TMI Blog1998 (1) TMI 406X X X X Extracts X X X X X X X X Extracts X X X X ..... nd over the assets of the company to the second respondent pursuant to the sale of the assets of the company made in favour of the second respon-dent. 2. The facts, which are relevant for the disposal of this application, may be briefly stated as hereunder: ( a )Pradeep Industrial Corporation instituted proceedings in Company Petition No. 17 of 1989, under sections 433( e ) and 433( f ) read with section 439 of the Companies Act, 1956 ( the Act ) for winding up of the company on 21-1-1989, and on the said company petition, this court directed notice on 16-2-1989, and thereafter the company came to be wound up by this court by its order, dated 25-3-1994. Subsequently, the said order was recalled on 2-6-1995. ( b )It is on record that the Corporation had in all, advanced a sum of Rs. 76 lakhs to the company on the security of the assets of the company, which have been mortgaged/hypothecated to the Corpo-ration. Since the company failed to repay the loan taken from the Corporation as per the terms and conditions of the loan advanced and committed default in payment of the loan advanced by the Corporation and the company was due in sum of Rs. 1,46,36,070 as on 15-9-1989, to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Annexure-H, dated 26-8-1993. Pursuant to the approval accorded by the BIFR, the Corporation had issued sale letter, dated 28-12-1995, to the second respondent, a copy of which has been produced as Annexure-R to this application. The second respondent, by its letter, dated 28-12-1995, accepted all the conditions stipulated in the letter, Annexure-R, issued by the Corporation. Thereafter, the second respondent, as per the terms and conditions of the sale, had paid the entire sale consideration of Rs. 2 crores and 80 lakhs to the Corporation. ( c )Aggrieved by the order Annexure-H, dated 26-8-1993, passed by the BIFR, the company had filed an appeal before the appellate authority as provided under the SIC Act and the appellate authority, by its order, dated 25-4-1995, dismissed the appeal. This court, by its order dated 25-4-1995, recalled the order dated 25-3-1994, winding up the company on the ground that the appeal filed by the company against the order Annexure-H was pending consideration before the appellate authority on the date of the winding up order made by this court on 25-3-1994. Subsequently, on the dismissal of the appeal by the appellate authority on 25-4-1995, thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by this court by its order, dated 17-9-1997. Further, during the pendency of this application, by means of order, dated 13-8-1997, this court had directed the applicant in Company Application No. 109 of 1997, i.e., the third respondent in this application, to furnish the valuation report of the company in respect of the assets sold by the company on the date of the sale either from an approved valuer or a Government valuer. Pursuant to the said order, the third respondent has filed three valuation reports, dated 21-8-1997, 1-3-1993, and 11-7-1996, given by one Sri R. Doreswamy, chartered engineer and approved valuer. As per the valuation report, dated 21-8-1997, the total value of the assets of the company as on April-September, 1994, was in a sum of Rs. 5,56,00,000. As per the valuation report, dated 1-3-1993, the total value of the assets of the company as on March, 1993, was in a sum of Rs. 4,87,50,000. As per the valuation report, dated 11-7-1997, the total value of the assets of the company as on 1-10-1995, was in a sum of Rs. 6,24,50,000. 3. I have elaborately heard Sri Ashok S. Hinchigeri, the learned counsel for the applicant, Sri Thomas V. Peter, the learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the provisions of the SIC Act and of any rules or scheme made thereunder, shall have overriding effect notwithstanding anything inconsistent therewith contained in any other law except the provisions of the Foreign Exchange Regulation Act, 1973, and the Urban Land (Ceiling and Regulation) Act, 1976, or the memorandum or articles of association of an industrial company or in any other instrument having effect by virtue of any law other than the SIC Act, etc. Therefore, relying upon the said provisions, they submitted that since the assets of the company were sold after giving wide publicity and the offer made by the second respondent, which was the highest offer, having been accepted by the Corporation, and the same also having been approved by the BIFR, there is absolutely no justification to nullify the sale or prevent the Corporation from handing over the assets of the company to the second respondent as per the terms and conditions of the sale. Thirdly, they submitted that since the sale of the assets of the company has been made prior to the order of winding up made on 31-10-1996, which has been approved by the BIFR, the provisions contained in the Act, which requires the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... econd respondent. He also submitted that it is well settled that in a court sale or a distress sale, normally, the real market value in respect of an asset is not secured and that cannot be a ground to nullify the sale. The learned counsel, in support of the submissions made by them relied upon the following decisions: (1) M.K. Ranganathan v. Government of Madras [1955] 25 Comp. Cas. 344 (SC), (2) Damji Valji Shah v. Life Insurance Corporation of India [1965] 35 Comp. Cas. 755 (SC), (3) Kayjay Industries (P.) Ltd. v. Asnew Drums (P.) Ltd. AIR 1974 SC 1331, (4) Aryavarta Plywood Ltd. v. Rajasthan State Industrial Investments Corpn. Ltd. [1991] 72 Comp. Cas. 5 (Delhi), (5) Internation Coach Builders Ltd. v. Karnataka State Financial Corpn. [1994] 81 Comp. Cas. 19 (Kar.), (6) Union of India v. Krishna Mills Ltd. [1994] 81 Comp. Cas. 50 (Raj.), (7) Central Bank of India v. Elmot Engg. Co. (P.) Ltd. [1994] 81 Comp. Cas. 13 (SC), (8) Gujarat State Financial Corpn. v. Official Liquidator, Himalaya Tools India (P.) Ltd. [1996] 87 Comp. Cas. 658 (Guj.), (9) Industrial Credit Investment Corpn. v. Srinivas Agencies [1996] 86 Comp. Cas. 255 (SC), (10) S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the Supreme Court in the case of M.K. Ranganathan ( supra ), was rendered before the introduction of sections 529 and 529A in the Act. In the case of Srinivas Agencies ( supra ), the Supreme Court has only followed the principle in M.K. Ranganathan s case ( supra ). They submitted that, on the other hand, the principle laid down by the Bombay High Court in the case of Maharashtra State Financial Corpn. v. Official Liquidator [1995] 82 Comp. Cas. 342 (Bom.) Fully applies to the facts of the present case. They further pointed out that the decision of the Bombay High Court in the case of Maharastra State Financial Corpn. ( supra ), has been approved by the Division Bench of this court in the case of Karnataka State Industrial Investment Development Corpn. Ltd. v. Shivmoni Steel Tubes Ltd. [1998] 94 Comp. Cas. 1 (Kar.). They further submitted that in the case of Shivmoni Steel Tubes Ltd. ( supra ), the Division Bench of this court, after referring to the case of International Coach Builders Ltd. ( supra ), and in the light of the direction given by the Supreme Court in the said case, has clearly held that the Supreme Court in M.K. Ranganathan s case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ituted, 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. (3) Any suit or proceeding by or against the company which is pending in any court other than that in which the winding up of the company is proceeding may, notwithstanding anything contained in any other law for the time being in force, be transferred to and disposed of by that court. (4) Nothing in sub-section (1) or sub-section (3) shall apply to any proceeding pending in appeal before the Supreme Court or a High Court." "456. Custody of company s property. (1) ** ** ** (2) All the property and effects of the company shall be deemed to be in the custody of the court as from the date of the order of the winding up of the company." "529. Application of insolvency rules in winding up of insolvent companies. (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 liabiliti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 pari passu with such dues; shall be paid in priority to all other debts. (2) The debts payable under clause ( a ) and clause ( b ) of sub-section (1) shall be paid in full, unless the assets are insufficient to meet them in which case they shall abate in equal proportions." "537. Avoidance of certain attachments, executions, etc., in winding up by or subject to supervision of court. (1) Where any company is being wound up by or subject to the supervision of the court ( a )any attachment, distress or execution put in force, without leave of the court, against the estate or effects of the company, after the commencement of the winding up; or ( b )any sale held, without leave of the court, of any of the properties or effects of the company after such commencement; shall be void. (2) Nothing in this section applies to any proceedings for the recovery of any tax or impost or any dues payable to the Government." ( b ) Sections 20 and 32(1) of the SIC Act, read as hereunder : "20. Winding up of sick industrial company. (1) Where the Board, after making inquiry under section 16 and after consideration of all the relevant facts and circumstances and after giving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Board without any recommendation by the specified authority referred to in that section, apply in relation to such amalgamation as they apply in relation to the amalgamation of the a company owning an industrial undertaking with another company." 8. Now, let me examine the question that would fall for my consideration in this application. 9. No doubt, the decision of this court in the case of International Coach Builders Ltd. ( supra ), and the decision of the Gujarat High Court in the case of Official Liquidator, Himalaya Tools (India) (P.) Ltd. ( supra ), rendered following the decision of this court in the case of International Coach Builders Ltd. ( supra ), relied upon by the learned counsel for the applicant and the second respondent, support their contention that the secured creditor is entitled to stand outside the winding up proceedings and enforce his security and in that view of the matter, even after the amendment of sections 529(1), 529A, leave of the Company Court is not required to be obtained by the secured creditor to enforce his security and bring the assets mortgaged to sale to realise his security. The Gujarat High Court and this court, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bject matter of dispute in the said case without the leave of the court, was not valid and directed for resale of the assets of the company subject to the conditions imposed in the said order, I am unable to accede to the submissions made by Sri Narayana Rao and Ashok Hinchigeri. In the case of Shivmoni Steel Tubes Ltd. ( supra ), this court has followed the decisions of the Bombay High Court in the case of Maharashtra State Financial Corporation ( supra ), wherein the Bombay High Court has considered the principle laid down by the Supreme Court in the case of M.K. Ranganathan ( supra ) and after elaborately discussing the effect of the proviso to section 529(1) and section 529A, which was inserted into the Act by reason of the Companies (Amendment) Act, 1985, has taken the view that though sections 529 and 529A, as amended, do not take away the rights of the secured creditor, since a pari passu charge is created in favour of the dues of the workmen on the rights of the secured creditor, the mortgagee or the secured creditor is required to join the pari passu chargeholder in the sale and he cannot sell the property ignoring the pari passu chargeholder and, therefore, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, page 1217, also defines pari passu as: with equal steps, that is to say, proceeding side by side at the same pace . Therefore, the rights of an official liquidator representing the workmen run equally with the rights of the secured creditors. In the case of co-mortgagees, the courts have held that one co-mortgagee cannot sell or institute any proceeding for the sale of the mortgaged property without joining the other co-mortgagees. If the other co-mortgagees are not willing to join as plaintiffs, they should be joined as defendants. This is because the mortgaged security is one, and it must be realised as a whole by a common sale. Thus, in the case of Mohammed Ismail Maracair v. Doraisami Mudaliar AIR 1958 Mad. 621, the court considered the case of co-mortgagees and held as a proposition of law that a mortgage is one and indivisible in regard to the amount and security. The court said that no suit can, therefore, be filed to enforce a mortgage which entails the disintegration of either the amount or the security. That, therefore, normally, all the mortgagees should join. But if some of them refuse to join, they should be included as defendants. Such mortgagees-defe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orations Act and section 529 of the Companies Act. Section 29 of the State Financial Corporations Act merely confers certain powers on the mortgagee. It does not cover situation where there is a pari passu chargeholder. Therefore, the power to sell which is given to a financial corporation under section 29 has to be exercised consistently with the right of a pari passu chargeholder. Such a right can be exercised with the consent of the pari passu chargeholder or on orders of the court after making him a party to the proceedings to enforce the security. Since the chargeholder is the official liquidator, his power to consent is subject to the sanction of the court." (p. 356) 10. As stated above, the principle extracted above, laid down by the Bombay High Court has been approved by the Division Bench of this court. Further, this court, keeping in view that an appeal against the earlier decision of this court in the case of International Coach Builders Ltd. ( supra ) was admitted, and the Supreme Court, while granting special leave to appeal, has directed the secured creditor to act jointly with the official liquidator, under the supervision and in accordance with the direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... theless, by the time the appellant completed the sale transaction in favour of respondent No. 7 on 30 September, 1995, the winding up order had already been passed on 8 September, 1995, and the official liquidator had already come into the picture as liquidator of the company under section 449 of the Act. There were workmen s dues to the tune of Rs. 80 lakhs. Because of the proviso to sub-section (1) of section 529 of the Act, the KSIIDC is not the only secured creditor entitled to sell the security by invoking section 29 of the SFC Act. The KSIIDC has to contend with the pari passu charge in favour of the workmen s dues, the workmen being represented by the official liquidator. The official liquidator would thus be an interested party in the sale of security. The proviso to sub-section (1) of section 529 as also section 529A of the Act, having created pari passu charge in favour of the workmen, the same would affect the right of the appellant, KSIIDC, to sell the security directly by itself by invoking section 29 of the SFC Act. The appellant is required to join the official liquidator in the sale, and the property cannot be sold ignoring the pari passu chargeholder. Similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is supplied] 11. This court, in paragraph 16 of the judgment, has also considered the decision of the Supreme Court in the case of M.K. Ranganathan ( supra ) and has observed as follows: "Sri Gopal Hegde relied upon a decision of the Supreme Court reported in M.K. Ranganathan v. Government of Madras [1955] 25 Comp. Cas. 344 (SC): in this regard. The Supreme Court was dealing with the provisions of section 232 of the Indian Companies Act, 1913, analogous to the provisions of section 537 of the Act. It was held therein that the secured creditor was outside the winding up and could realise his security without leave of the court. This decision of the Supreme Court certainly supports the case of the appellant, KSIIDC. But the said decision had no provision corresponding to sections 529 and 529A of the Act. Consideration of section 537 of the Act (section 232 of the Indian Companies Act, 1913), in the light of sections 529 and 529A, therefore, did not arise before the Supreme Court in the said decision." [Emphasis supplied] 12. As can be seen from the discussion made by this court in the case of Shivmoni Steel Tubes Ltd. ( supra ) following the decision of the Bomba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of the Act and, in that event, the provisions of the SIC Act would prevail over the provisions of the Act as contended by Sri Narayana Rao and Sri Ashok Hinchigeri. 14. I am of the view that there is no merit in the above submission of learned counsel. Sub-section (1) of section 10 of the SIC Act provides for enquiry being conducted by the BIFR and it confers power on the BIFR to recommend to the High Court for winding up of the company under certain circumstances set out in the said provision. Sub-section (2) of section 20 of the SIC Act confers power on the High Court to wind up the sick unit on the basis of the recommendation made by the BIFR. Sub-section (3) of section 20 confers power on the High Court to appoint a liquidator for the purpose of winding up of such a company. However, sub-section (4) of section 20 of the SIC Act was relied upon by Sri Rao and Sri Hinchigeri in support of their plea that the BIFR has absolute right to get the assets of the company sold and, therefore, since the sale in question of the company was caused to be effected by the BIFR, leave of the Company Court was not required to be secured. No doubt, sub-section (4) of section 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et the assets of such company sold, the question is whether it is not necessary in view of the pendency of the proceedings before the Company Court, to secure leave of the court for such a sale? The power to grant permission for sale of the assets of the court in respect of a company, in respect of which winding up proceedings have commenced, is given to the court. Under these circumstances, there cannot be any doubt that the court will take into consideration not only the interest of the secured creditor, who is entitled to enforce his security by standing outside the winding up proceedings, but also the interest of the workmen, who are also given substantial rights for which a charge is created on the security of the secured creditor and also various other creditors of the company. If a sale is to be caused by the BIFR in exercise of the power conferred under sub-section (4) of section 20, the BIFR may be primarily guided by the interest of the secured creditor only. Under these circumstances, while I am of the view that in view of sub-section (4) of section 20 of the Act, the BIFR has the undoubted right to get the assets of a sick industrial unit sold either during pendency of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in conflict with that of the liquidator, as was acknowledged in Karamelli Barnett Ltd., In re [1917] 1 Ch 203. We feel no difficulty in stating that in case of such conflict, the interest of the liquidator has to receive precedence over that of the receiver inasmuch as the former looks after the interest of a large segment of creditors along with that of workmen, whereas the latter confines his concern to the interest of the secured creditor on whose approach the receiver has been appointed . . . ." (p. 260) [Emphasis supplied] 15. It is, therefore, not possible to take a view that merely because the BIFR consists of highly responsible and reputed members and the secured creditor also would be interested in securing a high price, always a fair price will be secured in respect of the assets of the company, caused to be sold by the BIFR, as contended by the learned counsel for the Corporation and respondent No. 2. 16. Therefore, in the light of the above discussion, I am of the view that there is no conflict between the provisions contained in sub-section (4) of section 20 and the provisions contained in the Act. In fact, the view taken by the Division Bench of this cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18. Section 537(1)( b ) of the Act provides that when a company is being wound up by or subject to the supervision of the court, any sale held, without leave of the court, of any of the properties or effects of the company after such commencement is void. Therefore, a combined reading of sub-section (2) of section 441 and clause ( b ) of sub-section (1) of section 537 of the Act, makes it clear that even in cases where winding up petitions have been presented, if the sale of the assets of the company is made, such sale would be void even though there is no order of winding up. 19. Insofar as the contention advanced on behalf of the applicant and the second respondent that [since] every effort was made by the company and its director to get the sale of the assets of the company nullified by repeatedly filing writ petitions before this court, and this court having rejected the writ petitions, it must be held that the sale of the assets of the company has been properly done and, therefore, the applicant is entitled to deliver the assets of the company to the second respondent pursuant to the sale held, is concerned, it is no doubt true that every effort was made by the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to sell the assets of the company, which are mortgaged/hypothecated to the Corporation, jointly by the Corporation and the official liquidator, the minimum sale price/bid amount that has to be fixed must be at least Rs. 3,00,000 (rupees three lakhs) more than Rs. 2,80,00,000 (rupees two crores and eighty lakhs), for which the assets of the company were sold to the second respondent, plus the interest that would accrue on the said amount taking into consideration the various dates of deposit made by the second respondent at the rate which is being charged by the Corporation. Further, if no one offers to purchase the assets of the company exceeding the minimum bid amount, referred to above, the assets of the company, which are already sold to the second respondents shall be confirmed in favour of the second respondent at Rs. 2,80,00,000 (rupees 2 crorers and eighty lakhs) only. The process of sale shall be completed within two months from today, after fully complying with the procedure prescribed. It is also necessary to place on record the submission made by Sri Mallya on behalf of the third respondent, Sri Raj Kotak, that he will bear the expenses for conducting fresh sale, to b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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