2006 (4) TMI 264 - SC - Companies Law

Whether significance is lost in respect of inter se right of priority between two sets of secured creditors in view of section 529A of the Companies Act? Whether section 48 of the Transfer of Property Act stands over-ridden by section 529A of the Companies Act. 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? Held that - Appeal allowed. 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

Issues Involved:
1. Interpretation of sections 529 and 529A of the Companies Act, 1956.
2. Priority of rights among secured creditors under section 48 of the Transfer of Property Act.
3. Applicability of section 47 of the Provincial Insolvency Act, 1920.
4. Relinquishment of rights by secured creditors in liquidation proceedings.

Detailed Analysis:

1. Interpretation of Sections 529 and 529A of the Companies Act, 1956:
The Supreme Court examined the interpretation of sections 529 and 529A of the Companies Act, 1956, particularly in the context of the priority of claims among secured creditors. The Court noted that section 529A, which contains a non obstante clause, was enacted to ensure that the dues of workmen are treated pari passu with the secured creditors. However, the Court clarified that this does not eliminate the concept of inter se priorities among secured creditors. The Court stated, "Section 529A 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 therein to things, which the Parliament did not comprehend."

2. Priority of Rights Among Secured Creditors Under Section 48 of the Transfer of Property Act:
The Court emphasized the significance of section 48 of the Transfer of Property Act, which states that the claim of the first charge holder shall prevail over the claim of the second charge holder. The Court held that "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."

3. Applicability of Section 47 of the Provincial Insolvency Act, 1920:
The Court analyzed section 47 of the Provincial Insolvency Act, which deals with the rights of secured creditors in insolvency proceedings. The Court explained that a secured creditor has three options: (i) realize the security and prove for the balance, (ii) relinquish the security for the general benefit of creditors and prove for the whole debt, or (iii) value the security and prove for the balance. The Court stated, "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."

4. Relinquishment of Rights by Secured Creditors in Liquidation Proceedings:
The Court examined whether the appellant had relinquished its rights as a secured creditor by participating in the liquidation proceedings. The Court concluded that merely responding to a public notice and filing an affidavit of proof with the official liquidator does not amount to relinquishment of security. The Court stated, "The expression 'relinquish' has a different connotation. 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."

Conclusion:
The Supreme Court set aside the High Court's judgment, holding that the High Court misinterpreted the provisions of the Companies Act and the Transfer of Property Act. The Court reaffirmed the priority of the first charge holder over the second charge holder and clarified the conditions under which a secured creditor may be deemed to have relinquished their rights. The appeal was allowed, and the first respondent was ordered to bear the costs of the appellant.

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