2014 (4) TMI 980 - HC - Companies Law

Charge over secured debt - Held that - The amounts available with the company have to be disbursed among the secured creditors on the basis of the amounts outstanding and payable by the company in liquidation to the secured creditors. In this case, while it may be correct that the sum of Rs.104 lakhs ought to have been considered as debt outstanding towards the appellant bank, it cannot be ignored that in addition to the amount admitted as payable to other secured creditors, the other secured creditors would also be entitled to claim interest up to the date of winding up of the company. The Official Liquidator, in order to simplify the process, adopted the criteria of only taking into account the principal amount payable to all secured creditors as on the date of appointment of a Provisional Liquidator in order to determine the ratio in which the available funds could be disbursed. This method was adopted, apparently, for the reason that the funds available with the Official Liquidator were less than the principal amount payable to the secured creditors. The representative of the Central Bank had agreed with this methodology and confirmed the amount of principal outstanding. The other secured creditors have accepted and acted on the basis of the unanimous decision that only the principal amount would be considered by the Official Liquidator and the appellant is now estopped from challenging the same. In view of the fact that the representative of the appellant bank had agreed with the criteria adopted by the Official Liquidator, I find no reason to entertain the present appeal. The Official Liquidator exercises quasi judicial functions and the appellant cannot be permitted to resile from the concessions made before the Official Liquidator in discharge of his functions - Decided against appellant.

Summary

Issues:
1. Admittance of debt by Official Liquidator
2. Classification of debt as secured or unsecured
3. Consideration of funded interest as secured debt
4. Methodology for disbursement of funds to secured creditors

Analysis:

Issue 1: Admittance of Debt by Official Liquidator
The appellant challenged the order passed by the Official Liquidator admitting a debt of Rs.12,55,69,834 as secured by a second charge over the company's immovable assets. The appellant contended that an additional debt of Rs.104 lakhs, owed on account of funded interest, should also be considered as a secured debt.

Issue 2: Classification of Debt
Initially, the Official Liquidator had admitted a total claim of Rs.13,75,69,834, with Rs.1,20,00,000 classified as secured debt and the remaining amount as unsecured debt. However, the appellant disputed this classification and filed an appeal, leading to a court order to reconsider the decision.

Issue 3: Consideration of Funded Interest
The main issue in this appeal was whether the funded interest loan of Rs.104 lakhs should have been recognized by the Official Liquidator as a secured debt. The appellant argued that the funded interest loan was indeed a secured debt of the company and should have been accepted by the Official Liquidator.

Issue 4: Methodology for Disbursement
The Official Liquidator explained that due to insufficient funds, all secured creditors had unanimously agreed to adjudicate their claims based solely on the principal outstanding amount. This decision was made to expedite the adjudication and disbursement process. The appellant's representative had confirmed the outstanding principal amount during a meeting, agreeing to the methodology adopted by the Official Liquidator.

In the judgment, it was emphasized that while the funded interest loan should have been considered as outstanding debt, the Official Liquidator's decision to focus only on the principal amount for disbursement was justified. The court noted that accepting the funded interest as payable to the appellant bank would require a reevaluation of interest payable to other secured creditors, disrupting the agreed-upon ratio for fund distribution. The appellant was deemed estopped from challenging the methodology agreed upon earlier, and the court dismissed the appeal, upholding the Official Liquidator's decision.