2001 (4) TMI 828 - SC - Companies Law

Whether the interest claimed by appellants is liable to be disbursed under section 11(2)(b) of the Act on a preferential basis or the same is to be distributed under section 11(2)(c) of the Act? Do the secured creditors have the right to stand outside the distribution under section 11 of the Act and recover their dues? Held that - Appeal partly allowed. So far as the appellants claim for interest is concerned if the interest fell due within the notified period the same shall be distributed on the basis of the priority contemplated under section 11(2)(b) and so far as their claim for interest which fell due outside the notified period is concerned the same can be entertained by the Custodian only under section 11(2)(c). So far as the secured creditors are concerned subject to the right of the Custodian under section 4 of the Act they are entitled to recover the amounts due to them (principal and interest) from the property secured in their favour without taking recourse to section 11. But if the security is not large enough to extinguish their debt they can seek payment of the shortfall only under section 11(2)(c).

Summary

Issues:
1. Priority of interest payment under section 11(2)(b) vs. section 11(2)(c) of the Act.
2. Rights of secured creditors to recover dues under section 11.

Analysis:

Priority of Interest Payment (Section 11(2)(b) vs. Section 11(2)(c)):
The appellants contested the distribution of interest claimed by them, arguing that they are entitled to both the principal amount and the interest under section 11(2)(b) of the Act. However, the Custodian contended that only amounts due within the specified period are payable, and interest falling outside this period should be claimed under section 11(2)(c). The Court, considering previous judgments, held that interest or penalty outside the specified period can only be claimed under section 11(2)(c). The appellants' claim for interest was to be distributed based on the priority under section 11(2)(b) if it fell due within the specified period, and under section 11(2)(c) if it was due outside that period.

Rights of Secured Creditors:
The Special Court ruled that secured creditors, including some of the appellants, are not entitled to stand outside the distribution under section 11. The secured creditors argued that the property secured in their favor is not attachable by the Custodian, and thus the proceeds from such security should not be used for distribution under section 11(2). The Court clarified that the interest of a third party in attached property cannot be sold or distributed to discharge the liabilities of the notified person. Secured creditors are entitled to recover amounts due to them from the property secured in their favor, subject to the Custodian's right under section 4. If the security is insufficient to cover the debt, secured creditors can seek payment of the shortfall under section 11(2)(c).

In conclusion, the appeals were partly allowed based on the above analysis, with no costs awarded.