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TMI Blog2007 (9) TMI 401X X X X Extracts X X X X X X X X Extracts X X X X ..... al Institutions Act, 1993. 2. There may be a few dates that may be different in the three matters taken up together and there may be some irrelevant details which may be at variance in the three cases, but the principal matter in issue is the same and such issue does not stand on or fall by the varying dates or minor factual discrepancies in the three matters. 3. Bank of Rajasthan Ltd., is a secured creditor of each of the three companies in liquidation. Such bank instituted proceedings under sections 433, 434 and 439 of the Companies Act, 1956, for winding up each of the three companies. The three companies were wound up at the bank's behest. Most of the assets of the three companies have been sold off by the Official Liquidator through court. The Official Liquidator holds the sale proceeds for the same to be applied upon creditors' dues being ascertained and priorities assessed. The Official Liquidator complains of a common order made by the recovery officer by which the Official Liquidator has been required to transmit the sale proceeds to the recovery officer of the appropriate Debts Recovery Tribunal. 4. The bank asserts that by virtue of the provisions of the 1993 Act, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edings, it is the propriety thereof that the bank attacks in the light of the bounds of the Company Judge's authority as now prescribed by the Supreme Court. 6. The bank has obtained certificates in its recovery proceedings and is in the process of executing such certificates before the recovery officer. The Official Liquidator appeared on behalf of the defendants in the three sets of proceedings before the Tribunal as custodian of the assets of the companies in liquidation. Before the Tribunal, a Bombay property of one of the companies was declared as being mortgaged to the bank. It appears that from January, 2002, the Official Liquidator kept the recovery officer informed of the progress made in the liquidation proceedings, of claims received from creditors of the companies and of the sale of assets of the companies in liquidation pursuant to directions of the court. Before the recovery officer, the bank insisted that the adjudication of liability and recovery of the amount by execution of the certificate were within the exclusive jurisdiction of the Tribunal and the recovery officer to resist the Official Liquidator's stand before the recovery officer that the sale proceeds wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial Liquidator seeks to establish that there is no departure from the established procedure under the Companies Act in liquidation proceedings relating to companies in liquidation which are certificate debtors under the 1993 Act. The bank seeks to demonstrate that the position has completely altered in view of the 1993 Act and pronouncement thereon by the Supreme Court. 9. The apparent conflict between the two provisions of the two special statutes-the Companies Act and the 1993 Act-came to be noticed in the judgment in Allahabad Bank v. Canara Bank [2000] 101 Comp. Cas. 64 (SC). In that matter, Allahabad Bank, the appellant before the Supreme Court, obtained a money certificate from the Debts Recovery Tribunal while the Canara Bank, a secured creditor of the defendant company, had its claim pending before the same Tribunal. Winding up proceedings were instituted against the company before the Delhi High Court which stayed, in course of the winding up proceedings, the application for sale of the company's assets taken out by the Allahabad Bank before the Tribunal. The Supreme Court noticed that there was neither a winding up order passed against the defendant company nor had a pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Act or a provisional liquidator is appointed, the company court can stay proceedings under the RDB Act, transfer them to itself and also decide questions of liability, execution and priority under section 446(2) and (3) read with sections 529, 529A and 530, etc., of the Companies Act or whether these questions are all within the exclusive jurisdiction of the Tribunal? (4) Whether, in case it is decided that the distribution of monies is to be done only by the Tribunal, the provisions of section 73 of the Code of Civil Procedure and sub-sections (1) and (2) of sections 529 and section 530 of the Companies Act also apply-apart from section 529A-to the proceedings before the Tribunal under the RDB Act? (5) Whether in view of provisions in section 19(2) and 19(19) as introduced by Ordinance No. 1 of 2000, the Tribunal can permit the appellant-bank alone to appreciate the entire sale proceeds realised by the appellant except to the limited extent restricted by section 529A ? Can the secured creditors like Canara Bank claim under section 19(19) any part of the realisations made by the recovery officer and is there any difference between cases where the secured creditor opts to stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve now been brought into the Act with greater clarity under section 19(19) of Ordinance No. 1 of 2000. Priorities, so far as the amounts realised under the RDB Act are concerned, are to be worked out only by the Tribunal under the RDB Act. Section 19(19 ) of the RDB Act reads as follows : 'Where a certificate of recovery is issued against a company registered under the Companies Act, 1956 (1 of 1956), the Tribunal may order the sale proceeds of such company to be distributed among its secured creditors in accordance with the provisions of section 529A of the Companies Act, 1956, and to pay the surplus, if any, to the company.' Section 19(19) is clearly inconsistent with section 446 and other provisions of the Companies Act. Only section 529A is attracted to the proceedings before the Tribunal. Thus, on questions of adjudication, execution and working out priorities, the special provisions made in the RDB Act have to be applied." [Emphasis supplied] (p. 82) 12. The Supreme Court concluded that a view had rightly been taken by some High Courts that the Companies Act was a general statute and that the 1993 Act was a special statute and as such a provision in the special statute wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specific provision dealing with contractual and other statutory rights between different kinds of secured creditors, the specific provisions contained in the general statute would prevail. The specific provisions that the Supreme Court found in the Transfer of Property Act are laid down by section 48 thereof. 14. What must not be lost sight of is the context in which the Supreme Court rendered judgment in Allahabad Bank's case (supra). In view of the legal fiction in section 441 of the Companies Act, winding up proceedings are deemed to commence on the date of presentation of the petition. Such deeming provision takes effect only upon the company being wound up, for the date of commencement of winding up is irrelevant if the petition is dismissed or permanently stayed. In view of the legal fiction, the other provisions relating to liquidation become applicable upon commencement of winding up proceedings and till such proceedings are alive. The Supreme Court addressed the larger issue as to the conflict of the provisions of the two Acts and held that the 1993 Act would prevail but the Supreme Court's opinion cannot be widened to give section 19(19) of the 1993 Act any more effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -section. Where the certificate debtor is a company in liquidation, the recovery officer will distribute such proceeds from the sale of the assets of the company in liquidation that the recovery officer sells. If the company in liquidation has other available assets to be sold upon the secured asset not meeting the certificate claim, the recovery officer can call upon the concerned Official Liquidator to have such other available assets of the company in liquidation sold under the aegis of the recovery officer and such recovery officer will then distribute on the basis of the priorities recognised by section 529A of the Companies Act, such of the proceeds that have been realised by the sales conducted by the recovery officer. The sub-section does not recognise that the recovery officer will call upon the concerned Official Liquidator to produce before him all monies realised out of previous sale of assets of the company in liquidation for the recovery officer to be exclusively overseeing the distribution of the entire lot of the sale proceeds. 17. Such view would appear from the careful words used by the Supreme Court in Allahabad Bank's case (supra), the Supreme Court laid down t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing up can claim priority over all other creditors for release of the amounts realised out of the sale proceeds. 21. The principal matter in issue in the present proceedings fell for consideration before a Single Judge of this Court, though in different circumstances, in an unreported judgment in Reliance Ispat Industries Ltd., (In Liquidation) In re. [C.A. No. 716 of 2001 rendered on July 5, 2002]. A secured creditor of the company in liquidation in such matter sought a direction on the Official Liquidator to deposit the proceeds realised by the Official Liquidator following a court sale, with the Debts Recovery Tribunal. The secured creditor in that case relied on Allahabad Bank's case (supra), judgment of the Supreme Court. Another secured creditor opposed the application and urged that, the Allahabad Bank's case (supra), was confined to the sale proceeds realised out of the sales conducted by the Tribunal. The applicant's contention in that case was not accepted despite the Allahabad Bank's case (supra), being cited and the application stood rejected. 22. Before Allahabad Bank's case (supra), the Supreme Court had referred to the provisions of the 1993 Act in the context of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the reference to the 1993 Act in Srinivas Agencies' case (supra), was incidental and not central to the principal question. Allahabad Bank's case (supra), distinguished the view taken in Srinivas Agencies' case (supra), on the following lines : "Learned counsel for the respondent then relied upon certain observations in a recent case in Industrial Credit & Investment Corporation of India Ltd. v. Srinivas Agencies [1996] 86 Comp. Cas. 255 (SC), made in relation to the RDB Act, 1993, and to sections 529 and 529A of the Companies Act. That judgment related to a batch of appeals against the judgment of the Andhra Pradesh High Court dated 23-8-1989, and certain SLPs. (C) Nos. 10101 of 1991 and 11055 of 1992 (from Kerala) (the Kerala SLPs were registered as CAs of 1996) ( see here facts in Industrial Credit & Investment Corporation of India Ltd. v. Vanjinad Leathers Ltd. (In Liquidation) AIR 1997 Ker. 273. It has to be noticed that when the Andhra Pradesh High Court decided the matter and when the special leave petitions from Kerala were filed in 1991, the RDB Act, 1993, had not yet been enacted. But much later by the time the civil appeals came up for disposal on February 22, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... side winding up, have been considered. Much of the distinction that had been assiduously built up by courts as to the status of creditors queuing up before the Official Liquidator and the status of creditors of a company in liquidation choosing to stay outside winding up, has been obliterated. Paragraphs 19, 20, 24 and 25 need to be specially noticed : "The decision of the Bombay High Court in Maharastra State Financial Corporation v. Official Liquidator, Atrios Chemicals (P.) Ltd. AIR 1993 Bom. 392, gives weighty reasons as to why when the company is under winding up the SFC to which the assets of the company are charged cannot proceed to realise the security without intervention of the company court. We have already noticed that as a result of the amendment to section 529 a pari passu charge to the extent of the workmen's portion is created on the security of every secured creditor when he opts to realise a security by standing outside winding up. 'Pari passu' means 'with equal steps, equally, without preference' (Jowitt's Dictionary, volume II, 1959 edition 1294). Black's Law Dictionary, sixth edition, page 115 defines it as 'By an equal progress . . . Used especially of credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de 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'. 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 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, the provisions of sections 529 and 529A come into play and whatever superior rights had been ensured to SFCs under the provisions of the SFC Act are now subjected to and operate only in conjunction with the special rights given to the workmen, who as pari passu charge holders are represented by the Official Liquidator. We are, therefore, of the view that the unhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any proceeding under the SFC Act. What we have is only a liquidation proceeding pending and the secured creditors, the financial corporations approaching the company court for permission to stand outside the winding up and to sell the properties of the company in liquidation. The company court has rightly directed that the sale be held in association with the Official Liquidator representing the workmen and that the proceeds will be held by the Official Liquidator until they are distributed in terms of section 529A of the Companies Act under its supervision. The directions thus, made, clearly are consistent with the provisions of the relevant Acts and the views expressed by this Court in the decisions referred to above. In this situation, we find no reason to interfere with the decision of the High Court. We clarify that there is no inconsistency between the decisions in Allahabad Bank v. Canara Bank [2000] 101 Comp. Cas. 64 (SC) and in International Coach Builders Ltd. v. Karnataka State Financial Corporation [2003] 114 Comp. Cas. 614 (SC), in respect of the applicability of sections 529 and 529A of the Companies Act in the matter of distribution among the creditors. The right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rwise transfer the assets of a debtor company in liquidation, the said power could be exercised by it only after obtaining the appropriate permission from the company court and acting in terms of the directions issued by that court as regards associating the Official Liquidator with the sale, the fixing of the upset price or the reserve price, confirmation of the sale, holding of the sale proceeds and the distribution thereof among the creditors in terms of section 529A and section 529 of the Companies Act. (iv)In a case where proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, or the SFC Act are not set in motion, the concerned creditor is to approach the company court for appropriate directions regarding the realization of its securities consistent with the relevant provisions of the Companies Act regarding distribution of the assets of the company in liquidation." (p. 399) 27. The modes of recovery of debts by a recovery officer under the 1993 Act have been spelt out in sections 25 and 28 thereof : "25. Modes of recovery of debts.-The Recovery Officer shall, on receipt of the copy of the certificate under sub-section (7) of section 19, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this sub-section, every person to whom a notice is issued under this sub-section shall be bound to comply with such notice, and, in particular, where any such notice is issued to a post office, bank, financial institution, or an insurer, it shall not be necessary for any pass book, deposit receipt, policy or any other document to be produced for the purpose of any entry, endorsement or the like to be made before the payment is made notwithstanding any rule, practice or requirement to the contrary. (v) Any claim respecting any property in relation to which a notice under this sub-section has been issued arising after the date of the notice shall be void as against any demand contained in the notice. (vi) Where a person to whom a notice under this sub-section is sent objects to it by a statement on oath that the sum demanded or the part thereof is not due to the defendant or that he does not hold any money for or on account of the defendant, then, nothing contained in this sub-section shall be deemed to require such person to pay any such sum or part thereof, as the case may be, but if it is discovered that such statement was false in any material particular, such person shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy there is money belonging to the certificate debtor. Upon a company being wound up, the Official Liquidator comes to be in custody of all assets and properties of the company in liquidation. Section 456(1) of the Companies Act recognises the authority of the Official Liquidator as the custodian of all assets and properties of a company in liquidation. The Official Liquidator functions under the company court and the Companies Act and the Companies (Court) Rules, 1959, recognise such position. Section 446(2) of the Companies Act gives authority to the company court to dispose of, inter alia, any suit or proceedings by or against a company in liquidation; any claim made by or against the company in liquidation; and 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. The non obstante clause in section 446(2) yields to the overriding provisions of the 1993 Act but it is necessary to notice the scope of the company court's authority over all matters relating to a company in liquidation. 29. The Official Liquidator attached to a company court becomes the liquidator of the company wound up by suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncern whereof is fairness to all creditors subject to their respective rights, is followed. The Official Liquidator, under supervision of the Company Judge, has to ensure that the assets of a company in liquidation are realised, sold and the sale proceeds applied in accordance with the rules as regards priorities. The Official Liquidator, under supervision of the Company Judge, seeks to protect the interest of the creditor who ranks last in the list of priorities and has a duty to ensure that the spill-over after satisfying the debts of each class ranked in the hierarchy of priorities, is applied to those ranked next and the following, till the last. 31. The Official Liquidator reports to the Company Judge on all matters relating to a company in liquidation. His physical presence in the company court is indispensable. The Debts Recovery Tribunals have been set up under the 1993 Act to receive and deal with claims by banks and financial institutions that may institute proceedings before the appropriate Tribunal in accordance with the rules as to territorial jurisdiction recognised by the 1993 Act. It is not necessary that the Tribunal dealing with the claim of a bank or financial i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take away the company court's authority to supervise over all matters relating to a company in liquidation. The Supreme Court pronouncements recognise the authority of the company court. It would be inappropriate for the Company Judge, merely on strength of section 18 of 1993 Act to allow the Debts Recovery Tribunal to deal with all matters relating to the assessment of priorities of creditors of a company in liquidation and the distribution of dividends to creditors without reference to the company court. 34. Jurisdiction is authority ordained by law. Jurisdiction is not a privilege; for if it were, there would be an element of choice about it. Assumption of jurisdiction follows a command by law. It is a duty cast on the judicial authority that cannot be abdicated by the whims of such judicial authority. The failure by a judicial authority to exercise jurisdiction vested in it by law is as illegal and as inexcusable as the usurpation of jurisdiction beyond its bounds of authority. The Official Liquidator need not transmit the sale proceeds held by him to the recovery officer of the DRT-II, Delhi. It will be open to such recovery officer to apply under section 28(4) of the 1993 A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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