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

FactsCivil Appeal Nos. 4702 and 4703 of 19942. On 23rd May, 1988 a winding up petition was filed under Section 433 of the Companies Act, 1956 seeking to wind up the company known as International Coach Builders Ltd. Another petition by another creditor was also filed on 2.11.88. On 10.11.89, during the pendency of the above petitions before the High Court of Karnataka, the respondent, a Corporation established under the State Financial Corporation Act, 1951 (SFC Act), which was the second charge holder on the basis of the said company, took possession of the mortgaged assets of the said company in purported exercise of its power under Section 29 of the SFC Act. On 30.11.1990 the High Court of Karnataka in Company Petition No. 131 of 1988 made an order of winding up of International Coach Builders Ltd. and appointed the Official Liquidator as the Liquidator to take charge of the assets of the said company. On 30.11.90 theaccepted a bid of Rs. 85 lakhs made by Raheja Development Corporation for sale of the mortgaged assets of the said company, although, to its knowledge, the assets charged were totally valued at an estimated value of Rs. 97 lakhs. Neither the Official Liquidator, nor the Company Court, was in any way involved with the negotiations held by thewith the prospective purchaser. On 4.3.1991 the respondent filed an application under Section 446(2) (b) read with Section 537 of the Companies Act, 1956 before the High Court of Karnataka praying for leave to stand outside the winding up proceedings and realize its securities by selling the assets mortgaged to it. As per the resolution passed in its Board meeting held on 30.11.1990, it was resolved to accept the bid of M/s. Raheja Development Corporation. On 8.10.1991 the Company Court allowed the application of thefor standing outside the liquidation proceedings to work out its remedies under Section 29 of the SFC Act subject to an undertaking to discharge thedues. The Official Liquidator appealed against the order of the Company Judge praying that the sale of the assets of the company under liquidation should only be done by the Official Liquidator under the supervision of the Company Court. The appeal of the Official Liquidator (OSA No. 26/91) was dismissed by a Division Bench of the High Court of Karnataka. An application for review. Review Application No. 118/93, was also dismissed by the High Court of Karnataka. The Official Liquidator filed two Special Leave Petitions before this Court challenging the order of the Division Bench dated 23rd January, 1992 dismissing the appeal OSA No. 26/91, and the order dated 17th June, 1993 dismissing the Review Application No. 118/93. These are respectively Civil Appeal Nos. 4702 & 4703 of 1994.3. When the Special Leave Petitions came up for admission this Court made the followingLeave Petition granted.Meanwhile, it appears appropriate that the Respondent KSFC should sell the properties acting jointly with the Official Liquidator under the supervision and in accordance with the directions of the Learned Company Judge of the High Court and sale proceeds be deposited in the Court and then distributed in accordance with the directions of the Learned CompanyAppeal No. 12928 of 19964. As a sequel to the above order, M/s. Raheja Development Corporation moved an application before the Company Judge, High Court of Karnataka, for a direction to the Official Liquidator to concur in the sale effected by Karnataka State Finance Corporation (KSFC) in its favour. The Company Judge disposed of the application holding that, in view of the order passed by this Court, the application did not survive. M/s Raheja Development Corporation made an unsuccessful attempt to intervene in Civil Appeal No. 4701/94 by seeking relief therein, but its applications I.A. Nos. 4,5,6 & 7 were dismissed. M/s. Raheja Development Corporation appeal against the order of the Company Judge raising similar contentions as urged by the KSFC. The Division Bench dismissed the appeal by taking the same view as the Company Judge. The appellant is before this Court.Civil Appeal No. 6491 of 19955. A company known as M/s Prasad Bakers Pvt. Ltd. borrowed money from the appellanta State Financial Corporation established in Uttar Pradesh. The repayment of the borrowed money was secured by mortgage of the factory premises and hypothecation of plant and machineries of the said M/s. Prasad Bakers Pvt. Ltd. (the second respondent in the appeal). The second respondent defaulted in repayment of the loan and the appellant called in the money by a notice dated 30th June, 1987. On 18.9.1987 the appellant, in purporting to exercise its power under Section 29 of the SFC Act, took possession of the mortgaged assets. In the meanwhile, the first respondent, a creditor of the second respondent, had filed a petition under Section 433(e) of the Companies Act on which the High Court of Allahabad made an order dated 1.2.1994 for winding up of the second respondent company. Theappeared before the Company Judge and contended that it was a secured creditor having first charge over the mortgaged property and, despite commencement of the winding up proceeding, entitled to exercise its powers under Section 29 of the SFC Act to put to sale the mortgaged assets without leave of the Company Court. The learned Company Judge rejected the submission made on behalf of the appellantCorporation and directed winding up of the company. An appeal carried to the Division Bench was summarily dismissed. Hence, the appeal by the Corporation.Civil Appeal No. 2007 of 19976. The respondent company obtained large amounts of loans/advances from the appellant Karnataka State Finance Corporation (KSFC). The loans were secured by mortgages and charges on the assets of the respondent company. The company having defaulted in repayment of the loans according to the schedule, the KSFC issued a notice and took over the mortgaged and charged assets under Section 29 of the SFC Act. In the meanwhile, at the instance of a creditor of the respondent company, the company was ordered to be wound up. The KSFC made an application to the Company Judge under Section 537 of the Companies Act, 1956 for permission to stand outside the winding up proceedings and realize its security. The learned Company Judge dismissed the petition of the respondent. An appeal to the Division Bench also failed. The KSFC is in appeal and raises the same contentions with regard to its rights under Section 29 of the SFC Act.Civil Appeal No. 6303 of 19957. A company known as Himalaya Tools (India) Pvt. Ltd. had borrowed money from the Gujarat State Financial Corporation. The said company was ordered to be wound up on 25.1.1988 by the Company Court. On 9.5.1988, in purported exercise of rights under Section 29 of the SFC Act, the Gujarat State Financial Corporation (GSFC) took possession of the charged assets of the said company. The Official Liquidator of the said company took out asummons seeking a direction to GSFC forthwith to hand over possession of the assets of the company in liquidation. In the meanwhile, the GSFC took steps to transfer of the properties of the company in liquidation again purportedly under Section 29 of the SFC Act. On 20.12.1989 the GFSC handed over possession of the premises of the company in liquidation to M/s. Mahuvawala Trading Company for a consideration of Rs. 8,99,726.52. At no point of time was permission of the Company Court taken, nor was the sale approved by the Company Court. The Company Court on being moved did not find the sale to be wanting in bona fides and declined to set aside the sale, but directed GSFC deposit the consideration received in court taking the view that the powers under Section 29 could not be unilaterally exercised without concurrence of the Company Court. GSFC carried the matter in appeal to the Division Bench which allowed the appeal holding that GSFC as a secured creditor could opt to realise the securities by standing outside the winding up proceeding and neither the liquidator, nor the Company Court, could interfere with the rights of GSFC as a secured creditor once it opted to remain outside the winding up proceedings. The Official Liquidator is in appeal.

Reasoning:
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.