ORDER [ENTITY], J.
1. In all these applications, a common question or law relating to the power of the Company Court arises for making appropriate orders in regard to the priorities of the various claimants under the provisions of [SECTION] read with [SECTION] and [SECTION] of the [ACT], 19[SECTION][SECTION] (in short the Act).
2. In Company Application No. [SECTION]10 of 1983, filed under [SECTION] of the Act, the applicant is the Karnataka State Financial Corporation (in short the KSFC) and it has sought for an order by this Court directing the release of the assets of the Company (in liquidation) by the Official Liquidator to KSFC and for leave and permission to sell the said assets under [SECTION] of the State Financial Corporation Act, 19[SECTION]1 (in short the [ACT]). The ground for making this application is that KSFC has to recover a large sum of money from the respondent-Company (in liquidation) and these sums are covered by the security of the assets of the respondent-Company (in liquidation) in favour of KSFC and KSFC has decided to stand outside the winding up proceedings and realise its security by resorting to [SECTION] of the [ACT]. Should the assets now in the custody of the Official Liquidator be released in favour of KSFC and it is permitted to sell the assets, it will be in a position to get a good price for the said assets and realise the monies due to it, In Company Application No. [SECTION]1[SECTION] of 1988, KSFC has made a similar prayer against the respondent-Company (in liquidation), in that case also, KSFC claims to be a secured creditor to the extent of Rs. 30,[SECTION]7,8[SECTION][SECTION]-38p as on 28-8-198[SECTION] and it has chosen to remain outside the winding up proceedings for the purpose of working out its rights as to the secured creditor and therefore, it has prayed for permission to sell the two diesel generating sets which are the subject matter of security in its favour under [SECTION] of the [ACT].
In [CASE NUMBER], KSFC has sought for similar reliefs against the respondent-Company (in liquidation) on the ground that It would prefer to stand outside the winding up proceedings and to enforce Its rights as a secured creditor outside the winding up proceedings in accordance with the contractual terms of the mortgage executed by the respondent-Company and also under the statutory provisions of [ACT]. It wants permission and leave to sell such other properties of the respondent-Company which are mortgaged to it under the aforesaid mortgage deed for the recovery of Rs. 37,0[SECTION],803/- due as on 12-9-1987.
In [CASE NUMBER], KSFC has sought for permission to sell the properties of the Company (in liquidation) which have been mortgaged to it by referring to stand outside the winding up proceedings.
In Company Application No. [SECTION]07 of 1988, the Official Liquidator has sought for permission to dispose of the land, building and other properties of the Company (in liquidation) by inviting tenders and for other incidental reliefs. The Official Liquidator has also filed his objections to Company Application No. [SECTION]10 of 1988 and the Official Liquidator has submitted that these objections may be treated as objections in the other applications filed by the KSFC.
3. Briefly stated the objections of the Official Liquidator are that KSFC is fully aware of the winding up order as notice of the petition as well as the advertisement of the winding up order was made prior to the KSFC taking over the possession of the assets of the Company purporting to exercise the powers conferred under the [ACT]; that KSFC is put to strict proof to establish the liability of the respondent-Company in all these applications; that this Court in Company Applications Nos. [SECTION]00 and 707 of 198[SECTION] has taken the view that KSFC does not acquire the right to immoveable and moveable properties having regard to the fact that the properties had already come under the custody of this Court; that in terms of the provisions of [SECTION] of the Act the debts payable under Clause (a) and Clause (b) of Sub-section (1) shall be paid in full unless the assets are insufficient to meet them, in which case they shall abate in equal proportions; that in view of this provision, KSFC is not entitled to appropriation or adjustment of debts till the workmens' dues are paid and that the payments to the secured creditors shall abate in equal proportions with workmen's dues and this being the position and particularly when the statement of affairs has not been filed by the Directors of the Company whereby the actual dues to be cleared off by the Official Liquidator towards workmen's wages is not known this Court should not permit KSFC to enforce its claim against the Company (In liquidation) by standing outside the winding up; that in any event, in view of [SECTION] of the Act read with the relevant provisions of [SECTION] of the, Act, it is open to this Court to adjudicate the claims of the secured creditors even if it stands outside the winding up proceedings along with the claims of the workmen and make appropriate orders for giving effect to the priorities as indicated in [SECTION] of the Act.
[SECTION]. For the purpose of the disposal of these applications certain facts which are not in serious controversy may be noticed. They are: that KSFC is a secured creditor and from the documents produced by It the amounts due to it from the respective companies (in liquidation) in these applications cannot be seriously disputed; (ii) that KSFC was aware of the winding up order made by this Court in all these applications; that the notices of winding up petitions were duly published in the newspapers and the winding up orders were duly filed before the Registrar of Companies and therefore KSFC was aware of the winding up orders made by this Court prior to the filing of these applications. Whether they took over possession of the properties of the Companies (in liquidation) before or after the winding up orders were made is not relevant for the purpose of these applications, since in the light of the ruling of this Court in KARNATAKA BANK LTD. v. CRAFT TOOLS P. LTD(198[SECTION]) [SECTION]0 Com. Cas. 7[SECTION][SECTION]. The Company Court shall retains de Jure possession and custody of the properties in question.
[SECTION]. On the pleadings in these applications and in the light of the objections filed by the Official Liquidator, the following points arise for consideration:
(i) What is the scope of [SECTION] of the Act as also the scope of [SECTION] of the Act;
(ii) What is the effect of the proviso to [SECTION] of the Act;
(iii) What is the object of Incorporation of [SECTION] of the Act and how to give effect to [SECTION]; and
(iv) Is it open to KSFC to contend that its power under [SECTION] of the [ACT] is not taken away and it could still stand outside the winding up proceedings and enforce the security in its favour against the company (in liquidation) subject to the claims of the workmen under the proviso to [SECTION] of the Act. The amount due to KSFC is about Rs. [SECTION][SECTION] lakhs in the first application and the amount due to other secured creditors, like, Canara Bank; State Bank of Mysore; Vijaya Bank and Vysya Bank aggregates to Rs. 1,7[SECTION],700/-.
[SECTION]. The first question requires some consideration since the scope of [SECTION] if properly understood will offer a solution to other questions. [SECTION] reads as under:
"[SECTION][SECTION][SECTION]. Suits stayed on winding up order. -
(2) The Court which is winding-up the company shall, notwithstanding anything contained in any other law for the time being in force, have jurisdiction to entertain, or dispose of -
(a) any suit or proceeding by or against the company;
(b) any claim made by or against the company (including claims by or against any of its branches in India);
(c) any application made under [SECTION] by or in respect of the company;
(d) 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 of the company;
whether such suit or proceeding has been instituted, or is instituted, or such claim or question has arisen or arises or such application has been made or is made before or after the order for the winding-up of the company, or before or after the commencement of the Companies (Amendment) Act, I9[SECTION]0."
The relevant provisions of the [ACT] should be noticed since the difference in the language of the provisions of the respective Sections throws some light on the jurisdiction of the Company Courts in India under the Act. The corresponding provision in [ACT], 19[SECTION]8, is [SECTION] and that reads as:
"Actions stayed on winding up order -
When a winding up order has been made or a provisional liquidator has been appointed, no action or proceeding shall be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court may impose."
But [SECTION] was introduced by Act No. [SECTION][SECTION] of 19[SECTION]0 and by this sub-section, the Company Court is entrusted with the power to entertain and dispose of the matters more particularly mentioned in Sub-clauses 2(a), (b), (c) and (d). Under Sub-clause 2(b), this Court can dispose of any claim made by or against the Company. Under Sub-clause 2(d) this Court can also decide 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 of the company.
7. The Supreme Court in [PRECEDENT] . dealt with the scope of [SECTION] of the Act and observed as follows:
"Before we advert to the question of construction of [SECTION], it would be advantageous to notice the historical evolution of the provision as well as its present setting. [SECTION] of the [ACT], the predecessor of [SECTION] did not contain any provision similar or identical to that of [SECTION]. [SECTION] only provided for stay of suits and proceedings pending at the commencement of winding up proceeding, and embargo against the commencement of any suit or other legal proceedings against the Company except by the leave of the Court. This provision with little modification is re-enacted in [SECTION]. There was no specific provision conferring jurisdiction on the Court winding up the company analogous to the one conferred by [SECTION]. Sub-section (2) was introduced to enlarge the jurisdiction of the Court winding up the company so as to facilitate the disposal of winding up proceedings. The provision so enacted probably did not meet with the requirement with the result that the Committee appointed for examining comprehensive amendment to the [ACT] in its report recommended that 'a suit by or against a company in winding up should notwithstanding any provision in law for the time being be instituted in the Court in which the winding up proceedings are pending (see para 207 of the Company Law Committee Report).' To give effect to these recommendations, Sub-section (2) was suitably amended to bring it to its present form by Companies (Amendment) Act, 19[SECTION]0. The Committee noticed that on a winding up order being made and the Official Liquidator being appointed a Liquidator of the company, he has to take into his custody company property as required by [SECTION]. [SECTION] confers power on him to institute or defend any suit, prosecution, or other legal proceedings, civil or criminal, in the name and on behalf of the company. Power is conferred upon him to sell the properties both movable and immovable of the company and to realise the assets of the company and this was to be done for the purpose of distributing the assets of the company amongst the claimants. Now at a stage when a winding up order is made the company may as well have subsisting claims and to realise these claims the Liquidator will have to file suits. To avoid this eventuality and to keep all incidental proceedings in winding up before the Court which is winding up the company, its jurisdiction was enlarged to entertain petition amongst others for recovering the claims of the company. In the absence of a provision like [SECTION] under the repealed [ACT], the Official Liquidator in order to realise and recover the claims and subsisting debts owed to the company had the unenviable fate of filing suits. These suits as is not unknown, dragged on through the trial Court and Courts of appeal resulting not only in multiplicity of proceedings but would hold up the progress of the winding up proceedings. To save the company which is ordered to be wound up from this prolix and expensive litigation and to accelerate the disposal of winding up proceedings, the Parliament devised a cheap and summary remedy by conferring jurisdiction on the Court winding up the company to entertain petitions in respect of claims for and against the company. This was the object behind enacting [SECTION] and therefore, it must receive such construction at the hands of the Court as would advance the object and at any rate not thwart it.
The fascicules of sections included in [SECTION] of the [ACT] bears the heading 'Winding up'. [SECTION] sets out the circumstances in which a company may be wound up by the Court. [SECTION] provides that where the Court makes an order for the winding up of company, the Court shall forthwith cause intimation thereof to be sent to the Official Liquidator and the Registrar. [SECTION] provides that when a winding up order has been made or the Official Liquidator has been appointed as provisional liquidator, no suit or other legal proceedings shall be commenced, or if pending at the date of the winding up order, shall be proceeded with, against the company, except by leave of the Court and subject to such terms as the Court may impose. Then comes [SECTION]. It specifies the contours of the jurisdiction of the Court which is winding up the company. It confers special jurisdiction on the Court which is winding up the company to do things that are set out in the various sub-clauses notwithstanding anything contained in any other law for the time being in force. [SECTION] thus conferred special jurisdiction on the Court winding up the company which otherwise it may not have enjoyed. The Court in the [ACT] is defined in [SECTION] to mean with respect to any matter relating to a company (other than any offence against this Act), the Court having jurisdiction under the Act with respect to that matter relating to that company, as provided in [SECTION]. [SECTION] provides that the Court having jurisdiction under the Act shall be the High Court having jurisdiction in relation to the place at which the registered office of the company concerned is situate, except to the extent to which jurisdiction has been conferred on any District Court or District Courts subordinate to that High Court in pursuance of Sub-section (2).
The winding up petition has thus to be presented in the High Court before the Judge who is assigned the work under the [ACT]. Therefore, the Court which is winding up the Company will be the Court to whom the petition for winding up was presented and which passed the order for winding up the Company. In this case, the order was made by the learned Company Judge in the Kerala High Court directing winding up of the company. An appeal lies against the order for winding up the Company under [SECTION] to the same Court to which and in the same manner in which and subject to the same conditions under which, appeals lie from any order or decision of the Court in cases within its ordinary jurisdiction. In exercise of this Appellate Jurisdiction, the Appellate Bench entertained the appeals and directed that the winding up order shall be held in abeyance till the scheme is implemented and if any default is committed the winding up order made by the learned Company Judge would be revived."
But what is the scope of the jurisdiction of this Court under [SECTION] in relation to a secured creditor who prefers to stand outside the winding up did not arise for consideration in that case. But this Court in (In the matter of Sree [ENTITY] Cotton, Woollen and Silk Mills Co. Ltd) BANK OF MAHARASHTRA LTD. POONA v. OFFICIAL LIQUIDATOR, HIGH COURT BUILDINGS AIR 19[SECTION]9 Mysore 280 dealt with this question in a different context and not in relation to the construction of [SECTION] of the Act read with [SECTION] of the Act. [SECTION] without the proviso was very much in the statute book when this Court rendered its decision in [ENTITY]'s case. But the claim of the workmen did not arise for consideration in that case. The point that was raised in that case was whether the Official Liquidator should file a suit for obtaining possession of the properties mortgaged by the company (In liquidation) to a third party after the company went into liquidation or whether he could approach the Company Court by an application under [SECTION] of the Act. In that connection, [ENTITY], J., as he then was, observed as follows:
"The powers of the winding up Court under [SECTION] include the jurisdiction to entertain and dispose of any question of priorities or any other question whatsoever, whether of law or of fact, which may relate to or arise in the course of winding up of a company, notwithstanding anything contained in any other law for the time being in force.
The total effect of all these provisions is that all property and assets of the company which has been ordered to be wound up, immediately come under the custody of the winding up Court and are, in the eye of law, property in custodia legis. The Official Liquidator is in the position of a Receiver appointed by the Court for the purpose of acquiring and retaining the possession of all property and assets of the Company, acting subject to and in accordance with the directions from time to time given by the winding up Court.
Even in the case of properties of a company which are mortgaged or charged in favour of any of its creditors, the creditor does not acquire rights which are exhaustive of the entire title of the Company in respect of the properties. The properties continue to be the properties of the company, although by reason of a transfer of some interest therein by way of security, the creditor is enabled by law to enforce his security in the manner provided by law for the purpose of recovering moneys due to him. Hence, even when a secured creditor wants to exercise the option given to him by law to stand outside the insolvency and work out his rights, it cannot be said that the winding up Court is totally powerless or has no jurisdiction whatever in respect of him or in respect of the property over which he claims a certain right by way of security. In regard to such properties, questions may and do often arise either in respect of priorities or in respect of any other matter whatsoever, which may relate to the winding up of the company's affairs.
In trying, therefore, to reduce to his possession properties of the Company, whether mortgaged to third parties or not, the Liquidator is not trying to recover any property from anybody; he is acting on behalf of the Court into whose custody the properties have already come by virtue of the winding up order. In the event of any third party resisting or opposing or questioning his attempt to reduce the property to his possession in the name of the Court, if the Liquidator considers it necessary to approach the Court for directions, he is merely acting under [SECTION] of the Act and invoking the powers of the Court under [SECTION] of the Act and [SECTION] of the Companies (Court) Rules, 19[SECTION]9.
The clearest position therefore is that the Liquidator, in such circumstances, is not obliged to file a suit, nor is the filing of a suit or an application in the nature, of a suit before the winding up Court the only or the necessary way of invoking the jurisdiction of the Company Court. The proper proceeding is undoubtedly an application made to the winding up Court, and the Court fee payable thereon is as for an application and not as for a suit. The proper article applicable is [SECTION] of the Mysore Court Fees and Suits Valuation Act, 19[SECTION]8."
Having held so, the learned Judge on facts found that the Bank of Maharashtra which was the applicant in that company application before the Court, being a mortgagee of the immoveable properties and hypothecatee of moveable properties of the company (in liquidation) could in exercise of the rights and powers conferred upon it by the mortgage and hypothecation documents is entitled to take or to retain possession of the properties described in the said documents for the purpose of recovering monies due to it by enforcing its security against the said properties. The Court also observed that it has the power of selling the said properties without the intervention of Court for the purpose of recovering the monies due to it in accordance with the relevant Sections of [ACT] and [ACT] governing the exercise of such power. It was further held that the Bank will be accountable to the Company (in liquidation) as a mortgagee in possession and if It exercises the power of sale without the intervention of the Court, it will be accountable for the monies realised in accordance with or in terms of [SECTION] of the [ACT].
8. The claim of the workmen under [SECTION] of the Act did not arise for consideration in that case nor [SECTION] as this Section was not in the statute book at the time this Judgment was delivered by the learned Judge. But this decision is helpful to understand the nature of the possession of the properties which is under the custody of the Liquidator after the winding up order is made. This Court has held that even in the case of a creditor who stands outside the winding up, the properties continue to be the properties of the Company (in liquidation) although by reason of a transfer of some interest therein by way of security, the creditor is enabled by law to enforce his security in the manner provided by law for the purpose of recovering monies due to him. Hence, even when a secured creditor wants to exercise the option given to him by law to stand outside the winding up and work out his rights, it cannot be said that the winding up Court is totally powerless or has no jurisdiction whatsoever in respect of him or in respect of the property over which he claims a certain right by way of security. Similar observations are made by a Division Bench of the Bombay High Court in GLEITLARGOR (INDIA) P. LTD. and H.S. KAMLANI, OFFICIAL LIQUIDATOR v. MAZAGAON DOCK LTD. AND ORS. (198[SECTION]) [SECTION]7 Company Cases 7[SECTION]2 in that case, an application was made by the Official Liquidator for the recovery of book debts due to the company (in liquidation). These debts were hypothecated to the State Bank of India. The Bank had filed a suit against the Official Liquidator to recover those debts. In those proceedings an understanding was reached whereby the Official Liquidator was permitted to Initiate proceedings before the Company Court for the recovery of the book debts and the Bank had agreed to provide him legal assistance to prosecute those proceedings. The application was made under the provisions of [SECTION]. The Division Bench observed:
"It is not in dispute that the book debts stood hypothecated with the Bank. Such hypothecation, however, cannot make the bank owner of the debts and by itself authorises the bank to claim debt amounts from the Company's debtors in its own right or institute suits or any other proceedings against such debtor for such recovery directly in its own name. No one else also can sue or initiate proceedings for such recovery on behalf of the bank when it cannot sue on its own. The company continued to be the owner of the debts. The official liquidator alone can enforce its recovery representing the owner company on its going into liquidation. That is why the bank instituted a suit, Suit No. [SECTION]2[SECTION] of 1973, against the Official Liquidator and not against the company's debtors for recovery of its dues from the company. The receiver appointed in this suit by the Court at the instance of the bank was initially authorised to enforce the recovery of the book debts. Even such receiver could not have sued on behalf of the company. He could have sued in his own name, claiming to be suing for the creditor of the company on the authority of the Court's order. Secondly, the task would have been both expensive and time consuming. That appears to have prompted the bank to approach the Official Liquidator who was also under an obligation to collect the assets including such debts of the company from its debtors and could, as the representative of the company, directly initiate recovery proceedings under [SECTION] of the Act. This explains why the receiver was relieved of the charge of these book debts by subsequent order dated July 11, 1973, with the consent of the Official Liquidator . By that time, the understanding between the Official Liquidator and the bank was already reached. As seen earlier, Judge's summons were taken out by the Liquidator only after getting leave of the Court to that effect on July 23, 1973, virtually permitting the Liquidator to effectuate the understanding.
The assumption in the impugned order, of the Official Liquidator having initiated proceedings 'on behalf of the State Bank' is thus ill-founded and totally incorrect. When the bank could not enforce recovery of the company's debts in its own right notwithstanding the hypothecation, it could not authorise the official liquidator to initiate the proceedings and the question of his having initiated proceedings on the bank's behalf could ever have arisen. The liquidator could not have been appointed by the bank as its agent for such recoveries. The learned Judge, amongst others, inferred the agency from the circumstances of the bank having agreed to pay the commission. [SECTION] read with [SECTION] authorises the liquidator to recover fees for his work of realising the company's property as such liquidator. Thus, describing such fees as commission cannot make the liquidator the creditor's agent when the Act and the Rule do not so contemplate and when the dues happen to be of the company and not of the bank. That the receiver appointed in the suit of the bank against the liquidator could have instituted the suits for recovery of the company' s debts under the authority of the Court hearing the said suit, is not relevant to the point.
On the other hand, the official liquidator is under an obligation to collect the debts of the company. The official liquidator is empowered to do so under [SECTION]. It was all the more necessary for the liquidator to initiate recovery proceedings when mere hypothecation could not enable the bank to sue or otherwise recover the same in its own right. It could not allow the debts to become time-barred without committing breach of the obligation. Hypothecation could only prevent the official liquidator from impairing the security of the bank. Subject to this limitation, the liquidator had to act. The circumstance that the bank furnished the required money and legal services cannot alter the legal position."
The decision of the Supreme Court in RANGANATHAN v. GOVERNMENT OF MADRAS (19[SECTION][SECTION]) 2[SECTION] Company Cases 3[SECTION][SECTION] (SC) and the decision of the English Court in FOOD CONTROLLER v. CORK 1923 AC [SECTION][SECTION]7 (HL) were cited before the Division Bench and the Division Bench observed as follows:
"The proposition that the secured creditors are outside the 'winding up' is now too well settled to admit of any doubt. In fact, the law laid down by the Supreme Court is binding on us. It is however, difficult to see how recovery of debts of the company, under the arrangement with the creditor, when the same are hypothecated, militate against the rule of law laid down in these cases. The ratio of the case only go to emphasise that the winding-up proceedings cannot impair the security or the right of the secured creditor to satisfy his debt out of the property charged, without being required to prove his claim before the liquidator, and subjected to the rule of 'pari passu' or to share the proceeds of the charged property with any other creditor till his debt is satisfied in full.
This is not intended to relieve the official liquidator of his obligation to prevent the underselling of secured property and ensuring the return of the balance after meeting the claim of such creditor, when possible for benefit of the unsecured creditors and the shareholders. This also does not relieve him of his obligation to take possession of the company's properties including actionable claims and preventing their becoming time barred and find out ways and means for the recovery thereof if he is not possessed of the required means therefor. This rule does not prevent the official liquidator from dealing with such secured properties with the consent of the secured creditors consistent with their security, interest and rights, when it becomes necessary in the discharge of his duties, for the protection of the unsecured creditors. As indicated earlier, [SECTION] of the Act itself makes insolvency rules applicable in this behalf, which, in turn, permits even sale of immovable property by the official liquidator under authority of the Court if this can be done without impairing the security of the secured creditors. It will be sufficient in this behalf to refer to para [SECTION][SECTION][SECTION] of the Law of Insolvency in India by [ENTITY] and [SECTION] under the [ACT] referred to therein in this behalf.
It also cannot be ignored that the property on which security or charge is created, does not cease to be property of the company in its entirety. In a mortgage transaction, part of the property, i.e., equity of redemption, still stands vested in the company. In conceivable cases, where the property happens to be of far higher value than the secured debt or in cases where the debts hypothecated happens to be far more in quantity than the debts for which a charge is created, the official liquidator would be required to find out ways and means in the discharge of his duties towards the unsecured creditors, of collecting the said assets without in any manner impairing the security of the secured creditor and without causing any damages to their interest. The steps required to be taken for the benefit of the unsecured creditors may turn out to be incidentally even for the benefit of the secured creditors. The contention, therefore, that the official liquidator is not competent to initiate Judge's summons for recovery of the amount for the benefit of the secured creditors, appears to be thoroughly untenable.
It will be relevant to note that [SECTION] of the Rules framed under the [ACT], 19[SECTION][SECTION], prescribes the quantum of the fees of the official liquidator in respect of his work of realising the property (1) for debenture holders, or (2) for the secured creditors. The authority for this rule can be treated to [SECTION]. This can be only on the hypothesis that such realisation is part of the liquidation process and the duty of the official liquidator in proceedings in winding up. This itself militates against any assumption that the official liquidator cannot deal with secured property in any manner."
9. Having dealt with the scope of [SECTION] of the Act in the light of the decision of the Supreme Court in [ENTITY]' case and the decision of this Court in [ENTITY]'s case we will now consider the provisions of [SECTION] and [SECTION] of the Act to ascertain the rights of the secured creditor who stands outside the winding up with a view to enforce the security and realise the debts due to him. [SECTION] provides for application of insolvency rules in the winding up of insolvent companies. [SECTION] of the Act was amended by the Companies (Amendment) Act of 198[SECTION] (Act No. 3[SECTION] of 198[SECTION]). The amended Section reads as:
"[SECTION]. Application of insolvency rules in winding-up of insolvent companies -
(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 I
(c) the respective rights of 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) the liquidator shall be entitled to represent the workmen and enforce such charge;
(b) any amount realised by the liquidator by way of enforcement of such charge shall be applied rateably for the discharge of workmen's dues; and
(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]"
The [SECTION] was amended partly by the 19[SECTION]0 Companies (Amendment) Act and by Act No. 3[SECTION] of 198[SECTION] which reads as under:
"(2) All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the winding-up, and make such claims against the company as they respectively are entitled to make by virtue of this Section:
Provided that if a secured creditor instead of relinquishing his security and proving for his debt proceeds to realise his security, he shall be liable to pay his portion of the expenses incurred by the liquidator (including a provisional liquidator, if any) for the preservation of the security before its realisation by the secured creditor.
Explanation - For the purposes of this proviso, the portion of expenses incurred by the liquidator for the preservation of a security which the secured creditor shall be liable to pay shall be the whole of the expenses less an amount which bears to such expenses the same proportion as the workmen's portion in relation to the security bears to the value of the security."
So, what is the effect of this proviso on the other provisions of [SECTION] and in relation to [SECTION] which also finds a place under the 1st proviso to [SECTION] of the Act arises for consideration. Under [SECTION] the same rules with regard to the respective rights of secured and unsecured creditors as are in force for the time being under the law of insolvency in respect of the estates of persons adjudged insolvent would be applicable in the winding up of an insolvent company. It is not disputed that those rules are found under [SECTION] of the [ACT]. [SECTION] of the ([ACT] reads as under:
"(1) Where a secured creditor realises this security he may prove for the balance due to him, after deducting the net amount realised.
(2) Where a secured creditor relinquishes his security for the general benefit of the creditors, he may prove for his whole debt."
[SECTION], [SECTION], [SECTION] and [SECTION] are not relevant for the purpose of these applications. So, but for the amendment to [SECTION] by Act No. 3[SECTION] of 198[SECTION], the secured creditor, if he wanted to stand outside the winding up, could have realised the security by private sale in the light of this Section as in [ENTITY]'s case or in case of any dispute about the security in his favour, he could go to Civil Court, take a decree and realise his amount due to him and could have approached the Company Court for appropriation of the balance if any due to him. But now under the proviso to [SECTION] the security is Governed by a legal fiction. The security of every secured creditor whether he relinquishes his security and opts for realising the same outside the winding up Court shall be deemed 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 for realising the security, the claims of the workmen prop up for consideration and will have to be adjudicated. At that time the Liquidator is authorised to represent the workmen and enforce such charge, that is to say, by a legal fiction a charge is created in favour of the workmen on the property secured to the secured creditor and that charge created in favour, of the workmen will have to be enforced by the liquidator by representing the workmen. After such enforcement of the charge, the liquidator applies the amount in his hand in the manner provided under [SECTION]. At what point of time the liquidator has to enforce the charge and before which forum he can enforce such charge arise for consideration. If I were to accept the argument of Mr. [ENTITY] that under the first proviso to [SECTION] of the Act, KSFC should be permitted to enforce the security in Its favour and while giving such permission a direction should be given to KSFC as to the mode of realisation of the charge in favour of the workmen, a certain situation may arise where after realising the security in favour of the secured creditor either by private sale or through a Court of law, the secured creditor declines to acknowledge the charge of the workmen or honour the charge or given effect to the charge. It may be that KSFC which is a statutory financial institution may abide by the direction of this Court. While dealing with the amendment introduced for the benefit of the weaker sections of the Society, viz., workmen, this Court has to ensure while interpreting [SECTION] as amended, that fullest effect is given to those provisions in order to protect the rights of the workmen. It should be noticed that under [SECTION] of U.K. [ACT], 19[SECTION]8, there is no special provision as found in the proviso to [SECTION] creating a charge in favour of the workmen by a legal fiction. That was the position in our Act also prior to 198[SECTION]. So the rule of benevolent Construction applies while interpreting the first proviso to [SECTION]. In the Statement of Objects and Reasons attached to the Companies (Amendment) Bill, 198[SECTION], the following statement is found:
"Another announcement made by the Finance Minister in his Budget Speech relates to the decision of the Government to introduce necessary legislation so that legitimate dues of workers rank pari passu with secured creditors in the event of closure of the company, and above even the dues to Government. The resources of companies constitute a major segment of the material resources of the community; and common good demands that the ownership and control of the resources of every company are so distributed that in the unfortunate event of its liquidation workers, whose labour and effort constitute an invisible but easily perceivable part of the capital of the company are not deprived of their legitimate right to participate in the product of their labour and effort It is accordingly proposed to amend [SECTION] and [SECTION] of the [ACT], and also to incorporate a new Section in the Act, namely, [SECTION] vide [SECTION], [SECTION] and [SECTION] of the Bill."
In [PRECEDENT]. [PRECEDENT] said:
"In construing any enactment regard must be had not only to the words used but to the history of the Act and the reasons which led to it being passed. You must look to the mischief which had to be cured as well as to the cure provided."
10. The argument of Mr. [ENTITY] is that this Court should adopt a construction which should not go beyond the reasons given for the amendment to [SECTION] and the limited purpose of the proviso to [SECTION] is to ensure that the workers would get their legitimate dues in pari passu to the rights of the secured creditors and accordingly notwithstanding the language of the first proviso to [SECTION], the secured creditor chooses to stand outside the winding up and opts to realise the security, he should be permitted to do so without the interference of the Official Liquidator to his right under Sub-section (a) to the proviso to [SECTION]. This contention overlooks the mandate of the legislature directing the Liquidator to represent the workmen and enforce the charge created by a fiction of law under the first proviso to [SECTION] of the Act. Mr. [ENTITY] does not say that the Official Liquidator can represent the workmen in the sale proceedings before the appropriate authority under [SECTION] of [ACT]. Mr. [ENTITY] concedes that the claim of the workmen to enforce the charge in their favour could be worked out by the company Court under [SECTION] of the Act. If that be so, the priorities prescribed under [SECTION] could also be worked out under [SECTION] since under [SECTION] any question of priority or any other question whatsoever whether on law or on facts which may result in winding up the company could be decided by the Company Court. While considering the scope of [SECTION], in my view, the provisions of [SECTION] should not be overlooked. [SECTION] was put in the statute book by Act No. 3[SECTION] of 198[SECTION] and the language of [SECTION] should be noticed. It reads as:
"[SECTION] Overriding preferential payments - (1) Notwithstanding, anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company -
(a) workmen's dues; and
(b) debts due to secured creditors to the extent such debts rank under clause
(c) of the proviso to Sub-section (1) of [SECTION] pari passu with such dues shall be paid in priority to all other dues, (2) The debts payable under Clause (a) and Clause (b) of Sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions."
If the determination of the workmen's dues by enforcing the charge in their favour under the first proviso to [SECTION] has to be done by the Company Court under [SECTION], the preferential payment provided under [SECTION] should also be done by the Company Court if there is a claim by the workmen and such claim requires adjudication and enforcement under the provisions of the first proviso to [SECTION] of the Act. The illustration to [SECTION] brings out the meaning of the first proviso to [SECTION] clear. The illustration reads as:
"The value of the security of a secured creditor of a company is Rs. 1,00,000. The total amount of the workmen's dues is Rs. 1,00,000. The amount of the debts due from the company to its secured creditors is Rs. 3,00,000. The aggregate of the amount of workmen's dues and of the amounts of debts due to secured creditors is Rs. [SECTION],00,000. The workmen's portion of the security is, therefore, one-fourth of the value of the security, that is Rs. 2[SECTION],000."
So, in every case which attracts the proviso to [SECTION] there should be determination of the workmen's portion in the security and also the secured creditor's portion in the security. Such determination will have to be done, in my view, regard being had to [SECTION], simultaneously or more or less at the same time by the Company Court while adjudicating the claim of all persons under [SECTION] of the Act. In this connection certain observation made by the learned Company Judge in [PRECEDENT] was brought to my notice by Mr. [ENTITY]. The learned Judge in Karnataka Bank's case has observed that the secured creditor who has chosen to remain outside the winding up cannot prefer an application under [SECTION] for seeking possession of the security and/or for an order for sale thereof and payment to him to the amount due to him. The learned Judge further observed that the enforcement of the security cannot be effected by preferring a claim under [SECTION] of the [ACT], 19[SECTION][SECTION], unless the secured creditor also stands within the winding up proceedings. Those observations were made at the time when [SECTION] was not amended by Act No. 3[SECTION] of 198[SECTION] and [SECTION] was not in the statute book. The decision in [ENTITY]'s case was also adverted to by the learned Judge in that case and, though that decision was not followed by the learned Judge, there is no dictum in that case which runs counter to the ruling of [ENTITY], J., as he then was, in [ENTITY]'s case? Those observations of [ENTITY], J. are material for the proper interpretation of [SECTION] of the Act as amended and also [SECTION] of the Act.
11. In the context of the secured creditors standing outside the winding up proceedings what are the rights of the Company Court now, after the amendment, over such secured creditors. In my view, the words "standing outside the winding up" do not take away the jurisdiction of the Company Court to deal with such creditors and their properties under [SECTION] and [SECTION] of the Act. That is precisely what was decided by the learned Judge in [ENTITY]'s case I have already quoted the relevant portions of that Judgment in the earlier portions of this order. To quote the relevant portions once again:
"Even in the case of properties of a company which are mortgaged or charged in favour of any of its creditors, the creditor does not acquire rights which are exhaustive of the entire title of the Company in respect of the properties. The properties continue to be the properties of the company, although by reason of a transfer of some interest therein by way of security, the creditor is enabled by law to enforce his security in the manner provided by law for the purpose of recovering moneys due to him. Hence, even when a secured creditor wants to exercise the option given to him by law to stand outside the insolvency and work out his rights, it cannot be said that the winding up Court is totally powerless or has no jurisdiction whatever in respect of him or in respect of the property over which he claims a certain right by way of security. In regard to such properties, questions may and do often either in respect of priorities or in respect of any other matter whatsoever, which may relate to the winding up of the company's affairs."
In my view, this rulling in [ENTITY]'s case squarely supports the view that I have taken now on the proper construction of [SECTION] as amended. That means to say, even if the secured creditor stands outside the winding up, the company Court does not lose its jurisdiction under [SECTION] over such secured creditor. What all the expression "standing outside the winding up" means is that the secured creditor is given an option to realise the security either by private sale if he has power to do so or through Court sale if there is any dispute regarding the nature of the security or the value of the security or under [SECTION] of the [ACT] as in this case. But that does not mean that the company's assets in liquidation pursuant to the order of this Court are taken out of the purview of the jurisdiction of the Company Court. In the circumstances, the ruling in [ENTITY]'s case should be adopted for the proper construction of [SECTION] as amended and [SECTION] of the Act. Under [SECTION], the workmen's due and the debts due to the secured creditors to the extent of [SECTION] should be worked out in the light of the illustration given under [SECTION] and that could be worked out only by the Company Court in exertion of the power under [SECTION] of the Act. This is the plain construction of [SECTION] and [SECTION] of the Act and it is wrong to say that by this construction I will be stretching the language of these provisions beyond a point not intended by the legislature while making the Amendment to [SECTION].
12. The next point to be considered by this Court is what are the dues to the workmen. In C.A.No. [SECTION]1[SECTION] of 1988 the Official Liquidator has referred to the workmen's claim for wages. That claim is not made by the workmen but by one of the Directors in the statement of affairs filed by him. The first proviso to [SECTION] refers to the claim by the workmen. In the absence of the claim by the workmen either in these proceedings or in any other proceedings before any other Court of competent jurisdiction, is it necessary for this Court to go into the claims of the workmen by directing the Official Liquidator to represent them and enforce the charges in their favour? Mr. [ENTITY], learned Counsel for the Official Liquidator, has submitted that unless the statement of affairs are received from the Directors it will not be possible to ascertain the nature of the claim of the workmen. In other applications no statement of affairs are filed by the Directors. The Official Liquidator was not in a position to ascertain their claim upto this stage in these applications.
13. But the implementation of the priorities under [SECTION] of the Act is not dependent on the statement of affairs that has to be filed by the Director for SIC: when the winding up order is made. What is necessary for giving effect to [SECTION] and also to the first proviso to [SECTION] is that the workmen should be represented by the Official Liquidator for the enforcement of the change in their favour. Therefore, the absence of the statement OT affairs in all these applications but one or the sum mentioned as liability in Application No. [SECTION]1[SECTION] of 1988 towards wages of workmen is not a relevant factor to be taken into consideration for giving effect to [SECTION] The first proviso to [SECTION] is clear, i.e., the Official Liquidator must represent the workmen and enforce the charge in favour of the workmen in the security of the secured creditor. Accordingly, the Official Liquidator must take the necessary steps to file the claim of the workmen before this Court prior to the rights of KSFC as a secured creditor are determined and the priorities under [SECTION] are worked out. The value of the security of the secured creditor shall be after ascertaining the value of the workmen's portion under illustration to [SECTION]. For this purpose the Official Liquidator must take the necessary steps to issue notices to the workmen if there are any in these applications and, after ascertaining their dues must make the necessary application in this Court under [SECTION] for working out the preferential payments under [SECTION] This procedure would satisfy the claim of the secured creditors as also the claim of the workmen and the company Court will be in a position to determine the order of priorities and also the claims of the secured creditors and the workmen in a common adjudication under [SECTION] of the Act.
1[SECTION]. Accordingly, I direct the Official Liquidator to submit before this Court the claims of the workmen in all these applications within a period of [SECTION] weeks from this day. If no such claims are forthcoming from the workmen, this Court will determine the amount due to the secured creditor and make appropriate orders to enable them to realise the value of their security in these proceedings.
1[SECTION]. A number of other cases have been cited at the Bar by both sides. But all these decisions are not relevant to determine the points that arise for consideration since those decisions were rendered prior to the Amendment to [SECTION] and [SECTION] of the Act by Act No. 3[SECTION] Of 198[SECTION].
1[SECTION]. Mr. [ENTITY] submitted that if the matter is left to the Official Liquidator for settling the priorities as required under [SECTION] and [SECTION] of the Act, the assets of the company (in liquidation) which are also subject to security in favour of the KSFC would further diminish in value by deterioration or otherwise and they would not realise any value at ail and thereby the interest of the workmen would not be protected. He submitted that this Court can put KSFC on any terms as it deems fit for the protection of the rights of the workmen. [ENTITY], J. In C.A.No.[SECTION]00 of 198[SECTION] disposed of on 21-8-1987 [PRECEDENT] has considered the effect of [SECTION] of the [ACT] read with [SECTION] of the said Act, and [SECTION] of the Act and has held that the provisions of the Act in so far as they relate to winding up of the Company override the provisions of [SECTION] of the Act. The learned Judge observed thus:
"If the construction suggested by Mr. [ENTITY] is accepted by this Court and that is, having regard to [SECTION] of the Act which provides that the provisions of the said Act and any Rules 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 that Act, but save as aforesaid, the provisions of that Act shall be in addition to, and not in derogation of, any other law for the time being applicable to an industrial concern, the action taken by the Corporation in the instant case by taking possession of the moveable and immoveable assets must be held to be valid and legal and therefore, they have the right to dispose of them under [SECTION] of the Act, the result will be disastrous.
The question of [SECTION] of the Act coming into operation will arise only when there is repugnancy between the provisions of the State Financial Corporation Act, 19[SECTION]1 and any other law. If there is no repugnancy, or conflict, [SECTION] has no role to play. We cannot read repugnancy where none exists and then credit the Corporation in the instant case as having acted lawfully. [SECTION] of the Act reads as follows:
'Where any industrial concern, which is under a liability to Financial Corporation under an agreement, makes any default in repayment of any loan or advance or any instalment thereof (or in meeting its obligations in relation to any guarantee given by the Corporation) or otherwise fails to comply with the terms of its agreement with the Financial Corporation, the Financial Corporation shall have the (right to take over the management or possession or both of the industrial concern), as well as the (right to transfer by way of lease or sale) and realise the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation.
The Section extracted as above makes it abundantly clear that the right of the Corporation to walk in and take over all the assets is available to it only when the Company or where the industrial concern is in charge and control of its assets and not when the industrial concern has lost control over its assets in favour of another by operation of law or otherwise. Therefore, if it is a question of there being an order under [SECTION] against the industrial concern then [SECTION] would protect the action of the Corporation. But if the property of the industrial concern has already vested in this Court then it shall not exercise its power under [SECTION] of the Act, as that would be gross contempt of this Court. Such a construction apart from being absurd, is inconsisent with the scheme of things where the [ACT] enjoins all authorities to come to the assistance of the Courts."
In my view the same reasoning will have to be applied especially in view of the amended provision of [SECTION] of the Act and [SECTION] of the Act. These 2 Sections will take away the right of KSFC to deal with the property of the company (in liquidation) even before an order of winding up is made by this Court. In the circumstances, the rule of mischief and the Rule of benevolent construction will have to be applied for the interpretation of the first proviso to [SECTION] and the provisions of [SECTION] of the Act with full force even if it were to cause some loss to the secured creditor by a little delay in the sale of the properties by the Official Liquidator.
17. Therefore, the appropriate order to be made is to direct the Official Liquidator to cause the sale of these properties by public auction within a period of [SECTION] weeks from this day.
18. In order to facilitate the submission of amounts due to the workmen, the Official Liquidator is directed to take out advertisement in one issue of 'Deccan Herald' and in one issue of 'Kannada Prabha' in all these applications calling upon the workmen to furnish the claims by way of arrears of wages, and the other dues more particularly mentioned in [SECTION] of the Act. Such publication shall be caused within 2 weeks from this day and the workmen shall be called upon to file their claims within 2 weeks from the date of the application. If no claim is forthcoming, the property shall be sold by KSFC for the realisation of their dues subject to further orders of this Court.