TMI Blog1989 (2) TMI 349X X X X Extracts X X X X X X X X Extracts X X X X ..... any (in liquidation) by the official liquidator to KSFC and for leave and permission to sell the said assets under section 29 of the State Financial Corporations Act, 1951 (for short, "the SFC Act"). The ground for making this application is that the KSFC has to recover a large sum of money from the respondent-company (in liquidation) and these sums are covered by the security of the assets of the respondent-company (in liquidation) in favour of KSFC and KSFC has decided to stand outside the winding-up proceedings and realise its security by resorting to section 29 of the SFC Act. Should the assets, now in the custody of the official liquidator, be released in favour of KSFC and it is permitted to sell the assets, it will be in a position to get a good price for the said assets and realise the monies due to it. In Company Application No. 614 of 1988, KSFC has made a similar prayer against the respondent-company (in liquidation). In that case also, the KSFC claims to be a secured creditor to the extent of Rs. 30,57,855.38 as on August 28, 1986, and it has chosen to remain outside the winding-up proceedings for the purpose of working out its rights as a secured creditor and, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich case they shall abate in equal proportion; that, in view of this provision, KSFC is not entitled to appropriation or adjustment of debts till the workmen's dues are paid and that the payments to the secured creditors shall abate in equal proportion with workmen's dues and this being the position and particularly when the statement of affairs has not been filed by the directors of the company whereby the actual dues to be cleared off by the official liquidator towards workmen's wages is not known, this court should not permit KSFC to enforce its claim against the company (in liquidation) by standing outside the winding-up ; that, in any event, in view of section 529A of the Act read with the relevant provisions of section 446 of the Act, it is open to this court to adjudicate the claims of secured creditors even if they stood outside the winding-up proceedings along with the claims of the workmen and make appropriate orders for giving effect to the priorities as indicated in section 529A of the Act. For the purpose of the disposal of these applications, certain facts which are not in serious controversy may be noticed. They are: that KSFC is a secured creditor and from the doc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company; ( b )any claim made by or against the company (including claims by or against any of its branches in India); ( c )any application made under section 391 by or in respect of the company; ( d )any question of priorities or any other question whatsoever, whether of law or fact, which may relate to or arise in course of the winding-up of the company; whether such suit or proceeding has been instituted, or is instituted, or such claim or question has arisen or arises or such application has been made or is made before or after the order for the winding-up of the company, or before or after the commencement of the Companies (Amendment) Act, 1960." The relevant provisions of the English Companies Act should be noticed since the difference in the language of the provisions of the respective sections throws some light on the jurisdiction of the company courts in India under the Act. The corresponding provision in the English Companies Act, 1948, is section 231 and that reads as: "Actions stayed on winding-up order. When a winding-up order has been made or a provisional liquidator has been appointed, no action or proceeding shall be proceeded with or commenced again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ably amended to bring it to its present form by the Companies (Amendment) Act, 1960. The committee noticed that, on a winding up order being made and the official liquidator being appointed a liquidator of the company, he has to take into his custody company property as required by section 456. Section 457 confers power on him to institute or defend any suit, prosecution, or other legal proceedings, civil or criminal, in the name and on behalf of the company. Power is conferred upon him to sell the properties both movable and immovable of the company, and to realise the assets of the company and this was to be done for the purpose of distributing the assets of the company amongst the claimants. Now, at a stage when a winding-up order is made, the company may as well have subsisting claims and to realise these claims, the liquidator will have to file suits. To avoid this eventuality and to keep all incidental proceedings in winding up before the court which is winding up the company, its jurisdiction was enlarged to entertain a petition, amongst others, for recovering the claims of the company. In the absence of a provision like section 446(2) under the repealed Indian Companies Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 10. Section 10 provides that the court having jurisdiction under the Act shall be the High Court having jurisdiction in relation to the place at which the registered office of the company concerned is situate, except to the extent to which jurisdiction has been conferred on any District Court or District Courts subordinate to that High Court in pursuance of sub-section, (2). The winding-up petition has thus to be presented in the High Court before the judge who is assigned the work under the Companies Act. Therefore, the court which is winding up the company will be the court to whom the petition for winding up was presented and which passed the order for winding up the company. In this case, the order was made by the learned company judge in the Kerala High Court directing winding up of the company. An appeal lies against the order for winding up the company under section 483 to the same court to which and in the same manner in which and subject to the same conditions under which, appeals lie from any order or decision of the court in cases within its ordinary jurisdiction. In exercise of this appellate jurisdiction, the appellate Bench entertained the appeals and directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r charged in favour of any of its creditors, the creditor does not acquire rights which are exhaustive of the entire title of the company in respect of the properties. The properties continue to be the properties of the company, although by reason of a transfer of some interest therein by way of security, the creditor is enabled by law to enforce his security in the manner provided by law for the purpose of recovering moneys due to him. Hence, even when a secured creditor wants to exercise the option given to him by law to stand outside the insolvency and work out his rights, it cannot be said that the winding up court is totally powerless or has no jurisdiction whatever in respect of him or in respect of the property over which he claims a certain right by way of security. In regard to such properties, questions may and do often arise either in respect of priorities or in respect of any other matter whatsoever, which may relate to the winding up of the company's affairs. In trying, therefore, to reduce to his possession properties of the company, whether mortgaged to third parties or not, the liquidator is not trying to recover any property from anybody; he is acting on behalf o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 529A as this section was not in the statute book at the time this judgment was delivered by the learned judge. But this decision is helpful to understand the nature of the possession of the properties which is under the custody of the liquidator after the winding up order is made. This court has held that even in the case of a creditor who stands outside the winding up, the properties continue to be the properties of the company (in liquidation) although, by reason of a transfer of some interest therein by way of security, the creditor is enabled by law to enforce his security in the manner provided by law for the purpose of recovering monies due to him. Hence, even when a secured creditor wants to exercise the option given to him by law to stand outside the winding up and work out his rights, it cannot be said that the winding up court is totally powerless or has no jurisdiction whatsoever in respect of him or in respect of the property over which he claims a certain right by way of security. Similar observations are made by a Division Bench of the Bombay High Court in Gleitlargor (India) P. Ltd. v. Mazagaon Dock Ltd. [1985] 57 Comp. Cas. 742 . In that case, an applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he bank was already reached. As seen earlier, judge's summons were taken out by the liquidator only after getting leave of the court to that effect on July 23, 1973, virtually permitting the liquidator to effectuate the understanding. The assumption, in the impugned order, of the official liquidator having initiated proceedings 'on behalf of the State Bank' is thus ill-founded and totally incorrect. When the bank could not enforce recovery of the company's debts in its own right notwithstanding the hypothecation, it could not authorise the official liquidator to initiate the proceedings and the question of his having initiated proceedings on the bank's behalf could ever have arisen. The liquidator could not have been appointed by the bank as its agent for such recoveries. The learned judge, amongst others, inferred the agency from the circumstances of the bank having agreed to pay the commission. Section 451 read with rule 291 authorises the liquidator to recover fees for his work of realising the company's property as such liquidator. Thus, describing such fees as commission cannot make the liquidator the creditor's agent when the Act and the Rules do not so contemplate and when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholders. This also does not relieve him of his obligation to take possession of the company's properties including actionable claims and preventing their becoming time-barred and find out ways and means for the recovery thereof if he is not possessed of the required means therefor. This rule does not prevent the official liquidator from dealing with such secured properties with the consent of the secured creditors consistent with their security, interest and rights, when it becomes necessary in the discharge of his duties, for the protection of the unsecured creditors. As indicated earlier, section 529 of the Act itself makes insolvency rules applicable in this behalf, which, in turn, permit even sale of immovable property by the official liquidator under authority of the court if this can be done without impairing the security of the secured creditors. It will be sufficient in this behalf to refer to para 445 of the Law of Insolvency in India by Mulla and rules 18 to 21 under the Insolvency Act referred to therein in this behalf... It also cannot be ignored that the property on which security or charge is created, does not cease to be property of the company in its entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies. (1) In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to ( a )debts provable; ( b )the valuation of annuities and future and contingent liabilities; and ( c )the respective rights of secured and unsecured creditors; as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent: Provided that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen's portion therein, and, where a secured creditor, instead of relinquishing his security and proving his debt, opts to realise his security, ( a )the liquidator shall be entitled to represent the workmen and enforce such charge; ( b )any amount realised by the liquidator by way of enforcement of such charge shall be applied rateably for the discharge of workmen's dues ; and ( c )so much of the debt due to such secured creditor as could not be realised by him by virtue of the foregoing provisions of this proviso or the amount of the workmen's portion in his security, whichever is less, shall rank pari passu with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale in the light of this section as in Yellamma's case, AIR 1969 Mys 280; [1970] 40 Comp. Cas. 466 or, in case of any dispute about the security in his favour, he could go to civil court, take a decree and realise the amount due to him and could have approached the company court for appropriation of the balance, if any, due to him. But, now, under the proviso to section 529, the security is governed by a legal fiction. The security of every secured creditor, whether he relinquishes his security and opts for realising the same outside the winding up court, shall be deemed subject to a part passu charge in favour of the workmen to the extent of the workmen's portion therein, and, where a secured creditor, instead of relinquising his security and proving his debt, opts for realising the security, the claims of the workmen prop up for consideration and will have to be adjudicated. At that time the liquidator is authorised to represent the workmen and enforce such charge, that is to say, by a legal fiction, a charge is created in favour of the workmen on the property secured to the secured creditor and that charge created in favour of the workmen will have to be enforced by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rkers whose labour and effort constitute an invisible but easily perceivable part of the capital of the company are not deprived of their legitimate right to participate in the product of their labour and effort. It is accordingly proposed to amend sections 529 and 530 of the Companies Act, and also to incorporate a new section in the Act, namely, section 529A, vide clauses 4, 5 and 6 of the Bill." In Thomson v. Lord Clanmorris [1900] 1 Ch. 718 Lord Lindley M.R. said (at page 725): "...in construing any other statutory enactment regard must be had not only to the words used, but to the history of the Act, and the reasons which led to it being passed. You must look to the mischief which had to be cured as well as to the cure provided." The argument of Mr. Nandeeswar is that this court should adopt a construction which should not go beyond the reasons given for the amendment to section 529(1) and the limited purpose of the proviso to section 529(1) is to ensure that the workers would get their legitimate dues in pari passu to the rights of the secured creditors and, accordingly, notwithstanding the language of the first proviso to section 529(1), when the secured creditor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t proviso to section 529(1) of the Act. The illustration to section 529 brings out the meaning of the first proviso to section 529(1) clear. The illustration reads: "The value of the security of a secured creditor of a company is Rs. 1,00,000. The total amount of the workmen's dues is Rs. 1,00,000. The amount of the debts due from the company to its secured creditors is Rs. 3,00,000. The aggregate of the amount of workmen's dues and of the amounts of debts due to secured creditors is Rs. 4,00,000. The workmen's portion of the security is, therefore, one-fourth of the value of the security, that is Rs. 25,000." So, in every case which attracts the proviso to section 529(1), there should be determination of the workmen's portion in the security and also the secured creditors' portion in the security. Such determination will have to be done, in my view, regard being had to section 529A, simultaneously or more or less at the same time by the company court while adjudicating the claim of all persons under section 446(2)( b ) of the Act. In this connection, certain observations made by the learned company judge in Karnataka Bank Ltd. v. Craft Tools P. Ltd. [1986] 60 Comp. Cas. 75 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of recovering moneys due to him. Hence, even when a secured creditor wants to exercise the option given to him by law to stand outside the insolvency and work out his rights, it cannot be said that the winding up court is totally powerless or has no jurisdiction whatever in respect of him or in respect of the property over which he claims a certain right by way of security. In regard to such properties, questions may and do often arise either in respect of priorities or in respect of any other matter whatsoever, which may relate to the winding up of the company's affairs." In my view, this ruling in Yellamma's case, AIR 1960 Mys 280; [1970] 40 Comp. Cas. 466 squarely supports the view that I have taken now on the proper construction of section 529 as amended. That means to say, even if the secured creditor stands outside the winding up, the company court does not lose its jurisdiction under section 446(2)( b ) or ( d ) over such secured creditor. All that the expression "standing outside the winding up" means is that the secured creditor is given an option to realise the security either by private sale if he has power to do so or through court sale if there is any d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sary for giving effect to section 529A and also to the first proviso to section 529(1) is that the workmen should be represented by the official liquidator for the enforcement of the charge in their favour. Therefore, the absence of the statement of affairs in all these applications but one or the sum mentioned as a liability in Application No. 614 of 1988 towards wages of the workmen is not a relevant factor to be taken into consideration for giving effect to section 529A. The first proviso to section 529(1) is clear, i.e. , the official liquidator must represent the workmen and enforce the charge in favour of the workmen in the security of the secured creditor. Accordingly, the official liquidator must take the necessary steps to file the claim of the workmen before this court before the rights of KSFC as a secured creditor are determined and the priorities under section. 529A are worked out. The value of the security of the secured creditor shall be computed after ascertaining the value of the workmen's portion under the illustration to section 529. For this purpose, the official liquidator must take the necessary steps to issue notices to the workmen if there are any in thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inconsistent therewith contained in any other law for the time being in force or in the memorandum or articles of association of an industrial concern or in any other instrument having effect by virtue of any law other than that Act, but save as aforesaid, the provisions of that Act shall be in addition to, and not in derogation of, any other law for the time being applicable to an industrial concern, the action taken by the corporation in the instant case by taking possession of the movable and immovable assets must be held to be valid and legal and therefore, they have the right to dispose of them under section 29 of the Act, the result will be disastrous. The question of section 46B of the Act coming into operation will arise only when there is repugnancy between the provisions of the State Financial Corporations Act, 1951, and any other law. If there is no repugnancy, or conflict, section 46B has no role to play. We cannot read repugnancy where none exists and then credit the corporation in the instant case as having acted lawfully. Section 29(1) of the Act reads as follows: - 'Where any industrial concern, which is under a liability to a financial corporation under an agr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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