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2015 (7) TMI 1442 - HC - Companies LawDirection to deposit the auction amount received by it from the sale which was confirmed by the Company Court on 28.07.2011 of the immovable assets of the company in liquidation - Rule 9 of the Companies (Court) Rules 1959. Whether the amount received by RFC from the auction sale of the immovable assets of the company in liquidation under the direction and supervision of this Court has to be remitted to the O.L. or whether RFC is entitled to hold the said amount and appropriate it as the secured creditor of the Company in liquidation subject only to the pari passu charge of the workers under the proviso to Section 529(1) of the Act of 1956? HELD THAT - A State Financial Corporation cannot take possession of the assets of a debtor company after the said company is ordered to be wound up. This issue is not res integra and stands firmly settled by the judgment of the Hon ble Supreme Court in the case of Rajasthan State Financial Corporation Anr. Vs. Official Liquidator Anr. 2005 (10) TMI 280 - SUPREME COURT where a three judge Bench has endorsed the earlier two Judge judgments in the case of A.P. State Financial Corporation Vs. Official Liquidator 2000 (8) TMI 986 - SUPREME COURT and International Coach Builders Ltd. Vs. Karnataka State Financial Corporation 2003 (3) TMI 529 - SUPREME COURT . It has been held that in cases where a winding up order in respect of company in liquidation has been passed prior to the exercise of powers under Section 29 of the Act of 1951 by virtue of the workers debts of the company in liquidation statutorily being deemed to be pari passu with the debt of the secured creditors and all assets including fixed assets of the company in liquidation coming in such a situation in the custody of the O.L. on behalf of the Company Court the O.L. aside of being mandatorily required to be associated with the sale of the assets in all aspects should hold the proceeds of the sale for distribution thereof amongst creditors in terms of the priorities detailed for the purpose under the provisions of Sections 528 529 529A 530 of the Act of 1956. The application filed by the O.L. deserved to be allowed. The respondent-RFC is directed to deposit with the O.L. within seven working days following today the entire amount received by it from the sale of the assets of the company in liquidation along with upto date accrued interest. RFC as the secured creditor however would be entitled to receive amounts due to it in that capacity in accordance with the provisions of the Companies Act 1956 and the Rules of 1959. Pendency of cases is a serious issue in the administration of justice. Causes are multiple. Not the least however is reckless litigation by State instrumentalities despite being supported by legal departments and no lack of funds to obtain good legal advise before filing cases or setting up defences. Where the defences are baseless and in the face of admitted facts and/or settled legal position this Court would be failing in its duty in not imposing exemplary costs. The Hon ble Supreme Court in the case of Ramramesh Wari Devi Vs. Nirmala Devi Ors. 2011 (7) TMI 1305 - SUPREME COURT has held that frivolous and vexatious defence should be visited with exemplary costs. The present case is such a case. RFC is held liable to pay costs of Rupees One lac to the Rajasthan State Legal Services Authority within a period of ten weeks from today. The Deputy Registrar (Judicial) is directed to ensure that costs as directed are paid no doubt subject to an order to the contrary in an appeal. If costs are not paid as directed without just cause the Dy. Registrar (Judicial) to bring the matter to the notice of this court after ten weeks. The Company Application stands allowed accordingly.
Issues Involved:
1. Whether the Rajasthan Financial Corporation (RFC) is required to deposit the auction proceeds of the company in liquidation's assets with the Official Liquidator (OL). 2. Whether RFC, as a secured creditor, can retain and appropriate the auction proceeds against its outstanding dues. 3. The applicability of Sections 446, 529, and 529A of the Companies Act, 1956, in overriding Section 29 of the State Financial Corporation Act, 1951. 4. The imposition of costs on RFC for setting up a frivolous and vexatious defense. Detailed Analysis: 1. Deposit of Auction Proceeds by RFC: The primary issue was whether RFC should deposit the auction proceeds with the OL. The court held that the auction of the company's assets was conducted under the direction and supervision of the Company Court, and thus, RFC is required to deposit the entire auction amount along with accrued interest with the OL. This decision was based on the fact that the sale was for and on behalf of the OL, as evidenced by RFC seeking approval for the sale modalities and agreeing to the auction sale being subject to the court's confirmation. The court emphasized that the proceeds should be distributed among creditors according to the Companies Act, 1956. 2. RFC's Right to Retain Auction Proceeds: RFC argued that as a secured creditor with a first charge on the company's assets, it was entitled to retain the auction proceeds to satisfy its dues. However, the court rejected this argument, noting that RFC had not taken possession of the mortgaged assets before the winding up order. The court highlighted that RFC's attempt to invoke Section 29 of the Act of 1951 was negated by the Company Court's order dated 09.12.1991, which dismissed RFC's application to exercise its powers under Section 29. The court reiterated that RFC, despite being a secured creditor, could not dispose of the assets for its own benefit without the court's leave. 3. Overriding Effect of Companies Act Provisions: The court addressed the legal interplay between the Companies Act, 1956, and the State Financial Corporation Act, 1951. It referred to the Supreme Court's judgment, which established that Sections 446, 529, and 529A of the Companies Act, 1956, override Section 29 of the Act of 1951. This is because the 1985 amendment to the Companies Act, which introduced Sections 529 and 529A, granted workers' dues a pari passu charge with secured creditors, thus affecting the rights of secured creditors like RFC. The court concluded that the OL must hold the sale proceeds for distribution among creditors per the statutory priorities. 4. Imposition of Costs on RFC: The court imposed costs on RFC for setting up a frivolous and vexatious defense. It criticized RFC for disregarding the Company Court's previous orders and the established legal position. The court emphasized the importance of responsible litigation, particularly by state instrumentalities, and cited the Supreme Court's stance on imposing exemplary costs for frivolous defenses. Consequently, RFC was directed to pay costs of Rupees One lac to the Rajasthan State Legal Services Authority. Conclusion: The court allowed the application filed by the OL, directing RFC to deposit the auction proceeds with the OL for distribution among creditors according to the Companies Act, 1956. RFC was also ordered to pay costs for its baseless defense, underscoring the need for adherence to legal principles and responsible litigation practices.
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