2005 (10) TMI 280 - SC - Indian Laws

Winding up - Overriding preferential payments - Held that - The directions issued by the company court are in the interest of all the creditors and are well within its jurisdiction. But as finding merit in the submission that the company court was not justified in not ordering a fresh valuation of the properties. Having regard to the lapse of time, we are satisfied that a fresh valuation is necessary thus direct the company court to get a fresh valuation done by a valuer from the panel of valuers of the High Court. The other directions issued by the company court are affirmed.

Issues Involved:
1. Applicability of Section 29 of the State Financial Corporations Act (SFC Act) versus Section 529A of the Companies Act.
2. Rights of secured creditors standing outside the winding up process.
3. Role and authority of the Official Liquidator in asset realization and distribution.
4. Jurisdiction and precedence of the SFC Act over the Companies Act.
5. Necessity of fresh valuation of the company's assets.

Detailed Analysis:

1. Applicability of Section 29 of the State Financial Corporations Act (SFC Act) versus Section 529A of the Companies Act:
The judgment clarified that once a winding-up proceeding has commenced, the provisions of Sections 529 and 529A of the Companies Act get attracted. Section 529A provides for overriding preferential payment to workmen's dues and debts due to secured creditors. It was emphasized that the distribution of the proceeds of the sale of assets can only be in terms of Section 529A of the Companies Act, even if the assets are realized by a secured creditor through the SFC Act. The court held that the overriding provision in Section 529A would prevail over the SFC Act, notwithstanding Section 46B of the SFC Act.

2. Rights of Secured Creditors Standing Outside the Winding Up Process:
The appellants, as secured creditors, claimed the right to realize their securities independently of the winding-up process. However, the court held that the rights of secured creditors are affected by Sections 529 and 529A of the Companies Act once winding-up proceedings commence. The court emphasized that the secured creditors, even if standing outside the winding up, must associate with the Official Liquidator in the sale process and the distribution of proceeds must comply with Section 529A of the Companies Act.

3. Role and Authority of the Official Liquidator in Asset Realization and Distribution:
The court affirmed the role of the Official Liquidator in representing the workmen and ensuring that their dues are paid pari passu with the secured creditors. The Official Liquidator must be associated with the sale process to ensure that the assets are sold at a proper price and the proceeds are distributed according to the statutory provisions. The court also emphasized that the Official Liquidator holds a right on behalf of the workers and the creditors in general, and his involvement is crucial for the proper distribution of the sale proceeds.

4. Jurisdiction and Precedence of the SFC Act over the Companies Act:
The court addressed the apparent conflict between the SFC Act and the Companies Act. It held that while the SFC Act provides certain rights to financial corporations, these rights are restricted by the provisions of Sections 529 and 529A of the Companies Act when a company is in liquidation. The court clarified that there is no inconsistency between the decisions in Allahabad Bank v. Canara Bank and International Coach Builders Ltd. regarding the applicability of Sections 529 and 529A in the distribution of assets among creditors.

5. Necessity of Fresh Valuation of the Company's Assets:
The court found merit in the appellants' submission that a fresh valuation of the properties was necessary due to the lapse of time. The company court was directed to get a fresh valuation done by a valuer from the panel of valuers of the High Court. This direction was given to ensure that the assets are sold at a fair and current market value, which is in the best interest of all creditors.

Conclusion:
The Supreme Court affirmed the directions issued by the company court, emphasizing the necessity of associating the Official Liquidator in the sale process and ensuring the distribution of proceeds in accordance with Section 529A of the Companies Act. The court also ordered a fresh valuation of the properties to reflect their current market value. The appeal was thus disposed of with a modified direction for fresh valuation, while no order as to costs was made.

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