IN THE HIGH COURT OF JUDICATURE OF ANDHRA PRADESH : HYDERABAD MONDAY, THE THIRTIETH (30TH) DAY OF AUGUST, TWO THOUSAND AND TEN Present: HON’BLE SRI JUSTICE G.V.SEETHAPATHY Company Appeal No.29 of 2009 Between: A.P. Industrial Development Corporation Ltd., Hyderabad, rep. by its Chairman & Managing Director … Applicant And: M/s Marine & Communication Electronics (India) Ltd., (In Liquidation), rep. by its Official Liquidator & others … Respondents HON’BLE SRI JUSTICE G.V.SEETHAPATHY Company Appeal No.29 of 2010 in R.C.C.No.5 of 1996 JUDGMENT: This appeal is directed against the order dated 17.09.2009 of the Official Liquidator wherein, the plea of the appellant-Corporation to treat the claim of Rs.16,35,828.80 as preferential debt payable in preference to all other debts of the company in liquidation, was rejected. 2. The Official Liquidator, representing the first respondent company, filed reports in OLR No.1 of 2001 and OLR No.25 of 2010. The appellant filed reply affidavit. Heard the learned counsel for the appellant-Corporation, the learned counsel representing the Official Liquidator for the first respondent company in liquidation and the learned counsel for the other respondents-secured creditors. Perused the record. 3. By order dated 08.11.1996 in R.C.C.No.5 of 1996, this Court directed winding up of M/s Marine and Communication Electronics (India) Ltd., (Company in liquidation) and appointed the Official Liquidator as its Liquidator. By order dated 19.11.1996 this Court directed the Official Liquidator to re-adjudicate the claim of the appellant-APIDC Ltd., for priority expenses and to file a report. As per the directions of this Court, the Assistant General Manager of the appellant-Corporation approached the Official Liquidator for clarifying the pre and post winding period expenditure with the supporting bills and vouchers. The Official Liquidator advised the APIDC to submit a report on M/s HAWK Security Services (P) Ltd., duly bifurcating the pre and post winding up expenditure towards watch and ward services. Accordingly, APIDC vide letter dated 15.12.2009 furnished a letter received from M/s HAWK Security Services (P) Ltd., acknowledging receipt of Rs.9,40,405.70 towards the pre winding up period and Rs.4,28,802.75 towards the post winding up period. The Official Liquidator admitted a sum of Rs.12,94,431.85 as priority expenses pertaining to the post winding up period and a sum of Rs.9,40,405.70 was admitted as secured debt pertaining to the pre winding up period. Thus after re-adjudication, a total sum of Rs.59,42,607.70 was admitted as secured debt and Rs.1,45,65,981/- was admitted as unsecured debt, out of which, Rs.6,84,152.75 was admitted as priority expenses as on 17.09.2009 and Rs.6,10,279.10 was admitted as priority expenses after re-adjudication. But however the balance amount of Rs.9,40,405.70 was admitted only as secured debt on the ground that the said expenditure was incurred prior to winding up of the company. 4. The appellant-Corporation would contend that the claim in a sum of Rs.9,40,405.70 incurred towards watch and ward expenses for the period prior to winding up also should be treated as priority expenses on par with the post winding up expenses on the ground that the said amount was spent for protection of the security/mortgaged property, which ultimately, endured to the benefit of all the secured creditors and also workmen, who are treated as secured creditors under Section 529-A of the Companies Act. 5. The respondents on the other hand would contend that in terms of Section 476 of the Companies Act and Rule 338 of the Companies (Court) Rules 1959, only those expenses, which are properly incurred in the winding up of a company be payable in ‘priority’. According to the inter se priority as provided in Rule 338, which gives priority to only those costs, which are incurred for the purpose of realizing, protecting and preserving the property of the company in liquidation. 6. The question, which therefore, arises for consideration is whether the expenses incurred, though for safeguarding the property of the company for the period prior to the order of winding up, is also to be treated as priority expenses, as claimed by the appellant- Corporation or the said expenditure remains only secured debt as contended by the respondents? 7. Rule 338 of the Companies (Court) Rules 1959 states as follows: “The assets of a company in a winding up by the Court remaining after payment of the fees and expenses properly incurred in preserving, realizing or getting in the assets including, where the company has previously commenced to be wound up voluntarily, such remuneration, costs and expenses as the Court may allow to the liquidator in such voluntary winding up shall, subject to any order of the Court and to the rights of secured creditors, if any, be liable to be paid in the order of priority mentioned therein.” 8. A perusal of the above Rule would show that the payment of those expenses properly incurred for preserving the property are liable to be paid from out of the assets of the company and the remaining assets would be distributed in the order of priority mentioned therein. The above Rule does not make any distinction between the expenditure incurred in preserving the property during the period prior to winding up and subsequent to the order of winding up. As rightly contended by the learned counsel for the appellant, the steps taken for preserving the property and the expenditure incurred for duly safeguarding the same even during the period prior to winding up has now endured to the benefit of all the secured creditors and therefore, the amount of expenditure incurred by the appellant-Corporation for safeguarding and preserving the property by providing necessary watch and ward, is liable to be treated as preferential claim irrespective of whether the said expenditure was incurred for the period prior or subsequent to the order of winding up. 9. It is not disputed that the appellant-Corporation has incurred a total amount of Rs.22,34,590.95 and out of which, Rs.6,84,152.75 was treated as priority expenses by the Official Liquidator and subsequent to the re-adjudication, a sum of Rs.6,10,279.10 was also admitted and treated as priority expenses. The balance amount of Rs.9,40,405.70 which is admitted by the Official Liquidator as a secured debt is also liable to be treated as priority expenses, as the said amount was also incurred towards expenditure for safeguarding the property by providing necessary watch and ward. In the circumstances and for the reasons stated above, the impugned order of the Official Liquidator is modified accordingly. 10. In the result, the company appeal is disposed of as stated above. No order as to costs. ___________________ G.V.SEETHAPATHY, J Date: 30.08.2010 bss