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TMI Blog2003 (7) TMI 624X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 pursuant to the recommendation made by the Board for Industrial and Financial Reconstruction under the Sick Industrial Companies (Special Provisions) Act, 1985. The Canara Bank, the second respondent herein, filed a suit being O.S. No. 139 of 1980 on the file of the Court of the Subordinate Judge, Tirupati, for enforcing the debt of the company. The SFC which also financed the company filed an appropriate application under section 446 of the Companies Act, 1956 seeking leave of the Company Court to pursue the statutory remedy under section 29 of the State Financial Corporations Act ('SFC Act' for brevity). This Court by an order dated December 20, 1994, passed in C.A. No. 235 of 1994 permitted sale of assets by the SFC. The SFC proceeded under section 29 of the SFC Act and ultimately on June 23, 1995, the SFC and Canara Bank realised a sum of Rs. 405 lakhs and the assets were already handed over to the purchaser. 3. The appellant filed a claim petition in Form No. 66 as per rule 151 of the Companies (Court) Rules, on December 1, 2001, to admit its claim treating it as secured creditor by receiving the certified copy of the statement of account as proof of debt. The Official Liqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o legal formalities, obtained a bank guarantee as interim security, which was executed by the Canara Bank, and that the said bank guarantee duly executed by the company shall remain in force for a period of three months from the date of execution on August 7, 1981, or till the completion of legal formalities whichever is earlier. The charge created is not only in relation to the loan disbursed on January 11, 1982, but also disbursed subsequently. In the affidavit it was specifically stated that the SFC would lead evidence in support of the above contention. 6. The Official Liquidator, by notice of rejection dated June 17, 2002, rejected the claim of the SFC to the extent of Rs. 70.01 lakhs (Rs. 23.12 lakhs as against the principal and Rs. 46.89 lakhs towards interest) as on the date of passing of the winding up order, as the claim is not substantiated and not proved as a secured loan. The Official Liquidator also observed that the claim ranks pari passu with other unsecured creditors. 7. Learned standing counsel for the APSFC, Sri Y.N. Lohita submits that the Official Liquidator has erred in adjudicating the claim of the SFC though there is sufficient proof in support of the clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in its favour, but it is only a piece of evidence in support of their claim as on the date of winding up. In spite of giving adequate opportunity, the SFC did not enclose any evidence with their claim petition dated May 3, 2002, enclosing a report of the mediation, legal formalities, deed of hypothecation and statement of account. They did not produce Form No. 8 in order to prove that a charge is created in their favour under section 125 of the Companies Act. Any claim by the SFC, subsequent to the date of winding up, cannot be the subject-matter of adjudication under rule 147 of the Companies (Court) Rules. He placed reliance on the judgment of the Madras High Court in A. Shanmugham v. Official Liquidator [1992] 75 Comp. Cas. 181 . Points for consideration : 9. In view of the rival submissions, the points that arise for consideration are- "(1) Whether the Official Liquidator passed an order of rejection under rule 159 of the Companies (Court) Rules, 1959, which is clearly wrong requiring adjudication by this Court acting as Appellate Court under rule 164 of the Companies (Court) Rules, 1959 ? (2) Whether the appellant/SFC can be treated as secured creditor for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Jwaleshwari Pratap Narain Singh AIR 1951 SC 120). This limitation on the power of the appellate court in a first appeal from decree, on principle will also apply to an election appeal under section 116A. . . ." (p. 78) 12. The above ratio came to be laid down in the context of exercise of powers of the appellate Court under section 116A of the Representation of the People Act, 1951. In Baburao Bagaji Karemore v. Govind AIR 1974 SC 405, the Supreme Court again in an appeal under the Representation of the People Act, observed as under : ". . .It is needless for us to reiterate what has over a long course been observed in numerous decisions that a finding arrived at on an appreciation of conflicting testimony by a trial judge who had the opportunity of observing the demeanour of witnesses while giving evidence should not be lightly interfered with merely because an appellate court which had not the advantage of seeing and hearing the witnesses can take a different view. Before a finding of fact by a trial court can be set aside it must be established that the trial judge's findings were clearly unsound, perverse or have been based on grounds which are unsatisfactory by reason of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortunity to the corporation. However, the corporation is directed to place whatever material it is interested to place, before the Official Liquidator within a period of three weeks from today. Thereafter, the Official Liquidator is directed to adjudicate the matter expeditiously. Office is directed to number this C.A. No. 257 of 2002 as appeal and not as company application and furnish the copy of this order to learned counsel urgently." [Emphasis supplied] 14. The appellant again approached the Official Liquidator by filing a fresh claim in Form No. 66 reiterating its earlier stand. They did not produce any evidence in proof of their claim like charge in Form No. 8. They produced a certificate issued by Canara Bank dated August 8, 1981, original bank guarantee dated August 7, 1981, original agreement dated August 3, 1981, with Canara Bank, resolution of the board of directors of the company and copy of the letter from the SFC dated June 11, 1981, addressed to the company. They did not produce Form No. 8 registered by the company creating charge over the assets in their favour. The appellant merely relied on pari passu agreement with Canara Bank and it expected the Official Liqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any kind, which had been created by the company after acquisition of the property, the company shall cause the particulars of the charge, together with a copy of the instrument by which the charge is created or is evidenced, to be delivered with the Registrar for registration under the Act. A plain reading of sections 124 to 127 leaves no doubt that unless and until a charge is registered with the Registrar of Companies, it has no sanctity notwithstanding the fact that such charge was brought into vogue by reason of agreement inter-parties between the two creditors or by registration of guarantee bond. A charge to be a charge for the purpose of the Companies Act, must be registered with the Registrar of Companies. Here it is appropriate to refer to a recent judgment of the Apex Court in International Coach Builders Ltd. v. Karnataka State Financial Corpn. [2003] 114 Comp. Cas. 614 1. The Supreme Court considered the effect of section 29 of the State Financial Corporations Act, 1951 (SFC Act) on the winding up of a company. In the light of the provisions of sections 529 and 529A of the Companies Act, the Supreme Court repelled the contention that by reason of section 29 of the SFC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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." (p. 630) 17. The Supreme Court laid down the following principles : "(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." (p. 630) 18. Therefore, unless and until the pari passu agreement between SFC and Canara Bank and memorandum of deposit of title deeds executed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liquidation shall be admissible to proof against the company, but the debts of workmen shall be paid equally with all other debts. 20. Further, the guarantee agreement executed by the company in favour of the appellant on August 7, 1981, stipulated that the said guarantee is valid for a period of three months or till the completion of the legal formalities whichever is earlier. The guarantee expired on July 6, 1989, and the legal formalities were completed on January 11, 1982. Thereafter, there is no continuity of guarantee and in the absence of any charge registered with the Registrar of Companies, and, hence, the claim of SFC has to be treated as unsecured loan. 21. In the statement of account filed before the Official Liquidator, the SFC claimed the amount as on the date of filing the application in Form No. 66 which is not permissible under law. The company was ordered to be wound up by this Court on October 17, 1990. The liabilities of the company have to be determined as on the date of winding up and not subsequent thereto. This is made clear by rule 154 of the Companies (Court) Rules, which is to the effect that the value of debts and claims against the company shall be es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficial Liquidator [1992] 75 Comp. Cas. 181 (Mad.), Hon'ble Sri Justice A.R. Lakshmanan (as his Lordship then was) considered the question whether the cut-off date for allowing the ratio at which sale proceeds divided on a pari passu basis as per section 529 of the Companies Act should be the date of winding up order. His Lordship, after referring to the relevant case law, ruled as follows : "Thus, I hold that (i) the workmen become secured creditors by operation of law from the date of winding up order, (ii) the workmen have a pari passu charge over the security which is held by the secured creditor under the contract, and (iii) the cut-off date for arriving at the ratio at which the sale proceeds should be divided on a pari passu basis as per section 529 of the Companies Act, 1956, should be the date of the winding up order and not the date of sale. The workmen are entitled to claim interest from the date of the winding up order till the date of realisation of security." (p. 197) 23. After perusing the impugned order passed by the Official Liquidator and examining the material placed before me, I am convinced that the order of the Official Liquidator does not warrant any interfe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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