TMI Blog1993 (7) TMI 249X X X X Extracts X X X X X X X X Extracts X X X X ..... rted exercise of its powers under section 29 of the State Financial Corporations Act, 1951, i.e., on September 7, 1989, without the leave of the company court. By an order dated March 25, 1986, passed by this court in Company Petition No. 203 of 1985 filed by Indian Textiles ( i.e., the petitioning creditors of the said petition), Ajanta Rubbers Pvt. Ltd. (in liquidation) was directed to be wound up by and under the supervision of this court and the official liquidator attached to this court was appointed as the liquidator of the said company. By virtue of operation of the provisions contained in section 456 of the Companies Act, 1 of 1956, the official liquidator is entitled to the custody and control of all the properties, effects and claims to which the company under winding up is entitled. By virtue of the operation of section 456(2) of the said Act, all the properties and effects of the company are deemed to be in the custody of the company court as from the date of the order for the winding up of the company. The company has its registered office in the State of Maharashtra and its factory at Bharuch in the State of Gujarat. The company had obtained large amounts of fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plication to this court, being Application No. 65 of 1990, for a declaration that the said Corporation is in lawful possession of the mortgaged and hypothecated assets described in exhibits "A" and "B" to the said application and that the said Corporation is entitled to sell or otherwise dispose of and realise their securities and apply the net sale proceeds thereof towards satisfaction of their claim against the company in liquidation. By the said application the said Financial Corporation had sought a direction against the official liquidator to the effect that the official liquidator be directed to allow the Corporation to sell and/or dispose of the said mortgaged and/or hypothecated and/or charged properties and appropriate the sale proceeds thereof towards their claim against the company in liquidation. Unfortunately, the said Application No. 65 of 1990 was dismissed for default by an order passed by Vyas J. on January 28, 1993, and an oral application for restoration of the said Company Application No. 65 of 1990 was refused by this court. It is not known as to whether the Gujarat State Financial Corporation adopted any further proceedings in restoration of the said applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Financial Corporation is entitled to take possession of the mortgaged and hypothecated assets of the company in liquidation without obtaining the leave of the company court by invoking section 29 of the State Financial Corporations Act, 1951, and sell or other wise dispose of the same even though the official liquidator of the company under liquidation is deemed to be in custody of all the assets and properties of the company under liquidation? ( b )Whether the official liquidator is entitled to custody, control and possession of all the assets of the company under liquidation including the assets mortgaged, hypothecated and charged in favour of the State Financial Corporation and dispose of the same keeping the monetary claims of the secured creditors including the State Financial Corporation intact subject to the statutory pari passu charge in favour of the workmen created by operation of law under section 529A of the Companies Act, 1 of 1956? ( c )Whether the Gujarat State Financial Corporation acted illegally in taking possession of the mortgaged and hypothecated assets of the company in liquidation on September 7, 1989, without obtaining the prior leave of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irected to be wound up and the official liquidator is appointed. The State Financial Corporation is not entitled to take action under section 29 of the State Financial Corporations Act or adopt proceedings before the District Court for sale of the securities as contemplated under section 31 of the State Financial Corporations Act, 1951, without obtaining the prior leave of the company court winding up the company. Prior to the insertion of section 529A in the Companies Act, 1 of 1956, it was settled law that a secured creditor could remain outside the winding up of the company and could realise its securities without the intervention of the court. After the insertion of section 529A in the Companies Act, 1 of 1956, this view no longer holds the field. In view of the insertion of section 529A in the Companies Act, 1 of 1956, the workmen have statutory pari passu charge in their favour for their dues along with the secured creditors of the company and the official liquidator is enjoined by law to protect the interest of the workmen. In this view of the matter, the sale of the securities or the distribution of sale proceeds or the apportionment of the amount of sale proceeds cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , for the reasons discussed in the latter part of this order/judgment, I answer the questions formulated above as under: ( a ). . . No ( b ). . . Yes ( c ). . . Yes ( d )( e ) and ( f ) . . As discussed above and as discussed below and as set out in the operative part of this order. A few more facts are required to be stated before discussing the relevant case law cited at the Bar and dealing with the contentions urged. These facts in brief are as under: ( a )By an agreement dated January 16, 1979, the Gujarat State Financial Corporation agreed to advance a term loan of Rs. 30 lakhs to the company. The company created equitable mortgage over its immovable properties consisting of plot of land forming part of Survey No. 185/ 2p, 187/p and 184/p. in GIDC Industrial Estate at Bharuch in the registration of district and sub-district of Bharuch in the State of Gujarat on the footing of a first pari passu charge with the Gujarat Industrial Investment Corporation. The Gujarat State Financial Corporation as well as the Gujarat Industrial Investment Corporation advanced large amounts to the company (under liquidation). ( b )Some time in the year 1984, the Bank of Baroda fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnable on January 29, 1992. No ad interim order was passed by the court at this stage. The said judge's summons (Application No. 41 of 1992) appeared before the court on March 5, 1992. On this day, learned counsel for the Gujarat State Financial Corporation made a statement to the court that the Gujarat State Financial Corporation had already sold and delivered the plant and machinery of the company to Mita Machine and Forbes of Bombay. The said sale is supposed to have been effected by the Gujarat State Financial Corporation on or about December 23, 1991, without the leave of this court. Learned counsel for the Gujarat State Financial Corporation further informed the court that the land and building belonging to the company (under liquidation) was still not disposed of by the Corporation. These facts were recorded by the court in the order sheet of proceedings of the court on March 5, 1992. By my order dated March 5, 1992, I directed the Gujarat State Financial Corporation to maintain status quo in respect of undisposed of assets until further orders. The said order of status quo continues to be in force. The immovable properties of the company consisting of factory, land and buil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustrial concern as well as the right to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation." Section 46B of the State Financial Corporations Act, 1951, reads as under: "The provisions of this Act and of any rules or orders made thereunder shall have effect notwithstanding anything 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 this Act, but save as aforesaid, the provisions of this Act shall be in addition to, and not in derogation of, any other law for the time being applicable to an industrial concern." It is well-settled by the decisions of the apex court and this court delivered prior to the insertion of section 529A in the Companies Act, 1 of 1956, by the Companies (Amendment) Act, 1985, that a secured creditor could remain outside the winding up and realise his securities without the intervention of the court. By section 529A of the Act it was provided for the first time that "Notwithstanding anything contained in an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Courts of Karnataka, Gujarat and Kerala have already taken the view for which the official liquidator is canvassing in these proceedings. Learned counsel for the official liquidator submitted that in any event the Gujarat State Financial Corporation could not invoke section 29 of the State Financial Corporations Act against the official liquidator. Learned counsel for the official liquidator made several submissions at the Bar in support of his main submission that the Gujarat State Financial Corporation had violated sections 456 and 537 of the Companies Act, 1 of 1956. Mr. Majmudar, learned counsel for the former director of the company, Shri Harkisandas Keshavdas Kothari, supported the submissions of Mr. Subramaniam, learned counsel for the official liquidator, and cited several authorities at the Bar. Mr. Merchant, learned counsel for the Gujarat State Financial Corporation, submitted that the State Financial Corporations Act, 1951, was a special Act whereas the Companies Act, 1 of 1956, was a general Act. Mr. Merchant submitted that the provisions contained in the State Financial Corporations Act, 1951, had an overriding effect over the provisions of the Companies Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the industrial concern itself was in charge of and control of assets and not when the industrial concern had lost control over its assets in favour of another like the official liquidator by operation of law. In this case, the High Court construed section 29 of the State Financial Corporations Act, 1951, and held that the Financial Corporation had no right to deprive the official liquidator of his custody or control or deemed custody or control of the assets which had statutorily vested in the liquidator on the passing of the winding up order by operation of law with effect from the date of passing of the winding up order. The judgment of the Supreme Court in the case of M.K. Ranganathan v. Government of Madras [1955] 25 Comp. Cas. 344 ; AIR 1955 SC 604, was in terms cited before the High Court of Karnataka. The High Court distinguished the said judgment and held that the said judgment was not applicable to the situation before the High Court. The situation in this case is identical with the situation in the case before the High Court of Karnataka. I agree with the view taken by the High Court of Karnataka and hold that section 29(1) of the State Financial Corporations Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Companies Act, 1 of 1956, is a salutary provision and the decisions of the apex court or the High Courts in cases decided prior to the insertion of section 529A in the Act cannot be relied upon in a situation where section 529A of the Companies Act, 1 of 1956, is applicable. Mr. J.K. Majmudar, learned Counsel for Shri Harkishandas Keshavdas Kothari, ex-director of the company, relied upon the latest judgment of the High Court of Gujarat in the case of Official Liquidator, Himalaya Tools ( India ) Pvt. Ltd. v. Gujarat State Financial Corporation [1991] 2 Gujarat Law Herald 208. In this case, the official liquidator of the company (under liquidation) had made an application for a direction of the court to the effect that the Gujarat State Financial Corporation be directed to hand over possession of the assets taken charge of to the official liquidator. After surveying a large number of cases cited before the court/s, the High Court of Gujarat formulated its conclusion in para 33 of the judgment. M.B. Shah J. of the High Court of Gujarat held that section 29 of the State Financial Corporations Act did not empower the Financial Corporation to take possession of the prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur High Court in the case of State Industrial and Investment Corporation of Maharashtra Limited v. Maharashtra State Financial Corporation and in the case of Maharashtra State Financial Corporation v. Charan Investment Corporation [1988] 64 Comp. Cas. 102 (Bom). In this case, Bharucha J., as his Lordship then was (now His Lordship of the Supreme Court of India), speaking on behalf of the Division Bench, held that the sale of the assets held by the SICOM in exercise of its power of sale as a secured creditor outside the winding up and without the intervention of the court was not void. The Division Bench held that section 537 of the Companies Act, 1 of 1956, was not applicable to a case where the secured creditor chose to realise his security outside the winding up and without the intervention of the court. In my opinion, after insertion of section 529A of the Companies Act, 1 of 1956, in the statute, the legal position on the subject has undergone a vital change. In my humble opinion, the ratio of the said judgment has no applicability to the proceedings under consideration before the court. Now, by operation of law, a statutory security has been created in favour of the wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on the said amount by adopting separate appropriate proceedings is reserved. ( d )The official liquidator shall investigate the claims of the workmen expeditiously. The application made by learned counsel for Mr. Harkisandas Keshavdas Kothari, ex-director of the company (under liquidation), for taking action against the Gujarat State Financial Corporation under the Contempt of Courts Act, 1971, is rejected. The action of the Gujarat State Financial Corporation, though illegal, does not appear to be in the nature of wilful and deliberate defiance of the orders passed by this court. The impugned action of the Gujarat State Financial Corporation in taking possession of the assets on September 7, 1987, and sale of plant and machinery on or about December 23, 1991, is illegal but not mala fide . If the Gujarat State Financial Corporation does not comply with the orders of this court passed today within the time stipulated, the official liquidator shall be at liberty to make a report to this court for taking action against the Gujarat State Financial Corporation and its officers under the Contempt of Courts Act, 1971. Having regard to the facts and circumstances of the case ther ..... X X X X Extracts X X X X X X X X Extracts X X X X
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