2012 (12) TMI 391 - HC - Companies Law

Claim of Excise Department - Liability to pay Interest on principal amount - co. in liquidation - non-availability of funds - held that - Central Excise Department is only a preferential creditor and his debt has to rank after the payment has been made to the secured creditors and to the workmen; Provident Fund Commissioner is to rank in a still higher priority; further submission being that as on date in view of the financial status of the company, no interest is payable by the company. In the present case admittedly no interest was agreed upon between the parties; argument of the respondent is to the effect that Section 11AA of the Act is operative by law and interest becomes payable in view of this statutory provision. Rule 156 envisages a situation where no rate of interest has been agreed upon between the parties. It postulates that interest can be paid up to a maximum of 4%. where the Official Liquidator has a surplus after payment in full of all the claims which are admitted to proof. It is only where an excess amount is available that the question of payment of interest will be considered as per Rule 179. As on date as is the submission by the Official Liquidator, Rs.2,20,00,000/- is lying with him out of which Rs.35 lacs has to paid to the workmen. The claim of the Central Excise has been admitted to Rs.1,85,04,400.76; the liability of the company today would thus be almost Rs.2,20,00,000/-. Keeping in view of the fund position, no fund is available with the Official Liquidator to consider the payment of interest to the Department. Claim of interest of the Department (Central Excise) dis-allowed - application has become infructuous and disposed of.

Summary

Issues:
Liquidator seeking direction on recall of interest order, liability of company to pay interest, applicability of Section 11AA of Central Excise Act, 1944, priority of creditors in liquidation, provisions of Companies Act, rules on interest payment.

Analysis:
1. The liquidator filed an application seeking direction regarding the recall of an interest order issued by the Central Excise Department. The company in liquidation argued it was not liable to pay interest and proposed the principal amount as full settlement.

2. The Court reviewed seven adjudication orders passed by the Department, totaling Rs.1,85,04,400.76. The first order imposed a penalty of Rs.5 lacs, which was already paid. The subsequent orders detailed duty amounts and penalties due from the company.

3. The key issue was the quantum of interest. The Department relied on Section 11AA of the Central Excise Act, 1944, stating interest becomes payable automatically on determined duty amounts. The Liquidator argued the Companies Act provisions applied due to the company being in liquidation.

4. The Liquidator contended that as per the Companies Act, the Central Excise Department ranked as a preferential creditor, with liabilities to be settled after secured creditors, workmen, and Provident Fund Commissioner. The financial status of the company indicated no interest payment capability.

5. The Court referenced relevant rules under the Company (Court) Rules 1959 regarding interest payment scenarios. Rule 156 allowed interest up to 4% when no agreement existed, while Rule 179 addressed interest payment from surplus funds after settling admitted claims.

6. Considering the financial position and priority of creditors, the Court disallowed the Department's claim for interest due to lack of available funds. The application was deemed infructuous based on a previous court order.

7. The judgment highlighted the interplay between statutory provisions, liquidation laws, and creditor priorities in determining the liability of a company in liquidation to pay interest on adjudicated amounts.