AJN 1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION NOTICE OF MOTION NO.648 OF 2008 IN APPEAL NO.294 OF 2005 IN COURT RECEIVER'S REPORT DATED 5/07/2004 IN SUIT NO.3406 OF 1999 Bank of India & Ors. .... Appellants Vs. ICICI Bank Limited & Ors. .... Respondents Mr. R.A. Dada, senior counsel with Mr. Farzana K. i/b. FZB & Associates. Mr. Sachin Chandarama i/b M.K. Ambalal for respondent 1. Mr. Simil Purohit for ex-Directors of respondent 2. Mr. K.H. Mody i/b Ms. Mohana Nair for respondent 3. Ms. Geeta Shastri, A.G.P. for respondent 4. Mr. Sureshkumar for respondent 6. Ms. N.D. Buch with Mr. S.K. More for respondent 10. Mr. S.R. Rajguru with Ms. Nisha Valani for the Customs and Excise Department. Mr. Kedar Dighe for the Official Liquidator. Mr. D.V. Deokar, Ist Asstt. To Court Receiver present. AJN 2 Mr. P. Ramarao, Official Liquidator and Mr. Ramakant, Dy. Official Liquidator present. CORAM : SMT. RANJANA DESAI & K.K. TATED, JJ. DATED : 17TH DECEMBER, 2008. P.C. :- 1. This notice of motion is taken out by the appellants i.e. (1) Bank of India, (2) Union Bank of India and (3) State Bank of India praying that pending the hearing and final disposal of the appeal, the Court Receiver, High Court, Bombay, may be directed to pay to the appellants a sum of Rs.29,07,26,245.35 together with accrued interest on Rs.59,73,06,366.38 lying with the Court Receiver after keeping aside the amount of Rs.31,51,82,353/- mentioned in Exhibit-”G” to the Affidavit in Support of the notice of motion subject to the final decision of Appeal No.294 of 2005, Appeal No.40 of 2005 and Appeal No.201of 2005. 2. Admittedly, respondent 2 – Hico Products Limited had availed of various facilities from the appellants, who are secured creditors, from time to time, in consideration of which it had executed several AJN 3 documents in favour of the appellants. A suit was filed on 15/2/1999 by the appellants in this court being Suit No.1275 of 1999 which was subsequently transferred to the Debts Recovery Tribunal No.II (for short, “the DRT-II”), Mumbai. The suit was then numbered as Original Application No.2204 of 2000. The said original application was decreed by judgment dated 11/9/2002 by the DRT-II, Mumbai whereby respondent 2 along with five other guarantors was ordered and decreed to pay the amount due to the appellants. 3. It appears that the ICICI Bank and others had filed a suit in this court being Suit No.3406 of 1999 against respondent 2 and others for recovery of their respective dues. The said suit was filed subsequent to the suit filed by the appellants herein. By order passed in the said suit in November, 2001, the Court Receiver was directed to sell the immoveable and moveable properties belonging to respondent 2 by public auction. Pursuant to that order, the Court Receiver had sold various properties of respondent 2 at different times. It appears that in November/December, 2002, the Court Receiver invited claims in respect of the distribution of the amount of Rs.2,18,76,111.00 deposited with them being the sale AJN 4 proceeds of the properties sold by public auction. The appellants through their advocates lodged their claim with the Court Receiver. As directed by learned Single Judge of this court, the Court Receiver submitted his report dated 5/7/2003 for deciding the priorities of the claims and the manner in which the sale proceeds should be distributed in terms of the claims filed by the parties. It appears that as against the total claim of Rs.50,26,97,636.96, the sale proceeds then lying with the Court Receiver in 2003 were to the tune of Rs.2,18,76,111.00. Various claimants viz. the appellants, ICICI Bank, the workers union, Sales Tax departments and Customs, etc. were heard and learned Single Judge of this court passed order dated 6th, 7th and 8th October, 2004. giving priorities to various claims. The appellants preferred Appeal No.294 of 2005 challenging the said order. It appears that the Sale Tax department filed Appeal No.40 of 2005 and the Association of Chemical workers filed Appeal No.201 of 2005 challenging the said order. The said appeals are pending. 4. By order dated 28/2/2005 passed in the appeal filed by the Sales Tax Department, the parties agreed to distribution of a sum of Rs.2,35,90,007.00 to the State Government as payment under AJN 5 the Amnesty Scheme 2004. It appears that the Sales Tax Department claims an amount of Rs.2,86,54,565/- over and above the amount which is already paid to it. Subsequently, the Court Receiver has sold several other properties and as per Court Receiver's Report dated 5/9/2007 an aggregate sum of Rs.62,98,56,111.00 was recovered by the Court Receiver in the said sale. Out of that amount, an amount of Rs.4,01,42,472/- has been paid to various authorities such as State Government, Sales Tax Department as payment under the Amnesty Scheme, 2004. The balance sum of Rs.60,59,08,698.35 which includes interest together with further interest is lying with the Court Receiver. 5. The Official Liquidator has been appointed as the Liquidator of respondent 2 vide order dated 21/2/2007 passed in Company Petition No.75 of 1999. 6. On the present notice of motion, on 25/3/2008, Division Bench of this court passed an order directing the Official Liquidator to hear all the concerned parties except the secured creditors on 27/3/2008 in his office. The Official Liquidator was directed to adjudicate and file his report before this court on 2/4/2008. AJN 6 Pursuant to that order, the Official Liquidator has submitted his report dated 17/9/2008 to this court. The said report of the Official Liquidator indicates that an amount of Rs.64,49,33,162/- is lying with the Court Receiver, High Court, Bombay. The report states that the Official Liquidator proposes to declare a dividend @ 55 paise in a rupee to the workmen, secured creditors and Sales Tax Department in terms of section 529A of the Companies Act, 1956. The amounts claimed by the claimants and admitted by the Official Liquidator are as under : S.No. Claimant Amt. Claimed Amt. Admitted I (a) Bank of India 35,57,26,258/- 35,57,26,258/- (b) Union Bank of India 23,85,05,919/- 23,85,05,919/- (c) State Bank of India 10,99,30,115/- 10,99,30,115/- II Workmen 46,34,87,811/- 21,96,86,323/- III Sales Tax 15,06,43,909/- 15,06,43,909/- ----------------------- ---------------------- 131,32,94,092/- ========= 107,44,92,524/- ======== 7. The report states that on the basis of the aforesaid information, the total admitted amount payable to all these claimants comes to Rs.107,44,92,524/- and that the Official Liquidator proposes to declare a dividend @ 55 paise in a rupee on pari pasu basis which comes to Rs.59,09,70,885/-. We may AJN 7 reproduce the details given by the Official Liquidator, which are as under: S.No. Claimant Amt. Admitted Dividend Recommended @ 55% of admitted amount Balance Amount of 4% payable I.(a) Bank of India 35,57,26,258/- 19,56,49,441/- 16,00,76,817/- (b) Union Bank of India 23,85,05,919/- 13,11,78,255/- 10,73,27,664/- (c) State Bank of India 10,99,30,115/- 6,04,61,563/- 4,94,68,552/- II. Workmen 21,96,86,323/- 12,08,27,477/- 9,88,58,846/- III. Sales Tax 15,06,43,909/- 8,28,54,149/- 6,77,89,760/- Total 107,44,92,524/- 59,09,70,885/- 48,35,21,639/- 8. According to the Official Liquidator, after payment of dividend @ 55% as above, there will be a balance of Rs.5,39,62,277/- to the credit of the company (In Liquidation) lying with the Court Receiver. 9. Mr. Dada, learned senior counsel appearing for the appellants, who have taken out the present notice of motion, submitted that the appellants are secured creditors and, therefore, as per section 529A of the Companies Act, 1956, they are entitled to overriding preferential payment. Mr. Dada submitted that therefore, a direction be given to the Court Receiver as prayed for AJN 8 in the notice of motion. Mr. Dada submitted that the appellants have charged interest upto the date of winding up of respondent 2 as per Rule 156 of the Companies (Court) Rules, 1959. Mr. Dada submitted that the appellants are willing to file the necessary undertakings in this court to the effect that the appellant-banks undertake to bring back the amount disbursed to them in case it is found that it is paid in excess to what is to be paid to them or any amount if this court so directs. He states that the appellants will undertake to bring back the amount with such interest as this court may direct. In fact, necessary undertakings have been filed in the court. 10. Ms. Shastri, learned A.G.P. appearing for respondent 4 - the Sale Tax Department strenuously contended that a direction be given to the Court Receiver to disburse the dues of the Sales Tax Department. Ms. Shastri submitted that under the general law, the banks will have no priority to the extent of the amount which has accrued in the suit amount, unless dues of sales tax, land revenue and water charges are paid. Ms. Shastri relied on the judgment of the Supreme Court in State Bank of Bikaner & Jaipur v. AJN 9 National Iron & Steel Rolling Corporation & Ors. (1995) 2 SCC 19 where the Supreme Court was dealing with Section 11-AAAA of the Rajasthan Sales Tax Act, 1954. In that case, the appellant bank had filed a suit for recovery of its money from the respondent. Commercial Tax Officer got himself impleaded in the suit on the ground that he had a prior claim. The property which was the subject matter of the suit was sold in auction under court orders. Commercial Tax Officer made a claim that the sales tax dues were liable to be paid first. The Supreme Court referred to Section 11- AAAA of the Rajasthan Sales Tax Act and held that section creates a first charge on the property, thus clearly giving priority to the statutory charge over all other charges on the property including a mortgage. The Supreme Court held that the charge operates on the entire property including the interest of the mortgagee therein. Learned counsel also relied on the judgment of the Division Bench of this court in Appeal No.125 of 2000 in Chamber Summons No.104 of 1998 in Suit No.782 of 1992 dated 12/6/2000. In that case, the judgment creditor had argued that Section 38C of the Bombay Sales Tax Act would not be applicable because there was already a charge in his favour. This court held that the execution AJN 10 proceedings have not reached upto the state of confirmation of sale as envisaged by Order 21 Rule 92 of the Code of Civil Procedure. Property, therefore, continued to vest in the judgment debtor, who is the assessee under the Sales Tax Act and, therefore, section 38C of the Bombay Sales Tax Act was clearly applicable. Ms. Shastri also relied on the judgment of learned Single Judge of this court in Company Application No.312 of 2001 in Company Petition No.712 of 1997 (State of Maharashtra, through the Assistant Commissioner of Sales Tax v. The Official Liquidator of Reliance Heat Transfer Pvt. Ltd. (In Liquidation) dated 17/2/2004 where after considering the relevant provisions of law, learned Single Judge has held that the State of Maharashtra will have to be treated as a secured creditor of the company in Liquidation by operation of law, in relation to the dues recoverable by the State of Maharashtra under Bombay Sales Tax Act, 1959 and its claim will have to be considered along with other secured creditors and workers on pari passu basis by virtue of Section 529-A of the Companies Act. Ms. Shastri submitted that in fact the State of Maharashtra would get preference over the claim of secured creditors. Ms. Shastri AJN 11 submitted that the property has been sold in the appeal filed by the Sales Tax Department vide order dated 28/2/2005. By this order, this court has allowed the Sales Tax Department to withdraw a part of its dues. Ms. Shastri submitted that the amount received by sale of lot Nos.2, 5, 6, 9, 10, 13, 14, 15 and 17 is prior to liquidation and, hence, section 529A will not come in operation. 11. Mr. Rajguru, learned counsel for Customs and Central Excise Department submitted that a direction be given to the Court Receiver to disburse the amounts due to the Customs Department as the Customs Department is also on par with the secured creditors. In support of his submission, learned counsel relied on the judgment of the Calcutta High Court in Collector of Customs, Calcutta v. Dytron (India) Ltd., 1999 (108) E.L.T. 342 (Cal.) where the Calcutta High Court has held that until and unless the duties and statutory dues of Customs Authorities are paid, the chemicals imported by the company in liquidation were not available legally for sale to the purchasers at all. The Calcutta High Court observed that the provisions of Sections 529-A and 530 of the Companies Act, 1956 apply to situations where the claim of AJN 12 creditors in respect of the sale proceeds of the assets of the Company sold in liquidation are to be determined and the Customs Authorities claim to the chemicals in question, in which the Customs Authorities had a statutory right of detention and confiscation, had to be met before the chemicals could be validly sold as assets of the company in liquidation. The Calcutta High Court further held that the claim of the Customs Authorities would, therefore, stand outside proceedings under Sections 529, 529A and 530 of the Companies Act, 1956. Mr. Rajguru submitted that this judgment is clearly applicable to the facts of the present case. Mr. Rajguru also relied on an unreported order of the Andhra Pradesh High Court in Company Application No.1049 of 2007 in Company Petition No.34 of 1997 (M/s. Acme Flouro Polymers Ltd. (In. Liquidation) represented by the Official Liquidator, High Court of Andhra Pradesh, Hyderabad v. The Assistant Commissioner of Customs Bond Departments, New Customs House, Ballard Estate, Mumbai & Anr.) 12. Mr. Sureshkumar, learned counsel for respondent 6 – the Provident Fund Commissioner, submitted that the dues of the AJN 13 Provident Fund Commissioner must also be directed to be disbursed in view of the order dated 28/2/2005 passed by the Division Bench of this court in Notice of Motion No.416 of 2005 in Appeal No.40 of 2005 in Court Receiver's Report in Suit No.3406 of 1999 and other connected matters. He pointed out that as per the provisions of section 11(2) of the Employees Provident Fund (Misc. provisions) Act, 1952, the claim of the Provident Fund Commissioner will have to be considered on priority basis. In support of his submissions, Mr. Sureshkumar relied on the Supreme Court's judgment in State Bank of Bikaner & Jaipur's case (supra). He also relied on judgment of this court dated 23/6/2005 in Janata Sahakari Bank Limited v. Assistant Provident Fund Commissioner & Ors., judgment of this court in M/s. Indus Agro Products v. Union of India & Ors. in Writ Petition No.2932 of 2004 decided on 28/3/2006 and judgment of this court in Sicom Limited v. Union of India & Ors. in Writ Petition No.156 of 2008 decided on 16/2/2008. He also relied on the judgment of the Kerala High Court in Recovery Officer & Assistant Provident Fund Commissioner v. Kerala Financial Corporation, 2002 111 CLR 191. AJN 14 13. Mr. Purohit, learned counsel appearing for ex-directors of respondent 2 submitted that the secured creditors / appellants are entitled to interest only at the rate of 4% upto the date of winding up. However, in this case, their claim includes interest at excessive rate. At this stage, it must be noted that this statement appears to be factually incorrect. Mr. Dada learned counsel for the appellants has stated that interest is charged only upto the date of winding up. The Official Liquidator has confirmed this. It is clear from Rule 156 of the Companies (Court) Rules, 1959 that where the interest is not agreed upon, the rate of interest has to be 4%. Otherwise, the secured creditor is entitled to the contractual rate of interest. Here, the appellants will be entitled to the contractual rate of interest upto the date of winding up and they appear to have claimed accordingly. The above submission made by Mr. Purohit will, therefore, have to be rejected. 14. It must be stated that Mr. Dada, learned counsel for the appellants has submitted that submission of Ms. Shastri that the State of Maharashtra would get preference over the secured creditors is wrong. He drew our attention to the judgment of AJN 15 learned Single Judge of this court in Company Application No.312 of 2001, on which heavy reliance is placed by Ms. Shastri. He pointed out that learned Single Judge has observed that the proposition that tax liability would get preference over the claim of secured creditors and the workers of the company in liquidation was an extreme proposition and the issue to be considered is not whether the State of Maharashtra would get preference over the claim of the secured creditors and the workers but the question is whether the State of Maharashtra can be considered as a secured creditor of the company in liquidation, in relation to the dues. Mr. Dada also submitted that the judgment of the Supreme Court in State Bank of Bikaner & Jaipur's case (supra) will not be applicable to the present case because in that case, the Supreme Court has considered Section 11-AAAA of the Rajasthan Sales Tax Act, 1954 which is not in pari materia with Section 38-C of the Bombay Sales Tax Act. There is a material difference between the two. Section 38-C makes charge created by tax liability subject to any provision regarding first charge in any Central Act. This is absent in Section 11-AAAA of the Rajasthan Sales Tax Act, 1954. AJN 16 15. So far as the claim of the Sales Tax Department is concerned, Ms. Buch, learned counsel appearing for respondent 10 drew our attention to the judgments of the Supreme Court in Imperial Chit Funds (P) Ltd. (In Liquidation) v. Income-Tax Officer, 1996 Company Cases Vol.86 555; Textile Labour Association & Anr. v. Official Liquidator & Anr., 2004 Company Cases Vol.120 (S.C) 505; judgments of this court in Syndicate Bank & Anr. v. Official Liquidator, Wester Works Engineers Ltd. & Ors., 1999 Company Cases Vol.98 487; Polyolefins Industries Ltd. v. Kosmek Plastics Manufacturing Co. Ltd., 1999 Company Cases Vol.98 481, the judgment of the Kerala High Court in K.T.C. Tyres (India) Ltd. (In Liquidation) v. Official Liquidator, 2003 Company Cases Vol.114 185; the judgment of the Madras High Court in A. Shanmugham v. Official Liquidator, High Court, Madras, 1992 II CLR 745 and the judgment of the Delhi High Court in Haryana Financial Corporation v. PNB Auto Ancillary (India) Ltd. (In Liquidation), 1994 Company Cases, Vol.81 588. She submitted that the submission made by learned counsel for the Sales Tax Department that the Sales Tax Department is on par with the secured creditor is not correct. She submitted that the AJN 17 judgment of learned Single Judge of this court (A.M. Khanwilkar, J.) will have to be distinguished from the facts of this case. Learned counsel urged that, therefore, no order of disbursement be passed so far as the Sales Tax Department is concerned. 16. We must also mention the grievance made by Mr. Purohit, learned counsel for ex-directors of respondent 2 that the Sales Tax Department has inflated its claim. He submitted that therefore, they may not be permitted to withdraw any amount. 17. So far as the claims of Sales Tax Department, Provident Fund Commissioner and Customs Department are concerned, we may refer to order dated 13/9/2007 passed by learned Single Judge of this court on the Official Liquidator's report dated 2/8/2007 in Company Petition No.75 of 1999, which also pertains to respondent 2 – M/s. Hico Products Ltd. (In Liquidation). It appears that the Official Liquidator was seeking a direction to the Court Receiver to transfer the sale proceeds of the properties of respondent 2 along with interest accrued thereon to the Official Liquidator. Learned Single Judge noted that order dated 6th, 7th and 8th October, 2004 disposing of the Court Receiver's report, AJN 18 passed by learned Single Judge have been challenged in this court, that the appeals are pending and that the Division Bench of this court in Appeal No.40 of 2005 has given direction to disburse an amount of Rs.2,35,90,007/- to the State Government through the Commissioner of Sales Tax and Sales Tax Officer. Learned Single Judge observed that in this view of the matter, it would not be appropriate for him to pass any order on the report. He observed that the Official Liquidator and all other concerned parties should file appropriate applications either in the suit or in the appeals pending before the Division Bench seeking appropriate relief. In fact, pursuant to this order, the present notice of motion seems to have been filed. The Official Liquidator has also made a request in his report that the amount lying with the Court Receiver be transferred along with accrued interest thereon to him. We find that the Sales Tax Department, Customs Department and the Provident Fund Commissioner have not taken out appropriate proceedings as directed. Looking to the nature of rival contentions, we feel they can be dealt with only if these claimants take out appropriate proceedings and opportunity is given to the parties to file affidavits in reply. We have already noted that according to the 2nd respondent, Sales Tax Department has inflated AJN 19 it's claim. This grievance needs to be investigated after the Sales Tax Department makes an application for disbursement. In the circumstances, in our opinion, since the present appellants are covered by section 529A of the Companies Act and since they have already filed the undertakings in this court to the effect that in case this court directs they will bring back the amounts which are disbursed to them with such interest as may be directed by this court, we find no reason why their prayer should not be granted. So far as the other Departments are concerned, they would be at liberty to file appropriate proceedings making a prayer that the money may be disbursed to them also. We may note that the Official Liquidator's report dated 17/9/2008 indicates that there is enough money lying with the Court Receiver to pay others if they are able to satisfy the court that they fall within the ambit of section 529A of the Companies Act. On their making such applications, their claim can be considered. Hence, the following order : 18. The undertakings which are filed by the appellants are accepted by this court. The Court Receiver, High Court, Bombay is directed to transfer the sale proceeds of properties of respondent 2, which are lying with the Court Receiver along with accrued AJN 20 interest thereon after deducting the costs of the Court Receiver to the Official Liquidator as requested in the Official Liquidator's report dated 1/8/2008. Since an amount of Rs.24,00,000/- is invested as per order of this court dated 9/1/2004 in Suit No.4318 of 2001, there is no question of transferring the said amount. The Official Liquidator is directed to pay to appellants 1, 2 and 3 an amount of Rs.19,56,49,441/-, Rs.13,11,78,255/- and Rs.6,04,61,563/- respectively. The Official Liquidator is also directed to disburse the amount of Rs.12,08,27,477/- to the workmen. While disbursing the amounts to the appellants and the workmen, the Official Liquidator should follow the necessary procedure prescribed under the Companies (Court) Rules, 1959. We make it clear that we have not expressed any final opinion on the merits of the case of the parties. Notice of Motion is disposed of. [SMT. RANJANA DESAI, J.] [K.K. TATED, J.]