TMI Blog2001 (4) TMI 825X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 64 of 1997, but contending that the company court ought have held that the sale in favour of BPL Ltd., was void even on the ground of irregularities in the sale. He has also challenged the following observations recorded by the learned company judge in the course of the order : ( i ) that the company and its directors have made every effort to nullify the sale by filing writ petitions repeatedly and such conduct will not entitle them to any indulgence in the hands of the court; and ( ii ) that the process of sale of the assets of the company by KSIIDC and the purchase by BPL is proper and does not call for interference. 1.2 As the ranks of parties differ in the two appeals, for convenience the parties will be referred to as follows : BPL Ltd. (appellant in OSA No. 6 of 1998 and 4th respondent in OSA No. 7 of 1998) will be referred to as purchaser or BPL ; Inter Modal Transport Technology System (Karnataka) Ltd. will be referred to as the company when referred with reference to the period up to the date of order of winding (31-10-1996) and as the company in liquidation when referred with reference in any date subsequent to the order of winding up dated 31-10-1996. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... winding up petition (CP No. 17 of 1989 and connected petitions), allowing the petitions and ordering the company to be wound up under section 20(2). The said order was not passed with reference to the claims of the creditors who filed those company petitions under section 433 of the Companies Act but on the basis of the final opinion dated 26-8-1993 recorded by the BIFR under section 20(1). 6. In the meanwhile, the oral (final opinion) dated 26-8-1993 recommending winding up of the company was challenged by the company before AAIFR in Appeal No. 127 of 1993. The company court was unaware of the pendency of the said appeal when it passed the order of winding up on 25-3-1994. Subsequently, when the pendency of the appeal was brought to its notice, the company court found that it could not have passed the order of winding up, during the pendency of the appeal before AAIFR having regard to the bar contained in section 22(1) of SICA and, therefore, passed an order dated 2-6-1995 recalling the order of winding up dated 25-3-1994 and restoring the winding up petitions to file. 7. The AAIFR dismissed the appeal filed by the company against BIFR s order dated 26-8-1993, by order da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pproval to KSIIDC by letter dated 27-10-1995. In pursuance of it, BPL made a part payment of Rs. 1.64 crore to KSIIDC on 28-12-1995, in addition to the initial payment of Rs. 32 lakh made on 3-9-1994. On receipt of such payment, KSIIDC issued a sale letter dated 28-12-1995 to BPL. By reply dated 28-12-1995, BPL accepting the terms of the sale stipulated in KSIIDC s letter dated 28-12-1995 and the sale was concluded on 28-12-1995. 9. Before BPL could make the balance payment and take delivery, yet another writ petition was filed by the company in WP No. 8025 of 1996, wherein another interim order was granted, staying the sale of assets of the company. However, by subsequent order dated 10-4-1996, the learned single judge vacated and discontinued the interim stay. The said order dated 10-4-1996 was challenged in WA No. 1825 of 1996. The said appeal was rejected on 28-6-1996. WP No. 8760 of 1994 filed earlier was dismissed on 25-9-1996 and the appeal filed by the company against the said order in WA No. 9161 of 1996 was dismissed on 12-9-1997. Thereafter, yet another petition was filed by Raj Kotak (ex-director) in WP No. 34402 of 1996, which is stated to be pending, wherein an in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther directions while rejecting the application : "( i )Fresh steps should be taken to sell the assets of the company jointly by the KSIIDC and the official liquidator, fixing the minimum bid amount at Rs. 2.83 crore plus interest (at the prevailing lending rate of KSIIDC) on Rs. 2.8 crore from the respective dates of payments by BPL to the date of resale. ( ii )If no offers exceeding the said minimum bid amount is received, the sale of the assets of the company to BPL shall be confirmed at Rs. 2.8 crore. ( iii )The official liquidator shall secure appropriate directions from the company court for fresh sale and comply with the procedure prescribed and complete the sale within two months. ( iv )The third respondent (ex-director of company) shall bear the expenses to be incurred by KSIIDC and official liquidator; for conducting the fresh sale." 12. Feeling aggrieved, BPL, which purchased the assets from KSIIDC has filed OSA No. 6 of 1998. In brief the contentions of appellant are : ( a )Having regard to the order dated 26-8-1993 of the BIFR under section 20(4) permitting the sale and the subsequent approval of the sale by the BIFR by order dated 27-12-1995, and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he winding up and enforce his security by sale without intervention of court. But, after the insertion of proviso to sections 529(1) and 529A, a secured creditor who wants to stand outside the winding up and dispose of the secured assets, will have to take permission of the company court and has to act in association with the official liquidator, who will represent the workmen. Section 20(4) should be read harmoniously with sections 529, 529A, 433, 441(2) and 537 of the Companies Act and if so done, it will be seen that even if there is an order under section 20(4), the requirement of obtaining the leave of company court cannot be dispensed with. ( iii )Any sale by the secured creditor, during the pendency of winding up petition, without obtaining the permission of the company court and without associating the official liquidator will be void, vide decision of the Bombay High Court in Maharashtra State Financial Corpn. s case ( supra ) and the decision of a Division Bench of this court in Karnataka State Industrial Investment Development Corpn. Ltd. s case ( supra ). 15. The learned counsel for appellant in OSA No. 7 of 1998 contended that there were several procedura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng up of the sick industrial company and may proceed and cause to proceed with the winding up of the sick industrial company in accordance with provisions of the Companies Act, 1956 (1 of 1956). (3) For the purpose of winding up of the sick industrial company, the High Court may appoint any officer of the operating agency, if the operating agency gives its consent, as the liquidator of the sick industrial company and the officer so appointed shall for the purpose of the winding up of the sick industrial company be deemed to be, and have all the powers of, the official liquidator under the Companies Act, 1956 (1 of 1956). (4) Notwithstanding anything contained in sub-section (2) or sub-section (3), the Board may cause to be sold the assets of the sick industrial company in such manner as it may deem fit and forward the sale proceeds to the High Court for orders for distribution in accordance with the provisions of section 529A, and other provisions of the Companies Act, 1956 (1 of 1956)." 17.1 Section 22 of the SICA provides for suspension of legal proceedings, contracts, etc. Sub-section (1) provides, inter alia, that where an inquiry under section 16 is pending or an app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any is entirely governed by the provisions of the SICA. On the other hand, once an order of winding up is made by the High Court under section 20(2), acting on the opinion of the BIFR under section 20(1), the control and jurisdiction over the company, its affairs and assets pass over to the High Court and the BIFR ceases to have any power to pass any orders or give any directions. 19. Sub-section (4) of section 20 provides that notwithstanding anything contained in sub-section (2) or sub-section (3) of section 20, the BIFR may cause to be sold the assets of the sick industrial company in such manner as it may deem fit and forward the sale proceeds to the High Court for orders for distribution in accordance with the provisions of section 529A and other provisions of the Companies Act. That is, even though the power to order winding up and proceed with the winding up of the sick company on the basis of the opinion of the BIFR, is entrusted to the High Court under section 20(2), the BIFR is entrusted with the power to cause to be sold, the assets of the sick industrial company in such manner as it deems fit, subject only to the condition that the sale proceeds should be forwarded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 20(2). 21.1 Section 537 provides for avoidance of certain attachments, execution, sales, etc., in winding up by or subject to supervision of court. Sub-section (1) of section 537 provides that where any company is being wound up by or subject to the supervision of the court, any sale held without the leave of the court, of any of the properties or effects of the company after commencement of the winding up shall be void. 21.2 Having regard to the provision for relating back contained in section 441(2), the words commencement of the winding up occurring in section 537(1) refers to the time of presentation of the petition for winding up and not the date of order of winding up, where the winding up order is passed under section 433. The intention of relating back the winding up of a company to the date of presentation of the petition for winding up is to avoid dispositions of the property, made after presentation of the petition for winding up. Therefore, when an order of winding up is made, even though the actual process of winding up starts from the date of the order, the winding up of the company is deemed to commence from the date of filing of the petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the permission of the BIFR under section 20(4), there is no need to seek or obtain the leave of the company court or associate the official liquidator in the sale process. 21.5 In this case, the order of winding up though passed in a proceedings initiated by creditor under section 433 is not an order of winding up under section 433. The order of winding up is made under section 20(2). Therefore, the sale by KSIIDC in favour of BPL, which is before the date of winding up order under section 20(2) is valid and unaffected by such order of winding up. Re. Point (2) 22. In fact second question does not survive in view of our finding on Point (1). However, as elaborated arguments were addressed on this aspect and as the learned company judge, has decided the matter with reference to this issue, we will examine the question. 23. The position of a secured creditor who stands outside the winding up proceedings and realises his security was considered in M K Ranganathan s case ( supra ). The Supreme Court held that a secured creditor can stand outside the winding up and realise his security without intervention of the court, by effecting the sale of the mortgaged proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditor to sell the property acting jointly with the official liquidator under the supervision and in accordance with the directions of the company court and further directed that the sale proceeds shall be deposited in the court and then distributed in accordance with the directions of the company judge. 25. The decision of the Division Bench of this court in International Coach Builders Ltd. s case ( supra ) is followed in Gujarat State Finance Corpn. v. Official Liquidator, Himachal Tools (P.) Ltd. [1996] 87 Comp. Cas. 658 (Guj.). The Gujarat High Court has also taken the view that the amendment of section 529 and insertion of section 529A, by amending Act No. 35 of 1985 has not altered the position of a secured creditor, as envisaged under section 28(6) of the Insolvency Act, 1920 read with section 529(1)( c ), to stand outside the winding up and realise the security without intervention of the court. It, however, directed that from out of the sale proceeds realised by GSFC, proportion of workmen s dues shall be realised by the official liquidator from GSFC in view of the proviso to section 529(1). 26. In Aryavarta Plywood Ltd. v. Rajasthan State Industrial Inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the secured creditor. What are the rights of a pari passu charge holder ? Can a mortgagee exercise his power of sale without the consent of a pari passu charge holder ? ....It is, therefore, necessary that when a sale of a mortgaged property takes place, both the charge holders should join in the sale. The same ratio, in our view, would substantially apply to two chargeholders who have a pari passu charge for the recovery of their dues. It may be that unlike a co-mortgagee, a pari passu chargeholder can receive payment of his mortgage debt from the mortgagor and release his charge independently. But when it comes to realise the security, both the pari passu chargeholders must join or realise the security simultaneously. The sale proceeds are required to be divided proportionately between them in the same proportion as their dues. Hence, when a sale takes place, it is for the simultaneous recovery of claims of all pari passu charge holders. ". . . Also, the statutory right which is given to financial corporation under section 29 to sell the property has to be exercised consistently with the rights of a pari passu charge holder in whose favour a statutory char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n given to KSIIDC under section 29 of the SFC Act has to be exercised consistently with the right of pari passu charge holder who in the case of a company under liquidation, would be the official liquidator, whose consent can be subject to sanction of the court. Therefore, the statutory right given to the appellant-KSIIDC under section 29 of the SFC Act being required to be exercised consistently with the right of pari passu charge holder in whose favour statutory charge is created by the proviso to sub-section (1) of section 529 of the Act when the company is in liquidation, and the said pari passu charge holder being official liquidator who is required to act under the directions of the court, leave of the court would be necessary, and any sale without such leave would be void under section 537 of the Act. . . ." 28. In Andhra Pradesh State Financial Corpn. v. Official Liquidator AIR 2000 SC 2642, the Supreme Court considered the challenge by State Finance Corporation to the order of the learned company judge of the Andhra Pradesh High Court imposing the following conditions while granting permission to the State Financial Corporation to stay outside the liquidation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avartha Plywood Ltd. s case ( supra ) that the right of the secured creditor to stand outside the winding up and realise his security is unaffected by section 529(1) proviso and section 529A and, therefore, the secured creditor can sell the secured assets in his possession, without the leave of the company court and without associating the official liquidator, after an order of winding up. (2) The second view is expressed in International Coach Builders Ltd. s case ( supra ) that there is no change in the legal position expressed by the Supreme Court in M.K. Ranganathan s case ( supra ) even after amendment to section 529(1) and insertion of section 529A by Act 35 of 1985 except subjecting the sale proceeds realised by the secured creditor to a pari passu charge in favour of the workmen s dues as provided in the proviso to section 529(1) and, therefore, the right to secured creditor to stand outside the winding up and realise his security remains unaffected and, therefore, there is no need to shift the power of sale from the secured creditor to the official liquidator, when an order of winding up is made. In the case as the sale was with the permission of the company court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to sale of the assets of the company, by the secured creditor, during the pendency of a winding up proceedings, that is before the order of winding up, been considered. 32. Section 529 (corresponding to section 229 of the Companies Act, 1913) provides that in regard to the rights of secured and unsecured creditors, in the winding up of an insolvent company, the rules which are applicable to the estates of persons adjudged insolvent, under the law of insolvency, will prevail. The provisions of the Provincial Insolvency Act, 1920 governs the law of insolvency. Sections 27 and 28 of the said Act, relate to order of adjudication and effect of an order of adjudication. Sub-section (6) of section 28 of the Insolvency Act provides that an order of adjudication shall not affect the power of any secured creditor to realise or otherwise deal with his security, in the same manner as he would have been entitled to realise or deal with it, if section 28 had not been passed. Thus, it has always been recognised that the secured creditor can stand outside the winding up and if the law and/or terms of mortgage so provided, realise his security without the intervention of court, by effecting a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed, any sale by the secured creditor standing outside the winding up proceedings, before passing of the winding up order will not be rendered void, on the passing of the order of winding up. The only effect of proviso to section 529(1) is that on an order of winding up being made, the official liquidator representing the workmen having pari passu charge for their dues, will be entitled to apportionment of the sale proceeds, from the secured creditor in accordance with section 529. Re. Point (3) 34. It is contended that though, KSIIDC has obtained a valuation with regard to properties at Rs. 3.03 crore, the third respondent had obtained a valuation report valuing the assets at more than Rs. 4 crore, and the assets of the company have been sold in the year 1995 in pursuance of an advertisement given in March 1994 and there were violations in terms of sale in regard to manner of payment of sale price. Raj Kotak has filed OSA No. 7 of 1998 contending that the procedure adopted by KSIIDC in holding the sale in irregular and that has resulted in a sale at a price far less than the market price. The next question that arises for consideration is whether the sale should be i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company has been properly done in para 14 of his order. A reading of para 14 is entirely shows that the said statement is not a finding by the company court, but is the reference to a contention of KSIIDC and BPL, to that effect. Hence, we do not find any merit in OSA No. 7 of 1998. 38. As far as workers dues are concerned, we find that there are adequate safeguards. It is not disputed by KSIIDC that the sale is in terms of the permission granted by the BIFR under section 20(4) which clearly provides that the entire sale proceeds will have to be forwarded to the High Court for distribution in accordance with provisions of section 529A and other provisions of the Companies Act. Even the AAIFR, while confirming the order of the BIFR in appeal, has made it clear that the amount realised shall have to be deposited with this court for distribution as per law. It is stated that the sale realisation of Rs. 2.80 crores is with KSIIDC. KSIIDC will have to deposit the sale realisation with the company court for being dealt in accordance with section 20(4) read with the proviso to section 529(1). On the facts and circumstances, interest of justice will be served if KSIIDC is d ..... 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