1996 (2) TMI 370 - SC - Companies Law

Winding up - Stay of suits - Rights of creditors - Held 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 been 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.

Issues Involved:
1. Extent of the right of secured creditors to realize their debts from the assets of a company under winding up.
2. Conditions under which a pending suit or proceeding by a secured creditor should be transferred to the company court.

Detailed Analysis:

1. Extent of the Right of Secured Creditors:
The judgment clarifies that a secured creditor stands outside the winding-up proceeding and can proceed to realize his security without the leave of the winding-up court if the action was initiated before the company was wound up. This principle has been established since the decision in M.K. Ranganathan v. Government of Madras [1955] 2 SCR 374 and remains unchallenged. However, certain provisions in the Companies Act, 1956, such as sections 446, 529(1) and (2), 529A, and 537, impose restrictions on this right.

2. Conditions for Transferring Pending Suits:
The court emphasized the jurisdiction of the winding-up court under sections 446(2) and (3) to entertain or dispose of any suit or proceeding by or against the company, even if initiated before the winding-up order. Section 446(1) requires leave of the court for any suit or proceeding to continue against the company after a winding-up order is made. Section 537 states that any sale held without the leave of the winding-up court is void if the company is being wound up.

3. Granting Leave to Secured Creditors:
The court noted that the primary concern is balancing the interests of secured creditors and the company's other creditors, including workmen whose dues rank pari passu with secured creditors. The court highlighted that a receiver appointed by a civil court would primarily look after the interests of the secured creditor, whereas the liquidator appointed by the company court looks after the interests of all creditors and workmen. In cases of conflict, the liquidator's interest should prevail.

4. Transfer of Proceedings:
The court discussed the conditions under which a winding-up court should transfer a pending proceeding initiated by a secured creditor. It referred to the decision in Central Bank of India v. Elmot Engg. Co. [1944] 4 SCC 159, which emphasized safeguarding the company's assets from wasteful litigation. The court also referenced Sudarsan Chits (I) Ltd. v. O. Sukumaran Pillai [1984] 4 SCC 657, which traced the historical evolution of section 446(2) and its purpose to facilitate the disposal of winding-up proceedings by enlarging the jurisdiction of the winding-up court.

5. Balancing Interests:
The court recognized the need to protect the substantive rights of secured creditors while not jeopardizing the interests of other creditors. It suggested that company courts should generally grant leave to secured creditors to pursue their remedies in civil courts, subject to reasonable conditions. Where a receiver has been appointed before winding-up proceedings, he should generally be allowed to continue. The court emphasized that the terms imposed by the company court should be reasonable and that each case should be decided based on its specific facts and circumstances.

6. Consideration of Workmen's Dues:
The court noted that the company court should consider whether the dues of workmen are outstanding and ensure that after satisfying the secured creditor's debt, the workmen's dues can also be satisfied pari passu.

Conclusion:
The appeals and transfer cases were disposed of with the observations that the company court should pass appropriate orders considering the principles laid down in the judgment. No order as to cost was made.

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