Case: International Coach Builders Ltd Vs. Karnataka State Financial Corporation

of a company. Even assuming to the contrary, if a conflict arises, then we respectfully reiterate the view taken by the Division Bench of this court in A.P. State Financial Corporation Case (supra). This Court pointed out therein that section 29 of the SFC Act cannot override the provisions of section 29(1) and 529A of the Companies Act, 1956, inasmuch as the SFCs cannot exercise the right under section 29 ignoring a pari passu charge of the workmen. It was observed in the judgment: "Therefore, the power to sell which is given to a financial corporation under Section 29 has to be exercised consistently with the right of a pari passu charge holder. Such a right can be exercised with the consent of the pari passu charge holder or on holders of the court after making him a party to the proceedings to enforce the security. Since the charge holder is the Officer Liquidator, his power to consent is subject to the sanction of the Court." 27. This very contention based on the non-obstante clause in Section 46B of the SFC Act was rejected by pointing out that if the non-obstante clause in section 529A and section 46B conflicts with the non-obstante clause in section 529A, then the amendments to the Companies Act made in of 1985 must prevail over the non-obstante clause in section 46B of the SFC Act which was inserted in the year 1956. Far from taking a different view of the matter, we too are of the same view as has been taken in the judgment of this Court in A.P. State Financial Corporation case (supra). 28. Similar view was taken by a Division Bench of the A.P. High Court in Andhra Pradesh State Financial Corporation vs. Electrothermic (P) Ltd. & Anr. (1986 Co. Cases 402) and a learned single Judge of the Punjab High Court in Official Liquidator, Ravindra Pharmaceutical (P) Ltd. vs. Haryana Financial Corporation (Company cases Vol. 98 p. 683). 29. The Division Bench of the Gujarat High Court in C.A. No. 6303 of 1995 has, however, struck a discordant note. The Division Bench was impressed by the fact that in M.K. Ranganathan this Court had emphasised the right of a secured creditor to realize his security by standing outside the winding up of a company. It also emphasised that the proviso to section 529 of the Companies Act operates only where a secured creditor, instead of relinquishing his security and proving his debt, proceeds to realise his security. In the words of the Gujarat High Court "But the fat remains, it has yet been left at the option of the secured creditor to realise the security without proving his debt in the winding up proceedings." This seems to be the linchpin of the reasoning. 30. In our view, the reasoning of the Gujarat High Court that in case the secured creditor does not opt to realise the security, the liquidator, by dint of the proviso to section 529, does not become a charge holder in the estate of the company so as to exercise the right of a simple mortgagee as envisaged under section 100 of the Transfer of Property Act, appears to be non-sequitur. If a secured creditor does not opt to stand outside the winding up but relinquishes his security and proves his debt in the winding up, then there is no doubt that the official liquidator will come into custody of all the assets of the company in liquidation and the distribution of the assets would have to proceed in accordance with the provisions of section 529A of the Companies Act, in which case the secured creditor stands in line as an unsecured creditor. It is only when the SFC as a secured creditor opts to stand outside the winding up and seeks to realise its security that the conflict, if any, can arise. We have already indicated as to who must yield in such a clash of the titans. The fact that the liquidator or the workmen do not have a right independently to enforce the charge, unless the creditor decides to stand outside the winding up, does not make any difference to the situation, in our view. It is not the contention of the SFCs that they do not desire to exercise the option available to them of standing outside the winding up. In fact, it is their contention that as mortgages they have a right to stand outside the winding up and are not subject to the supervisory jurisdiction of the Company Court. They also contend that, unlike other mortgagees, they have a special right by reason of sections 29 of the SFC Act of taking possession of the assets and realising them by sale, transfer and so on. We are, therefore, unable to accept the reasoning of the Gujarat High Court as correct. 31. Finally, counsel for the SFCs urge that the view we are to take would obliterate the difference between a creditor opting to stay outside winding up and one who opts to prove his debts in winding up. We are unable to accept it. As a result of the amendments made by the Act of 1985 in the Companies Act, 1956, the SFCs as secured creditors, must seek leave of the Company Court for the limited purpose of ensuring that the pari passu charge in favour of the workmen is safeguarded by imposition of suitable conditions under the supervision of the Company Court. If this amounts to impeding their hitherto unimpeded rights, so be it. Such is the Parliament intendment, according to us. This impediment is of a limited nature for the specific purpose of protecting the pari passu charge of the workmens dues and subject thereto, SFCs can continue to exercise their statutory rights as secured creditors without being reduced to the status of unsecured creditors required to prove their debts in insolvency and stand in line with other unsecured creditors. Neither is the apprehension expressed justified, nor the contention sound.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]25. 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 the 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 section 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 passuare represented by the official liquidator. We re, therefore, of the view that the unhindered right hitherto available to the SFCs to realise their security, without recourse to the Court, no longer holds true as the right vested in the official liquidator is a statutory impediment to such exercise and has to be reckoned with. And since the official liquidator can do nothing without the leave or concurrence of the Court, all necessary applications must, therefore, come to the Company Court.26. We do not really see a conflict between Section 29 of the SFC Act and the Companies Act at all, since the rights under section 29 were not intended to operate in the situation of winding up of a company. Even assuming to the contrary, if a conflict arises, then we respectfully reiterate the view taken by the Division Bench of this court in A.P. State Financial Corporation Case (supra). This Court pointed out therein that section 29 of the SFC Act cannot override the provisions of section 29(1) and 529A of the Companies Act, 1956, inasmuch as the SFCs cannot exercise the right under section 29 ignoring a pari passu charge of the workmen.In our view, the reasoning of the Gujarat High Court that in case the secured creditor does not opt to realise the security, the liquidator, by dint of the proviso to section 529, does not become a charge holder in the estate of the company so as to exercise the right of a simple mortgagee as envisaged under section 100 of the Transfer of Property Act, appears to beIf a secured creditor does not opt to stand outside the winding up but relinquishes his security and proves his debt in the winding up, then there is no doubt that the official liquidator will come into custody of all the assets of the company in liquidation and the distribution of the assets would have to proceed in accordance with the provisions of section 529A of the Companies Act, in which case the secured creditor stands in line as an unsecured creditor. It is only when the SFC as a secured creditor opts to stand outside the winding up and seeks to realise its security that the conflict, if any, can arise. We have already indicated as to who must yield in such a clash of the titans. The fact that the liquidator or the workmen do not have a right independently to enforce the charge, unless the creditor decides to stand outside the winding up, does not make any difference to the situation, in our view. It is not the contention of the SFCs that they do not desire to exercise the option available to them of standing outside the winding up. In fact, it is their contention that as mortgages they have a right to stand outside the winding up and are not subject to the supervisory jurisdiction of the Company Court. They also contend that, unlike other mortgagees, they have a special right by reason of sections 29 of the SFC Act of taking possession of the assets and realising them by sale, transfer and so on. We are, therefore, unable to accept the reasoning of the Gujarat High Court aswas a case arising under Section 232 of the Companies Act, 1913. This Court was required to consider the meaning of the provision "any sale held without leave of the Court of any of the properties" used in Section 232(1) of the Companies Act, 1913 which rendered such sales void. It was held that these words refer only to sales held through the intervention of the Court and not to sales effected by the secured creditor outside the winding up without intervention of the Court. This Court pointed out that the law in England, and under the provisions of the Companies Act in India, was the same, namely, that the secured creditor had the right of realizing his security by standing outside the winding up, in which case he was not required to seek intervention of the Court.As a result of the proviso added in Section 529, the security of every secured creditor is deemed to be subject to age in favour of the workmen to the extent of theportion, as defined in(3)(c) therein. It is further provided, that, where the secured creditor, instead of relinquishing its mortgage and providing his debt, opts to stand outside the winding up proceedings and realise his security, the Official Liquidator shall be entitled to represent the workmen and enforce such charge and that any amount realised by enforcement of such charge shall be applied ratably by the Official Liquidator for the discharge ofdues. It is true that even the amended proviso does not give the Liquidator an independent right of enforcing the charge by selling the security against which such charge is created. Nonetheless, it creates age in favour of the workmen to the extent ofdues and makes the Liquidator the representative of the workmen to enforce such a charge. By reason of Clause (c) of the newly added proviso, so much of the debt due to the secured creditor opting to realise security as could not be realized because of the specifically created rights in favour of the workmen, or the amount of theportion in the security, whichever is less, shall rank pari passu with thedues under Section 529A. Section 529A provides for overriding preferential payments ofdues and unrealised portion of the secured creditors dues, as provided in clause (c) of the proviso to Sectionthe first place, we see no such conflict between the provisions of the Companies Act as amended in 1985 and the provisions of the SFC Act, 1951. In our view, the provisions of the SFC Act were merely intended to give an expeditious remedy to the SFCs without having to go through the procedure of enforcing the mortgage under the Transfer of Properties Act, 1882. In fact, even under Section 69 of the Transfer of Property Act, under certain circumstances a mortgagee has the power to sell the mortgaged property in default of payment of mortgaged money without intervention of the court. Under the general law, the SFCs would have to file a suit for realising their security unless they qualified under section 69 of the Transfer of Property Act. This meant considerable delay and holding up of the public monies due to the SFCs. In public interest, therefore, special provisions were made by Sections 29, 20, 31 and 12 enabling the SFCs to take possession of the mortgaged assets and sell them without having to move a court of law. The provisions of Section 29 to 32 and the rights flowing thereon are exercisable under ordinary circumstances. However, when the debtor is a Company in winding up, the rights of the SFCs are affected by the provisions of the Companies Act, 1956. Looked at from this point of view, therefore, there is no conflict between the provisions of the SFC Act and the Companies Act. Assuming that there is conflict, then the judgment of this Court in A.P. State Financial Corporations vs. Official Liquidator (2000) 7 SCC 291 ) clearly holds that the amendments made in Section 529 and 529A would override and control and the rights under Section 29 of the SFC Act. Though the Companies Act may be general law, the provisions introduced therein in 1985 were intended to confer special rights on the workers and pro tanto must be treated as special law made by Parliament. Since the amendments to the Companies Act were made by a later Act of 1985, they would override the provisions of section 29 of SFC Act, 1951. We are unable to accept the contention that the view taken in A.P. State Financial Corporation (supra) needs reconsideration. Far from it, we are in agreement with the view expressed therein.