2020 (1) TMI 111 - HC - Companies Law

Grant of Interest - Sanction of financial facilities by the first Respondent to the Petitioner - main focus of the arguments of the learned counsel for the Official Liquidator was on the grant of interest at the rate of 12% per annum by the Arbitral Tribunal - HELD THAT - The contention of the learned counsel for the Official Liquidator was that interest is payable at a rate not exceeding 4% per annum up to the date of winding up order as per Rule 156. In order to test this contention, it is necessary to closely examine Rule 156. Upon examining Rule 156, it is clear that it applies if interest is not reserved or agreed for . By implication, it does not apply if interest is agreed upon in the contract out of which the debt arises. In this case, it is the admitted position that the debt arises out of the extension of financial facilities to the Petitioner by the first Respondent and that the relevant loan agreements specify a rate of interest and a rate of penal interest. Therefore, Rule 156 is clearly inapplicable. Moreover, Rule 156 also refers to the right of a creditor to prove for interest at a rate not exceeding 4% per annum up to that date from the time when the debt or sum was payable . This clearly indicates that even in cases where a rate of interest is not specified in the contract in question, Rule 156 only applies to creditors who participate in the winding up and submit their claims for adjudication by the Official Liquidator - Therefore, the contention of the learned counsel for the Official Liquidator with regard to the applicability of Rule 156 up to the date of the winding up order is rejected. The conclusions of the other High Courts, in the judgments cited by the learned counsel for the Official Liquidator, with regard to the applicability of Rules 156 and 179 to secured creditors who stand outside the winding up. The text of the said Rules provide unambiguous evidence of the intention to apply the said Rules only where contractual interest is not specified, in the case of Rule 156, and with regard to both Rules 156 and 179, only where the creditor concerned, whether secured or unsecured, submits a claim for adjudication by the Official Liquidator - the contention of the learned counsel for the Official Liquidator to the effect that interest should not have been awarded at a rate exceeding 4% per annum for the period subsequent to the date of the winding up order is also untenable. Consequently, both the grounds of challenge to the Award are rejected. The first Respondent is entitled to recover the amounts awarded only from the sale proceeds of the Hypothecated Assets, as described in the schedule to the Modified Hypothecation Deed read with the relevant Forms 8 and 13, after also ensuring that permissible expenses of the Official Liquidator in relation to the Hypothecated Assets and the amounts due as per the pari passu charge of the workmen in respect of the workmen's portion of the said security are paid from such sale proceeds. However, if the sale proceeds of these assets are insufficient to realise the amount awarded, whether in respect of principal or interest, the claims of the first Respondent would be required to be decided in accordance with Section 529, 529-A and other applicable provisions of the Companies Act and, in such event, Rule 179 would apply. The relevant facts and documents with regard to the sale price of the Hypothecated Assets, the workmen's dues , the workmen's portion in the Hypothecated Assets, etc. are unavailable - These aspects would be required to be considered while dealing with execution proceedings relating to the Award and no definitive conclusions can be recorded herein. The Petition to set aside the Arbitral Award is dismissed.

Issues Involved:
1. Validity of the Arbitral Award.
2. Applicability of Rule 156 of the Companies Court Rules, 1959.
3. Applicability of Rule 179 of the Companies Court Rules, 1959.
4. Rights of a secured creditor standing outside the winding-up proceedings.

Issue-wise Detailed Analysis:

1. Validity of the Arbitral Award:
The Arbitral Award dated 05.12.2007, which allowed all claims made by the first Respondent/claimant, was challenged by the Petitioner. The main focus of the challenge was on the grant of interest at the rate of 12% per annum by the Arbitral Tribunal. The Petitioner argued that the interest should have been capped at 4% as per the Companies Court Rules. However, the Court found that the Arbitral Tribunal had considered the pleadings, evidence, and arguments reasonably and applied the terms of the contract correctly. Therefore, no grounds were made out to interfere with the Award.

2. Applicability of Rule 156 of the Companies Court Rules, 1959:
The Petitioner contended that Rule 156, which governs the payment of interest by a company in liquidation up to the date of the winding-up order, should limit the interest to 4% per annum. However, the Court found that Rule 156 applies only if "interest is not reserved or agreed for" in the contract. Since the relevant loan agreements specified a rate of interest and penal interest, Rule 156 was deemed inapplicable. Thus, the contention regarding the applicability of Rule 156 was rejected.

3. Applicability of Rule 179 of the Companies Court Rules, 1959:
The Petitioner argued that Rule 179, which governs the payment of interest from the date of the winding-up order, should apply, limiting the interest to 4% per annum. The Court examined Rule 179 and concluded that it applies only to creditors who participate in the winding-up by submitting their claims for adjudication by the Official Liquidator. Since the first Respondent was a secured creditor standing outside the winding-up proceedings, Rule 179 was found inapplicable. Consequently, the contention regarding the applicability of Rule 179 was also rejected.

4. Rights of a Secured Creditor Standing Outside the Winding-Up Proceedings:
The first Respondent, being a secured creditor, was granted leave to prosecute its claim outside the winding-up proceedings. The Court noted that the first Respondent's entitlement to interest was based on the contract between the parties. The first Respondent was allowed to enforce its security to realize its dues, and the charge over the Hypothecated Assets was enforceable against the Official Liquidator. The Court referred to the principles set out in the Supreme Court judgment in Jitendra Nath Singh v. Official Liquidator, which supported the first Respondent's position. The first Respondent was entitled to recover amounts awarded from the sale proceeds of the Hypothecated Assets, subject to the payment of permissible expenses and workmen's dues.

Conclusion:
The Petition to set aside the Arbitral Award was dismissed. The first Respondent was entitled to recover the awarded amounts from the sale proceeds of the Hypothecated Assets, with considerations for the Official Liquidator's permissible expenses and the workmen's dues. If the sale proceeds were insufficient, the claims would be decided according to applicable provisions of the Companies Act, and Rule 179 would apply.

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