2018 (9) TMI 1390 - HC - Companies Law

Winding up petition - manner in which the expenses incurred in connection with the winding up of a Company are to be paid, shared, recouped or recovered is dealt with in Rule 292 of the Companies (Court) Rules, 1959 (Rules) and Section 529 of the Companies Act, 1956 - Held that - If the secured creditor surrendered the security to the Liquidator and decides to prove whole of the debt as an unsecured creditor, then he shall be entitled to be reimbursed the entire security expenses incurred by him and if the liquidator has incurred, the liquidator cannot call upon the said secured creditor to reimburse the expenses incurred but the expenses will be distributed among all unsecured creditors including the secured creditor who has surrendered the security to the liquidator. Therefore, though the Liquidator had, in his Report, sought to grant certain security expenses, the same cannot be paid over to SICOM as SICOM is liable to pay the same since it is exclusively entitled to the realization proceeds of its security. Hence no amount under this headsecurity is now payable by the liquidator to SICOM. Liability of claim - Held that - By operation of law, the liability of the company is capped at ₹ 47,25,598/ . Admittedly, the guarantor has paid ₹ 50,50,000/ which is ₹ 3,24,402/ more than the liability of the company (in liquidation). Therefore, SICOM cannot claim from the company the amount that it has already received from the guarantor. The official liquidator need not pay this amount to SICOM. SICOM has a decree against the guarantor. There is no decree against the company (in liquidation). It is entirely left upon SICOM to execute the decree against the guarantor and recover its entire decretal amount from the guarantor. There could be a situation that SICOM recovers the entire amount and the guarantor would step into the shoes of SICOM and the guarantor may or may not claim the amount of ₹ 47,25,598/ from the liquidator. Even assuming that guarantor makes such a claim, still the claim of the guarantor will rank pari pasu with other unsecured creditors. The guarantor having paid off the entire liability of the company (in liquidation), it will be open to the guarantor to lodge its claim with the official liquidator to that extent and the official liquidator will consider the claim and adjudicate it in accordance with law. It is clarified that I have not made any observation on the merits of such claim and that will be decided independently by the official liquidator. To ensure to the benefit of all unsecured creditors who may or may not get their entire claim, SICOM should be directed to pay interest @ 9% per annum on ₹ 31,11,101/ from the date SICOM received that amount upto date it deposited the amount with the Official Liquidator. This amount to be paid over to official liquidator within four weeks. In view of the above, the official liquidator is directed to rework the amounts mentioned in Paragraphs 22 to 24 of the official liquidator s report and take further steps to make payments. At this stage, Shri Kanade states that SICOM should be permitted to sit with the official liquidator to rework the actual amount spent on security expenses. If the expenses incurred was to preserve the security of SICOM and SICOM has stood outside winding up and realized this security for its sole benefit, as stated earlier, the question of recovering any amount from the official liquidator does not arise. Therefore, I see no reason why SICOM should sit with the official liquidator to rework the security charges. This will extend to Canara Bank also.

Summary

Issues Involved:
1. Whether secured creditors such as SICOM and Canara Bank are entitled to seek recovery/reimbursement of amounts spent by them towards security charges for protecting their security.
2. Whether the amounts paid by the guarantor to the creditor are to be credited against the amounts due and payable by the principal debtor to the creditor.

Issue-wise Detailed Analysis:

Issue 1: Recovery/Reimbursement of Security Charges by Secured Creditors

In the context of the official liquidator's report, the liquidator sought directions regarding the reimbursement of security expenses incurred by secured creditors SICOM and Canara Bank. The court examined the relevant provisions under Rule 292 of the Companies (Court) Rules, 1959, and Section 529 of the Companies Act, 1956.

Rule 292 stipulates that if a creditor or contributory advances money to preserve the assets of the company, such amounts should be repaid out of the sale proceeds of the assets of the company in priority to any debt. This rule does not distinguish between secured and unsecured creditors.

Section 529(1) of the Companies Act provides that the rules of insolvency applicable to individuals also apply to the winding up of a company. A secured creditor has two options: surrender its security and claim as an ordinary creditor, or retain its security and stand outside the winding up. If a secured creditor opts to stand outside the winding up, they must pay their portion of the expenses incurred by the liquidator for preserving the security before its realization.

The court concluded that secured creditors who have decided to stand outside the winding up and realize their security cannot claim reimbursement from the official liquidator for the expenses incurred in preserving the security. The reasoning is that allowing such reimbursement would unfairly benefit the secured creditor at the expense of unsecured creditors.

In conclusion, the liquidator need not reimburse SICOM or Canara Bank for the security expenses incurred for preserving the security, as the entire sale proceeds are being paid over to them.

Issue 2: Crediting Amounts Paid by Guarantor Against Principal Debtor's Debt

Regarding the amounts paid by the guarantor, the court considered the liability of the guarantor and the principal debtor under Section 128 of the Indian Contract Act, 1872. This section provides that the liability of the surety is co-extensive with that of the principal debtor, meaning payment by one discharges the other.

The court noted that SICOM had already received a sum of ?50,50,000 from the guarantor, which exceeded the adjudicated claim of ?47,25,598. Therefore, SICOM could not claim any further amount from the official liquidator, as the liability of the company in liquidation was already discharged by the guarantor's payment.

The court also referenced the Supreme Court's decision in Industrial Investment Bank of India vs. Biswanath Jhunjhunwala, which held that the guarantor's rights and liabilities are co-extensive with the principal debtor's. Consequently, the creditor cannot recover the same amount twice (once from the principal debtor and once from the guarantor).

The court concluded that the official liquidator need not pay any further amount to SICOM, and SICOM is free to recover any remaining amounts under the decree against the guarantor. If the guarantor steps into the shoes of SICOM, their claim will rank pari passu with other unsecured creditors.

General Observations:

The court directed SICOM to pay interest at 9% per annum on ?31,11,101 from the date SICOM received the amount until the date it was deposited with the official liquidator. This interest is to be paid within four weeks, benefiting all unsecured creditors.

The court disposed of the official liquidator's report and the related company application, noting that SICOM should not sit with the official liquidator to rework the security charges, as the question of recovering any amount from the official liquidator does not arise.