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TMI Blog1994 (10) TMI 249X X X X Extracts X X X X X X X X Extracts X X X X ..... nd/or mortgaged with the Corporation. The Corporation exercised its powers under section 29 of the State Financial Corporations Act, 1951, and took possession of the assets of the company hypothecated/mortgaged with it allegedly on May 9, 1988. The plant and machinery, possession of which was taken over by the Corporation was transferred to Mahuvawala Trading Company, Bombay, for a sum of Rs. 8,99,786.57 and possession was handed over to the purchaser on December 20, 1989. The official liquidator moved the company court by an application making a prayer that the respondent-Corporation be directed to hand over possession of Himalaya Tools Pvt. Ltd. to the applicant immediately. It was contended on behalf of the applicant that once an order for winding up of the company has been passed and the official liquidator is appointed to take charge of the properties of the company, the assets of the company are deemed to be in the custody of the court as from the date of the order of winding up of the company and no person including the secured creditor has a right to take possession of the property from the custody of the court except with the leave of the court. Only the court can deal w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplication for proper distribution as per the Companies Act. The Corporation is directed to hand over possession of the assets of the company under liquidation to the official liquidator within fifteen days from today. The Corporation is also directed to deposit the amount of Rs. 8,99,786.52 received by it by sale of plant and machinery of the company under liquidation with the official liquidator within fifteen days from today. In the facts and circumstances of the case, there shall be no order as to costs". Aggrieved with the aforesaid order, the Corporation has preferred this appeal. Mr. B.R. Shah, learned counsel appearing for the Corporation, contended that the law is firmly established that the secured creditor is outside the winding up and he can realise his security without intervention of the court by effecting sale of the mortgaged property by private or public sale. Leave of the court is necessary only when intervention of the court is sought for realising the security. He placed reliance for this proposition on the case of M.K. Ranganathan v. Government of Madras [1955] 25 Comp Cas 344 ; AIR 1955 SC 604. It was also urged by learned counsel that though the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. (2) The court which is winding up the company shall, notwithstanding anything contained in any other law for the time being in force, have jurisdiction to entertain, or dispose of ( a )any suit or proceeding by or against the company ; ( b )any claim made by or against the company (including claims by or against any of its branches in India) ; ( c )any application made under section 391 by or in respect of the company ; ( d )any question of priorities or any other question whatsoever, whether of law or fact, which may relate to or arise in course of the winding up of the company ; whether such suit or proceeding has been instituted, or is instituted, or such claim or question has arisen or arises or such application has been made or is made before or after the order for the winding up of the company, or before or after the commencement of the Companies (Amendment) Act, 1960. (3) Any suit or proceeding by or against the company which is pending in any court other than that in which the winding up of the company is proceeding may, notwithstanding anything contained in any other law for the time being in force, be transferred to and disposed of by that court. (4) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor for the preservation of a security which the secured creditor shall be liable to pay shall be the whole of the expenses less an amount which bears to such expenses the same proportion as the workmen's portion in relation to the security bears to the value of the security." "529A. Overriding preferential payments. (1) Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company ( a )workmen's dues ; and ( b )debts due to secured creditors to the extent such debts rank under clause ( c ) of the proviso to sub-section (1) of section 529 pari passu with such dues ; shall be paid in priority to all other debts. (2) The debts payable under clause ( a ) and clause ( b ) of sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions." "537. Avoidance of certain attachments, executions, etc., in winding up by or subject to supervision of court (1) Where any company is being wound up by or subject to the supervision of the court ( a )any attachment, distress or execution put in force, without leave of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may at any time before realisation redeem it on payment to the creditor of the assessed value. (5) Where a creditor, after having valued his security, subsequently realises it, the net amount realised shall be substituted for the amount of any valuation previously made by the creditor, and shall be treated in all respects as an amended valuation made by the creditor. (6) Where a secured creditor does not comply with the provisions of this section, he shall be excluded from all share in any dividend." It may be seen that in section 446(1), it has been envisaged that where winding up order has been made or official liquidator has been appointed as provisional liquidator, no suit or "other legal proceedings" shall be commenced or if pending at the date of winding up order, can be proceeded with against the company except by the leave of the court and subject to the conditions as the court may impose. This provision by itself does not leave the secured creditor out of its net if he has to commence or proceed with a suit or other legal proceeding. However, under section 529, the rules applicable to rights of secured creditors, with respect to the estate of persons insolvent, as ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch right is his property and on an adjudication, the property of the mortgagee does not vest in the court or the official liquidator. What is vested in the court is the property of the insolvent. In the case of an insolvent company, the same principle applies, albeit no vesting of the property in the court take place, but only custody is deemed to be with the court. Their Lordships of the Supreme Court quoted with approval the principle enunciated by Lord Wrenbury in Food Controller v. Cork [1923] AC 647, wherein he stated as under (page 670) : "The phrase 'outside the winding up' is an intelligible phrase if used, as it often is, with reference to a secured creditor, say a mortgagee. The mortgagee of a company in liquidation is in a position to say 'the mortgaged property is to the extent of the mortgage my property. It is immaterial to me whether my mortgagor is in winding up or not. I remain outside the "winding up" and shall enforce my rights as mortgagee.' This is to be contrasted with the case in which such a creditor prefers to assert his right, not as a mortgagee, but as a creditor. He may say 'I will prove in respect of my debt'. If so, he comes into the winding up." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the security before its realisation by the secured creditor. The proviso emphasises the position that the secured creditor is still entitled to keep himself outside the winding up proceedings and realise the security without necessity of proving his debts, albeit he shall reimburse the expenses incurred by the creditor, if any, for the preservation of the security before its realisation. It is his option. The proviso to section 529(2) was amended and Explanation was inserted by the very same Act No. 35 of 1985, by which a pari passu charge was created in favour of the workmen by inserting the proviso to section 529. Workmen's dues along with the unrealised debt of the secured creditor to the extent they remain unrealised due to enforcement of the pari passu charge were placed at par as first priority over all other debts under section 529A. By amending the proviso and inserting the Explanation, the only change which has been made is that the secured creditor too is liable to pay only the proportionate expenses for preservation taking into consideration the pari passu charge in favour of the workmen's dues. But the fact remains, it has yet been left at the option of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ewly inserted provision creating a charge in favour of the workmen and authorising the liquidator to enforce such charge on behalf of the workmen, does not empower the liquidator or the workmen to enforce such charge independent of the option of the secured creditor to realise the security. If the provisions of sub-clauses ( a ), ( b ) and ( c ) of section 529(1) as we see, can be invoked only in case the secured creditor opts to realise the security, it must be held that the exercise of option to realise the security without necessity to prove the debts in winding up proceedings is an option left to the secured creditor to remain outside the winding up proceedings and does not bring him within the winding up proceedings. It is also to be noticed that a charge is created on the security of every secured creditor and not on the property of the company to be wound up. It is apparent from a reading of section 529 that by inserting the proviso to sub-section (1) and sub-section (3), no additional security is created, other than that already existing to encumber the estate of an insolvent company. What has been done is that to the extent the security in favour of the secured creditor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principle enunciated in M.K. Ranganathan's case [1955] 25 Comp Cas 344; AIR 1965 SC 604, by their Lordships of the Supreme Court that the secured creditor, if he decides to realise his security without interventio: of the court, is outside the winding up proceedings. Section 529A in respect of secured creditor comes into play only in respect of the debt which has not been realised by the secured creditor and not otherwise. Where a secured creditor opts to realise his security without relinquishing his security and without proving his debt, the realisation is to be governed by the proviso to section 529(1) and the workmen get from such realisation only that much proportion for which they rank pari passu qua the realisation of the security. It is only for the remainder, for the purpose of disbursement of dividend by the official liquidator from the realisation made by him from the assets of the company which could not have beer realised by the secured creditor, or in respect of which secured creditor have relinquished their security, that workmen's dues are to be paid in all priority. Even then along with the workmen's dues, the debts due to the secured creditor to the extent th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company wound up, even if a secured creditor of such assets opted to stand outside the winding up proceedings to realise the security and that as the winding up order of the company though made on November 30, 1990, related back to the date of presentation of the petition by the Karnataka State Financial Corporation under section 29 of the State Financial Corporations Act it cannot exercise the power under section 29 to sell the same. The company court rejected the contention of the liquidator and granted the application of the Corporation subject to an undertaking given by the Karnataka State Financial Corporation respecting the workmen's dues in the company to be wound up. On appeal, the same contentions were raised. Justice N. Venkatachala (as he then was) speaking for the court, while examining sections 529(1) and 529A observed as under (at page 32 of 81 Comp Cas) : "The proviso to sub-section (2), as it stands after its amendment by Act 35 of 1985, states in unequivocal words that the liability of paying the expenses incurred by the liquidator for preservation of secured creditor's security till its realisation by the secured creditor arises if, such secured creditor, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eds to realise his security standing outside the winding up." The aforesaid view of the Division Bench of the Karnataka High Court fully accords with the view which we have taken above, of the provisions of sections 529 and 529A as they stand after the amendment of 1985, with which we are in respectful agreement. In Karnataka State Financial Corporation v. Patil Dyes and Chemicals Pvt. Ltd. [1991] 70 Comp Cas 38 , the Karnataka High Court was concerned with the question whether the company court has jurisdiction to decide an application moved by the official liquidator representing the workmen for the purpose of enforcement of the charge created under the Act and there is any dispute about such enforcement of right. The court was not concerned with the question whether a secured creditor could proceed to realise his security without the leave of the court where intervention of the court is not required and whether if he does so, the action is invalid. Rather the court accepted this position that the secured creditor of the company in liquidation stands outside the winding up. The court answered the question posed before it in the following manner (headnote) : "Even if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssu claim of a secured creditor under section 529(1)( c ) and clause ( c ) to the proviso are questions relating to priority arising in the course of winding up and falls within the jurisdiction of the company court if any dispute in respect thereto arises, to be decided and entertained. Therefore, there cannot be any quarrel with the said principle. However, the case is of little assistance on the question raised before us as to whether the secured creditor is under an obligation to seek leave of the court, if instead of relinquishing the security in winding up, he opts to realise the security. The next case relied upon by learned counsel for the official liquidator in this connection is Kerala Financial Corporation v. Official Liquidator [1991] 71 Comp Cas 324 of the Kerala High Court. The said decision also does not deal with the question of the right of the secured creditor to stand outside the winding up proceedings and realise the security. The question raised before the court was after the order of winding up is made, whether section 29 of the State Financial Corporations Act at all remains operative and power under section 29 at all can be exercised by the State Fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enforcement of the charge of the workmen only ranks pari passu with the workmen's dues. Therefore, sale by the secured creditor at his option and enforcement of the charge against realisation is a condition precedent before the secured creditor's debt ranks pari passu with the workmen's dues under section 529A. This necessarily means that it is only all unsecured debts that come within purview of section 529A and the question of applying priority arises on disbursement of dividend by official liquidator. It appears that the attention of the court was not drawn to the language used in the proviso to section 529(1) and sub-clause ( c ) of the proviso to section 529 which has to be read with section 529A. The next case relied upon by learned counsel for the official liquidator is Maharashtra State Financial Corporation v. Official Liquidator [1995] 82 Comp Cas 342 ; AIR 1993 Bom 392. It is true that the decision of the Bombay High Court supports the contention of learned counsel for the official liquidator. With great respect, we have not been able to persuade ourselves to agree with the same for the reasons already detailed above, for arriving at our conclusion. In our opin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Corporation has taken action under section 29, after the winding up order was made and the property came to be in the custody of the court in view of the provisions of section 456(2) of the Companies Act. It was contended by learned counsel for the official liquidator that once the property came into the custody of the court, it was not open to anybody to take that property out from the custody of the court in exercise of the power under section 29 of the State Financial Corporations Act without leave of the court. This contention need not detain us much. As noticed above, the principle behind keeping a secured creditor outside the insolvency proceedings or winding up proceedings, for the purpose of realising the security or otherwise dealing with security, without intervention of the court is that that right is exercised to enforce the secured creditor's own claim to the property. It also provides that from the date of the order of adjudication and vesting of the insolvent's property in the court, no proceedings or other legal proceedings shall be commenced or the pending suit or other legal proceedings continue. Yet secured creditors are kept out of insolvency proceedings a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the property does not come to the court and is not available for distribution of dividends generally unless the mortgagee relinquishes it or the surplus, if any, comes to the court. Enforcement of such right remains outside the insolvency proceedings or winding up proceedings, as the case may be. Therefore, once we have come to the conclusion that amendment in section 529 and insertion of section 529A does not affect the right of the secured creditor to realise the security without intervention of the court by keeping himself outside winding up proceedings, the further contention that the property being in the custody of the court cannot be taken outside its custody without leave of the court ( sic ) . If that were so, the provisions of section 529(1)( c ), which correspond to section 229 of the Act of 1913 read in the light of section 29(6) of the Insolvency Act, as interpreted by their Lordships of the Supreme Court in M.K. Ranganathan's case [1955] 25 Comp Cas 344, would be rendered otiose, because in that event, in no case, after the winding up order has been made, or custody is handed over to the receiver or official liquidator, can the secured creditor remain outside the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "to explore the possibility of reviving the sick unit and restore it to the normal functioning." Obviously, the purpose of the Act of 1985 is to preserve the assets and resources of the company for its revival until the matter is decided finally one way or the other. Therefore, taking all these into consideration, their Lordships observed in the first instance as under (at page 818) : . "...Section 22(1) shorn of the irrelevant part, provides that where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in any other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for appointment of a receiver in respect thereof shall lie or be proceeded with further, except with the consent of the BIFR or, as the case may be, the appellate authority. The purpose and object of this provision is clearly to await the outcome of the reference made to the BIFR for the revival and rehabilitation of the sick industrial company. The words "or the like" which follow the words "execution" and "distress" are clearly intended to con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... blished in M.K. Ranganathan's case [1955] 25 Comp Cas 344 (SC), it is only where the intervention of the court is sought for realising the security, that is to say, that the security is to be realised through legal proceedings, that leave of the court is required before proceeding further, but if no intervention of the court is sought and if no legal proceedings are to be instituted, the secured creditor is entitled to stand outside the winding up proceedings and opt to realise his security. As a result of the aforesaid discussion, this appeal succeeds. The judgment of the learned company judge is set aside and the application moved by the official liquidator for transfer of possession of the assets of the company hypothecated/mortgaged with the Corporation as security is rejected. However, it is made clear that from the amount of Rs. 8,99,786.52 which has been realised as sale consideration of the plant and machinery, the proportion of workmen's dues, if not already realised by the official liquidator, shall be realised by him from the Corporation without any hindrance being put by the Corporation of any sort whatsoever, and the Corporation shall pay the amount demanded by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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