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TMI Blog1997 (3) TMI 474X X X X Extracts X X X X X X X X Extracts X X X X ..... hort), as against the said order of the BIFR also came to be dismissed, and when the said order of the AAIFR was communicated to the court, Company Petition No. 49 of 1994 was registered. Both the company petitions were clubbed together and notices issued. Among others, the secured creditors of the company under liquidation are the present appellant, Karnataka State Industrial Investment and Development Corporation Limited (KSIIDC), respondent No. 2, Karnataka State Financial Corporation (KSFC), respondent No. 4, Industrial Development Bank of India (IDBI), respondent No. 5, Canara Bank and respondent No. 6, Syndicate Bank. The said Canara Bank and the Syndicate Bank filed Company Application No. 153 of 1995, seeking permission to sell the hypothecated plant and machinery. The secretary of the employees' union of the company also filed Company Application No. 150 of 1995, pleading the cause of the 300 workmen of the company who were to get about Rs. 80 lakhs. On September 8, 1995, the court passed an order to wind up the company in view of the orders passed by the BIFR and the AAIFR. In the meantime, the appellant, KSIIDC, acting under section 29 of the State Financial Corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber 8, 1995, the court had passed an order to wind up the company. On October 26, 1995, KSIIDC filed Company Application No. 535 of 1995, before the company judge to recognise and record its right as secured creditor to stand outside the winding up proceedings in enforcement of its security for realisation of the amount due to it, to approve the sale held in favour of respondent No. 7 and to appropriate the sale proceeds towards dues on pari passu basis. On December 14, 1995, one Priyanka Builders filed Company Application No. 786 of 1995, offering a total price of Rs. 5.02 crores on the same terms and conditions as had been offered by the KSIIDC to respondent No. 7. To demonstrate their bona fides , the said Priyanka Builders also produced copies of the bank drafts for a sum of Rs. 50 lakhs which they had sent to the official liquidator. They sought for a direction for sale of land, building, plant and machinery of the company under liquidation to them. The official liquidator also filed Company Application No. 2 of 1996, under sections 456 and 457 of the Companies Act, 1956 ("the Act" for short), for a declaration that the sale conducted by the KSIIDC in favour of responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stification for not approving the sale in favour of respondent No. 7 and there was no necessity at all for associating the official liquidator with the re-auction. Learned counsel for the contesting respondents urge thus : where an industrial concern like the present respondent No. 1 in respect of which the appellant seeks to invoke section 29 of the State Financial Corporations Act, 1951, also happens to be a company in the winding up, then, the official liquidator would be equally concerned as pari passu charge-holder of the workmen's dues by virtue of the proviso to sub-section (1) of section 529 of the Act. The provisions of the SFC Act as well the Act, therefore, shall have to be read consistently with each other, which is permitted by the latter part of section 46B of the SFC Act, and the question of repugnancy would not arise. Section 537 of the Act would thus inevitably apply and no sale could have been held without leave of the court. Sale by the appellant in favour of respondent No. 7 completed on September 30, 1995, after passing of the winding up order on September 8, 1995, is, therefore, void. The learned company judge was right in directing that the official liquida ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completed after this winding up order dated September 8, 1995 ; and, as such, without reference to the date of commencement of winding up, the sale so held after the date of winding up order would render it void under section 537(1)( b ) of the Act. We may revert to this context after considering the question as to when exactly the sale by the KSIIDC in favour of respondent No. 7 was completed. According to learned counsel for the appellant, KSIIDC, and respondent No. 7, Insotex (India) Limited, the sale by the KSIIDC in favour of respondent No. 7 had been completed, with respondent No. 7, by its letter dated June 5, 1995, accepting the conditions imposed, as regards payment of interest by the KSIIDC, and paying Rs. 150 lakhs by cheque. This, according to the said learned counsel, was much prior to the date of passing of winding up order. Learned counsel for the other respondents, however, point to the other circumstances which make it amply clear that the sale was not completed as on June 5, 1995. Even, according to the KSIIDC, when the highest offer of Rs. 451 lakhs of respondent No. 7 was recommended to be accepted, the ICICI suggested that there should be further negotiations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leave of the court. This decision of the Supreme Court certainly supports the case of the appellant, KSIIDC. But the said decision had no provision corresponding to sections 529 and 529A of the Act. Consideration of section 537 of the Act (section 232 of the Indian Companies Act, 1913), in the light of sections 529 and 529A, therefore, did not arise before the Supreme Court in the said decision. Sri Gopal Hegde, learned counsel for the appellant, KSIIDC, refers to certain other decisions in support of his contention. In State Industrial and Investment Corporation of Maharashtra Ltd. v. Maharashtra State Financial Corporation [1988] 64 Comp Cas 102 (Bom), where a secured creditor exercises its power to sell outside the winding up and without intervention of the court, the Bombay High Court has held that such a sale was not void as section 537 of the Act does not apply. In Aryavarta Plywood Ltd. ( In Liquidation ) v. Rajasthan State Industrial and Investment Corporation Ltd. [1990] 1 Comp LJ 222 ; [1991] 72 Comp Cas 5 , the Delhi High Court held that the sale in exercise of powers under section 29 of the SFC Act without seeking the aid of the court in enforcing the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he SFC Act subject to the undertaking given by the KSFC respecting the workmen's dues, held thus (page 34): "For the foregoing reasons, we are not left in doubt that permission granted to the KSFC, a secured creditor of the company (ICBL) in wind-ing-up, to sell that company's assets, which are already in its possession and constitute security for repayment of the loan, and realise its security subject to payment of workmen's dues as undertaken by it by standing outside such winding up, is well in accordance with the provisions of section 529, as amended, and section 529A, as inserted in the Companies Act and section 29 and section 46B of the State Financial Corporations Act, 1951." This decision, however, was questioned in an appeal before the Supreme Court. The matter is still pending before the Supreme Court. While granting special leave, the Supreme Court made the following order: "Meanwhile, it appears appropriate that the respondent, Karnataka State Financial Corporation, should sell the property acting jointly with the official liquidator under the supervision and in accordance with the directions of the learned company judge of the High Court and the sale proceeds be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n's dues. Therefore, because of the proviso to section 529, the secured creditor is not the only mortgagee entitled to sell the security. He has a co-mortgagee (in the form of workmen) with an equivalent charge on the same security. These workmen are to be represented by the official liquidator. Therefore, when a secured creditor seeks to realise his security, he has also to contend with the official liquidator. The official liquidator is an interested party in the sale of the security in two capacities in such a situation (1) as a representative of the pari passu charge-holders ; and (2) as an officer of the court in custody of the company's properties, who is responsible for the sale and distribution of the assets of the company in winding up. In both these capacities, he has an interest in the sale of the mortgaged security by the secured creditor. What are the rights of a pari passu charge-holder? Can a mortgagee exercise his power of sale without the consent of a pari passu charge-holde? The meaning of the word 'pari passu' is defined in Jowitt's Dictionary of English Law, Volume II, 1959 Edition, page 1294, as : 'With equal step, equally, without preference'. The term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of his mortgage debt from the mortgagor and release his charge independently. But when it comes to realising the security, both the pari passu charge-holders must join or realise the security simultaneously. The sale proceeds are required to be divided proportionately between them in the same proportion as their dues. Hence, when a sale takes place, it is for the simultaneous recovery of claims of all pari passu charge-holders." It was further observed in paragraph 23 thus (page 355): "Also, the statutory right which is given to a financial corporation under section 29 to sell the property has to be exercised consistently with the rights of a pari passu charge-holder in whose favour a statutory charge is created by the proviso to section 529 of the Companies Act, when the company is in liquidation. Therefore, such a power can be exercised only with the concurrence of the official liquidator and the official liquidator is required to take the permission of the court before giving such concurrence since he is an officer of the court and is required to act under the directions of the court while exercising his powers on behalf of the workers." Referring to the contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany in winding up when the secured creditor prefers to stand outside the winding up and enforces his security in exercise of the power under section 29 of the SFC Act. We fully agree with the exposition of law as made by Mrs. Justice Sujata Manohar in this regard. It is no doubt true that on July 29, 1994, the appellant, KSIIDC, had taken over possession of the assets of the company under liquidation acting under section 29 of the SFC Act. It is also true that no provisional liquidator had been appointed under section 450 of the Act. Nevertheless, by the time the appellant completed the sale transaction in favour of respondent No. 7 on September 30, 1995, the winding up order had already been passed on September 8, 1995, and the official liquidator had already come into the picture as liquidator of the company under section 449 of the Act. There were workmen's dues to the tune of Rs. 80 lakhs. Because of the proviso to sub-section (1) of section 529 of the Act, the KSIIDC is not the only secured creditor entitled to sell the security by invoking section 29 of the SFC Act. The KSIIDC has to contend with the pari passu charge in favour of the workmen's dues, the workmen being re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the court, leave of the court would be necessary, and, any sale without such leave would be void under section 537 of the Act. The learned company judge was, therefore, right in declining to approve the sale in favour of respondent No. 7 and giving fresh directions for resale of the property by the appellant, KSIIDC, by standing outside the winding up in association with the official liquidator right from the time of settling the terms of advertisement, and making the said resale subject to confirmation by the court. While thus finding that there is no merit in the appeal, the fact also remains that respondent No. 7 has already parted with a sum of Rs. 150 lakhs towards sale consideration as far back as on June 5, 1995. The price settled in favour of the said respondent No. 7 was Rs. 486 lakhs. In the circumstances, therefore, in the said resale, it would be appropriate that the first bid shall be taken as that of respondent No. 7 at Rs. 496 lakhs, the difference of Rs. 10 lakhs being on account of the fact that respondent No. 7 had already paid a huge sum of Rs. 150 lakhs as far back as on June 5, 1995. The first bid thus being of respondent No. 7 at Rs. 496 lakhs, if any oth ..... X X X X Extracts X X X X X X X X Extracts X X X X
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