Case: SWARAJ INFRASTRUCTURE PVT. LTD Vs. KOTAK MAHINDRA BANK LTD

the Madras, Calcutta and Karnataka High Courts and as reiterated in the judgment of the Company Court in Canfin Homes Ltd., it is not possible to accept the submission which was urged on behalf of the appellant. The law does not impose an unreasonable condition of requiring a secured creditor to forsake his security before he asserts a right to urge that a company which is unable to pay its debts should be wound up. The respondent has stated before the learned Company Judge, when the petition for winding up came up for hearing that it was not possible for the respondent to recover her dues by the sale of the land in respect of which a security has been created in favour of the respondent. The claim of the respondent is still to be proved in the course of the winding up proceedings. A secured creditor who has a mortgage, charge or lien on the property of the company as security for her debt may either: (a) enforce the security and prove in the winding up for the balance of the debt after deducting the amount realised; or (b) surrender the security to the Liquidator and prove for the whole of the debt as an unsecured creditor; or (c) estimate the value of the property subject to her security, and prove for the balance of the debt after deducting the estimated value; or (d) rely on the security and not prove in the winding up proceedings. [Penningtons Company Law (Fourth edition, page 762)]. A secured creditor has the option of relinquishing his security and/or proving the entirety of his debt in the course of winding up. If the secured creditor does so in the course of winding up proceedings, the security will enure for the benefit of the body of creditors. On the other hand, it is open to a secured creditor to prove in the course of winding up proceedings to the extent of debt which has not been realised outside the proceedings for winding up by either accounting for the amount that has been so realised or by estimating the value of the property subject to security so as to enable him to prove in respect of the balance of the debt. On either view of the matter, that stage is still to arrive.” 18. In fact, even in Jitendra Nath Singh v. Official Liquidator, (2013) 1 SCC 462 , this Court, after referring to Section 47 of the Provincial Insolvency Act, 1920 and Section 529 of the Companies Act, 1956, held as follows: “16.1. A secured creditor has only a charge over a particular property or asset of the company. The secured creditor has the option to either realise his security or relinquish his security. If the secured creditor relinquishes his security, like any other unsecured creditor, he is entitled to prove the debt due to him and receive dividends out of the assets of the company in the winding-up proceedings. If the secured creditor opts to realise his security, he is entitled to realise his security in a proceeding other than the winding-up proceeding but has to pay to the liquidator the costs of preservation of the security till he realises the security.” (emphasis supplied)xxx xxx xxx17. In support of our aforesaid conclusions, we may now cite some authorities. In Allahabad Bank v. Canara Bank [(2000) 4 SCC 406] , a two-Judge Bench of this Court speaking through M. Jagannadha Rao, J. discussed these rights of the secured creditors in paras 62, 63, 64 and 65 of the judgment as reported in SCC, which are extracted hereinbelow: (SCC pp. 435-36) “62. Secured creditors fall under two categories. Those who desire to go before the Company Court and those who like to stand outside the winding up.63. The first category of secured creditors mentioned above are those who go before the Company Court for dividend by relinquishing their security in accordance with the insolvency rules mentioned in Section 529. The insolvency rules are those contained in Sections 45 to 50 of the Provincial Insolvency Act. Section 47(2) of that Act states that a secured creditor who wishes to come before the Official Liquidator has to prove his debt and he can prove his debt only if he relinquishes his security for the benefit of the general body of creditors. In that event, he will rank with the unsecured creditors and has to take his dividend as provided in Section 529(2). Till today, Canara Bank has not made it clear whether it wants to come under this category.xxx xxx xxx” 19. We now come to the argument based on Section 434(1)(b) of the Companies Act, 1956. It is obvious that Section 434(1)(b) is attracted only if execution or other process is issued in respect of an order of a Tribunal in favour of a creditor of the company is returned unsatisfied in whole or in part. This is only one of three instances in which a company shall be deemed to be unable to pay its debts. If the fact situation fits sub-clause (b) of Section 434(1), then a company may be said to be deemed to be unable to pay its debts. However, this does not mean that each one of the sub-clauses of Section 434(1) are mutually exclusive in the sense that once Section 434(1)(b) applies, Section 434(1)(a) ceases to be applicable. Also, on the facts of this case, we may state that the company petition was filed only on 03.07.2015, pursuant to a notice under Section 433 of the Companies Act, 1956 dated 15.04.2015. This petition was filed under Section 433(e) read with Section 434(1)(a) of the Companies Act, 1956. At the stage at which the petition was filed, it could not possibly have been filed under Section 434(1)(b) of the Companies Act, 1956, as execution or other process in the form of a recovery certificate had not been issued by the Recovery Officer till 12.08.2015, i.e., till after the company petition was filed.

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

Explanation:
0[ds]13. It is true that this Court has stated that a winding up petition is a form of equitable execution of a debt, but this is qualified by stating that a winding up order is not a normal alternative to the ordinary procedure for realization of debts due to a creditor. We are of the view that both the judgments contained in Amalgamated Commercial Traders (supra) as well as in Harinagar Sugar Mills (supra), recognize the fact that a winding up proceeding is not a proceeding that can be referred to as a proceeding for realization of debts and would, therefore, not be covered by the language of Section 17 read with Section 18 of the Recovery of Debts Act. When it comes to a winding up proceeding under the Companies Act, 1956, since such a proceeding is notdue to banks, the bar contained in Section 18 read with Section 34 of the Recovery of Debts Act would not apply to winding up proceedings under the Companies Act, 1956.14. In point of fact, a Division Bench of the Bombay High Court in Viral Filaments Ltd. v. Indusind Bank Ltd., (2001) 3 Mah LJ 552 reached this very conclusion after closely examining the judgment in Allahabad Bank v. Canara Bank (supra) of this Court. We approve of the reasoning contained in the aforesaid Bombay High Courta matter of fact, sub-paragraphs (i) and (iv) of paragraph 18 would show that proceedings before the DRT, and winding up proceedings under the Companies Act, 1956, can carry on in parallel streams. That is why paragraph 18(i) states that a Debts Recovery Tribunal, acting under the Recovery of Debts Act, would be entitled to order sale, and sell the properties of the debtor, even of a company in liquidation, but only after giving notice to the Official Liquidator, or to the Liquidator appointed by the Company Court, and after hearing him.The second important point raised by learned counsel for the appellant is that a conjoint reading of the Companies Act, 1956 and the Provincial Insolvency Act, 1920, would make it clear that the secured creditor must, at the time of filing the petition for winding up, state that it has given up his security, or else, such winding up petition would not be maintainable.We now come to the argument based on Section 434(1)(b) of the Companies Act, 1956. It is obvious that Section 434(1)(b) is attracted only if execution or other process is issued in respect of an order of a Tribunal in favour of a creditor of the company is returned unsatisfied in whole or in part. This is only one of three instances in which a company shall be deemed to be unable to pay its debts. If the fact situation fits sub-clause (b) of Section 434(1), then a company may be said to be deemed to be unable to pay its debts. However, this does not mean that each one of the sub-clauses of Section 434(1) are mutually exclusive in the sense that once Section 434(1)(b) applies, Section 434(1)(a) ceases to be applicable. Also, on the facts of this case, we may state that the company petition was filed only on 03.07.2015, pursuant to a notice under Section 433 of the Companies Act, 1956 dated 15.04.2015. This petition was filed under Section 433(e) read with Section 434(1)(a) of the Companies Act, 1956. At the stage at which the petition was filed, it could not possibly have been filed under Section 434(1)(b) of the Companies Act, 1956, as execution or other process in the form of a recovery certificate had not been issued by the Recovery Officer till 12.08.2015, i.e., till after the company petition was filed.