Case: Icici Bank Ltd Vs. Sidco Leathers Ltd.

3. The appellant herein is a Banking Company. It, along with Industrial Finance Corporation of India (IFCI) and Industrial Development Bank of India (IDBI), advanced the following amounts by way of loan to Respondent No.1 with a view to give financial assistance to it in setting up a plant for manufacture of leather boards:a) IDBI Rupee Term Loans of Rs.193.2 lacs and Foreign Currency loan of Italian Lira 1380900,000.b) IFCI Rupee Term Loans of Rs.196.74 lacs, Central Investment subsidy of Rs.25 lacs and Foreign Currency loan of DM 2127,565.c) ICICI Rupee Term Loans of Rs.96.61 lacs and Foreign Currency loan of Italian Lira 1380900,000.4. The Punjab National Bank (PNB) also advanced a loan to the said Respondent for providing working capital funds. The 1st Respondent, in order to secure the amounts lent to it, created a first charge in favour of the appellant along with other financial institutions, i.e., Respondent Nos.3 (IFCI) and Respondent No.4 (IDBI) herein by way of equitable mortgage by deposit of title deeds of its immovable property. A second charge was created in favour of PNB by way of constructive delivery of title deeds remaining in deposit with Respondent No.3 herein, clearly indicating that the charge in favour of the latter was subject and subservient to charges in favour of IFCI, IDBI and ICICI.5. On an application for winding up of the 1st Respondent made before the High Court of Judicature at Allahabad, an order was passed on 16.12.1993 directing its winding up whereupon an Official Liquidator was appointed. The borrowing facilities of the said Respondent had been terminated. A suit for recovery of the credited sum was filed by the appellant along with the Respondent Nos.3 and 4 herein against the 1st Respondent in the High court of Judicature at Bombay, which was numbered as Suit No.2789/1995. The said suit was thereafter transferred to the Debt Recovery Tribunal, Bombay. Recovery proceedings are admittedly pending adjudication.6. The Official Liquidator was one of the defendants. Liberty was granted by the Debt Recovery Tribunal to the appellant herein and the other respondents to obtain permission of the Company Court, i.e., High Court of Judicature at Allahabad to continue the prosecution of the said suit. Thereupon, an application under Section 446 of the Companies Act, 1956 was filed by the plaintiffs in the said suit stating that they were Secured Creditors and had decided to remain outside the winding up proceedings being desirous of realizing the Security in the suit. The permission to continue the proceedings in the said Suit No.2789/95 was granted by the High Court of Judicature at Allahabad on 30.8.1995. In the said suit, however, the Respondent No.2 herein, PNB, was not impleaded as a party.7. PNB filed a Civil Suit in the Court of Civil Judge, Fatehpur (U.P.) on 15.10.1998, which was numbered as Suit No.2/98, for recovery of money payable to it by the 1st Respondent. In its plaint it was, inter alia,the defendant No.1 company had secured various other financial facilities from the Defendant Nos.4, 5 and 6 in whose favour the Defendant No.1 company had created Equitable mortgage as Collateral Security by deposit of original title deeds in respect of land, building and plant and machineries situated at Village Kauriya, Tehsil Binkdi, District Fatehpur (U.P.), but, then the Defendant No.1 company agreed to secure the second charge on the said mortgaged property in favour of the plaintiff Bank, after the defendant Nos.4, 5 and 6 gave their consent to the effect that the title deeds in respect of the aforesaid properties shall remain with the Defendant No.4, for and on behalf of the Joint First charge holders, viz. Defendant No.4, 5 and 6 and the said title deeds shall also be retained by the Defendant No.4, as agents, for and on behalf of the plaintiff Bank as a Second charge holder in respect of the aforesaid properties.xxx xxx xxx12. That the said Charge of the Plaintiff Bank regarding the grant of cash credit hypothecation limit and creation of Second Charge in respect of immoveable properties of the Defendant No.1 company in favour of the Plaintiff Bank, was duly registered with the Registrar of Companies (U.P.) at Kanpur, on the basis of submission of the Defendant No.1 company with the Registrar of Companies (U.P.) Kanpur.It is, however, not in dispute that in the meantime the assets of the Company were sold and the Official Liquidator, against the said assets, received a sum of Rs.65,72,311/-. As on 31.10.2001, the Official Liquidator had a sum of Rs.71,00,351/- available with him for distribution to the creditors of the Company. An advertisement was issued by the said Official Liquidator being Notice in Form No.63 prescribed under Rule 148(1) of the Companies (Court) Rules, 1959, inter alia,creditor so fails to submit his affidavit of proof within the time limited as aforesaid will be excluded from the benefit of any distribution of dividend before the debt is proved or as the case may be from objecting to such distribution. Any creditor who has sent in his proof, if so required by notice in writing from the Official Liquidator shall either in person or by his advocate, attend the investigation of such debt or claim at such time and place as shall be specified in such notice and shall produce such further evidence of his debt or claim as may be required.In response to the said notice, the appellant herein lodged a claim stating as under:S.No. Name of Secured Creditor Amount Claimed To be disbursed 1.6 paise1. xx xx xx2. ICICI 26,18,44,044.00 41.89,506.0010. Although, before us the factual aspect of the matter that Respondent No.2 was the second charge holder, whereas the appellant and IFCI and IDBI were the first charge holders is not in dispute, we may, however, notice that Respondent No.2, in its letter dated 20.11.1989, addressed to the appellant and Respondent Nos. 3 and 4 categoricallyPunjab National Bank, hereby confirm that notwithstanding anything to the contrary contained in or by virtue of the various securities created/to be created by M/s. Sidco Leathers Ltd. (hereinafter referred to as the Company) in favour of Punjab National Bank on the immovable and movable properties (save and except book debts) of the Company, the charges created to be credited by the Company in favour of Punjab National Bank for its working capital facilities being Cash Credit limit of Rs.80 lac and bills discounting of Rs.54 (Fifty four lac only) shall be subject and subservient to the charges created/to be created by the Company in favour of:(1)(a) rupee term loan of Rs.277.00 lac in Participation with IDBI and ICICI to the extent mentioned below:IFCI - Rs.112.00 lac IDBI - Rs.110.00 lac ICICI - Rs. 55.00 lac xx xx xx We further agree and confirm as follows:i) We shall not be entitled to call upon IFCI/IDBI/ICICI and other pari passu charge holders, if any, (hereinafter referred to as the first charge holders) to exercise or enforce any of the rights under their securities or otherwise.ii) We shall not resort to any legal proceedings for the sale of the mortgaged properties or for the exercise of our any other right (a) against the Company unless (a) we exhaust our remedies as a first charge holders on the current assets of the Company, (b) we give to the first charge holders a notice of minimum period of 60 days of our intention in this regard and (c) we obtain prior written approval of IFCI/IDBI/ICICI and other first charge holders in this regard.iii) We, in our capacity as a second charge holder, take steps to enforce the security for realization of our dues consequent on default or breach committed by the Company after giving notice to and obtaining prior approval of the first charge holders as at (ii) above, the first charge holders, shall also be at liberty (but without obligation) to call upon the Company to repay forthwith their respective loans and advances as if they have become due under their respective loan documents and shall also be at liberty to exercise and/or all the right and remedies available to them as first mortgages or under any law for the time being in force.In the Memorandum of Entry, acting also on behalf of the Respondent No.1, the BankThe said Shri M. Zafrulla stated that the documents of title, evidences, deeds and writings more particularly described in the First Schedule hereunder written (hereinafter called "the said deeds") in respect of the Companys all immovable properties situated at Village Klauriya Mustaquil, Tehsil Binki, District Fatehpur in the State of Uttar Pradesh were deposited on the 11th day of August, 1988 and further deposited by way of constructive delivery on the 8th day of November, 1989 by the Company with IFCI and IFCI acting for itself and as agent of.Industrial Development Bank of India13. The Industrial Credit & Investment Corporation of India Ltd. in order to create security, by way of joint mortgage by deposit of title deeds, on the Companys all immovable properties together with the buildings and other structures, fixed plant and machinery, fixtures and fittings, constructed or erected or installed thereon or to be constructed, erected or installed thereon, for securing the due repayment, discharge and redemption by the Company."14. It is not in dispute that the suit filed by Respondent No.2 has been decreed; whereas the proceedings before the Debt Recovery Tribunal (DRT) initiated by the appellant and others is still pending. It is furthermore not in dispute that the appellant along with Respondent Nos. 3 and 4 filed a Company Application before the learned Company Judge of the High Court of Judicature at Allahabad, inter alia, praying for that their claim for a sum of Rs.4,56,06,736 as on 16.12.1993 should be considered on pro-rata basis and further prayed that the claim of PNB be excluded from the movable and immovable assets of the Company.15. By an order dated 9.1.2002, the first prayer of the appellant was allowed. However, as regards the second prayer, order was reserved. By an order dated 24.5.2002, relying on or on the basis of the decision of this Court in Allahabad Bank vs. Canara Bank & Anr. [AIR 2000 SC 1535 ] it wastest in law, as emerges from the aforesaid discussion is that where the secured creditors even if it has first charge over mortgaged assets, in preference to other secured creditors, having second charge over the same assets, opts to prove his debts before Official Liquidator and claim dividend by joining winding up proceedings, relinquishes his claim over the assets and ranks equal to other secured creditors, including those who have second charge over the assets and shall be entitled to pro rata share out of the sale proceeds subject to the claim of workmen to be determined as provided under Section 529-A of the Companies Act, 1956.I may add here that IFCI, IDBI and ICICI had given foreign currency loan and term loans to the company (in liquidation) by connotation, the rate of interest and liquidated damages were claimed. Punjab National Bank had second charge over the fixed assets of the company for working capital of Rs.134 lacs by deposit of title deeds created by the company in favour of Punjab National Bank on 21st November 1989 at IFCI office. The second charge in favour of Punjab National Bank was subject to first charge of IFCI, IDBI and ICICI. It is admitted to the applicant that Punjab National Bank might have first charge on the current assets of the company but that claim of Punjab National Bank as second charge holder of Rs.1,32,22,539/- has to be excluded and that the Punjab National Bank may get its share out of the sale proceeds of current assets. Since the applicants - IFCI and IDBI have joined the winding up proceedings and have submitted proof of their debts before the Official Liquidator, as held above, they shall be taken to have given up their securities and thus they can not claim any priority over the assets of Punjab National Bank on the fixed assets.An intra-court appeal known as Special Appeal thereagainst was filed by the appellant before the Division Bench of the High Court. Having regard to the provisions contained in Section 47 of the Provincial Insolvency Act, 1920, it was held that the appellant having opted to remain outside the liquidation proceedings by expressing its desire to continue with its suit, in respect of the second claim of beneficial right, Section 48 of the Transfer of Property Act will have no application in the instant case. It was further opined that in view of the terminology used in Section 529-A of the Companies Act, the right of Secured Creditors being a contingent right, the appellant shall rank with unsecured creditors and has to take his dividend as provided under Section 529(2) of the Act.18. The High Court relying upon Allahabad Bank (supra) furthersecond class of secured creditors are those who come under section 529(1)(b) read with proviso (c). These are those who opt to stand outside the winding up to realize their security. Section 19(19) of the RDB Act, 1993 permits distribution to secured creditors only in accordance with Section 529-A of the Companies Act, 1956 which includes the creditors who stand outside the winding up. These secured creditors in certain circumstances can come before the Company Court and claim priority over all other creditors to realize the amounts out of other moneys lying in the Company Court. This limited priority is declared in Section 529-A (1). It is however restricted only to the extent specified in clause (b) of Section 529-A(1). The Canara Bank had laid claims against realizations by other creditors. The Supreme Court found that it has not exercised its option to remain outside the winding up proceedings and thus it was held that the question of such claim can be raised only if the Canara Bank had stood outside the winding up and had realized the amount and if it shows that out of the amounts privately realized by it, some portion has been rateably taken away by the liquidator under sub- clause (a) and (b) of the proviso to Section 529(1). It is only then that it can claim that it should be reimbursed at the same level as a secured creditor with priority over the realizations of other creditors lying the Tribunal.On the aforementioned findings, the said special appeal was dismissed.

Court's reasoning:
Section 47 of the Provincial Insolvency Act is attracted by virtue of Section 529(1) of the Companies Act. Sub-section (2) of Section 47 would become applicable where a secured creditor voluntarily relinquishes his security for the general benefit of theenvisages a conscious act, i.e., an act where a person was aware of his right and then relinquishes the same. The same must be for the general benefit of the creditors. His action must lead to a conclusion that he, for one reason or the other, intended to stand in the queue for receiving money owed to him. It, however, does not stand obliterated only by the filing of an affidavit or proof of claim with the official liquidator. Such a claim had been filed pursuant to a notice issued by the official liquidator. If the creditor does not respond to the said notice, he would not be in a position to bring to the notice of the official liquidator, the existence of his(3) of Section 47 clearly envisages the position where he does not either realise or relinquish his security. He, in such a situation, may state in his Affidavit of Proof, the particulars of the security and value at which he assesses the same. The consequences therefor would ensue. If the Official Receiver proceeds to sell the security, the Court first has to pay the amount at which the security was valued to the secured creditor out of the salefact, sub-section (3) of section 47 lends support to this method of payment to the mortgagee. If the official receiver proceeds to sell the security, the court first has to pay the amount at which the security was valued to the secured creditor out of the sale proceeds. Whatever may be the position in regard to the balance, in so far as the value of his assessment is concerned, he can be preferentially paid out of the sale proceeds.64. If the sale was valid, I fail to see how the mortgagee could be deprived of his security, particularly when he had not relinquished. The property was sold with a clear understanding that the mortgagee will be paid firm from the sale proceeds. This mode of realization of security is not, in my view, derogatory either to section 47 or to section 59 of the Act.It was further(3) of s. 47 of the Act does not come in the way of the official liquidator entertaining the application of the bank for payment of secured loans in accordance with the hypothecation agreement and the mortgage by deposit of title deeds, as proved by the bank. In the result, the bank is entitled to realize that amount on a preferential basis as a secured creditor notwithstanding the fact that it filed the affidavit indicating that it stands within liquidation but subject to the reservation of its security being continued.A Division bench of the Gujarat High Court in Gujarat Steel Tube Employees Union & Anr. v. O.L. of Gujarat Steel Tubes Ltd. & Ors. [disposed of on 9.1.2006],Court is also of the view that simply because the secured creditors participate in the sale proceedings undertaken by the Court and they also became the members of the Sale Committee constituted pursuant to the directions issued by the Court does not mean that they have exercised their option of remaining outside the winding up and they have relinquished their security. As a matter of fact, relinquishment of security by the secured creditors require a positive action on the part of the secured creditors. They have never stated in any of the proceedings that they are relinquishing their securities. On the contrary, they have made it clear that they remain outside the winding up and they participate in the sale proceeds only with a view to facilitate the sale proceeds so as to get the auction proceedings completed as expeditiously as possible. There is also substance in the say of the secured creditors that as soon as the assets of the companies are sold and realization is taken place, their securities are converted from the specified assets into cash and they have equal right in cash which is realized on sale of the assets of the Company inWe agree with the said view.