sell the
properties acting jointly with the Official Liquidator under the
supervision and in accordance with the direction of the Learned Company
Judge of the High Court and sale proceeds be deposited in the Court and
then distributed in accordance with the direction of the Learned Company
Judge.”

Civil Appeal No. 12928 of 1996

As a seque to the above order, M/s Raheja Development Corporation moved an
application before the Company Judge, High Court of Karnataka, for a
direction to the Official Liquidator to concur in the sale effected by
Karnataka State Finance Corporation (KSFC) in its favour. The Company Judge
disposed of the application holding that, in view of the order passed by
this Court, the application did not survive. M/s Raheja Development
Corporation made an unsuccessful attempt to intervene in Civil Appeal
No.4702/94 by seeking relief therein, but its applications I.A. Nos. 4,5,6
& 7 were dismissed. M/s Raheja Development Corporation appealed against the
order of the Company Judge raising similar contentions as urged by the
KSFC. The Division Bench dismissed the appeal by taking the same view as
the Company Judge. The appellant is before this Court.

Civil Appeal No. 6491 of 1995

A company known as M/s. Prasad Bakers Pvt. Ltd. borrowed money from the
appellant-a State Financial Corporation established in Uttar Pradesh. The
repayment of the borrowed money was secured by mortgage of the factory
premises and hypothecation of plant and machineries of the said M/s. Prasad
Bakers Pvt. Ltd. (the second respondent in the appeal). The second
respondent defaulted in repayment of the loan and the appellant called in
the money by a notice dated 30th June 1997. On 18.9.1987 the appellant, in
purporting to exercise its power under Section 29 of SFC Act, took
possession of the mortgaged assets. In the meanwhile, the first respondent,
a creditor of the second respondent, had filed a petition under Section 433
(e) of the Companies Act on which the High Court of Allahabad made an order
dated 1.2.1994 for winding up of the second respondent company. The
appellant-Corporation appeared before the Company Judge and contended that
it was a secured creditor having first charge over the mortgaged property
and, despite commencement of the winding up proceeding, entitled to
exercise its powers under Section 29 of the SFC Act to put to sale the
mortgaged assets without leave of the Company Court. The learned Company
Judge rejected the submission made on behalf of the appellant-Corporation
and directed winding up of the company. An appeal carried to the Division
Bench was summarily dismissed. Hence, the appeal by the Corporation.

Civil Appeal No. 2007 of 1997

The respondent company obtained large amounts of loans/advances from the
appellant Karnataka State Finance Corporation (KSFC). The loans were
secured by mortgages and charges on the assets of the respondent company.
The company having defaulted in repayment of the loans according to the
schedule, the KSFC issued a notice and took over the mortgaged and charged
assets under Section 29 of the SFC Act. In the meanwhile, at the instance
of a creditor of the respondent company the company was ordered to be wound
up. The KSFC made an application to the Company Judge under Section 537 of
the Companies Act, 1956 for permission to stand outside the winding up
proceedings and realize its security. The learned Company Judge dismissed
the petition of the respondent. An appeal to the Division Bench also
failed. The KSFC is in appeal and raises the same contentions with regard
to its rights under Section 29 of the SFC Act.

Civil Appeal No. 6303 of 1995

A company known as Himalaya Tools (India) Pvt. Ltd. had borrowed money from
the Gujarat State Financial Corporation. The said company was ordered to be
wound up on 25.1.1988 by the Company Court. On 9.5.1988, in purported
exercise of rights under Section 29 of the SFC Act, the Gujarat State
Financial Corporation (GSFC) took possession of the charged assets of the
said company. The Official Liquidator of the said company took out a
judge’s summons seeking a direction to GSFC forthwith to hand over’
possession of the asset of the company in liquidation. In the meanwhile the
GSFC took steps to transfer of the properties of the company liquidation,
again purportedly under Section 29 of the SFC Act. On 20.12.1989 the GSFC
handed over possession of the premises of the company in liquidation to M/s
Mahuvawala Trading Company for a consideration of Rs. 8,99,726.52. At no
point of time was permission of the Company Court taken, nor was the sale
approved by the Company Court. The Company Court on being moved did not
find the sale to be wanting in bona fides and declined to set aside the
sale, but directed GSFC to deposit the consideration received in court
taking the view that the powers under Section 29 could not be unilaterally
exercised without concurrence of the Company Court. GSFC carried the matter
in appeal to the Division Bench which allowed the appeal holding that GSFC
as a secured creditor could opt to realise the securities by standing
outside the winding up proceeding and neither the liquidator, nor the
Company Court, could interfere with the rights of GSFC as a secured
creditor once it opted to remain outside the winding up proceedings. The
Official Liquidator is in appeal.

The common question agitated in all these appeals is: whether the rights of
the State Financial Corporation under Section 29 of SFC Act to sell and
realise the security could be exercised without reference to the Company
Court when a winding up order is made against the company.

Conflicting views have been taken by different High Courts on this issue.
Hence, the need for this Court to settle the law.

Relevant Statutory Provisions

Before we address ourselves to the question of law argued, it is necessary
to refer to some of the relevant statutory provisions. The State Financial
Corporation Act, 1951 was brought on the statute book to grant special
privileges to State Financial Corporations established thereunder in the
matter of enforcement of their claims against borrowers and to enable
speedier recovery of public monies. The relevant povisions of the SFC Act
are Sections 29 and 31 which read as under:

“Section 29 – (1) Where any industrial concern, which is under a liability
to the Financial Corporation under an agreement, makes any default in
repayment of any loan or advance or any instalment thereof [or in meeting
its obligations in relation to any guarantee given by the Corporation] or
otherwise fails to comply with the terms of its agreement with the
Financial Corporation, the Financial Corporation shall have the [right to
take over the management or possession or both of the industrial concerns]
as well as the [right to transfer by way of lease or sale] and realize the
property pledged, mortgaged, hypothecated or assigned to the Financial
Corporation.

(2) Any transfer of property made by the Financial Corporation, in
exercise of its powers [ ***] under sub-section (1), shall vest in the
transferee all rights in or to the property transferred [as if the
transfer] had been made by the owner of the property.

(3) The Financial Corporation shall have the same rights and powers with
respect to goods manufactured or produced wholly or partly from goods
forming part of the security held by it as it had with respect to the
original goods.

(4) [Where any action has been taken against an industrial concern] under
the provisions of subsection (1), all costs, [ charges and expenses which
in the opinion of the Financial Corporation have been properly incurred] by
it [as incidental thereto] shall be recoverable from the industrial concern
and the money which is received by it [ ***] shall, in the absence of any
contract to the contrary, be held by it in trust to be applied firstly, in
payment of such costs, charges and expenses and, secondly, in discharge of
the debt due to the Financial Corporation and the residue of the money so
received shall be paid to the person entitled thereto.]

(5) [Where the Financial Corporation has taken any action against an
industrial concern] under the provisions of sub-section (1), the Financial
Corporation shall be deemed to be the owner of such concern, for the
purpose of suits by or against the concern, and shall sue and be sued in
the name of [the concern].

“Section 31 – (1) Where an industrial concern, in breach of any agreement,
makes any default in repayment of any loan or advance or any instalment
thereof [or in meeting its obligations in relation to any guarantee given
by the Corporation] or otherwise fails to comply with the terms of its
agreement with the Financial Corporation or where the Financial Corporation
requires an industrial concern to make immediate repayment of any loan or
advance under Section 30 the industrial concern fails to make such
repayment, [then, without prejudice to the provisions of section 29 of this
Act and of section 69 of the Transfer of Property Act, 1882 (4 of 1882)]
any officer of the Financial Corporation, generally or specially authorized
by the Board in this behalf, may apply to the district judge within the
limits of whose jurisdiction the industrial concern carries on the whole or
a substantial part of its business for one or more of the following reliefs
namely:-

(a) for an order for the sale of the property pledged, mortgaged,
hypothecated or assigned to the [Financial Corporation ] as security for
the loan or advance; or

(aa) or enforcing the liability of any surety; or]

(b) for transferring the management of the industrial concern to the
Financial Corporation; or

(c) for an interim injunction restraining the industrial concern from
transferring or removing its machinery or plant or equipment from the
premises of the industrial concern without the permission of the Board,
where such removal is apprehended.

(2) An application under sub-section (1) shall state the nature and extent
of the liability of the industrial concern to the Financial Corporation,
the ground on which it is made and such other particulars as may be
prescribed.

Section 32 empowers the Corporation to move the District Judge for
appropriate ad interim and interim orders in aid of action under Section
31. Section 46B gives an overriding effect to the provisions of the Act and
reads as under:

“Section 46B – The provision of this Act and of any rule or orders made
thereunder shall have effect notwithstanding anything inconsistent
therewith contained in any other law for the time being in force or in the
memorandum or articles of associations of an industrial concern or in any
other instrument having effect by virtue of any law other than this Act,
but save as aforesaid, the provisions of this Act shall be in addition to,
and not in derogation of, any other law for the time being applicable to an
industrial concern.]

Section 46B was inserted by Act 56 of 1956 with effect from 1.10.1956.

The relevant provisions of the Companies Act, 1956 which need to be noticed
are: Section 529 and 529A which read as under:

“Section 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 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 if 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
charges shall be applied ratably for the discharge of workmen’ 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 purpose of section
529.]”

“Section 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
such dues shall be paid in priority to all other debts.”

The Contentions

It is contended on behalf of the SFCs that they are secured creditors and
as such entitled to exercise their rights under the mortgage as also the
statutory rights conferred on them by Section 29 of SFC Act without
interference of courts. Hence, it is urged that the SFCs can sell the
mortgaged and charged properties without reference to any court, much less
the Company Court. Reliance is placed on the judgment of this Court in M.K.
Ranganathan and Anr. v. Government of Madras and Ors., AIR (1955) SC 604.
That was a case arising under Section 232 of the Companies Act, 1913. This
Court was required to consider the meaning of the provision “any sale held
without leave of the Court of any of the properties” used in Section 232
(1) of the Companies Act, 1913 which rendered such sales void. It was held
that these words refer only to sales held through the intervention of the
Court and not to sales ‘effected by the secured creditor outside the
winding up without intervention of the Court. This Court pointed out that
the law in England, and under the provisions of the Companies Act in India,
was the same, namely, that the secured creditor had the right of realizing
his security by standing outside the winding up, in which case he was not
required to seek intervention of the Court.

The decision in Ranganathan (supra) held the field for considerable period,
both under the Companies Act, 1913 and the Companies Act, 1956. However, by
amending Act 35 of 1985, amendments were carried out in section 529 and a
new Section 529A was enacted. These developments in our view, brought about
a qualitative change in the legal situation. It is important to notice that
M.K.. Ranganathan (supra) was decided under the Companies Act, 1913 which
did not have any provision corresponding to the proviso to Section 529 or
Section 529A of the Companies Act 1956. Obviously therefore, Ranganathan
could not have considered the impact of these amendments on the provisions
of section 232 of the Companies Act, 1913 (corresponding to Section 537 of
the Companies Act. 1956).

The Division Bench of the Bombay High Court has considered in detail the
change in the legal situation brought about by these new legal provision in
Maharashtra State Financial Corporation v. Ballarpur Industries Limited,
AIR (1993) Bombay 392.

As a result of the proviso added in Section 529, the security of every
secured creditor is deemed to be subject to a ‘pari passu’ charge in favour
of the workmen to the extent of the workmen’s dues (called ‘workmen’s
portion, as defined in sub-section (3)(c) therein. It is further provided
that, where the secured creditor, instead of relinquishing its mortgage and
proving his debt, opts to stand outside the winding up proceedings and
realise his security, the Official. Liquidator shall be entitled to
represent the workman and enforce such charge and that any amount realised
by enforcement of such charge shall be applied ratably by the Official
Liquidator for the discharge of workmen’s dues. It is true that even the
amended proviso does not give the Liquidator an independent right of
enforcing the charge by selling the security against which such charge is
created. Nonetheless, it creates a ‘pari passu’ charge in favour of the
workmen to the extent of their dues and makes the Liquidator the
representative of the workmen to enforce such a charge. By reason of Clause
(c) of the newly added proviso , so much of the debt due to the secured
creditor opting to realise security as could not be realize because of the
specially created rights in favour of the workmen or the amount of the
workmen’s portion in the security, whichever is less , shall rank ‘pari
passu’ with the workmen’s dues under Section 529A. Section 529A provides
for overriding preferential payments of workmen’s dues and unrealised
portion of the secured creditors dues, as provided in clause (c) of the
proviso to Section 529.

Counsel for the SFCs contended that there is a conflict between the
provisions of Section 529 read with Section 529A of the Companies Act on
the one hand and Section 29 of the SFC Act on the other. It is urged that
the provisions of the Companies Act being general law must yield to the
provisions of the SFC Act which is special law. In the first place, we see
no such conflict between the provisions of the Companies Act as amended in
1985 and the provisions of the SFC Act, 1951. In our view, the provisions
of the SFC Act were merely intended to give an expeditious remedy to the
SFCs without having to go through the procedure of enforcing the mortgage
under the Transfer of Properties Act, 1882. In fact, even under Section 69
of the Transfer of Property Act, under certain circumstances a mortgagee
has the power to sell the mortgaged property in default of payment of
mortgaged money without intervention of the court. Under the general law,
the SFCS would have to file a suit for realising their security unless they
qualified under section 69 of the Transfer of Property Act. This meant
considerable delay and holding up of the public monies due to the SFCs. In
public interest, therefore, special provisions were made by Section 29, 30,
31 and 32 enabling the SFCs to take possession of the mortgaged assets and
sell them without having to move a court of law. The provisions of Section
29 to 32 and the rights flowing thereon are exercisable under ordinary
circumstances. However, when the debtor is a Company in winding up, the
rights of the SFCs are affected by the provisions of the Companies Act,
1956. Looked at from this point of view, therefore, there is no conflict
between the provisions of the SFC Act and the Companies Act. Assuming that
there is conflict, then the judgment of this Court in A.P. State Financial
Corporation v. Official Liquidator, [2000] 7 SCC 291 clearly holds that the
amendments made in Section 529 and 529A would override and control the
rights under Section 29 of the SFC Act. Though the Companies Act may be
general law, the provisions introduced therein in 1985, were intended to
confer special rights on the workers and pro tanto must be treated as
special law made by Parliament. Since the amendments to the Companies Act
were made by a later Act of 1985, they would override the provisions of
section 29 of SFC Act, 1951. We are unable to accept the contention that
the view taken in A. P. State Financial Corporation (supra) needs
reconsideration. Far from it, we are in agreement with the view expressed
therein.

The decision of the Bombay High Court in Maharashtra State Financial
Corporation case (supra) gives weighty reasons as to why when the company
is under winding up the SFC to which the assets of the company are charged
cannot proceed to realise the security without intervention of the Company
Court. We have already noticed that as a result of the amendment to Section
529 a pari passu charge to the extent of the workmen’s portion is created
on the security of every secured creditor when he opts to realize a
security by standing outside winding up. ‘Pari Passu’ means “with equal
steps, equally, without preference” (Jowitt’s Dictionary, Vol. II, 1959
Edition 1294). Black’s Law Dictionary, 6th Edition, 115 defines it as ‘By
an equal progress… used especially of creditors who, in marshalling
assets, are entitled to receive out of the same fund without any precedence
over each other.” It is also defined as “With equal steps, that is to say,
proceeding side by side at the same place” (Prem’s Judicial Dictionary,
Volume III, 1964 Edition, page 1217)

The rights of the pari passu charge holders would run equally, temporally
and potently, with the rights of the secured creditors. The Official
Liquidator, as the representative of the workmen, to enforce such pari
passu charge would have the right of representing the workmen equally with
the rights of the secured creditors. Charge is defined under Section 100 of
the Transfer of Properties Act thus:

“Section 100-Where immoveable property of one person is by act of parties
or operation of law made security for the payment of money to another, and
the transaction does not amount to a mortgage, the latter person is said to
have a charge on the property; and all the provisions hereinbefore
contained [which apply to a simple mortgage shall, so far as may be, apply
to such charge.]

Though the charge by itself may not amount to mortgage, all the provisions
which apply to a simple mortgage, so far as may be, apply to a charge.
Thus, the Official Liquidator, as the representative of the workmen’s pari
passu charge, would be in the position of a co-mortgagee. Though Section 29
hitherto enabled the SFC as a mortgagee to exercise its right thereunder by
taking possession of the property and selling it in satisfaction of its
debt, the situation has now changed. Because of the aforesaid statutory
intervention, the SFC must necessarily contend with a pari passu charge
holder who has equal rights. It is well established law that where there
are co-mortgagees, one co-mortgagee cannot sell without consent of the
comortgagee or institute any proceedings for sale of mortgaged property
without joining the other co-mortgagees either as plaintiffs or as
defendants. The SFC’s right under Section 29 of freely realising its
security gets trammeled if it has to take on a pari passu charge holder.
The realisation of the security can thereafter only be done either by
satisfaction of the pari passu charge or by a suit in which the pari passu
charge holder would be a party defendant. Though when the SFC Act was
enacted in 1951 it was intended that SAF could act unilaterally, the
amendments made to the Companies Act in 1985 have introduced a pari passu
charge holder as a co-helmsman of the ship of the SFC, who can neither be
ignored nor overridden. In other words, the existence of the pari passu
charge holder being represented by the Official Liquidator would
necessarily bring in supervision of the Company Court as the Official
Liquidator cannot act without directions from and supervision of the
Company Court. This is precisely the reason why the judgment of this Court
in A.P. State Financial Corporation (supra) holds that the statutory right
of the SFCs to sell the property under Section 29 of the SFC Act is now
subject to the provisions of Section 529 and Section 529 A of the Companies
Act. The statutory right to sell the property under Section 29 of the Act
has now to be exercised in tandem with the rights of pari passu charge in
favour of the workmen created by the proviso to Section 529 of the
Companies Act. This Court observed in A.P. State Financial Corporation
(Supra):

“The Act of 1951 is a special Act for grant of financial assistance to
industrial concerns with a view to boost up industrialization and also
recovery of such financial assistance if it becomes bad and similarly the
Companies Act deals with companies including winding up of such companies.
The proviso to sub-section (1) of Section 529 and Section 529-A being a
subsequent enactment, the non obstante clause in Section 529-A prevails
over Section 29 of the Act of 1951 in view of the settled position of law.
We are, therefore, of the opinion that the above proviso to sub-section (1)
of Section 529 and Section 529-A will control Section 29 of the Act of
1951. In other words the statutory right to sell the property under Section
29 of the Act of 1951 has to be exercised with the rights of pari passu
charge to the workmen created by the proviso to Section 529 of the
Companies Act. Under the proviso to sub-section (1) of Section 529, the
liquidator shall be entitled to represent the workmen and force (sic
enforce) the above pari passu charge. Therefore, the Company Court was
fully justified in imposing the above conditions to enable the Official
Liquidator to discharge his function properly under the supervision of the
Company Court as the new Section 529-A of the Companies Act confers upon a
Company Court the duty to ensure that the workmen’s dues are paid in
priority to all other debts in accordance with the provisions of the above
section. The legislature has amended the Companies Act in 1985 with a
social purpose viz. to protect dues of the workmen. If conditions are not
imposed to protect the right of the workmen there is every possibility that
the secured creditor may frustrate the above pari passu right of the
workmen.”

Since the Official Liquidator is in the position of a comortgagee, the SFCs
cannot act independently or by ignoring him for enforcing their security.
It is established law that, in case of co-mortgagees, all of them should
join in the suit for enforcing the security, but if some of them refuse to
join, they have to be included as defendants, not merely as performa
parties, but as necessary parties inasmuch as the mortgage right vests in
them along with the plaintiffs mortgages. (See in this connection the
judgment of the Privy Council in Sunitibala Debi v. Dharae Sundri Debi, AIR
(1919) PC 24). The same principle would be substantially true and
applicable in the case of a mortgagee and a pari passu charge-holder over
the same security for realising the security. The realization of the
security can only be done by both the charge-holders joining and realising
the security simultaneously. If a sale takes place, it can only be
simultaneously for recovery of the claim of all pari passu charge holders
and sale proceeds are required to be divided proportionately in the same
proportion as their dues.

In support of their respective contentions, parties have referred to and
relied upon judgments of different High Courts. The view taken by the
Bombay High Court commands itself to us. The Division Bench of the said
High Court pointed out that, like a secured creditor, the official
liquidator as a pari passu charge holder cannot independently bring the
security to sale ignoring the secured creditor. He must, therefore, either
obtain concurrence of the secured creditor for sale and take the Court’s
sanction, or he can apply for sanction of the Court after notice to the
secured creditor. In either event, the Court while granting sanction may
impose appropriate conditions and give directions regarding the conduct of
the sale, the fixing of the reserve bid, acceptance of the bid,
confirmation of sale and distribution of sale proceeds.

We cannot be unmindful of the fact that every creditor is interested in
realizing the security only for his benefit and to the extent necessary for
recovery of his outstandings. Prior to 1985 it might have been possible for
a secured creditor under section 529 of the Companies Act, 1956, or its
predecessor, section 232 of the Companies Act, 1913 as interpreted by this
Court in M.K. Ranganathan case (supra), to opt to stand outside the winding
up and realise the security by bringing it to sale. This was possible
because the secured creditor had unrestricted right of standing outside the
winding up and proceeding against the property mortgaged to him. Or, to put
it in the words Lord Wrenbury in Food Controller v. Cork, (1923) AC 647 A,
[as quoted in para 15 of M.K. Ranganathan case (supra)]:

“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 mortgage, but as a creditor. He may say ‘I will prove
in respect of my debt’. If so, he comes into the winding up.”

Of course, even in such a situation, if the same property was mortgaged to
more than one secured creditor, they had to either come to an agreement, or
in the event of disagreement, there had to be a suit in which dissenting
mortgagee had to be sued as a necessary party defendant. No doubt section
29 of the SFC Act was intended to place the SFCs on a better footing . But,
in our view, this better footing is available only so long as the debtor is
not a company or is a going company. The moment a winding up order is made
in respect of a debtor company, the provisions of section 529 and 529A come
into play and whatever superior rights had been ensured to SFCs under the
provisions of the SFC Act are now subjected to and operate only in
conjunction with the special rights given to the workmen, who as pari passu
charge-holders are represented by the official liquidator. We are,
therefore, of the view that the unhindered right hitherto available to the
SFCs to realise their security, without recourse to the Court, no longer
holds true as the right vested in the official liquidator is a statutory
impediment to such exercise and has to be reckoned with. And since the
official liquidator can do nothing without the leave or concurrence of the
Court, all necessary applications must, therefore, come to the Company
Court.

We do not really see a conflict between Section 29 of the ‘SFC Act and the
Companies Act at all, since the rights under Section 29 were not intended
to operate in the situation of winding up of a company. Even assuming to
the contrary, if a conflict arises, then we respectfully reiterate the view
taken by the Division bench of this court in A.P. State Financial
Corporation case (supra). This Court pointed out therein that section 29 of
the SFC ACT cannot override the provisions of section 29(1) and 529A of the
Companies Act, 1956, inasmuch as the SFCs cannot exercise the right under
section 29 ignoring a pari passu charge of the workmen. It was observed in
the judgment:

“The proviso to sub-section (1) of Section 529 and Section 529-A being a
subsequent enactment, the non obstante clause in section 529-A prevails
over Section 29 of the Act of 1951 in view of the settled position of law.
We are therefore, of the opinion that the above proviso to sub-section (1)
of the Section 529 and Section 529-A will control Section 29 of the Act of
1951. In other words the statutory rights to sell the property under
Section 29 of the Act of 1951 has to be exercised with the rights of pari
passu charge to the workmen created by. the proviso to Section 529 of the
Companies Act. Under the proviso to sub-section (1) of Section 529, the
liquidator shall be entitled to represent the workmen and force (sic
enforce) the above pari passu charge.”

This very contention based on the non-obstante clause in Section 46B of the
SFC Act was rejected by pointing out that if the non-obstante clause in
section 529A and section 46B of the SFC Act which was inserted in the year
1956. Far from taking a different view of the matter, we too are of the
same view as has been taken in the judgment of this Court in A.P. State
Financial Corporation case (supra).

Similar view was taken by a Division Bench of the A.P. High Court in Andhra
Pradesh State Financial Corporation v. Electrothermic (P) Ltd. and Anr.,
(1986) Co. Cases 402 and a learned single Judge of the Punjab High Court in
Official Liquidator, Ravindra Pharmaceutical (P) Ltd. v. Haryana Financial
Corporation, (Company cases Vol. 98 p. 683).

The Division Bench of the Gujarat High Court in C.A. No. 6303 of 1995 has,
however, struck a discordant note. The Division Bench was impressed by the
fact that in M.K. Ranganathan this Court had emphasised the right of a
secured creditor to realize his security by standing outside the winding up
of a company. It also emphasised that the proviso to section 529 of the
Companies Act operates only where a secured creditor, instead of
relinquishing his security and proving his debt, proceeds to realise his
security. In the words of the Gujarat High Court “But the fact remains, it
has yet been left at the option of the secured creditor to realise the
security without proving his debt in the winding up proceedings.” This
seems to be the linchpin of the reasoning. In our view, the reasoning of
the Gujarat High Court that in case secured creditor does not opt to
realise the security, the liquidator, by dint of the proviso to section
529, does not become a charge holder in the estate of the company so as to
exercise the right of a simple mortgagee as envisaged under section 100 of
the Transfer of Property Act, appears to be non-sequitur, secured creditor
does not opt to stand outside the winding up but relinquishes his security
and proves his debt in the winding up, then there is no doubt that the
official liquidator will come into custody of all the assets of the company
in liquidation and the distribution of the assets would have to proceed in
accordance with the provisions of section 529A of the Companies Act, in
which case the secured creditor stands in line as an unsecured creditor. It
is only when the SFC as a secured creditor opts stand outside the winding
up and seeks to realise its security that the conflict, if any, can arise.
We have already indicated as to who must yield in such a clash of the
titans. The fact that the liquidator or the workmen do not have a right
independently to enforce the charge, unless the creditor decides to stand
outside the winding up, does not make any difference to the situation, in
our view. It is not the contention of the SFCs that they do not desire to
exercise the option available to them of standing outside the winding up.
In fact, it is their contention that as mortgages they have a right to
stand outside the winding up and are not subject to the supervisory
jurisdiction of the Company Court. They also contend that, unlike other
mortgagees, they have a special right by reason of sections 29 of the SFC
Act of taking possession of the assets and realising them by sale, transfer
and so on. We are, therefore, unable to accept the reasoning of the Gujarat
High Court as correct.

Finally, counsel for the SFCs urge that the view we are to take would
obliterate the difference between a creditor opting to stay outside up and
one who opts to prove his debts in winding up. We are unable to accept it.
As a result of the amendments made by the Act of 1985 in the Companies Act,
1956, the SFCs as secured creditors, must seek leave of the Company Court
for the limited purpose of ensuring that the pari passu charge in favour of
the workmen is safeguarded by imposition of suitable conditions under the
supervision of the Company Court. If this amount to impeding their hitherto
unimpeded rights, so be it. Such is the Parliamentary intendment, according
to us. This impediment is of a limited nature for the specific purpose of
protecting the pari passu charge of the workmen’s dues and subject thereto,
SFCs can continue to exercise their statutory rights as secured creditors
without being reduced to the status of unsecured creditors required to
prove their debts in insolvency and stand in line with other unsecured
creditors. Neither is the apprehension expressed justified, nor the
contention sound. We, therefore, hold as under :

1. The right unilaterally exercisable under section 29 of the SFC Act
is available against a debtor, if a company, only so long as there is no
order of winding up ;

2. The SFCs cannot unilaterally act to realise the mortgaged
properties without the consent of the official liquidator representing
workmen for the pari passu charge in their favour under the proviso to
section 529 of the Companies Act, 1956.

3. If the official liquidator does not consent, the SFCs have to move
the Company Court for appropriate directions to the official liquidator who
is the pari passu charge holder on behalf of the workmen. In any event, the
official liquidator cannot act without seeking directions from the Company
Court and under its supervision.

In the result, Civil Appeal No. 4702/1994 and Civil appeal No. 4703/ 1994
are allowed and the Karnataka State Finance Corporation is directed to move
the Company Court to seek appropriate directions in the matter. The
judgment of the Division Bench as well as the single Judge permitting the
SFC to sell the assets of M/s Raheja Development Corporation without the
leave of the Company Court are set aside, with liberty to the KSFC to move
the Company Court and seek appropriate directions in the matter of
realization of its securities.

Civil Appeal No. 12928/1996 is dismissed.

Civil Appeal Nos. 6491/95 and 2007/97 are dismissed with the same liberty
to the SFC to move the Company Court for further directions.

Civil Appeal No. 6303/1995 is allowed. The judgment of the Division Bench
of the Gujarat High Court is set aside and the judgment of the Company
Judge is upheld. The Gujarat State Finance Corporation has the same liberty
for moving the learned Company Judge for appropriate directions for
realisation of the sale proceeds of the assets.

All the aforesaid appeals are accordingly disposed of with no order as to
costs.

 

 

 

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