2015 (2) TMI 689 - SC - Companies Law

Proposed scheme of arrangement with creditors- Application filed under section 391 of the Act- Valuation issue- Unsecured creditors- Held that -From the narration of facts and the contentions which have been highlighted, it is clear that two facts are beyond dispute. First, the appellant stands registered as a secured creditor of the respondent company on the record of the Registrar of Companies under the Act; and second, the arbitral tribunal has passed an award on the basis of consent and it has the status of a decree which is executable in law. We will be failing in our duty if we do not advert to the issue that the appellant shall remain as a secured creditor, for it was registered as such under the Registrar of Companies. The formalities for creating the charge having duly followed, the Division Bench has referred to the Form No. 8 and 13 and also adverted to the power of Registrar to make entries of satisfaction and release, as provided under Sections 138 and 139 of the Act. It has also expressed the view that in the absence of any proceeding, the status of the company as a secured creditor continues. After registration of the deed of hypothecation, if a condition subsequent is not satisfied, that would be in a different realm altogether. In any case, the finding has been recorded that the respondent was not at fault and, in any case, that would not change the status of the appellant as a secured creditor. In view of the aforesaid analysis, we are of the considered opinion that the appellant cannot be treated as an unsecured creditor and it is not permissible for him to put forth a stand that it would not be bound by the Scheme that has been approved by the learned Company Judge. Decided against appellant.

Issues Involved:
1. Maintainability of the application under Section 391(1) of the Companies Act.
2. Jurisdiction of the Company Court to stay criminal proceedings.
3. Status of the appellant as a secured creditor.
4. Applicability of Order II, Rule 2 of CPC and res judicata.
5. Validity and effect of the arbitration award on the status of the appellant.

Detailed Analysis:

1. Maintainability of the Application under Section 391(1) of the Companies Act:
The Company Judge held that the application under Section 391(1) was maintainable and that the court had jurisdiction to consider it, even for convening a meeting of its creditors. The court's jurisdiction was not affected solely because an application had been filed before the Debt Recovery Tribunal. The Judge emphasized the distinction between Section 391(1) and 391(2) and noted that various phases exist until the scheme is approved, each with its own room to operate.

2. Jurisdiction of the Company Court to Stay Criminal Proceedings:
The Company Judge ruled that the Company Court, in exercising power under Section 391(6), has no jurisdiction to stay criminal proceedings initiated under Section 138 of the Negotiable Instruments Act or proceedings pending before the Debt Recovery Tribunal under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

3. Status of the Appellant as a Secured Creditor:
The appellant contended that it was an unsecured creditor due to the lack of an escrow account as required by the hypothecation deed. However, the Company Judge and the Division Bench found that the appellant was a secured creditor based on the deed of hypothecation, registration with the Registrar of Companies, and the absence of any formal proceedings to change this status. The court noted that the formalities for creating the charge were duly followed, and the charge was registered, thus maintaining the appellant's status as a secured creditor.

4. Applicability of Order II, Rule 2 of CPC and Res Judicata:
The appellant argued that the arbitration award, which had the status of a decree, extinguished its status as a secured creditor, invoking the principles of Order II, Rule 2 of CPC and res judicata. The Supreme Court held that the arbitration award did not extinguish the charge created by the hypothecation deed. The Court referenced Order XXXIV, Rules 14 and 15 of CPC, and the principle that a suit for enforcement of a mortgage or charge is not barred by a prior suit for recovery of money. The Court concluded that the principle of res judicata did not apply as the issues before the Company Court and the Arbitral Tribunal were different.

5. Validity and Effect of the Arbitration Award on the Status of the Appellant:
The appellant asserted that the arbitration award, being a simple money decree, changed its status to that of an unsecured creditor. The Supreme Court disagreed, stating that the arbitration award did not expressly extinguish the charge. The Court emphasized that the hypothecation deed and the charge registered with the Registrar of Companies remained valid, and the appellant continued to be a secured creditor. The Court also noted that the provisions of Sections 176 and 177 of the Contract Act, 1872, which pertain to the rights of a pawnee, supported the view that the charge was not extinguished by the arbitration award.

Conclusion:
The Supreme Court upheld the decisions of the Company Judge and the Division Bench, confirming that the appellant remained a secured creditor and was bound by the scheme approved by the Company Judge. The appeal was dismissed with no order as to costs.

← Previous Next →