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TMI Blog2003 (3) TMI 529X X X X Extracts X X X X X X X X Extracts X X X X ..... 433 of the Companies Act, 1956 seeking to wind up the company known as International Coach Builders Ltd. Another petition by another creditor was also filed on 2-11-1988. On 10-11-1989, during the pendency of the above petitions before the High Court of Karnataka, the respondent, a Corporation established under the State Financial Corporation Act, 1951 (SFC Act), which was the second charge holder on the assets of the said company, took possession of the mortgaged assets of the said company in purported exercise of its power under section 29 of the SFC Act. On 30-11-1990 the High Court of Karnataka in Company Petition No. 131 of 1988 made an order of winding up of International Coach Builders Ltd. and appointed the Official Liquidator as the Liquidator to take charge of the assets of the said company. On 30-11-1990 the respondent-corporation accepted a bid of Rs. 85 lakhs made by Raheja Development Corporation for sale of the mortgaged assets of the said company, although, to its knowledge, the assets charged were totally valued at an estimated value of Rs. 97 lakhs. Neither the Official Liquidator, nor the Company Court, was in any way involved with the negotiations held by the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order passed by this Court, the application did not survive. M/s. Raheja Development Corporation made an unsuccessful attempt to intervene in Civil Appeal No. 4701/94 by seeking relief therein, but its applications I.A. Nos. 4, 5, 6 & 7 were dismissed. M/s. Raheja Development Corporation appealed against the order of the Company Judge raising similar contentions as urged by the KSFC. The Division Bench dismissed the appeal by taking the same view as the Company Judge. The appellant is before this Court. Civil Appeal No. 6491 of 1995 5. A company known as M/s. Prasad Bakers Pvt. Ltd. borrowed money from the appellant - a State Financial Corporation established in Uttar Pradesh. The repayment of the borrowed money was secured by mortgage of the factory premises and hypothecation of plant and machineries of the said M/s. Prasad Bakers Pvt. Ltd. (the second respondent in the appeal). The second respondent defaulted in repayment of the loan and the appellant called in the money by a notice dated 30th June, 1987. On 18-9-1987 the appellant, in purporting to exercise its power under section 29 of SFC Act, took possession of the mortgaged assets. In the meanwhile, the first responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer of the properties of the company in liquidation, again purportedly under section 29 of the SFC Act. On 20-12-1989 the GSFC handed over possession of the premises of the company in liquidation to M/s. Mahuvawala Trading Company for a consideration of Rs. 8,99,726.52. At no point of time was permission of the Company Court taken, nor was the sale approved by the Company Court. The Company Court on being moved did not find the sale to be wanting in bona fides and declined to set aside the sale, but directed GSFC to deposit the consideration received in court taking the view that the powers under section 29 could not be unilaterally exercised without concurrence of the Company Court. GSFC carried the matter in appeal to the Division Bench which allowed the appeal holding that GSFC as a secured creditor could opt to realise the securities by standing outside the winding up proceedings and neither the liquidator, nor the Company Court, could interfere with the rights of GSFC as a secured creditor once it opted to remain outside the winding up proceedings. The Official Liquidator is in appeal. 8. The common question agitated in all these appeals is : whether the rights of the State F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d firstly, in payment of such costs, charges and expenses and, secondly, in discharge of the debt due to the Financial Corporation, and the residue of the money so received shall be paid to the person entitled thereto. (5) Where the Financial Corporation has taken any action against an industrial concern under the provisions of sub-section (1), the Financial Corporation shall be deemed to be the owner of such concern, for the purposes of suits by or against the concern, and shall sue and be sued in the name of the concern." "31 - (1) Where an industrial concern, in breach of any agreement, makes any default in repayment of any loan or advance or any instalment thereof or in meeting its obligations in relation to any guarantee given by the Corporation or otherwise fails to comply with the terms of its agreement with the Financial Corporation or where the Financial Corporation requires an industrial concern to make immediate repayment of any loan or advance under section 30 and the industrial concern fails to make such repayment, then, without prejudice to the provisions of section 29 of this Act and of section 69 of the Transfer of Property Act, 1882 (4 of 1882) any officer of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e estates of persons adjudged insolvent: Provided that the security if 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 realize his security,- (a )the liquidator shall be entitled to represent the workmen and enforce such charge; (b)any amount realized by the liquidator by way of enforcement of such charge shall be applied ratably for the discharge of workmen's dues; and (c )so much of the debt due to such secured creditor as could not be realized 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 workmen's dues for the purposes of section 529A. 529A - (1) Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company- (a )workmen's dues; and (b)debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of section 529 pari passu wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As a result of the proviso added in section 529, the security of every secured creditor is deemed to be subject or a 'pari passu' charge in favour of the workmen to the extent of the workmen's dues [called 'workmen's portion, as defined in sub-section (3)(c)] therein. It is further provided that, where the secured creditor, instead of relinquishing its mortgage and proving his debt, opts to stand outside the winding up proceedings and realise his security, the Official Liquidator shall be entitled to represent the workmen and enforce such charge and that any amount realised by enforcement of such charge shall be applied ratably by the Official Liquidator for the discharge of workmen's dues. It is true that even the amended proviso does not give the Liquidator an independent right of enforcing the charge by selling the security against which such charge is created. Nonetheless, it creates a 'pari passu' charge in favour of the workmen to the extent of their dues and makes the Liquidator the representative of the workmen to enforce such a charge. By reason of clause (c) of the newly added proviso, so much of the debt due to the secured creditor opting to realise security as could not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under section 29 of the SFC Act. Though the Companies Act may be general law, the provisions introduced therein in 1985 were intended to confer special rights on the workers and pro tanto must be treated as special law made by Parliament. Since the amendments to the Companies Act were made by a later Act of 1985, they would override the provisions of section 29 of SFC Act, 1951. We are unable to accept the contention that the view taken in A.P. State Financial Corpn. case (supra) needs reconsideration. Far from it, we are in agreement with the view expressed therein. 19. The decision of the Bombay High Court in Maharashtra State Financial Corpn's. case (supra) gives weightly reasons as to why when the company is under winding up the SFC to which the assets of the company are charged cannot proceed to realise the security without intervention of the Company Court. We have already noticed that as a result of the amendment to section 529 a pari passu charge to the extent of the workmen's portion is created on the security of every secured creditor when he opts to realize a security by standing outside winding up. 'Pari Passu' means "with, equal steps, equally, without preference" ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der would be a party defendant. Though when the SFC Act was enacted in 1951 it was intended that SFC could act unilaterally, the amendments made to the Companies Act in 1985 have introduced a pari passu charge holder as a co-helmsman of the ship of the SFC, who can neither be ignored nor overridden. In other words, the existence of the pari passu charge holder being represented by the Official Liquidator would necessarily bring in supervision of the Company Court as the Official Liquidator cannot act without directions from and supervision of the Company Court. This is precisely the reason why the judgment of this Court in A.P. State Financial Corpon's case (supra) holds that the statutory right of the SFCs to sell the property under section 29 of the SFC Act is now subject to the provisions of section 529 and section 529A of the Companies Act. The statutory right to sell the property under section 29 of the Act has now to be exercised in tandem with the rights of pari passu charge in favour of the workmen created by the proviso to section 529 of the Companies Act. This Court observed in A.P. State Financial Corpn.'s case (supra) : "The Act of 1951 is a special Act for grant of fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i passu charge-holder over the same security for realising the security. The realization of the security can only be done by both the charge-holders joining and realising the security simultaneously. If a sale takes place, it can only be simultaneously for recovery of the claim of all pari passu charge-holders and sale proceeds are required to be divided proportionately in the same proportion as their dues. 23. In support of their respective contentions, parties have referred to and relied upon judgments of different High Courts. The view taken by the Bombay High Court commends itself to us. The Division Bench of the said High Court pointed out that, like a secured creditor, the official liquidator as a pari passu charge holder cannot independently bring the security to sale ignoring the secured creditor. He must, therefore, either obtain concurrence of the secured creditor for sale and take the Court's sanction, or he can apply for sanction of the Court after notice to the secured creditor. In either event, the Court while granting sanction may impose appropriate conditions and give directions regarding the conduct of the sale, the fixing of the reserve bid, acceptance of the bid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, of the view that the unhindered right hitherto available to the SFCs to realise their security, without recourse to the Court, no longer holds true as the right vested in the official liquidator is a statutory impediment to such exercise and has to be reckoned with. And since the official liquidator can do nothing without the leave or concurrence of the Court, all necessary applications must, therefore, come to the Company Court. 26. We do not really see a conflict between section 29 of the SFC Act and the Companies Act at all, since the rights under section 29 were not intended to operate in the situation of winding up of a company. Even assuming to the contrary, if a conflict arises, then we respectfully reiterate the view taken by the Division Bench of this Court in A.P. State Financial Corpn.'s case (supra). This Court pointed out therein that section 29 of the SFC Act cannot override the provisions of section 29(1) and 529A of the Companies Act, 1956, inasmuch as the SFCs cannot exercise the right under section 29 ignoring a pari passu charge of the workmen. It was observed in the judgment : "Therefore, the power to sell which is given to a financial corporation under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, appears to be non-sequitur. If a secured creditor does not opt to stand outside the winding up but relinquishes his security and proves his debt in the winding up, then there is no doubt that the official liquidator will come into custody of all the assets of the company in liquidation and the distribution of the assets would have to proceed in accordance with the provisions of section 529A of the Companies Act, in which case the secured creditor stands in line as an unsecured creditor. It is only when the SFC as a secured creditor opts to stand outside the winding up and seeks to realise its security that the conflict, if any, can arise. We have already indicated as to who must yield in such a clash of the titans. The fact that the liquidator or the workmen do not have a right independently to enforce the charge, unless the creditor decides to stand outside the winding up, does not make any difference to the situation, in our view. It is not the contention of the SFCs that they do not desire to exercise the option available to them of standing outside the winding up. In fact, it is their contention that as mortgages they have a right to stand outside the winding up and are not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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