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TMI Blog2004 (12) TMI 392X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1956 [for short, the Act]. 2. The winding up proceedings has now reached the stage wherein either the Official Liquidator or the secured creditors have sold substantial portion of assets of the company and the same is realized and the Official Liquidator had also notified inviting claims from interested persons and the last date for receipt of such claims had been notified to be 11-8-2003. The Official Liquidator had also been permitted by order dated 12-9-2003 passed by this Court, to avail the services of M/s HNS Rao Co., Chartered Accountants, for processing the claim applications of the creditors and workmen and to submit a report to the Official Liquidator. 3. Much prior to this, Karnataka State Industrial Investment Development Corporation Ltd. (KSIIDC), a secured creditor, had made an application seeking permission to stand outside the winding up proceedings and to realize the assets of the company secured in its favour for repayment of loan advanced by it in favour of the company. M/s KSIIDC, a State owned financial corporation, within the meaning of this expression under the State Financial Corporations Act, 1951 (for short, SFC Act), it appears, had invok ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In terms of the provisions of section 529A of the Act, dues to the workmen are being on par with any amount payable to the secured creditor and in fact apart from the workman having put forth their claims before the Official Liquidator, several secured creditors having notified with the Official Liquidator about the amount due to them, the Official Liquidator was keen on processing the claims and settling the dues, particularly as the workmen, who claim that they are out of employment ever since 1988 and are pressing hard for payment. However, the Official Liquidator found a stumbling block in KSIIDC - lead bank amongst the secured creditors - which in fact is holding on to the funds of the company under liquidation, having not notified the amount due to it, the Official Liquidator was handicapped in working out the apportionment amongst the secured creditors or even determining the amount that can be paid in favour of the workmen in particular. 7. It is at this stage, the controversy has arisen in the light of several legal contentions sought to be put forth particularly by KSIIDC through its learned counsel Sri K. Gopal Hegde, who claims that KSIIDC, being a secured credito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs are going on under the supervision of the Court, the provisions of the Act prevail over the other provisions, including the provisions of the SFC Act; that the only right which a secured creditor can claim is for priority in payment over other unsecured creditors; that any secured creditor ranked pari passu with the claims of the workmen, as Official Liquidator usually represents and has a duty to take care of the interests of the workmen, as one wing of the secured creditors, and unless the Official Liquidator knows the claims of all the secured creditors, it is not possible for the Official Liquidator to distribute any dividend in favour of the workmen vis-a-vis their claims; that even the secured creditor is required to notify its claims when the Official Liquidator invites such claims and within the permitted time; that the stand on the part of KSIIDC leads to an incongruent situation such as a secured creditor if does not notify its claim at all, the Official Liquidator will not be in a position to work out the proportion in which the amount is to be apportioned amongst the secured creditor including the workmen and by not notifying its claim, any one of the secured cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it should seek the permission of the Company Court in the sense it should notify the sum. In this regard, learned counsel has drawn the attention of the court to the provisions of section 529 of the Act, wherein it is indicated that in the winding up of an insolvent company, the law and procedure to be applied is the same as in the case of a person adjudged insolvent, which is governed by the provisions of the Provisional Insolvency Act, but the provisions of Provisional Insolvency Act do not apply to the secured creditor; that the proviso to sub-section (2) of section 529 of the Act expressly indicates the situation wherein a secured creditor may not relinquish its security in which event he may stand outside the winding up proceedings and realize the amount due to him and the only condition is that such secured creditor has to pay the Official Liquidator the expenditure incurred by the liquidator for preservation of security before its realization by the secured creditor. Sri Gopal Hegde submits that in the instant case, the assets having been taken over by the KSIIDC in exercise of its power under section 29 of the SFC Act, even before the winding up order is passed, no such o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oses to adopt a stand that it need not notify or prove before the Official Liquidator either the principal amount or the interest part of it, nothing can be paid to KSIIDC at this juncture, when the last date for notifying the claim before the Official Liquidator has already expired. Sri Narayan Bhat has also pointed out the discrepancies in the very pleadings of the KSIIDC viz., while at one point of time, the amount due was indicated as to be Rs. 45 lakhs, it is indicated to be Rs. 72 lakhs at a subsequent point of time i.e. in terms of memo dated 23-7-2004, which also does not have any authenticity as the memo is not supported by an affidavit of any of the responsible officer of the corporation. It is the submission of Sri Narayan Bhat that when there is a dispute as to the sum due to the secured creditor, and even as amongst the secured creditors, the workmen s due are pari passu unless the Official Liquidator is aware of the amount due to all the secured creditors, there is no way of the Official Liquidator disbursing the amounts to creditors including the workmen; that as the KSIIDC has been holding the fund belonging to the company for quite some time, it is liable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is only the Official Liquidator who can deal with such property for sale etc. in terms of section 457 of the Act read with rule 273 of the Rules, and that a secured creditor even in the nature of a State owned financial corporation, does not have any absolute right to bring to sale such properties of the company under liquidation. It is also the submission of Sri Deepak that one secured creditor cannot seek protection or claim priority or a special status over another secured creditor, to counter the submission of Sri Gopal Hegde that KSIIDC has an edge over the other secured creditors in view of the provisions of section 29 of the SFC Act. In support of his submissions, Sri Deepak has relied on the decision in Industrial Credit Investment Corpn. of India Ltd. v. Srinivas Agencies [1996] 86 Comp. Cas. 255 (SC). Learned counsel for the Official Liquidator has also relied on the following decisions in the context of position of a secured creditor: Karnataka Bank Ltd. v. Craft Tools (P.) Ltd. ( In Liquidation ) [1986] 60 Comp. Cas. 756 (Kar.), Mysore Surgical Cottons (P.) Ltd. v. Karnataka State Financial Corpn. [1988] 1 Comp. LJ. 63 (Kar.), M.K. Ranganathan v. Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rties, are to be found in sections 172 to 176 of the Indian Contract Act (for short, the Contract Act) insofar as the movable assets of the company are concerned and sections 58, 67, 78 and 81 of the Transfer of Property Act (for short, T.P. Act), in respect of immovable properties. 22. Broadly speaking, the right under section 176 of the Contract Act of a pledgee is one to retain the possession of the pledged articles pending repayment of the amount borrowed on the security of the articles, but without actually making use of the pledged articles and to effect sale thereof on the failure of the borrower to repay the amount even after receipt of a notice, calling upon him to pay the debt. The amount realized in excess of the debt on such sale is to be restored to the borrower. 23. The pledgee has a legal obligation to restore the pledged articles if the pledgor is prepared to tender the debt amount before sale. The pledgee cannot retain possession of the pledged articles and at the same time seek realization of debt, as held by the Supreme Court in the case of Lallan Prasad v. Rahmat Ali AIR 1967 SC 1322. 24. Insofar as the rights of a mortgagee in respect of a mortg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case considerable amount being due to the workmen from the company under liquidation in respect of which amount, a charge is created by statute, which charge runs pari passu with the other charge-holders like financial corporations and financial institutions, it will be necessary to ascertain the amount due to each of such secured creditor even for a proper distribution of the dividends to various secured creditors and promoters, from out of the amount realized by sale of the assets of the company under liquidation, as the sales have taken place subsequent to the passing of winding up order. 28. In a situation of this nature, it is not possible to accept the submission of Sri K. Gopal Hegde, learned counsel appearing for the secured creditor - KSIIDC - that the secured creditor need not put forth any claim or notify any amount before the Official Liquidator. It is no doubt true that the Official Liquidator is not determining the right of a secured creditor, which is statutorily provided for and regulated, but he is nevertheless required to ascertain such rights in the light of the competing claims of various secured creditors including the workmen on whose behalf the Offici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty for the borrowed amount, the de fure ownership of the borrower in the property gets reduced, to the extent of the amount borrowed, and to the extent of the obligations to repay the amount, the ownership of the borrower in the property is transferred. 32. In winding up proceedings what is distributed is such of the assets owned by the company under liquidation. What is not owned by the company cannot be the subject-matter for distribution. It is for this reason that a secured creditor is permitted to stand outside the winding up proceedings and to realize his security. In law, to the extent of the amount borrowed and to the extent of such portion of the property in question represents this amount, it has already passed to the ownership of the creditor. But, what was the amount that was borrowed and what was the amount that was due if had not been ascertained and had not been determined earlier, it will be necessary for the Official Liquidator or the Company Court to ascertain this amount based on such supporting materials that may be placed before the Official Liquidator or the Company Court by the party concerned, as there are competing claims even among the secured cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y other person, the Official Liquidator comes on the scene pursuant to the order of winding up the affairs of the company passed by this court only to supervise the liquidation proceedings, which implies that it is not for keeping alive the unit or to continue the unit that the Official Liquidator comes on the scene, but to put an end to it for the purpose of realizing the assets and for distribution of the same amongst various stakeholders. In the light of such statutory provisions i.e., the provisions of SFC Act vis-a-vis the provisions of the Companies Act, it is inevitable to conclude that the role of the Official Liquidator under the Act is much bigger and goes beyond the enabling provisions in favour of a State Financial Corporation provided under the SFC Act. If that is so, on and after the date of passing of winding up order, even a secured creditor like a State financial corporation, who might have exercised its power under section 29 of the SFC Act, is nevertheless answerable to the Official Liquidator and has to comply with the requirements of the Act, if not all obligations of any other person staking a claim, but at least such acts as will facilitate the Official L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... put forth by the workmen and other secured creditors other than the KSIIDC, particularly with the help of the report of the Chartered Accountant, the amount either towards the principal or towards the interest claimed as due to KSIIDC is not clear. There are conflicting versions. Even the other secured creditors are not admitting the amount now claimed by KSIIDC and this has to be cleared. Even with regard to the amount claimed by the workmen and as determined and admitted by the Official Liquidator, Sri Gopal Hegde, learned counsel appearing for KSIIDC, has sought to dispute the same by urging several contentions, inter alia that what had been indicated to be the amount due at the time when this court permitted the corporation to effect the sale of properties is different from the amount now claimed and admitted by the Official Liquidator. 39. Unless the amount due to each of the secured creditor is ascertained, there is no way for the Official Liquidator to distribute the proceeds amongst the secured creditors, who hold pari passu charge. By an understanding amongst the secured creditors and in terms of an agreement amongst them, it had been agreed that all the secured c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtheless required to notify the Official Liquidator of the amount due not only for the purpose of verification of such amount, which in law is due to the secured creditor, but also for the purpose of determination of proportionate distribution of the assets realized, amongst the various secured creditors. ( iv )The Official Liquidator is bound to take note of the amount notified by the secured creditor at any stage before the distribution of the dividends, though the secured creditor has not complied with the time-limit fixed by the Official Liquidator to notify the claim. In the absence of a claim being put forth by the secured creditor notifying the Official Liquidator about the amount due, the Official Liquidator, if proceeds on the premise that no amount is due to such a non-notified secured creditor, and distributes the available amount amongst the other secured creditors who have notified their claims, and the secured creditor who has not so notified, may be left high and dry and while will not have any claim over the company under liquidation, which will have to be dissolved when once the winding up proceedings are concluded, the charge which such secured creditor held ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of SFC Act. Insofar as the claim of the financial institutions are concerned, the matter is not res integra and it is covered by the decision of the Supreme Court in the case of Allahabad Bank v. Canara Bank AIR 2000 SC 1535. In the light of the law laid down by the Supreme Court in the case of Allahabad Bank ( supra ) it is quite clear that the Company Court has no jurisdiction for determining the entitlement of the secured creditor vis-a-vis company under liquidation. Such determination is within the exclusive Jurisdiction of the Debt Recovery Tribunal (Tribunal, for short), functioning under the provisions of the Recovery of Debts Due to the Banks and Financial Institutions Act, 1993. Pendency of proceedings before the winding up court and an order by the Company Court to wind up the affairs of the company which owes amounts to financial institutions, do not have any bearing on this position regarding the exclusive jurisdiction of the Tribunal in respect of such determination and want of jurisdiction on the part of the Company Court. 42. While the rights of a secured creditor for the purpose of enforcing his security, even when the borrower is declared as an insol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly what had been secured in favour of KSIIDC. While, as I have already discussed earlier, it is open to the KSIIDC to retain, in law, such part of the sale proceeds representing the value of its security, balance had to be deposited before the Company Court. This possibly can happen only when the amount for which the property has been secured is ascertained. Even in respect of this amount, KSIIDC is required to share it pari passu with the amount due to workmen. So far as this aspect is concerned, the Official Liquidator having adjudicated the claims of the workmen, that amount is ascertained. The sale proceeds of the assets of the company being available before this court, and steps having been taken at the instance of the Company Court and with the permission of the Company Court, it cannot be said that for the distribution of any part of this amount, the matter has to go before any other forum including the Debt Recovery Tribunal. If any creditor puts forth the claim for distribution of dividends before the Company Court as a creditor in respect of the company under liquidation, that creditor should be equipped with a certificate which perhaps is the evidence for the entitleme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y on their merits applying the questions of law as indicated in this order. ORDER (DATED 16-12-2004) 1. This Order is in continuation of Order dated 13-12-2004 in OLR No. 533/2004, for the purpose of disposing of the connected company applications, in the light of subsequent submissions made by the learned counsel for the parties. 2. All these matters had been heard earlier and were to be ordered. While in the process, Sri Narayan Bhat, learned counsel for the Applicants in C.A. 1234 of 2002 representing the erstwhile workmen of the company under liquidation, moved the Court for listing the matter for further hearing on the premise that though certain amounts have been realised from the sale of assets of the company under liquidation, in view of the various claims and counter claims and these matters require resolution etc., the amount has not been distributed so far. The Official Liquidator before whom the claims on behalf of workmen had been put forward has now determined the entitlement of the amount due to the workmen; that at any rate the amount due to the workmen is now ascertained; that the workmen have been out of employment as the company had declared lock-out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with KSIIDC. 5. Even with regard to this, the Court passed an order subsequently directing M/s KSIIDC only to retain such portion of the amount which the Corporation was entitled to on the day the winding up of proceedings was passed by this Court and transfer the balance amount to Official Liquidator. This was in terms of the order dated 24-6-2004, the part of it reads as under: - "7. However, it is open to M/s. KSIIDC to deposit such part of the amount as it deems fit from out of the amount held by it, with the Official Liquidator for the purpose of meeting the workers dues without prejudice to their claims and subject to passing of orders by this Court on this aspect. 8. The Official Liquidator may also file a report with regard to the present position of the funds available with the Official Liquidator himself for distribution vis-a-vis of the various claims and such allied information supplementing the information already filed before the Court in O.L.R. 573/03 and 111/04." 6. Subsequently, a memo came to be filed on behalf of KSIIDC on 22-7-2004 inter alia indicating that the Corporation had while retained a sum of Rs. 189.45 lakhs and Rs. 136.50 lakhs has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings. In the light of the decision and law laid dawn by the Supreme Court in Allahabad Bank s case ( supra ), it is not within the jurisdiction of this Court to determine their claims or entitlement in the course of winding up proceedings before the Company Court. However, to the extent, this Court is not called upon to determine any entitlement or any amount in favour of any of these financial institutions and if claim put forward is not in dispute even in the course of winding up proceedings, it will be within the jurisdiction of the Company Court to issue necessary directions in the matter of distribution of dividends to various creditors. 11. The position so far as M/s. KSIIDC as emerges from the legal and contractual position is that M/s. KSIIDC had opted to remain outside the winding up proceedings. In fact, this Court had also permitted them to sell such assets which was already in possession of the company. What is submitted by Mr. Gopal Hegde appearing for the Corporation is that so far as the Corporation is concerned, it is not obliged to go before the Debt Recovery Tribunal for bringing to sale the property secured in their favour but it has a statutory righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany, 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 the secured and unsecured creditors; as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent; Provided that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen s portion therein, and, where a secured creditor, instead of relinquishing his security and proving his debt, opts to realise his security, ( a ) and ( b )****** (c) so much of the debt due to such secured creditor as could not be realised by him by virtue of the foregoing provisions of this proviso or the amount of the workmen s portion in his security, whichever is less, shall rank pari passu with the workmen s dues for the purposes of section 529A." [Emphasis supplied] 16. In the present case, as the amount realised by the sale of the property by the company is much more than the entitlement of the amount to the Corporation and representing the ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to get back substantial amount or full amount that it had yielded in favour of workmen, the amount to be apportioned in favour of workmen may not be sufficient to meet the entire admitted amount in favour of workmen. The situation may be that on working priority claim under section 529A, no further amount may be left with the Official Liquidator for further distribution of the dividend. Anyway this has to be computed by the Official Liquidator in terms of the direction enumerated above and the dividend should be distributed on such basis. 20. Insofar as the claims of the applicants M/s Canara Bank, Syndicate Bank in Application No. 220/03 and M/s ICICI Bank in Application No. 694/00 is concerned, they are the persons who joined the queue before the Official Liquidator. The learned counsel for the applicants pointed out that though the Court had passed the order dated 10-9-1997 in Application No. 134 of 1996 filed by Industrial Credit and Investment Corporation of India Limited, the secured creditors are directed to jointly sell the assets of the company in liquidation along with the Official Liquidator and they were permitted to remain outside the winding up of proceedings. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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