2014 (1) TMI 1809 - HC - Indian Laws

Petition for winding up to relinquish all the securities - Proceedings under the SARFAESI Act - whether respondent- banks can maintain a winding up petition without giving up security and/or can stand outside winding up in respect of secured assets and still maintain the petition for winding up for remaining debts? - Held that - When the company petition was filed the respondents -banks did not relinquish the security namely, . Kingfisher House. It was not binding on the respondents -banks while filing a petition for winding up to relinquish all the securities. The requirements of law is that if a secured creditor who seeks to prove whole of his debt in the course of proceedings of winding up must before he could prove the debt relinquish his security for the benefit of the general body of creditors. In other words if the secured creditor relinquish the entire security for the benefit of general body of creditors he would have to prove whole of his debt. As against this if the secured creditor has realised his security he may prove for the balance due after deducting the net amount that has been realized. Thus stage for relinquishing of security arise only when the secured creditor seeks whole of his debt in the course of winding up. The proceedings initiated by the respondent -banks under SARFAESI are not alternate to the winding up petition. In the present case the respondents - banks did not surrender or relinquish their right in the Kingfisher House in respect of which even before filing of company petition they had initiated proceedings under the SARFAESI Act. That apart the proceedings under Section 14 of the SARFAESI Act in any case need not be stayed or directions need not be issued not to proceed with the same since till this date no order of winding up has been passed against the company at the instance of respondent -banks or at the instance of any other petitioner. In our opinion the learned Judge has considered the questions raised in proper perspective and we do not find any reasonto interfere with the same. In the result the appeal fails and dismissed as such.

Issues Involved:
1. Jurisdiction of the Company Court vis-`a-vis SARFAESI Act.
2. Rights of secured creditors to stand outside the winding up process.
3. Doctrine of election and its applicability to secured creditors.
4. Timing and necessity of relinquishing security by secured creditors in winding up proceedings.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Company Court vis-`a-vis SARFAESI Act:
The primary issue was whether there is a bar of jurisdiction in terms of Sections 34 and 35 of the SARFAESI Act for the Company Court to grant relief as prayed for. Section 34 bars civil courts from entertaining suits or proceedings in matters that a Debt Recovery Tribunal or an Appellate Tribunal is empowered to determine under the SARFAESI Act. Section 35 declares that the provisions of the SARFAESI Act prevail over other laws. The court held that the SARFAESI Act, being a special legislation and a later enactment, overrides the Companies Act. The Supreme Court in Allahabad Bank held that when there are two special laws, the latter normally prevails if it has an overriding effect. Thus, the Company Court does not have jurisdiction to interfere with proceedings under the SARFAESI Act, especially when no winding-up order or appointment of a provisional liquidator has been made.

2. Rights of Secured Creditors to Stand Outside the Winding Up Process:
The court addressed whether secured creditors could choose to stand outside the winding up while simultaneously seeking to enforce their secured interests. The court noted that secured creditors have the right to stand outside the winding up and realize their security without the leave of the winding-up court, as long as no winding-up order has been passed. The court referenced the Supreme Court's observations in M.K. Ranganathan and International Coach Builders Ltd., which clarified that secured creditors could realize their security without the leave of the winding-up court until a winding-up order is passed.

3. Doctrine of Election and Its Applicability to Secured Creditors:
The appellant argued that the respondent-banks, having filed a winding-up petition, were estopped from filing an application under Section 14 of the SARFAESI Act, invoking the doctrine of election. The court rejected this argument, stating that the doctrine of election does not apply in this context. The court emphasized that the secured creditors could file a petition for winding up without relinquishing their security. The court cited the Supreme Court's judgment in Rajasthan State Industrial Development and Investment Corporation, which explained that the doctrine of election is based on estoppel and equity, but it does not preclude secured creditors from pursuing remedies under the SARFAESI Act while a winding-up petition is pending.

4. Timing and Necessity of Relinquishing Security by Secured Creditors in Winding Up Proceedings:
The court clarified that the stage for relinquishing security arises only when the secured creditor seeks to prove the whole of their debt in the course of winding-up proceedings. The court referenced Hegde and Golay Ltd., which stated that a secured creditor need not relinquish their security at the stage of filing a winding-up petition. The court further noted that the respondents-banks had initiated proceedings under the SARFAESI Act before filing the winding-up petition and had explicitly stated in the petition that they were standing outside the winding-up process concerning their secured interests. The court concluded that the respondents-banks were not required to relinquish their security while filing the winding-up petition and could pursue remedies under the SARFAESI Act independently.

Conclusion:
The appeal was dismissed, and the court upheld the decision of the learned single Judge. The court affirmed that the SARFAESI Act prevails over the Companies Act, and secured creditors could stand outside the winding-up process while enforcing their secured interests. The doctrine of election was not applicable to preclude secured creditors from pursuing remedies under the SARFAESI Act. The secured creditors were not required to relinquish their security at the stage of filing a winding-up petition.

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