2007 (11) TMI 421 - HC - Companies Law

Charges - whether belated registration of a charge can be permitted in respect of any asset of a company which has been directed to be wound up? Whether a charge comes to be created only upon the formal execution of a document and not on the company s undertaking to the creditor to create a charge? Held that - It would, however, be permissible for the rectification of a charge or the modification of the extent of a charge, at the liquidation stage but that presupposes the charge being already registered. There is a huge distinction between the modification of an already registered charge and the attempt to have an unregistered charge freshly registered. Section 141 and the discretion found therein cannot be carried so far as to allow a creditor to undo the effect of section 125 by which the charge created or agreed to be created in his favour by the company can be avoided by the Official Liquidator and the other creditors of the company. It would also appear from the decisions of the English courts under the provisions of both the 1948 Act and the 1985 Act in England which are in pari materia with sections 125 and 141 of the Act of 1956 applicable in this country, that the condition ordinarily imposed for allowing subsequent registration is that it would be open to the other creditors who had entered into transactions with the company during the interregnum, to disregard such registration The order of the Company Law Board is maintained, but for alto-gether different reasons. The reasons given by the Company Law Board in support of the order of rejecting are not approved. The appeal and connected applications are dismissed.

Summary

Issues:
1. Registration of charge in immovable properties of a company in liquidation.
2. Permissibility of belated registration of a charge.
3. Rights of creditors upon company liquidation.
4. Application under section 141 of the Companies Act, 1956.
5. Consideration of creditor's claim in liquidation proceedings.

Issue 1: Registration of Charge in Immovable Properties
The appellant sought to record its charge on the immovable properties of a company in liquidation. The Company Law Board dismissed the appellant's application under section 141 of the Companies Act, 1956. The key legal issue was whether a belated registration of a charge on any asset of a company under liquidation can be allowed. The Board framed questions regarding the applicability of section 125 of the Act and the justification for condoning the delay in filing charge particulars.

Issue 2: Belated Registration of a Charge
The Company Law Board ruled against the appellant on the first issue, leading to the dismissal of the second issue. The critical concern was whether an application for charge registration could be entertained after a company's winding-up order. Section 125 of the Act deems unregistered charges void against the Official Liquidator and other creditors. Allowing post-liquidation charge registration would undermine the rights of secured creditors and workmen.

Issue 3: Rights of Creditors upon Liquidation
Upon a company's liquidation, creditors' rights crystallize, with workmen elevated to secured creditor status under section 529A of the Act. The judgment emphasized that rectification or modification of a charge is permissible during liquidation if the charge is already registered. However, fresh registration of an unregistered charge post-liquidation is not allowed to prevent dilution of creditor rights.

Issue 4: Application under Section 141
The appellant's appeal challenged the Official Liquidator's decision not to consider the appellant as a secured creditor concerning the company's immovable properties. The appellant sought enlargement of time under section 141 for charge registration. The judgment clarified the distinction between rectifying an existing charge and seeking fresh registration post-liquidation.

Issue 5: Creditor's Claim in Liquidation
The appellant's claim was partially recognized by the Official Liquidator based on the charge over movable properties. However, the appellant was considered an unsecured creditor for the remaining claim. The judgment highlighted the priority basis for creditor payments in liquidation proceedings and the implications of charge registration post-liquidation.

Overall, the Court upheld the Company Law Board's decision, emphasizing the importance of adhering to registration requirements and creditor rights in liquidation scenarios. The judgment provided a detailed analysis of legal principles governing charge registration and creditor priorities in company liquidation proceedings.