Case: Maharashtra State Financial Corporation, Bombay Vs. Official Liquidator, High Court Bombay

( 1 ) THE appellants are Maharashtra State Finance Corporation. The appellants lent and advanced to Messrs. Atrois Chemicals Private Limited (hereinafter referred to as the company) a sum of Rs. 6 lakhs which was secured by an indenture of mortgage dated 28/01/1980 executed by the company whereby the company mortgaged its land, building, plant and machinery etc. situate at Tarapur in favour of the appellants. This deed of mortgage has been lodged for registration with theof Assurances at Bombay on 28/01/1980. The charge in favour of the appellants in also registered with the Registrar of Companies on 3/11/1980 under Section 125 of the Companies Act,2 ) THE company was also sanctioned another loan of Rs. 2 lakhs by the appellants. This loan was secured by a deed of further charge dated 16/06/1981 executed by the company. The charge is also registered with theof Assurances at Bombay on 16/06/1981. The charge is also registered with the Registrar of Companies on 16/09/1983 under Section 125 of the Companies Act,3 ) UNDER an Order of this Court dated 31/07/1987, the company has been ordered to be wound up. The Official Liquidator has been appointed Liquidator of the4 ) UNDER the terms of the mortgage deeds, the appellants have a right to take possession of and sell the mortgaged properties of the company without the intervention of the Court. Moreover, under Section 29 of the State Financial Corporations Act, 1951 also the appellants have a statutory right, inter alia, to take possession of and realise the mortgaged property in case the industrial concern to whom the loan is advanced makes a default in repayment of loan or any instalment thereof or otherwise fails to comply with the terms of its agreement with the financial corporation. As the company had made persistent defaults in paying the installments of principal amount and interest as and when they became due to the appellant, the appellants recalled the loan on 17/05/1988. According to the appellants, as on 30/06/1988, an amount of Rs. 13,07,067. 53 was due and payable to them by the company.( 5 ) IN view of the terms of the indenture of mortgage and further charge referred to above and the provisions of the State Financial Corporations Act, 1951, the appellants took out a Judges Summons before the Company Judge dated 16/08/1988 seeking leave under Section 537 of the Companies Act, 1956 to proceed with the sale of the land, building, plant and machinery of the company situate at Tarapur. The learned Judge, by his order dated 21/09/1988, dismissed the Judges Summons. Hence, the present appeal has been filed by the appellants.

Court's reasoning:
( 14 ) THE Privy Council, in the case of Sunitibala Debi v. Dharae Sundari Debi reported in AIR 1919 PC 24, said in the case of two mortgagees holding asthat the right of either mortgagee who desires to realise the mortgaged property and obtain payment of the debt, if the consent of thecannot be obtained, is to add theas a defendant to the suit and to ask for the proper mortgage decree. It is, therefore, necessary that when a sale of a mortgaged property takes place, both the charge holders should join in the15 ) THE same ratio, in our view, would substantially apply to two chargeholders who have a pari passu charge for the recovery of their dues. It may be that unlike aa pari passu chargeholder can receive payment of his mortgage debt from the mortgagor and release his charge independently. But when it comes to realising the security, both the pari passu chargeholder must join or realise the security simultaneously. The sale proceeds are required to be divided proportionately between them in the same proportion as their dues. Hence, when a sale takes place, it is for the simultaneous recovery of claims of all pari passusubmission cannot be accepted. There is nothing in the proviso which takes away the right of a secured creditor to realise his security. On the contrary, the proviso refers expressly to a situation where the secured creditor of is to realise the security. In such a situation the statutory obligation is cast on the Liquidator to enforce the charge in favour of the workmen. . The words used are"the Liquidator shall. . . . . . . . . enforce such charge". In other words, when a secured creditor opts to realise his security, the Official Liquidator is also required to join in the sale for the purpose of enforcing his charge. If he feels that the sale, for example, cannot be conducted properly by the secured creditor, he may apply to the Company Court for permission to conduct the sale on behalf of both the mortgagees after giving notice to the secured creditor, when the Company Court, after hearing all concerned parties, will give appropriate directions. The statutory duty cast upon the Official Liquidator to enforce his charge when a secured creditor opts to realise his security cannot be construed as taking away a right of a secured creditor to realise his security. Both the pari passu chargeholders are required toin the conduct of the sale, and if such cooperation is not possible, both have to abide by the directions which the Company Court may give in this23 ) OUR attention is drawn to two decisions of the Karnataka High Court. In the case of Karnataka State Financial Corporation v. Patil Dyes and Chemicals (P) Ltd. , reported in (1991) 70 Com Cas 38, the Court considered a case where a state financial corporation, as a secured creditor, sought leave of the Court under S. 537 of the Companies Act for permission to sell the mortgaged property of the respondent company in liquidation for the recovery of its dues in exercise of its powers under S. 29 of the State Financial Corporations Act, 1951. The Court held that this right is available to a financial corporation only when the company is not in winding up. Once the company is in winding up and "its property vests in the Court", the state financial corporation cannot exercise its power under S. 29 and in such a situation only the Official Liquidator can sell the properties of the company in winding up. With respect to the learned Judge, he is not right in proceeding on the footing that the property of a company in winding up vests in the Official Liquidator. He has only the custody of the property of the company. Under S. 456 of the Companies Act, the Official Liquidator is required to take into his custody and control all the properties of the company in winding up. The property of the company does not vest in him as in the case of insolvency. The property remains the property of the company. Therefore. the Official Liquidator cannot demand possession of the property from a mortgagee lawfully in possession of it. Also, the rights conferred on a financial corporation as a mortgagee under S. 29 of the State Financial Corporations Act are not obliterated when the company is in winding up. It may have to exercise its right to take possession with the permission of the Court. Also, the statutory right which is given to a financial corporation under S. 29 to sell the property has to be exercised consistently with the rights of a pari passu chargeholder in whose favour a statutory charge is created by the Proviso to S. 529 of the Companies Act when the company is in liquidation. Therefore, such a power can be exercised only with the concurrence of the Official Liquidator and the Official Liquidator is required to take the permission of the Court before giving such concurrence since he is an officer of the Court and is required to act under the directions of the Court while exercising his powers on behalf of the workers. However, we entirely agree with the learned Judge when he says in the above judgment that for the implementation of the priorities under S. 529a of the Companies Act the Official Liquidator must take necessary steps to file the claim of the workman before the Court as set out in the judgment and that this is not dependent on the statement of affairs being filed by the directors of the company. This, however, is not a question which requires determination in the present case and, hence we do not propose to go into this question. We respectfully differ from this judgment in so far as it lays down that if there are workmens dues, only the Official Liquidator can sell the properties which are secured to a state financial corporation if the company is wound up.( 24 ) THE next case which requires to be considered is that of Mysore Surgical Cotton (P) Ltd. v. Karnataka State Financial Corporation, reported in (1988) 1 Company LJ 63 (Kant ). In that case, the Official Liquidator sought a direction that the financial corporation should hand over possession of the assets and effects of the company to him. While the financial corporation asked for leave of the Court under S. 537 (1) of the Companies Act to sell the assets of the company. The learned Judge of the Karnataka High Court distinguished the decision of the Supreme Court in M. K. Ranganathan v. Government of Madras (AIR 1955 SC 604  ) (supra) and held that S. 29 of the State Financial Corporations Act would not apply when the debtor was a company in winding up. It said that S. 29 cannot take away from the custody of the Court, properties which had lawfully vested in the Court by virtue of the company being wound up. The facts of the case are not clear. But it seems that the financial corporation had taken possession of the properties secured to it before the Official Liquidator came on the scene. The Court directed the financial corporation to hand over the property to the Official Liquidator and declined to grant permission to the financial corporation to sell the properties. We respectfully differ from the learned Judge in so far as he has held that a mortgagee in possession of the property of a company mustthe property to the Official Liquidator when the company is wound up. This judgment also seems to proceed on the basis that on winding up, the properties of the company vest in Court. As stated earlier, this is not so. The decision does not deal with the rights of a mortgagee in possession with power to sell without the intervention of the Court and the impact of the Proviso to Section 529 on this power. It is, therefore, in any case, not of much assistance to25 ) OUR attention is also drawn to a decision of this Court in the case of State Industrial and Investment Corporation of Maharashtra Limited v. Maharashtra State Financial Corporation, (1988) 64 Com Cas 102. The Division Bench, in that case, has held that the Maharashtra State Financial Corporation, a duly secured creditor, was outside the winding up and it was entitled to sell the mortgaged property without obtaining leave of the Company Court under Section 537 of the Companies Act. The Division Bench has relied upon the decision of the Supreme Court in the case of M. K. Ranganathan v. Govt. of Madras (AIR 1955 SC 604  ) (supra) in this behalf. It is not clear from the judgment whether in respect of the case before the Court, the amendment to Section 529 of the Companies Act had come into force or was applicable. The Division Bench has not considered the amended provisions of Section 529 at all and any contention in that connection does not appear to have been raised before the Division Bench. Hence, this judgment does not carry the matter anyhowever, do not see any inconsistency between the provisions of Section 29 of the State Financial Corporations Act and Section 529 of the Companies Act. Section 29 of the State Financial Corporations Act merely confers certain powers on the mortgagee. It does not cover a situation where there is a pari passu chargeholder. 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 chargeholder. Such a right can be exercised with the consent of the pari passu chargeholder or on orders of the Court after making him a party to the proceedings to enforce the security. Since the chargeholder is the Official Liquidator, his power to consent is subject to the sanction of the Court.