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Rajasthan Financial Corpn. Versus Official Liquidator

2005 (10) TMI 280 - SUPREME COURT OF INDIA

Winding up - Overriding preferential payments - Held that:- The directions issued by the company court are in the interest of all the creditors and are well within its jurisdiction. But as finding merit in the submission that the company court was not justified in not ordering a fresh valuation of the properties. Having regard to the lapse of time, we are satisfied that a fresh valuation is necessary thus direct the company court to get a fresh valuation done by a valuer from the panel of valuer .....

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ellant No. 1, The Rajasthan Financial Corporation, is a corporation constituted under section 3 of the State Financial Corporations Act, 1951 (hereinafter referred to as the SFC Act ). Appellant No. 2, the Rajasthan State Industrial Development and Investment Corporation Limited, is a deemed financial institution by virtue of exercise of power by the Central Government under section 46 of the SFC Act. The appellants are the secured creditors of M/s. Vikas Woollen Mills Ltd. (hereinafter referred .....

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n. He sought the issue of a direction to the appellants, the secured creditors, to advance Rs. 25,000 each to the Official Liquidator to meet the expenses for selling the assets of the company-in-liquidation on condition that the amounts would be reimbursed to the appellants on priority basis from the sale proceeds. The information about the filing of this application was conveyed by the Official Liquidator to the appellants by communication dated 21-4-1995. Apparently, the appellants had no not .....

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al Liquidator, the appellants also filed an application praying that as secured creditors standing outside the winding up, they may be permitted to realize the securities and apportion the net sale proceeds between them and the Bank of Baroda, another secured creditor, who was also entitled to payment pari passu with them. They undertook to pay over the dues of the workmen on the same being adjudicated by the Official Liquidator to the extent of the availability of the funds out of the net sale .....

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ew of a valuation report already available, it was not necessary to have a fresh valuation. The court permitted the Rajasthan State Financial Corporation, Appellant No. 1, to invite offers for sale of the properties and directed it to finalize the same in consultation with the Official Liquidator. It was directed that the reserve price would be fixed by the Company Judge on the report of the Official Liquidator. The sale proceeds were to be retained by the Official Liquidator until further order .....

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y the dismissal of their appeal by the Division Bench, that the appellants have filed this appeal by special leave before this court. 2. It has to be noticed that even though the appellants could have proceeded under section 29 or under section 31 of the SFC Act, neither of the appellants has chosen to actually invoke those provisions or to approach the concerned District Court under section 31 of the SFC Act. In other words, no proceeding under the SFC Act has been set in motion by the appellan .....

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, it is apparent that no right is acquired by the appellants or no right has accrued to them or can accrue to them under section 32 of the Act, unless any such right is conferred on the appellants by any other law in force. There is no plea that other than the SFC Act, any other law confers any additional right on the appellants. A mere right to take advantage of an enactment without any act done towards availing of that right cannot be deemed a right accrued [See Abbot v. Minister of Land (1895 .....

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l came up for hearing before two learned Judges, it was submitted that there was a conflict between the decisions in Allahabad Bank v. Canara Bank [2004]4 SCC 406 and in International Coach Builders Ltd. v. Karnataka State Financial Corpn. [2003] 10 SCC 482. The two learned Judges taking note of this submission and taking note of the importance of the question of law involved, placed the matter before a larger bench. That is how the matter has come up before us. 5. Learned Senior Counsel appeari .....

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matter of disbursement of the proceeds among the creditors. Learned counsel submitted that Allahabad Bank (supra) was an authority in support of the proposition that the SFC Act would prevail over the Companies Act, it being general law as against the special law protecting corporations, like the appellants, namely, the SFC Act. Learned counsel submitted that the decision in International Coach Builders Ltd. s case (supra) has not adverted to the earlier decision and had not properly understood .....

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cial Liquidator and in directing the Official Liquidator to hold the sale proceeds until further orders from the company court and that the proceeds have to be distributed only in terms of section 529A of the Companies Act. Learned counsel further submitted that no interference was called for with the decision of the High Court. 6. There is no doubt that the appellants are financial corporations within the meaning of the SFC Act conferred with the right to proceed under that Act, to take over th .....

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winding up of a company is resorted to, sections 529 and 529A of the Companies Act get attracted. Section 528 provides for debts of all descriptions to be admitted to proof. Section 529 makes applicable the rules of insolvency in the winding up of insolvent companies. The rules with regard to debts provable, the valuation of annuities and future and contingent liabilities, and the respective rights of secured and unsecured creditors; as are in force for the time being under the law of insolvenc .....

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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 rateably 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 t .....

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ime 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 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. A combined reading of .....

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s have to be paid in full if the assets are sufficient to meet them and if they are not sufficient, in equal proportions. 8. In Karnataka State Financial Corpn. v. Patil Dyes & Chemicals (P.) Ltd. [1991] 70 Comp. Cas. 38 , the Karnataka High Court held that rights under section 29(1) of the SFC Act were available to the corporation only when the company is in charge and control of its assets and not when the company has lost control over its assets by the intervention of the company court an .....

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ked out in the light of the illustration given under section 529 and that could be ordered only by the company court in exercise of his powers under section 446(2)(b) and (d) of the Companies Act. 9. In Kerala Financial Corpn. v. Official Liquidator [1991] 71 Comp. Cas. 324, the Kerala High Court held that section 529A of the Act prevailed over section 29 of the SFC Act in case of a conflict and since the workmen s dues which rank pari passu with the dues of the secured creditors will have to be .....

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the Financial Corporation had sought permission of the company court to initiate proceedings under section 29 of the SFC Act. 10. In Maharashtra State Financial Corpn. s case (supra), the Bombay High Court took the view that rights conferred on a Financial Corporation as a mortgagee under section 29 of the SFC Act are not obliterated when the company is in winding up. The statutory right under section 29 to sell the property, had to be exercised consistently with the rights of a pari passu charg .....

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eld that there was no inconsistency between the SFC Act and section 529 read with section 529A of the Companies Act and hence section 46B of the SFC Act was not attracted. 11. In International Coach Builders Ltd. (In Liquidation) v. Karnataka State Financial Corpn. [1994] 81 Comp. Cas. 19, a Division Bench of the Karnataka High Court held that the right of a secured creditor of a company-in-liquidation, there the Karnataka State Financial Corporation, to realize its security by taking possession .....

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poration to the Company and which the Corporation had already taken into possession before the winding up was ordered, and the permission to realize the dues of the Corporation subject to payment of the workmen s dues as undertaken by it, by standing outside the winding up, was well in accordance with the provisions of section 529, as amended, and section 529A as inserted in the Companies Act, 1956, and section 29 and section 46B of the SFC Act. 12. In Gujarat State Financial Corpn. v. Official .....

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company court. To the extent of the charge or mortgage, the property does not come to the court and is not available for distribution of dividends generally unless the mortgagee relinquishes it or the surplus, if any, comes to the court. Enforcement of such right remains outside the insolvency proceedings or winding up proceedings. It was held that the power of recovery of loans by State Financial Corporations under section 29 of the SFC Act was not in conflict with section 529A of the Companie .....

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y the Civil Court in a suit filed by the secured creditor, the interest of the Official Liquidator should have precedence. The Court observed that the liquidator looks after the interests of a large segment of creditors along with that of workmen, whereas the Receiver appointed in a creditor s suit confines his concern to the interest of the particular secured creditor at whose instance, the Receiver had been appointed. 14. In Allahabad Bank s case (supra), the question of jurisdiction of the De .....

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ecovery Officer under that Act and in such a case, the company court s jurisdiction under sections 442, 537 and 446 of the Companies Act stood ousted. Hence, no leave of the company court was necessary for initiating proceedings under the Recovery of Debts Act. Even the priorities among various creditors, could be decided only by the Debts Recovery Tribunal in accordance with section 19(19) of the Recovery of Debts Act read with section 529A of the Companies Act and in no other manner. The Court .....

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ity to all secured creditors. Hence, it was necessary to identify the limited class of secured creditors who have priority over all others in accordance with section 529A of the Companies Act. The Court also held that the occasion for a claim by a secured creditor against the realization by other creditors of the debtor under section 529A read with proviso (c) to section 529(1) of the Companies Act could arise before the Debts Recovery Tribunal only if the concerned creditor had stood outside th .....

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very Tribunal in the face of sections 442, 537 and 466 of the Companies Act. 15. In A.P. State Financial Corpn. v. Official Liquidator [2000] 7 SCC 291, this Court held that the Company Judge, while permitting the Financial Corporation to stay outside the liquidation proceedings, rightly imposed conditions to ensure that the Corporation would : (i) discharge its liability due to workers under section 529A of the Companies Act, (ii) inform the Official Liquidator in advance about the proposed sal .....

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uld prevail over the non obstante clause contained in section 46B of the SFC Act. 16. In International Coach Builders Ltd. s case (supra), this Court consi-dered the correctness of the views expressed by the Karnataka High Court and the Gujarat High Court. This Court held that a right is available to a Financial Corporation under section 29 of the SFC Act against a debtor, if a company, only so long as there is no order of winding up. When the debtor is a company in winding up, the rights of Fin .....

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at the decision in Allahabad Bank s case (supra) was not adverted to in this decision. This decision recognizes that, whether a creditor is standing outside the winding up or not, the distribution of the proceeds has to be in terms of section 529 of the Companies Act, read with section 529A of that Act in a case where the debtor is a company-in-liquidation. As far as we can see, there is no conflict on the question of the applicability of section 529A read with section 529 of the Companies Act t .....

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roduced by Act 35 of 1985 and the overriding provision therein would prevail over the SFC Act of 1951 as amended in 1956 and notwithstanding section 46B of the SFC Act. As regards distribution of assets, there is no conflict. It seems to us that whether the assets are realized by a secured creditor even if it be by proceeding under the SFC Act or under the Recovery of Debts Act, the distribution of the assets could only be in terms of section 529A of the Act and by recognizing the right of the l .....

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of the assets held at the instance of the financial institutions coming under the Recovery of Debts Act or of Financial Corporations coming under the SFC Act, can only be with the association of the Official Liquidator and under the supervision of the company court. The right of a financial institution or of the Recovery Tribunal or that of a Financial Corporation or the Court which has been approached under section 31 of the SFC Act to sell the assets may not be taken away, but the same stands .....

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he winding up and to sell the properties of the company-in-liquidation. The company court has rightly directed that the sale be held in association with the Official Liquidator representing the workmen and that the proceeds will be held by the Official Liquidator until they are distributed in terms of section 529A of the Companies Act under its supervision. The directions thus, made, clearly are consistent with the provisions of the relevant Acts and the views expressed by this Court in the deci .....

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cts and standing outside the winding up, is different from the distribution of the proceeds of the sale of the security and the distribution in a case where the debtor is a company in the process of being wound up, can only be in terms of section 529A read with section 529 of the Companies Act. After all, the liquidator represents the entire body of creditors and also holds a right on behalf of the workers to have a distribution pari passu with the secured creditors and the duty for further dist .....

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e is fetched for the assets of the company in liquidation. It was in that context that the rights of the Official Liquidator were discussed in International Coach Builders Ltd. s case (supra). The Debt Recovery Tribunal and the District Court entertaining an application under section 31 of the SFC Act should issue notice to the liquidator and hear him before ordering a sale, as the representative of the creditors in general. 18. In the light of the discussion as above, we think it proper to sum .....

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ower to order sale of the assets of a borrower company-in-liquidation, but only after notice to the Official Liquidator or the liquidator appointed by the Company Court and after hearing him. (iii)If a Financial Corporation acting under section 29 of the SFC Act seeks to sell or otherwise transfer the assets of a debtor company-in-liquidation, the said power could be exercised by it only after obtaining the appropriate permission from the company court and acting in terms of the directions issue .....

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