Case: OFFICIAL LIQUIDATOR, M/S. METALLIC SOAPS &amp; CHEMICALS (PVT.) LTD Vs. MANAGER, KARNATAKA STATE FINANCIAL CORPORATION

1. Metallic Soaps and Chemicals (Pvt.) Limited, a company incorporated and registered as a private limited company under the Companies Act, 1956 (hereinafter referred to as Companies Act) went into financial difficulties which resulted in winding up petitions being filed by two creditors - Company Petition No. 90/1987 on 08.10.l997 and Company Petition No. 74/1989 filed on 10.07.1989. The said company had availed of loan facilities from respondent No. 1 - Karnataka State Financial Corporation, a Corporation within the meaning of the State Financial Corporation Act, 1951 (hereinafter referred to as the SFC Act). The immovable property and the machinery were mortgaged and hypothecated respectively with respondent No. 1. At the stage when the company petitions were still pending, respondent No. 1 took action under Section 29 of the SFC Act on 25.04.1992 to realise its dues. The relevant provisions read as under:29.Rights of Financial Corporation in case of default. -(1) Where any industrial concern, which is under a liability to the Financial Corporation under an agreement, makes any default in repayment of any loan or advance or any installment thereof or in meeting its obligations in relation to any guarantee given by the Corporation or otherwise fails to comply with the terms of its agreement with the Financial Corporation, the Financial Corporation shall have the right to take over the management or possession or both of the industrial concerns, as well as the right to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation.(5) Where the Financial Corporation has taken any action against an industrial concern under the provisions of sub-section (1), the Financial Corporation shall be deemed to be the owner of such concern, for the purposes of suits by or against the concern, and shall sue and be sued in the name of the concern.2. The winding up order in the company petitions filed in 1987-1989 was made on 13.08.1993. The property taken possession of by respondent No. 1 was sold to respondent No. 2 on 21.02.1994.3. It appears that the proceedings in respect of the company, now represented by the official liquidator as the appellant before us, under the SFC Act continued oblivious of the other proceedings.4. The endeavour to set at nought the sale in favour of respondent No.2 resulted in the proceedings before the Karnataka High Court. In terms of the impugned order dated 14.02.2007, it was opined that since respondent No. 1 had taken possession of the premises under Section 29 of the SFC Act prior to the order for winding up, the transaction in favour of respondent No.2 could not be effected and the only direction to be made was that the amount realised by respondent No. 1 would be equitably distributed amongst respondent No. 1 and any claim of the workmen lodged and verified by the official liquidator in view of Sections 529A and 529 of the Companies Act.

Court's reasoning:
7. A perusal of the impugned order shows that the reasoning of the Division Bench is predicated on the judgment of this Court in Rajasthan State Financial Corporation and Anr. vs. Official Liquidator and Anr. [2005 (8) SCC 190 ].17. Thus, on the authorities what emerges is that once a winding-up proceeding has commenced and the Liquidator is put in charge of the assets of the company being wound up, the distribution of the proceeds of the sale of the assets held at the instance of the financial institutions coming under the Recovery of Debts Act or of financial corporations coming under the SFC Act, can only be with the association of the Official Liquidator and under the supervision of the Company Court. The right of a financial institution or of the Recovery Tribunal or that of a financial corporation or the Court which has been approached under Section 31 of the SFC Act to sell the assets may not be taken away, but the same stands restricted by the requirement of the Official Liquidator being associated with it, giving the Company Court the right to ensure that the distribution of the assets in terms of Section 529-A of the Companies Act takes place. In the case on hand, admittedly, the appellants have not set in motion any proceeding under the SFC Act. What we have is only a liquidation proceeding pending and the secured creditors, the financial corporations approaching the company Court for permission to stand outside the winding up and to sell the properties of the company-in-liquidation. The Company Court has rightly directed that the sale be held in association with the Official Liquidator representing the workmen and that the proceeds will be held by the Official Liquidator until they are distributed in terms of Section 529-A of the Companies Act under its supervision. The directions thus, made, clearly are consistent with the provisions of the relevant Acts and the views expressed by this Court in the decisions referred to above. In this situation, we find no reason to interfere with the decision of the High Court. We clarify that there is no inconsistency between the decisions in Allahabad Bank vs. Canara Bank [(2000) 4 SCC 406]  and in International Coach Builders Ltd. vs. Karnataka State Financial Corpn.[(2003) 10 SCC 482]  in respect of the applicability of Sections 529 and 529-A of the Companies Act in the matter of distribution among the creditors. The right to sell under the SFC Act or under the Recovery of Debts Act by a creditor coming within those Acts and standing outside the winding up, is different from the distribution of the proceeds of the sale of the security. The distribution in a case where the debtor is a company in the process of being wound up, can only be in terms of Section 529A read with Section 529 of the Companies Act. After all, the Liquidator represents the entire body of creditors and also holds a right on behalf of the workers to have a distribution pari passu with the secured creditors and the duty for further distribution of the proceeds on the basis of the preferences contained in Section 530 of the Companies Act under the directions of the Company Court. In other words, the distribution of the sale proceeds under the direction of the Company Court is his responsibility. To ensure the proper working out of the scheme of distribution, it is necessary to associate the Official Liquidator with the process of sale so that he can ensure, in the light of the directions of the company Court, that a proper price is fetched for the assets of the company-inliquidation. It was in that context that the rights of the Official Liquidator were discussed in International Coach Builders Ltd. The Debts Recovery Tribunal and the District Court entertaining an application under Section 31 of the SFC Act should issue notice to the Liquidator and hear him before ordering a sale, as the representative of the creditors in general.10. At the conclusion of hearing, what has come to light, is that neither any claim of the workmen have been invited nor are pending with the Official Liquidator. Thus, for over 25 years nothing has been done by the Official Liquidator in this behalf while merely asserting a theoretical right of pari passu right of the workmen with respondent No. 1 corporation.11. On a perusal of the legal provisions expounded before us, we have no doubt that the role of the official liquidator and his association with the sale of the assets, where action is taken under the SFC Act, is to ensure that a proper price is obtained for the assets sold so as to protect the rights of the other secured creditors. In this behalf, we may note the judgment of this Court in Bakemans Industries Pvt. Ltd. vs. New Cawnpore Flour Mills & Ors. [2008 (15) SCC 1 ] where it has been categorically opined that the provisions of Section 29 of the SFC Act, that being a special statute, would prevail over the general powers of the Company Judge under the Companies Act.13. We are, thus, of the view that the rights of the workmen, as and when the Official Liquidator verifies the dues, are fully protected as their rights would be pari passu with the rights of respondent No. 1 so far as the distribution of sale proceeds realised from respondent No. 2 are concerned.