SWARAJ INFRASTRUCTURE PVT. LTD. versus KOTAK MAHINDRA BANK LTD.
[2019] 1 S.C.R. 682, Supreme Court of India, 2019
Outcome: Dismissed (Dismissed)
Segment: Ratio
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SWARAJ INFRASTRUCTURE PVT. LTD.
v.
KOTAK MAHINDRA BANK LTD.
(Civil Appeal No. 1291 of 2019)
JANUARY 29, 2019
[R. F. NARIMAN AND NAVIN SINHA, JJ.]
Companies Act, 1956:
ss. 439, 434(1)(a) and (1)(b), 441(2) and 529 – Winding up
petition – By the secured creditor/respondent-Bank, after obtaining
decree from Debts Recovery Tribunal and a recovery certificate
based thereon – Maintainability of the petition – Plea of debtor
companies inter alia that the petition was barred by provisions in
s.17 r/w. s.18 of Recovery of Debts Act; that the creditor must either
relinquish its security and stand in line in winding up proceeding
or realize its security outside the winding up proceeding; and that
in the present case s.434(1)(b) would be attracted and not
s.434(1)(a) – On appeal, held: Winding up proceeding is not a
proceeding for realization of debts and therefore would not be
covered by the language of s.17 r/w. ss.18 and s.34 of Debts
Recovery Act – u/s. 439, a secured creditor’s petition for winding
up is maintainable without any requirement for relinquishing its
security – In view of s.529(1)(c), s.47 would be applicable and not
s.9(2) of the Provincial Insolvency Act and hence winding up petition
cannot be deemed to commence at the time of presentation of the
petition – Reliance on s.441(2) by the debtors, is misplaced – At the
stage at which the winding up petition was filed, the same could not
have been filed
u/s.434(1)(b) and hence s.434(1)(b) was inapplicable
– Winding up petition was maintainable – Recovery of Debts Due
to Banks and Financial Institutions Act, 1993 – ss.17, 18 and 34 –
Provincial Insolvency Act, 1920 – ss.9(2) and 47.
ss.434(1)(a) and (1)(b) – Applicability of the provisions –
Held: Applicability of sub-s.(b) of s.434(1) does not mean that
provision under sub-clause (a) of s.434(1) shall cease to be
applicable – Each one of the sub-clauses of s.434(1) are not mutually
exclusive.
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Dismissing the appeals, the Court
HELD:1. 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 Due to Banks and
Financial Institutions Act, 1993. When it comes to a winding up
proceeding under the Companies Act, 1956, since such a
proceeding is not “for recovery of debts” due 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. [Para 13][695-G-H; 696-A]
Amalgamated Commercial Traders (P.) Ltd. v. A.C.K.
Krishnaswami and Ors. (1965) 35 Comp Cas 456 (SC);
M/s IBA Health (India) Pvt. Ltd. v. M/s Info-Drive
Systems Sdn. Bhd. (2010) 10 SCC 553 : [2010] 12
SCR 137 – relied on.
Viral Filaments Ltd. v. Indusind Bank Ltd. (2001) 3 Mah
LJ 552 – approved.
Harinagar Sugar Mills Co. Ltd. v. M.W. Pradhan [1966]
3 SCR 948; Rajasthan State Financial Corporation v.
Official Liquidator (2005) 8 SCC 190 : [2005] 3 Suppl.
SCR 1073; Official Liquidator v. Allahabad Bank
(2013) 4 SCC 381 : [2013] 4 SCR 207 – referred to.
2.1 It is not correct to say that as per s. 441(2) of Companies
Act, the winding up of a company shall be deemed to commence
at the time of presentation of the petition for winding up, and that
the stage at which a secured creditor has to give up his security
is at the stage of the
filing of the winding up petition itself. [Para
17][700-C-D]
2.2 Under Section 439 of the Companies Act, 1956, a
secured creditor’s petition for winding up is maintainable without
any requirement of it having to give up or relinquish its security.
This is in contrast to Section 9(2) of the Provincial Insolvency
Act, 1920. A provision akin to s. 9(2) of Provincial Insolvency
Act is absent in s. 439 of the Companies Act, 1956. [Para 17][700-
D-E, G-H]
SWARAJ INFRASTRUCTURE PVT. LTD. v. KOTAK
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2.3 Section 529(1)(c) of the Companies Act, 1956 specifically
refers to the right of a secured creditor under the law of insolvency
“with respect to the estates of persons adjudged insolvent”. The
express language of Section 529(1)(c) of the Companies Act, 1956
makes it clear that it is Section 47 of the Provincial Insolvency
Act, 1920 alone that is attracted, and not Section 9(2). Section 47
of the Provincial Insolvency Act, 1920 occurs only at the stage
where an adjudication order has already been passed, which is
the stage referred to by Section 529 of the Companies Act, 1956.
[Para 17][701-A-B; 700-H]
2.4  Reliance on Section 441(2) of the Companies Act, 1956
is misplaced for yet another reason. Section 441(2) has to be
read with Section 441(1), and so read, makes it clear that it became
necessary to enact sub-section (2), because a petition for voluntary
winding up of a company presented before the Tribunal would be
said to commence at an anterior point of time, namely, at the
time of the passing of the resolution whereby the company
resolves to voluntarily wind itself up. In contrast, therefore,
Section 441(2) says “in any other case”, i.e., in cases other than
those falling under sub-section (1) of Section 441 of the Companies
Act, 1956, the winding up of a company by the Tribunal shall be
deemed to commence at the time of presentation of the petition
for winding up. The context of the provision, therefore,
makes it
clear that it cannot be read so as to introduce Section 9(2) of the
Provincial Insolvency Act, 1920 by the back door, as it were,
when no such provision is contained in Section 439 of the
Companies Act, 1956 itself. [Para 17][701-C-E]
Jitendra Nath Singh v. Official Liquidator (2013) 1 SCC
462 : [2012] 13 SCR 339 – relied on.
Hegde & Golay Limited v. State Bank of India ILR 1987
KAR 2673; Asian Power Controls Ltd. v. Bubbles Goyal
(2013) 3 Mah LJ 811  17 – approved.
3. It cannot be said that s. 434(1)(b) was applicable in the
present case. 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
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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 the  present case, the company petition was filed pursuant
to a notice under Section 433 of the Companies Act, 1956. 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 after the company petition was filed.
[Para 19][705-A-D]
4. The cases like the present one have to be decided by
balancing the interest of creditors. It is not open for persons like
the appellant to resist a winding up petition which is otherwise
maintainable without there being any bona fide defence to the
same. The respondent cannot be said to be blowing hot and cold
in pursuing a remedy under the Recovery of Debts Act and a
winding up proceeding under the Companies Act, 1956
simultaneously. [Para 20][705-E-F]
Lissenden v. C.A.V. Bosch, Ltd. [1940] 1 All E.R. 425 –
referred to.
Case Law Reference
(1965)
35 Comp Cas 456 (SC)
relied on
Para 11
[2010] 12 SCR 137
relied on
Para 11
[1966] 3 SCR 948
referred to
Para 12
(2001) 3 Mah LJ 552
approved
Para 14
[2005] 3 Suppl. SCR 1073
referred to
Para 15
[2013] 4 SCR 207 16
referred to
Para 16
ILR 1987 KAR 2673
approved
Para 17
(2013) 3 Mah LJ 811  17
approved
Para 17
SWARAJ INFRASTRUCTURE PVT. LTD. v. KOTAK
MAHINDRA BANK LTD.
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[2012] 13  SCR 339
relied on
Para 18
[1940] 1 All E.R. 425
referred to
Para 20
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1291
of 2019.
From the Judgment and Order dated 28.01.2018 of the High Court
of  Judicature at Bombay in Appeal No. 339 of 2017.
WITH
Civil Appeal Nos. 1292, 1294, 1293 of 2019.
K. Parameshwar, Udit Gupta (For M/s. Udit Kishan and
Associates), Advs. for the Appellant.
Shyam Divan, Sr. Adv., Ms. Sonia Dube, S. Chakraborty, Ms.
Surbhi Anand, Ms. Harshita Verma, Ms. Kanchan Yadav (For M/s. Legal
Options, Advs.), Advs. for the Respondent.
The Judgment of the Court was delivered by
R. F. NARIMAN, J. 1. Leave granted.
2. The present case involves the right of a secured creditor to file
a winding up petition after such secured creditor has obtained a decree
from the Debts Recovery Tribunal [“DRT”] and a recovery certificate
based thereon.
3. Several appeals were taken up together for hearing by the
Division Bench of the Bombay High Court. The brief facts necessary to
decide the present appeals are as follows:
The respondent, Kotak Mahindra Bank Limited, advanced various
loans to the companies in question. The outstanding amount against these
companies as on date, together with interest, is stated to be in the region
of INR 48 crores. The respondent approached the Debts Recovery
Tribunal, Mumbai by filing three separate original applications to recover
the debt owed to them. The Debts Recovery Tribunal
delivered three
separate judgments on 16.01.2015 allowing the applications filed by the
respondent bank. Apparently, the said orders are final as no appeals
have been preferred to the Debts Recovery Appellate Tribunal
[“DRAT”], Mumbai. Recovery certificates dated 12.08.2015 for the
said amounts were then issued by the Recovery Officer under Section
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19(19) of the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993 [“Recovery of Debts Act”]. We have been informed that
various attempts were made to auction the properties that were security
for the loans granted, but each of these attempts has yielded no results.
In the meanwhile, the respondent issued statutory notices dated
15.04.2015 under Sections 433 and 434 of the Companies Act, 1956. As
no payments were forthcoming, a company petition was filed before the
Bombay High Court on 03.07.2015. By an order dated 26.07.2017, the
said petition was admitted as the companies in question were said to be
commercially insolvent. In the appeals that were filed to the Division
Bench of the Bombay High Court, the main point argued was that once
a secured creditor has obtained an order from the DRT, and a recovery
certificate has been issued thereupon, such secured creditor cannot file
a winding up petition as the Recovery of Debts Act is a special Act
which vests exclusive jurisdiction in the DRT. Also, a secured creditor
can file a winding up petition only on giving up its security, which has not
been done in the present case. These contentions did not find favour
with the Division Bench who then dismissed the appeals in question.
4. Shri K. Parameshwar, learned advocate, appearing on behalf
of the appellants, has urged a number of points before us. He first argued
that this Court has held that the Recovery of Debts Act is a special
statute qua
the general statute of the Companies Act, 1956, and that this
Court has further held that exclusive jurisdiction is vested in the DRT
under the Recovery of Debts Act to the exclusion of the Company Court.
As this is so, once the DRT has been approached, the necessary corollary
is that a winding up petition to realize the same debt would be expressly
barred on a conjoint reading of Sections 17 and 18 of the Recovery of
Debts Act. He further argued that in any case, the secured creditor is
put to an election where it must either relinquish its security and stand in
line in the winding up proceeding or realize its security outside the winding
up proceeding. On the facts of the present case, it has filed a successful
action to realize its security outside the winding up proceeding, as a
result of which, the winding up proceeding filed by it, without giving up
the mortgaged security, would not be maintainable. It was further argued
that, in any event, Section 434(1)(b) of the Companies Act, 1956 would
be attracted, and not Section 434(1)(a), and that since the security has
not yet been realized, the winding up petition dressed up under Section
434(1)(a), but really under Section 434(1)(b), would not be maintainable.
SWARAJ INFRASTRUCTURE PVT. LTD. v. KOTAK
MAHINDRA BANK LTD. [R. F. NARIMAN, J.]
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Also, reliance on certain High Court judgments by the impugned judgment
is completely misplaced for the reason that the provisions of the
Companies Act, 1956 would show that the secured creditor has to
relinquish its security when it files a winding up petition, and not thereafter,
as has been held in these judgments.
5. In answer to these contentions, Shri Shyam Divan, learned
Senior Advocate appearing on behalf of the respondent, has argued,
relying upon Section 439 of the Companies Act, 1956 in particular, that a
secured creditor can maintain a winding up petition in the fact situation
as obtains in the present case. According to him, the judgment relied
upon by the appellant, namely, Allahabad Bank v. Canara Bank, (2000)
4 SCC 406, is distinguishable in that the context of that judgment was
whether leave had to be obtained from the Company Court when a
winding up proceeding is either pending, or a winding up order is made,
in order to pursue a debt recovery proceeding under the Recovery of
Debts Act. He also argued before us that the election that is to take
place with the secured creditor giving up its security is at the stage of
proof of claims, which is only after a winding up order has been passed,
and which stage has not yet arrived on the facts of the present case.
Also, according to him, the petition has been filed only on the ground of
inability to pay debts, and once the statutory presumption is raised
under
Section 434(1)(a) of the Companies Act, 1956, it is clear that winding up
must follow in the absence of payment of outstanding amounts of debts
owed. According to the learned Senior Advocate, his client has gone
from pillar to post in an attempt to recover the loans made to the appellants
and has not yet succeeded in any endeavour to do so. Also, nothing has
been repaid so far and the debt owed by these companies, which is
mounting, amounts to a staggering figure of INR 48 crores. According
to the learned counsel, therefore, the High Court was right in dismissing
the appeal filed by the appellants.
6. After hearing learned counsel for both sides, it is important to
first set out the relevant provisions of the Companies Act, 1956 and the
Recovery of Debts Act, 1993.
Section 434(1) of the Companies Act, 1956 reads as follows:
“434. Company when deemed unable to pay its debts.—(1)
A company shall be deemed to be unable to pay its debts—
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(a)
if a creditor, by assignment or otherwise, to whom the
company is indebted in a sum exceeding one lakh rupees
then due, has served on the company, by causing it to be
delivered at its registered office, by registered post or
otherwise, a demand under his hand requiring the company
to pay the sum so due and the company has for three weeks
thereafter neglected to pay the sum, or to secure or
compound for it to the reasonable satisfaction of the creditor;
(b)if execution or other process issued on a decree or order
of any Court or Tribunal in favour of a creditor of the
company is returned unsatisfied in whole or in part; or
(c)if it is proved to the satisfaction of the Tribunal that the
company is unable to pay its debts, and, in determining
whether a company is unable to pay its debts, the Tribunal
shall take into account the contingent and prospective
liabilities of the company.
xxx xxx xxx”
Section 439(1)(b) and Section 439(2) of the Companies Act, 1956
read as follows:
“439. Provisions as to applications for winding up.—(1) An
application to theTribunal for the winding up of a company shall
be by petition presented, subject to the provisions of this section—
xxx xxx xxx
(b) by any creditor or creditors, including any contingent or
prospective creditor or creditors; or
xxx xxx xxx
(2) A secured creditor, the holder of any debentures (including
debenture stock), whether or not any trustee or trustees have
been appointed in respect of such and other
like debentures, and
the trustee for the holders of debentures, shall be deemed to be
creditors within the meaning of clause (b) of sub-section (1).
xxx xxx xxx”
Section 441, which deals with commencement of winding up, reads
as follows:
SWARAJ INFRASTRUCTURE PVT. LTD. v. KOTAK
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“441. Commencement of winding up by Tribunal.—(1)
Where, before the presentation of a petition for the winding up of
a company by the Tribunal, a resolution has been passed by the
company for voluntary winding up, the winding up of the company
shall be deemed to have commenced at the time of the passing of
the resolution, and unless the Tribunal, on proof of fraud or mistake,
thinks fit to direct otherwise, all proceedings taken in the voluntary
winding up shall be deemed to have been validly taken.
(2) In any other case, the winding up of a company by the Tribunal
shall be deemed to commence at the time of the presentation of
the petition for the winding up.”
Section 529(1) of the Companies Act reads as follows:
“529. Application of insolvency rules in winding up of
insolvent companies.—(1) In the winding up of an insolvent
company, the same rules shall prevail and be observed with regard
to—
(a) debts provable;
(b) the valuation of annuities and future and contingent liabilities;
and
(c) the respective rights of secured and unsecured creditors;
as are in force for the time being under the law of insolvency with
respect to the estates of persons adjudged insolvent:
xxx xxx xxx”
The reference made in Section 529 of the Companies Act, 1956
is to Section 47 of the Provincial Insolvency Act, 1920 which reads as
follows:
“47. Secured creditors.—(1) Where a secured creditor realises
his security, he may prove for the
balance due to him, after
deducting the net amount realised.
(2) Where a secured creditor relinquishes his security for the
general benefit of the creditors, he may prove for his whole debt.
(3) Where a secured creditor does not either realise or relinquish
his security, he shall, before being entitled to have his debt entered
in the schedule, state in his proof the particulars of his security,
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and the value at which he assesses it, and shall be entitled to
receive a dividend only in respect of the balance due to him after
deducting the value so assessed.
(4) Where a security is so valued, the Court may at any time
before realisation redeem it on payment to the creditor of the
assessed value.
(5) Where a creditor, after having valued his security, subsequently
realises it, the net amount realised shall be substituted for the
amount of any valuation previously made by the creditor, and shall
be treated in all respects as an amended valuation made by the
creditor.
(6) Where a secured creditor does not comply with the provisions
of this section, he shall be excluded from all share in any dividend.”
7. The relevant provisions of the Recovery of Debts Act, 1993,
read as follows:
“17. Jurisdiction, powers and authority of Tribunals.—(1) A
Tribunal shall exercise, on and from the appointed day, the
jurisdiction, powers and authority to entertain and decide
applications from the banks and financial institutions for recovery
of debts due to such banks and financial institutions.
(1-A) Without prejudice to sub-section (1),—
(a)the Tribunal shall exercise, on and from the date to be
appointed by the Central Government, the jurisdiction,
powers and authority to entertain and decide applications
under Part III of Insolvency and Bankruptcy Code, 2016;
(b)the Tribunal shall have circuit sittings in all district
headquarters.
(2) An Appellate Tribunal shall
exercise, on and from the appointed
day, the jurisdiction, powers and authority to entertain appeals
against any order made, or deemed to have been made, by a
Tribunal under this Act.
(2-A) Without prejudice to sub-section (2), the Appellate Tribunal
shall exercise, on and from the date to be appointed by the Central
Government, the jurisdiction, powers and authority to entertain
SWARAJ INFRASTRUCTURE PVT. LTD. v. KOTAK
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appeals against the order made by the Adjudicating Authority under
Part III of the Insolvency and Bankruptcy Code, 2016.”
“18. Bar of jurisdiction.—On and from the appointed day, no
court or other authority shall have, or be entitled to exercise, any
jurisdiction, powers or authority (except the Supreme Court, and
a High Court exercising jurisdiction under Articles 226 and 227 of
the Constitution) in relation to the matters specified in Section 17:
Provided that any proceedings in relation to the recovery of debts
due to any multi-State co-operative bank pending before the date
of commencement of the Enforcement of Security Interest and
Recovery of Debts Laws (Amendment) Act, 2012 under the Multi-
State Co-operative Societies Act, 2002 ((39 of 2002) shall be
continued and nothing contained in this section shall, after such
commencement, apply to such proceedings.”
“19. Application to the Tribunal.—
xxx xxx xxx
(19) Where a certificate of recovery is issued against a company
as defined under the Companies Act, 2013 (18 of 2013) and such
company is under liquidation, the Tribunal may by an order direct
that the sale proceeds of secured assets of such company be
distributed in the same manner as provided in Section 326 of the
Companies Act, 2013 or under any other law for the time being in
force.
xxx xxx xxx”
“34. Act to have overriding effect.—(1) Save as provided under
sub-section (2), the provisions of this Act shall
have effect
notwithstanding anything inconsistent therewith contained in any
other law for the time being in force or in any instrument having
effect by virtue of any law other than this Act.
xxx xxx xxx”
8. In Allahabad Bank v. Canara Bank (supra), this Court dealt
with whether the secured creditor, namely, Allahabad Bank in that case,
was obliged to seek the leave of the Company Court under the Companies
Act, 1956, and whether the Company Court can stay recovery
proceedings which had been initiated under the Recovery of Debts Act
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in the event of a winding up order being passed under the Companies
Act, 1956. In this context, this Court held, adverting to Sections 17 and
18 of the Recovery of Debts Act, that the jurisdiction of the Tribunal in
regard to adjudication of applications for recovery of debts under Section
17 is exclusive. No dual jurisdiction is contemplated, particularly having
regard to Section 34 of the said Act, which has overriding effect over
other statutes including the Companies Act, 1956 – see paragraphs 21 to
23. The said judgment further goes on to state:
“23. …… The provisions of Section 34(1) clearly state that the
RDB Act overrides other laws to the extent of “inconsistency”.
In our opinion, the prescription of an exclusive Tribunal both
for adjudication and execution is 
a 
procedure
clearly inconsistent with realisation of these debts in any other
manner.”
xxx xxx xxx
“25. Thus, the adjudication of liability and the recovery of the
amount by execution of the certificate are respectively within
the exclusive jurisdiction of the Tribunal and the Recovery Officer
and no other court or authority much less the civil court or the
Company Court can go into the said questions relating to the liability
and the recovery except as provided in the Act. Point 1 is decided
accordingly.”
  (emphasis in original)
9. In answering whether the Recovery of Debts Act overrides
the provisions of Sections 442 and 537 and 446 of the Companies Act,
1956, this Court held that the
Recovery of Debts Act is a special statute
which would necessarily override the aforesaid provisions of the more
general statute, namely, the Companies Act, 1956. Even otherwise, if
both are treated as special laws, since the Recovery of Debts Act is
later in point of time, together with a non-obstante clause contained in
Section 34, the said Act will prevail to the extent set out in the Recovery
of Debts Act. This Court then concluded:
“50. For the aforesaid reasons, we hold that at the stage
of adjudication under Section 17 and execution of the certificate
under Section 25 etc. the provisions of the RDB Act, 1993 confer
exclusive jurisdiction on the Tribunal and the Recovery Officer in
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respect of debts payable to banks and financial institutions and
there can be no interference by the Company Court under Section
442 read with Section 537 or under Section 446 of the Companies
Act, 1956. In respect of the monies realised under the RDB Act,
the question of priorities among the banks and financial institutions
and other creditors can be decided only by the Tribunal under the
RDB Act and in accordance with Section 19(19) read with Section
529-A of the Companies Act and in no other manner. The
provisions of the RDB Act, 1993 are to the above extent
inconsistent with the provisions of the Companies Act, 1956 and
the latter Act has to yield to the provisions of the former. This
position holds good during the pendency of the winding-up petition
against the debtor Company and also after a winding-up order is
passed. No leave of the Company Court is necessary for initiating
or continuing the proceedings under the RDB Act, 1993. Points 2
and 3 are decided accordingly in favour of the appellant and against
the respondents.”
10. It is important to note that the aforesaid statement of the law
was made in the context of non-requirement of leave of the Company
Court to initiate, continue with, and execute orders passed under the
Recovery of Debts Act. What is important to note is that the Companies
Act, 1956 is overridden to the extent of the inconsistency between the
Companies Act, 1956 and the Recovery of Debts
Act only qua recovery
of debts due to banks and financial institutions.
11. It is settled law that a winding up proceeding initiated under
Section 433(e) and 434 of the Companies Act, 1956 is not a means of
seeking to enforce payment of a debt. This Court, in Amalgamated
Commercial Traders (P.) Ltd. v. A.C.K. Krishnaswami and Ors.,
(1965) 35 Comp Cas 456 (SC) [“Amalgamated Commercial
Traders”], has held:
“13. It is well-settled that “a winding up petition is not a legitimate
means of seeking to enforce payment of the debt which is bona
fide disputed by the company. A petition presented ostensibly for
a winding up order but really to exercise pressure will be dismissed,
and under circumstances may be stigmatized as a scandalous abuse
of the process of the court.”
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This statement of the law has subsequently been followed in
several judgments, one of which is M/s IBA Health (India) Pvt. Ltd.
v. M/s Info-Drive Systems Sdn. Bhd., (2010) 10 SCC 553 (at
paragraph 21).
12. However, it was pointed out that a subsequent judgment of
this Court, of the selfsame strength of three learned Judges, in Harinagar
Sugar Mills Co. Ltd. v. M.W. Pradhan, (1966) 3 SCR 948 [“Harinagar
Sugar Mills”], has held as follows:
“5. …… Can it be said that the petition filed by the Receiver for
winding up of the Company is not a mode of realisation of the
debt due to the joint family from the Company? In Palmer’s
Company Precedents, Part II, 1960 Edn., at p. 25, the following
passage appears:
“A winding up petition is a perfectly proper remedy for
enforcing payment of a just debt. It is the mode of execution
which the Court gives to a creditor against a company unable
to pay its debts.”
This view is supported by the decisions in Bowes v. Hope Life
Insurance and Guarantee Co. [(1865) II HLC 388], Re General
Company for Promotion of Land Credit [(1870) LR 5 Ch D
380] and Re National Permanent Building Society [(1869) LR
5 Ch D 309]. It is true that “a winding up order is not a normal
alternative in the case of a company to the ordinary procedure for
the realisation of the debts due to it”; but nonetheless it is a form
of equitable execution……”
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 not “for
recovery of debts” due to banks, the bar contained in Section 18 read
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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 Court judgment.
15. However, Shri K. Parameshwar, appearing on behalf of the
appellants, also relied upon Rajasthan State Financial Corporation v.
Official Liquidator, (2005) 8 SCC 190, and paragraph 18 of the aforesaid
judgment, in particular. Paragraph 18 reads as follows:
“18. In the light of the discussion as above, we think it proper to
sum up the legal position thus:
(i) A Debts Recovery Tribunal acting under the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 would
be entitled to order the sale and to sell the properties of the debtor,
even if a company-in-liquidation, through its Recovery Officer
but only after notice to the Official Liquidator or the Liquidator
appointed by the Company Court and after hearing him.
(ii) A District Court entertaining an application under Section 31
of the SFC Act will have the power to order sale of the assets of
a borrower company-in-liquidation, but only after notice to the
Official Liquidator or the Liquidator appointed by
the Company
Court and after hearing him.
(iii) If a financial corporation acting under Section 29 of the
SFC Act seeks to sell or otherwise transfer the assets of a debtor
company-in-liquidation, the said power could be exercised by it
only after obtaining the appropriate permission from the Company
Court and acting in terms of the directions issued by that court as
regards associating the Official Liquidator with the sale, the fixing
of the upset price or the reserve price, confirmation of the sale,
holding of the sale proceeds and the distribution thereof among
the creditors in terms of Section 529-A and Section 529 of the
Companies Act.
(iv) In a case where proceedings under the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993 or the SFC Act
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are not set in motion, the creditor concerned is to approach the
Company Court for appropriate directions regarding the realisation
of its securities consistent with the relevant provisions of the
Companies Act regarding distribution of the assets of the company-
in-liquidation.”
As a 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.
16. To similar effect is the judgment of this Court in Official
Liquidator v. Allahabad Bank, (2013) 4 SCC 381, where this Court
held as follows:
“24. From the aforesaid authorities, it clearly emerges that the
sale has to be conducted by DRT with the association of the
Official Liquidator. We may hasten to clarify that as the present
controversy only relates to the sale, we are not going to say
anything with regard to the distribution. However, it is noticeable
that under Section 19(19) of the RDB Act, the legislature has
clearly stated that distribution has to be done in accordance with
Section 529-A of the 1956 Act. The purpose of stating
so is that it
is a complete code in itself and the Tribunal has the exclusive
jurisdiction for the purpose of sale of the properties for realisation
of the dues of the banks and financial institutions.”
xxx xxx xxx
“31. The aforesaid analysis makes it luculent that DRT has
exclusive jurisdiction to sell the properties in a proceeding instituted
by the banks or financial institutions, but at the time of auction and
sale, it is required to associate the Official Liquidator. The said
principle has also been reiterated in Pravin Gada v. Central Bank
of India [(2013) 2 SCC 101 : (2013) 1 SCC (Civ) 988].
32. Once the Official Liquidator is associated, needless to say, he
has a role to see that there is no irregularity in conducting the
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auction and appropriate price is obtained by holding an auction in
a fair, transparent and non-arbitrary manner in consonance with
the Rules framed under the RDB Act.”
17. 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. In Hegde & Golay Limited v. State Bank of India,
ILR 1987 KAR 2673, a learned single Judge of the Karnataka High
Court, Venkatachaliah, J. (as he then was), dealt with this point as follows:
“12. Re: Point (a):
The contention is that the Bank which is a secured creditor cannot
maintain a winding-up petition without making an election either
to give-up the security or value it as required by Section 9(2) of
the Provincial Insolvency Act, 1920. It is urged that by Section
529(1) of the Act, the Rules of Insolvency in Section 9(2) are
attracted.
Section 9(2) of the Provincial Insolvency Act reads:
“If the petitioning creditor, is a secured creditor, he shall in his
Petition either state that he is willing to relinquish his security
for the benefit of the creditors in the event of the debtor being
adjudged insolvent or given an estimate of the value of the
security. In the latter case, he
may be admitted as a petitioning-
creditor to the extent of the balance of the debt due to him
after deducting the value so estimated in the same way as if
he were an unsecured creditor”.
 (emphasis in original)
13. The contention is that a secured-creditor may stand outside
insolvency; but if he brings-up a creditor’s winding-up petition he
must, in his petition, state that he is either willing to relinquish the
security for the benefit of the body of creditors or give an estimate
of the value of the security. Learned Company-Judge has taken
the view, if we may say so with respect, quite rightly, that this rule
of Insolvency Law is not attracted to the presentation of a winding-
up petition.
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14. Sri Shetty says that both in bankruptcy and winding-up the
law is the same and the petitioning-creditor, if he is a secured
creditor, must conform to the rule in Section 9(2). He relied upon
M.K. Ranganathan v. Government of Madras [AIR 1955 SC
604] and Hansraj v. Official Liquidators, Dehradun Mussorie
Electric Trading Company Limited [AIR 1929 Allahabad 353].
The observation in Ranganathan’s case [AIR 1955 SC 604] relied
upon is this:
“Section 229 recognises the position of the secured creditor
generally as outside the winding up but enables him in the event
of his desiring to take the benefit of the winding up proceedings
to prove his debt, to value the same and share in the distribution
pro rata of the assets of the company just in the same way as
he would be able to do in the case of insolvency under the
Presidency Towns Insolvency Act or the Provincial Insolvency
Act”.
In Hansraj’s case [AIR 1929 Allahabad 353] it was observed:
“…….. I am, therefore, of opinion that the rules contained in
any Section of the Provincial Insolvency Act, the rules, if any,
made under the Act and any appropriate established rules of
practice in insolvency proceedings are imported into the
Companies Act, unless there is something in the Companies
Act itself already providing for the matter in question, or in
conflict with the rule which it is proposed to import”.
These observations, in our opinion, do not advance the contention
of Sri Shetty any further. Section
529(1) of the ‘Act’ attracts the
rules of insolvency to winding-up in relation to “the respective
rights of secured and unsecured creditors” and confines these
Rules so attracted to matters that arise between these two classes
of creditors. Sections 528 and 529 of the ‘Act’ are in the chapter
“Proof and Ranking of Claims” and deal with the question of
proof of debts and the rights of secured and unsecured creditors.
Section 529(2) itself, in so far it expressly envisages, and provides
for, the contingency that if a secured-creditor proceeds to realise
his security he should pay the expenses incurred by the Liquidator,
by implication, rules out the construction contended for by Sri
Shetty. The words “in winding-up of insolvent company” in Section
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529(1) of the ‘Act’ has obvious reference to a post winding-up
stage.
The point to note is that this rule of insolvency is attracted to
winding-up in the matter of proof of debts. That is after the stage
of the winding-up order. A secured creditor is, under Section 439(2)
of the ‘Act’ as much a creditor entitled to present a winding up
petition as any other. The law in regard to the right of a Secured
Creditor to present a petition for adjudication under the Insolvency
law is different from the right of a secured creditor to present a
winding-up petition……”
Shri Parameshwar took exception to this statement of the law,
and referred to Section 441 of the Companies Act, 1956, in particular,
sub-section (2) thereof, to state that this judgment has missed the fact
that the winding up of a company shall be deemed to commence at the
time of presentation of the petition for winding up, and that, if this is so,
the stage at which a secured creditor has to give up his security is at the
stage of the filing of the winding up petition itself. We are afraid that we
cannot agree.  First and foremost, it is important to notice that under
Section 439 of the Companies Act, 1956, a secured creditor’s petition
for winding up is maintainable without any requirement of it having to
give up or relinquish its security. This is in contrast to Section 9(2) of the
Provincial Insolvency Act, 1920, which reads as follows:
“9. Conditions on which
creditor may petition.—
xxx xxx xxx
(2) If the petitioning creditor is a secured creditor, he shall in his
petition either state that he is willing to relinquish his security for
the benefit of the creditors in the event of the debtor being adjudged
insolvent, or give an estimate of the value of the security. In the
latter case, he may be admitted as a petitioning creditor to the
extent of the balance of the debt due to him after deducting the
value so estimated in the same way as if he were an unsecured
creditor.”
What is conspicuous by its absence is a provision akin to Section
9(2) of the Provincial Insolvency Act, 1920 in Section 439 of the
Companies Act, 1956. In point of fact, Section 47 of the Provincial
Insolvency Act, 1920 occurs only at the stage where an adjudication
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order has already been passed, which is the stage referred to by Section
529 of the Companies Act, 1956. In fact, Section 529(1)(c) of the
Companies Act, 1956 specifically refers to the right of a secured creditor
under the law of insolvency “with respect to the estates of persons
adjudged insolvent”. The express language of Section 529(1)(c) of the
Companies Act, 1956 makes it clear that it is Section 47 of the Provincial
Insolvency Act, 1920 alone that is attracted, and not Section 9(2), as
was contended by learned counsel for the appellants before us. We may
also add that reliance on Section 441(2) of the Companies Act, 1956 is
misplaced for yet another reason. Section 441(2) has to be read with
Section 441(1), and so read, makes it clear that it became necessary to
enact sub-section (2), because a petition for voluntary winding up of a
company presented before the Tribunal would be said to commence at
an anterior point of time, namely, at the time of the passing of the resolution
whereby the company resolves to voluntarily wind itself up. In contrast,
therefore, Section 441(2) says “in any other case”, i.e., in cases other
than those falling under sub-section (1) of Section 441 of the Companies
Act, 1956, the winding up of a company by the Tribunal shall be deemed
to commence at the time of presentation of the petition for winding up.
The context of the provision, therefore, makes it clear that it cannot be
read so as to introduce Section 9(2) of the
Provincial Insolvency Act,
1920 by the back door, as it were, when no such provision is contained in
Section 439 of the Companies Act, 1956 itself. The absence, therefore,
of any provision akin to Section 9(2) of the Provincial Insolvency Act,
1920 in Section 439 of the Companies Act, 1956; the language of Section
529(1)(c) of the Companies Act, 1956, which expressly refers only to
Section 47 and not to Section 9(2) of the Provincial Insolvency Act,
1920; and the context in which Section 441(2) of the Companies Act,
1956 appears, namely, to contrast winding up petitions that have been
filed under the Act with voluntary winding up petitions, all lead to the
conclusion that there is no need to revisit the correct statement of the
law by the learned single Judge of the Karnataka High Court. Indeed,
this statement of the law has been followed subsequently by a Division
Bench of the Bombay High court in Asian Power Controls Ltd. v.
Bubbles Goyal, (2013) 3 Mah LJ 811 as follows:
“10. Section 529(1) of the Companies Act, 1956, provides that in
the winding up of an insolvent company, the same rules shall prevail
and be observed with regard to (a) debts provable; (b) the valuation
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of annuities and future and contingent liabilities; and (c) the
respective rights of secured and unsecured creditors; as are in
force for the time being under the law of insolvency with respect
to the estates of persons adjudged insolvent. Under sub-section
(2) of section 529, all persons who in any such case would be
entitled to prove, for and receive dividends out of the assets of the
company, may come in under the winding up, and make such claims
against the company as they respectively are entitled to make by
virtue of the section. Section 529-A provides an overriding
preferential priority to the dues of the workmen and to the debts
due to secured creditors to the extent to which such debts rank
pari passu under clause (c) of the proviso to sub-section (1) of
section 529 with such dues. The rules of insolvency which are
attracted to proceedings of winding up are inter alia those pertaining
to the proof of debts. This is after the stage of the winding up
order. This principle has been enunciated in a judgment of Mr.
Justice M.N. Venkatachaliah (as the learned Chief Justice then
was) speaking for a Division Bench of the Karnataka High Court
in Hegde and Golay Limited v. State Bank of India, ILR 1987
KAR 2673. The judgment of the Company Judge of this Court in
Canfin Homes Ltd. (supra) has also followed the principle that
the scheme of the provisions relating to winding up, particularly
those in sections 528 and 529
would indicate that the stage of
proving a claim of a debt arises after an order of winding up is
passed. In Canffin Homes Ltd., this Court held as follows:—
“15. The secured creditor who seeks to prove the whole of his
debt in the course of the proceedings of winding up must before
he can prove his debt relinquish his security for the benefit of
the general body of the creditors. If he surrenders his security
for the benefit of the general body of creditors, he may prove
the whole of his debt. If the secured creditor has realised his
security, he may prove for the balance due to him after
deducting the net amount that has been realised. The stage for
relinquishing security arises when a secured creditor seeks to
prove the whole of his debt in the course of winding up. If, he
elects to prove in the course of winding up the whole of the
debt due and owing to him, he has to necessarily surrender his
security for the benefit of the general body creditors.”
 (emphasis in original)
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Having regard to the position in law as consistently followed in
the judgments of 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.
[Pennington’s 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:
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“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 xxx
“17. 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”
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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. For this reason
also, it is clear that this contention of the learned counsel appearing for
the appellant must be rejected.
20. We may only end by
saying that cases like the present one
have to be decided by balancing the interest of creditors to whom money
is owing, with a debtor company which will now go in the red since a
winding up petition is admitted against it. It is not open for persons like
the appellant to resist a winding up petition which is otherwise maintainable
without there being any bona fide defence to the same. We may also
hasten to add that the respondent cannot be said to be blowing hot and
cold in pursuing a remedy under the Recovery of Debts Act and a winding
up proceeding under the Companies Act, 1956 simultaneously. Here, it
is important to refer to the judgment of Lord Atkin in Lissenden v.
C.A.V. Bosch, Ltd., [1940] 1 All E.R. 425, at 436-437, which says:
“The doctrine of election could have no place in the present case.
The applicant is not faced with alternative rights. It is the same
right that he claims, but in larger degree. In Mills v. Duckworth,
[1938] 1 All E.R. 318, a plaintiff who had been awarded damages
for negligence had taken the judgment sum out of a larger sum
paid into Court and had then appealed against the quantum of
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damages, and was met by a similar objection to his appeal. Greer,
L.J., in overruling the objection, pointedly said, at p. 321:
“He [the plaintiff] said: “I am not going to blow hot and cold. I
am going to blow hotter.”
Here the applicant is not faced with a choice between alternative
rights. He has exercised an undisputed right to compensation, and
claims to have a right to more. One has not lost one’s right to a
second helping because one has taken the first.”
When secured creditors like the respondent are driven from pillar
to post to recover what is legitimately due to them, in attempting to avail
of more than one remedy at the same time, they do not “blow hot and
cold”, but they blow hot and hotter. The appeals are accordingly dismissed
with no order as to costs.
Kalpana K. Tripathy
          Appeals dismissed.