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TMI Blog2003 (3) TMI 529X X X X Extracts X X X X X X X X Extracts X X X X ..... king directions from the Company Court and under its supervision. - CIVIL APPEAL NOS. 4702 AND 4703 OF 1994, 6303 AND 6491 OF 1995, 12928 OF 1996 AND 2007 OF 1997 - - - Dated:- 5-3-2003 - MRS. RUMA PAL AND B.N. SRIKRISHNA, JJ. R.P. Bhatt, Dilip Goswami, Mrs. Revathy Raghavan, Arvind Biswal, Gopala Krishnan, S. Prasad, S. Ravindra Bhat, Naveen R. Nath, Mrs. Lalit Mohini Bhat, Ms. Hetu Arora, Dyan Prakash, Nikhil Nayyar, Trideep Pais, Gautam Narayan, Mrs. B. Sunita Rao, Shrish Kumar Misra, Anis Kumar Gupta, Sunil Dogra, Ms. Sayali Phatak, Rakesh K. Sharma, M.N. Shroff, S.N. Bhat, P.P. Singh and Ms. H. Wahi for the Appearing Party. JUDGMENT B.N. Srikrishna, J. - These appeals arising under different factual backgrounds raise the same question of law and can, therefore, conveniently be disposed of by a common judgment. Facts : Civil Appeal Nos. 4702 and 4703 of 1994 2. On 23rd May, 1988 a winding up petition was filed under section 433 of the Companies Act, 1956 seeking to wind up the company known as International Coach Builders Ltd. Another petition by another creditor was also filed on 2-11-1988. On 10-11-1989, during the pendency of the above petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Review Application No. 118/93. These are respectively Civil Appeal Nos. 4702 4703 of 1994. 3. When the Special Leave Petitions came up for admission this Court made the following order: "Special Leave Petition granted. Meanwhile, it appears appropriate that the Respondent KSFC should sell the properties 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 sale proceeds be deposited in the Court and then distributed in accordance with the directions of the Learned Company Judge." Civil Appeal No. 12928 of 1996 4. As a sequel to the above order, M/s. Raheja Development Corporation moved an application before the Company Judge, High Court of Karnataka, for a direction to the Official Liquidator to concur in the sale effected by Karnataka State Finance Corporation (KSFC) in its favour. The Company Judge disposed of the application holding that, in view of the order passed by this Court, the application did not survive. M/s. Raheja Development Corporation made an unsuccessful attempt to intervene in Civil Appeal No. 4701/94 by seeking relief therein, but its applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Judge under section 537 of the Companies Act, 1956 for permission to stand outside the winding up proceedings and realize its security. The learned Company Judge dismissed the petition of the respondent. An appeal to the Division Bench also failed. The KSFC is in appeal and raises the same contentions with regard to its rights under section 29 of the SFC Act. Civil Appeal No. 6303 of 1995 7. A company known as Himalaya Tools (India) Pvt. Ltd. had borrowed money from the Gujarat State Financial Corporation. The said company was ordered to be wound up on 25-1-1988 by the Company Court. On 9-5-1988, in purported exercise of rights under section 29 of the SFC Act, the Gujarat State Financial Corporation (GSFC) took possession of the charged assets of the said company. The Official Liquidator of the said company took out a judge s summons seeking a direction to GSFC forthwith to hand over possession of the assets of the company in liquidation. In the meanwhile, the GSFC took steps to transfer of the properties of the company in liquidation, again purportedly under section 29 of the SFC Act. On 20-12-1989 the GSFC handed over possession of the premises of the company in liquidat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of lease or sale and realize the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation. (2) Any transfer of property made by the Financial Corporation, in exercise of its powers under sub-section (1), shall vest in the transferee all rights in or to the property transferred as if the transfer had been made by the owner of the property. (3) The Financial Corporation shall have the same rights and powers with respect to goods manufactured or produced wholly or partly from goods forming part of the security held by it as it had with respect to the original goods. (4) Where any action has been taken against an industrial concern under the provisions of sub-section (1), all costs, charges and expenses which in the opinion of the Financial Corporation have been properly incurred by it as incidental thereto shall be recoverable from the industrial concern and the money which is received by it shall, in the absence of any contract to the contrary, be held by it in trust to be applied firstly, in payment of such costs, charges and expenses and, secondly, in discharge of the debt due to the Financial Corporation, and the residue of the money so received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act and of any rule or orders made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in the memorandum or articles of association of an industrial concern or in any other instrument having effect by virtue of any law other than this Act, but save as aforesaid, the provisions of this Act shall be in addition to, and not in derogation of, any other law for the time being applicable to an industrial concern." 12. Section 46B was inserted by Act 56 of 1956 with effect from 1-10-1956. 13. The relevant provisions of the Companies Act, 1956 which need to be noticed are: Sections 529 and 529A which read as under : " 529 - (1) In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to ( a )debts provable; ( b )the valuation of annuities and future and contingent liabilities; and ( c )the respective rights of secured and unsecured creditors; as are in force or the time being under the law of insolvency with respect to the estates of persons adjudged insolvent: Provided that the security if every secured creditor shall be deemed to be subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which case he was not required to seek intervention of the Court. 15. The decision in M.K. Ranganathan s case ( supra ) held the field for considerable period, both under the Companies Act, 1913 and the Com- panies Act, 1956. However, by amending Act 35 of 1985, amendments were carried out in section 529 and a new section 529A was enacted. These developments, in our view, brought about a qualitative change in the legal situation. It is important to notice that M.K. Ranganathan s case ( supra ) was decided under the Companies Act, 1913 which did not have any provision corresponding to the proviso to section 529 or section 529A of the Companies Act, 1956. Obviously, therefore, Ranganathan could not have considered the impact of these amendments on the provisions of section 232 of the Companies Act, 1913 (corresponding to section 537 of the Companies Act, 1956). 16. The Division Bench of the Bombay High Court has considered in detail the change in the legal situation brought about by these new legal provisions in Maharashtra State Financial Corpn. v. Ballarpur Industries Ltd. AIR 1993 Bom. 392. 17. As a result of the proviso added in section 529, the security of ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged property in default of payment of mortgaged money without intervention of the court. Under the general law, the SFCs would have to file a suit for realising their security unless they qualified under section 69 of the Transfer of Property Act. This meant considerable delay and holding up of the public monies due to the SFCs. In public interest, therefore, special provisions were made by sections 29, 30, 31 and 32 enabling the SFCs to take possession of the mortgaged assets and sell them without having to move a court of law. The provisions of sections 29 to 32 and the rights flowing thereon are exercisable under ordinary circumstances. However, when the debtor is a Company in winding up, the rights of the SFCs are affected by the provisions of the Companies Act, 1956. Looked at from this point of view, therefore, there is no conflict between the provisions of the SFC Act and the Companies Act. Assuming that there is conflict, then the judgment of this Court in A.P. State Financial Corpn. v. Official Liquidator [(2000) 7 SCC 291] clearly holds that the amendments made in section 529 and 529A would override and control the rights under section 29 of the SFC Act. Though the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rge. 21. Though the charge by itself may not amount to mortgage, all the provisions which apply to a simple mortgage, so far as may be, apply to a charge. Thus, the Official Liquidator, as the representative of the workmen s pari passu charge, would be in the position of a co-mortgagee. Though section 29 hitherto enabled the SFC as a mortgagee to exercise its right thereunder by taking possession of the property and selling it in satisfaction of its debt, the situation has now changed. Because of the aforesaid statutory intervention, the SFC must necessarily contend with a pari passu charge holder who has equal rights. It is well established law that where there are co-mortgagees, one co-mortgagee cannot sell without consent of the co-mortgagee or institute any proceedings for sale of mortgaged property without joining the other co-mortgagees either as plaintiffs or as defendants. The SFC s right under section 29 of freely realising its security gets trammelled if it has to take on a pari passu charge holder. The realisation of the security can thereafter only be done either by satisfaction of the pari passu charge or by a suit in which the pari passu charge holder wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court as the new section 529A of the Companies Act confers upon a Company Court the duty to ensure that the workmen s dues are paid in priority to all other debts in accordance with the provisions of the above section. The Legislature has amended the Companies Act in 1985 with a social purpose viz. to protect dues of the workmen. If conditions are not imposed to protect the right of the workmen there is every possibility that the secured creditor may frustrate the above pari passu right of the workmen." 22. Since the Official Liquidator is in the position of a co-mortgagee, the SFCs cannot act independently or by ignoring him for enforcing their security. It is established law that, in case of co-mortgagees, all of them should join in the suit for enforcing the security, but if some of them refuse to join, they have to be included as defendants, not merely as performa parties, but as necessary parties inasmuch as the mortgage right vests in them along with the plaintiffs-mortgagees. ( See in this connection the judgment of the Privy Council in Sunitibala Debi v. Dharae Sundari Debi AIR 1919 PC 24. The same principle would be substantially true and applicable in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is immaterial to me whether my mortgage 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." (p. 607) 25. Of course, even in such a situation, if the same property was mortgaged to more than one secured creditor, they had to either come to an agreement, or in the event of disagreement, there had to be a suit in which dissenting mortgagee had to be sued as a necessary party defendant. No doubt section 29 of the SFC Act was intended to place the SFCs on a better footing. But, in our view, this better footing is available only so long as the debtor is not a company or is a going company. The moment a winding up order is made in respect of a debtor company, provisions of section 529 and 529A come into play and whatever superior rights had been ensured to SFCs under the provisions of SFC Act are now subjected to and operate only in conjunction with special rights given to the workmen, who as pari passu charge-holde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 02 and a learned Single Judge of the Punjab High Court in Official Liquidator, Ravindra Pharmaceutical (P.) Ltd. v. Haryana Financial Corpn. ( 98 Comp. Cas. 683). 29. The Division Bench of the Gujarat High Court in C.A. No. 6303 of 1995 has, however, struck a discordant note. The Division Bench was impressed by the fact that in M.K. Ranganathan this Court had emphasised the right of a secured creditor to realize his security by standing outside the winding up of a company. It also emphasised that the proviso to section 529 of the Companies Act operates only where a secured creditor, instead of relinquishing his security and proving his debt, proceeds to realise his security. In the words of the Gujarat High Court "But the fact remains, it has yet been left at the option of the secured creditor to realise the security without proving his debt in the winding up proceedings." This seems to be the linch-pin of the reasoning. 30. In our view, the reasoning of the Gujarat High Court that in case the secured creditor does not opt to realise the security, the liquidator, by dint of the proviso to section 529, does not become a charge holder in the estate of the company so as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c purpose of protecting the pari passu charge of the workmen s dues and subject thereto, SFCs can continue to exercise their statutory rights as secured creditors without being reduced to the status of unsecured creditors required to prove their debts in insolvency and stand in line with other unsecured creditors. Neither is the apprehension expressed justified, nor the contention sound. 32. We, therefore, hold as under : 1.The right unilaterally exercisable under section 29 of the SFC Act is available against a debtor, if a company, only so long as there is no order of winding up; 2.The SFCs cannot unilaterally act to realise the mortgaged properties without the consent of the official liquidator representing workmen for the pari passu charge in their favour under the proviso to section 529 of the Companies Act, 1956. 3.If the official liquidator does not consent, the SFCs have to move the Company Court for appropriate directions to the official liquidator who is the pari passu charge holder on behalf of the workmen. In any event, the official liquidator cannot act without seeking directions from the Company Court and under its supervision. 33. In the result, C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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