2008 (7) TMI 584 - HC - Companies Law

Winding up - whether on the facts and circumstances, the claim of the appellant towards the damages in respect of the property for the period which was in the custody of the Official Liquidator after vesting of all the properties consequent to the orders of winding up of company would constitute as costs and expenses or would amount to a debt to be adjudicated along with other claims? Held that - On considering the provisions of the Companies Act and the Rules made therein, the claim as now made by the appellant totally stands apart and does not fall under any other claim as debt but it squarely falls within the costs, charges and expenses incurred during the process of winding up and the applicant would be entitled to these amounts, de hors the settlement of debts or other claims. Appeal allowed.

Summary

Issues Involved:
1. Whether the claim of the appellant for damages during the period the property was in the custody of the Official Liquidator constitutes costs and expenses or a debt to be adjudicated with other claims.
2. Whether the appellant's claim can be considered preferential and paid before the adjudication of all other claims.

Issue-wise Detailed Analysis:

1. Nature of the Claim: Costs and Expenses vs. Debt
The appellant, owner of the property leased to the respondent company, sought damages for use and occupation during the period the property was in the custody of the Official Liquidator after the company was wound up. The claim was for the period from 17-7-2001 to 12-12-2003. The Official Liquidator had rejected most of the claim, admitting only a portion as unsecured debt. The appellant argued that the claim should be treated as costs and expenses under section 476 of the Companies Act, 1956, rather than a debt.

The court examined section 476, which allows the court to order payment of costs, charges, and expenses incurred in the winding up process from the assets of the company. It was held that these costs, charges, and expenses are distinct from debts and should not be treated on par with other claims. The court emphasized that the amounts incurred during the winding up process are not debts but incidental costs and expenses necessary for managing the company's assets.

2. Preferential Payment of the Claim
The appellant contended that the claim should be paid immediately without waiting for the adjudication of other claims. The Official Liquidator and the learned Single Judge had held that the appellant must wait until all claims are adjudicated and that the claim does not have preferential status.

The court referred to sections 529A and 530 of the Companies Act, which prioritize workmen's dues and secured creditors' debts over other debts. However, the court clarified that these provisions apply to debts and not to costs, charges, and expenses incurred in the winding up process. Rule 338 of the Companies (Court) Rules, 1959, was also examined, which outlines the order of priority for payments from the company's assets. The court concluded that the appellant's claim for damages during the period the property was in the custody of the Official Liquidator falls under costs and expenses, which should be paid before other debts are settled.

Conclusion:
The court held that the appellant's claim for damages during the period the property was in the custody of the Official Liquidator constitutes costs and expenses incurred during the winding up process. These costs and expenses are distinct from debts and should be paid before the adjudication of other claims. The appeal was allowed, setting aside the orders of the learned Single Judge, and the application filed by the appellant was granted.