TMI Blog2006 (4) TMI 264X X X X Extracts X X X X X X X X Extracts X X X X ..... ranted. 2. Interpretation of sections 529 and 529A of the Companies Act, 1956 is involved in this appeal, which arises out of a judgment and order dated 4-8-2004 passed by the High Court of Judicature at Allahabad in Special Appeal No. 698 of 2002 affirming the judgment and order dated 24-5-2002 passed by a learned Single Judge of the said Court. 3. The appellant herein is a Banking Company. It along with Industrial Finance Corporation of India (IFCI) and Industrial Development Bank of India (IDBI), advanced the following amounts by way of loan to Respondent No. 1 with a view to give financial assistance to it in setting up a plant for manufacture of leather boards: ( a )IDBI Rupee Term Loans of Rs. 193.2 lakhs and Foreign Currency loan of Italian Lira 1380900.000. ( b )IFCI Rupee Term Loans of Rs. 196.74 lakhs. Central Investment subsidy of Rs. 25 lakhs and Foreign Currency loan of DM 2127.565. ( c )ICICI Rupee Term Loans of Rs. 96.61 lakhs and Foreign Currency loan of Italian Lira 1380900.000. 4. The Punjab National Bank (PNB) also advanced a loan to the said Respondent for providing working capital funds. The 1st Respondent, in order to secure the amounts lent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollateral Security by deposit of original title deeds in respect of land, building and plant and machineries situated at Village Kauriya, Tehsil Binkdi, District Fatehpur (U.P.), but, then the Defendant No. 1 company agreed to secure the second charge on the said mortgaged property in favour of the plaintiff Bank, after the defendant Nos. 4, 5 and 6 gave their consent to the effect that the title deeds in respect of the aforesaid properties shall remain with the Defendant No. 4, for and on behalf of the Joint First charge holders, viz., Defendant Nos.4, 5 and 6 and the said title deeds shall also be retained by the Defendant No. 4, as agents, for and on behalf of the plaintiff Bank as a second charge holder in respect of the aforesaid properties. ****** 12. That the said charge of the Plaintiff Bank regarding the grant of cash credit hypothecation limit and creation of second charge in respect of immovable properties of the Defendant No. 1 company in favour of the Plaintiff Bank, was duly registered with the Registrar of Companies (U.P.) at Kanpur, on the basis of submission of the Defendant No. 1 company with the Registrar of Companies (U.P.) Kanpur." 8. It is, however, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1)( a ) Rupee term loan of Rs. 277.00 lakh in participation with IDBI and ICICI to the extent mentioned below: IFCI - Rs. 112.00 lakh IDBI - Rs. 110.00 lakh ICICI - Rs. 55.00 lakh ****** We further agree and confirm as follows: ( i )We shall not be entitled to call upon IFCI/IDBI/ICICI and other pari passu charge holders, if any, (hereinafter referred to as the first charge holders) to exercise or enforce any of the rights, under their securities or otherwise. ( ii )We shall not resort to any legal proceedings for the sale of the mortgaged properties or for the exercise of our any other right ( a ) against the Company unless - ( a ) we exhaust our remedies as a first charge holders on the current assets of the Company, ( b ) we give to the first charge holders a notice of minimum period of 60 days of our intention in this regard and (c) we obtain prior written approval of IFCI/IDBI/ICICI and other first charge holders in this regard. ( iii )We, in our capacity as a second charge holder, take steps to enforce the security for realization of our dues consequent on default or breach committed by the Company after giving notice to and obtaining prior approval of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or on the basis of the decision of this Court in Allahabad Bank v. Canara Bank AIR 2000 SC 1535 it was held: "The test in law, as emerges from the aforesaid discussion is that where the secured creditors even if it has first charge over mortgaged assets, in preference to other secured creditors, having second charge over the same assets, opts to prove his debts before Official Liquidator and claim dividend by joining winding up proceedings, relinquishes his claim over the assets and ranks equal to other secured creditors, including those who have second charge over the assets and shall be entitled to pro rata share out of the sale proceeds subject to the claim of workmen to be determined as provided under section 529A of the Companies Act, 1956. I may add here that IFCI, IDBI and ICICI had given foreign currency loan and term loans to the company (in liquidation) by connotation, the rate of interest and liquidated damages were claimed. Punjab National Bank had second charge over the fixed assets of the company for working capital of Rs. 134 lakhs by deposit of title deeds created by the company in favour of Punjab National Bank on 21st November 1989 at IFCI office. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... realizations by other creditors. The Supreme Court found that it has not exercised its option to remain outside the winding up proceedings and thus it was held that the question of such claim can be raised only if the Canara Bank had stood outside the winding up and had realized the amount and if it shows that out of the amounts privately realized by it some portion has been rateably taken away by the liquidator under sub-clauses ( a ) and ( b ) of the proviso to section 529(1). It is only then that itcan claim that it should be reimbursed at the same level as a secured creditor with priority over the realizations of other creditors lying the Tribunal." On the aforementioned findings, the said special appeal was dismissed. 16. Mr. Rajiv Shakdher, learned Senior Counsel appearing on behalf of the appellant would submit that: ( i )The High Court misread and misinterpreted the judgment of this Court in Allahabad Bank s case ( supra ), as therein this Court was primarily concerned with interpretation of section 446 of the Companies Act vis-a-vis the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 ( RDB Act , for short), i.e., as to wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Provincial Insolvency Act shall apply to the instant case in terms whereof the Appellant had three options: ( i )He can realize his security and if there is something left due to him, then come and prove its claim for the balance; or ( ii )He has to give up his security and to come into liquidation ranking with other creditors and take share in the distribution of the dividends; or ( iii )To value his security and to come into liquidation and prove for any dues that according to him remain outstanding in respect of his debt on the valuation of his security. Having regard to the fact that the Appellant had not exercised his option in regard to the same, its claim was extinguished. 18. The learned counsel appearing on behalf of the Official Liquidator submitted that having regard to the provisions of sub-section (2) of section 47 of the Provincial Insolvency Act, the Appellant would be deemed to have relinquished its rights. 19. The questions therefore which arise for our consideration are: ( a )Whether significance is lost in respect of inter se right of priority between two sets of secured creditors in view of section 529A of the Companies Act? ( b )Whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditor does not either realise or relinquish his security, he shall, before being entitled to have his debt entered in the Schedule, state in his proof the particulars of his security and the value at which he assesses it and shall be entitled to receive a dividend only in respect of the balance due to him after deducting the value so assessed. (4) and (5)********** (6) Where a secured creditor does not comply with the provision of this section, he shall be excluded from all shares in any dividend." 27. The second class of the secured creditors are those who come under section 529A(1)( b ) of the Companies Act, i.e., those who opt to stand outside the winding up to realize their security. They also can, in certain circumstances, go before the Company Court. 28. In Allahabad Bank case ( supra ) Jagannadha Rao, J., referring to the Tiwari Committee Report, 1981 as regard framing of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 Act (for short "RDB Act"), stated the law in the following terms: Even in regard to "priorities" among creditors, the said Committee stated in Annexure I as follows: "The Adjudication Officer will have such power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .) was a member. It was stated: "In Allahabad Bank v. Canara Bank [1996] 4 SCC 165 the question of jurisdiction of the Debts Recovery Tribunal under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, vis-a-vis the Company Court arose for decision. This Court held that even where a winding up petition is pending, or a winding up order has been passed against the debtor company, the adjudication of liability and execution of the certificate in respect of debts payable to banks and financial institutions, are respectively within the exclusive jurisdiction of the Debts Recovery Tribunal and the Recovery 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 took into account the fact that the Recovery of Debts Due to Banks an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same was enacted. 34. In terms of section 529 of the Companies Act, as it stood prior to its amendment, the dues of the workmen were not treated pari passu with the secured creditors as a result whereof innumerable instances came to the notice of the court that the workers may not get anything after discharging the debts of the secured creditors. It is only with a view to bring the workman s dues pari passu with the secured creditors. Section 529A was enacted. 35. The non obstante nature of a provision although may be of wide amplitude, the interpretative process thereof must be kept confined to the legislative policy. Only because the dues of the workmen and the debt due to the secured creditors are treated pari passu with each other, the same by itself, in our considered view, would not lead to the conclusion that the concept of inter se priorities amongst the secured creditors had thereby been intended to be given a total go-by. 36. A non obstante clause must be given effect to, to the extent the Parliament intended and not beyond the same. 37. Section 529A of the Companies Act does not ex facie contain a provision (on the aspect of priority) am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [ See Workmen of Firestone Tyre Rubber Co. of India (P.) Ltd. v. Management [1973] 1 SCC 813. 41. If the Parliament while amending the provisions of the Companies Act intended to take away such a valuable right of the first charge holder, we see no reason why it could not have stated so explicitly. Deprivation of legal right existing in favour of a person cannot be presumed in construing the statute. It is in fact the other way round and thus, a contrary presumption shall have to be raised. 42. Section 529(1)( c ) of the Companies Act speaks about the respective rights of the secured creditors which would mean the respective rights of secured creditors vis-a-vis unsecured creditors. It does not envisage respective rights amongst the secured creditors. Merely because section 529 does not specifically provide for the rights of priorities over the mortgaged assets, that, in our opinion, would not mean that the provisions of section 48 of the Transfer of Property Act in relation to a company, which has undergone liquidation, shall stand obliterated. 43. If we were to accept that inter se priority of secured creditors gets obliterated by merely responding to a public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Registered Deed at any point in time which is subsequent to a prior but an unregistered deed. This is also subject to the doctrine of notice, i.e., that parties to the Registered Deed executed after the Unregistered Deed did not have notice of the same; ( ii )where there are exceptions carved out by a statute - for example, section 98 of the Bengal Tenancy Act. ( iii )a mortgage executed on the directions of the Court to preserve a property; ( iv )where a salvage lien is created, i.e., where lien is created for moneys advanced for the purposes of saving the property from destruction or forfeiture. The salvage lien is confined in English Law to maritime lien. In Mulla s Transfer of Property Act, 9th edition, pages 346-347, it is stated: "Again, when a court for the purpose of preserving the property in suit, directs the receiver to execute a mortgage, it has jurisdiction to order that the mortgage shall take precedence over prior charges. This is an application of the equity which gives salvage liens, i.e., liens for money advanced for the purpose of saving the property from destruction of forfeiture, priority over all their encumbrances. With regard to such liens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interpretation of section 13(2) in the light of the context or setting in which it occurs and having regard to the object and purpose of its enactment. Now, one thing is clear that the power conferred under section 13(2) is a corrective or rectificatory power and it is conferred in terms of widest amplitude. It is left to the discretion of the commission whether the power should be exercised in a given case and if so, to what extent. But it must be remembered that this discretion being a judicial or in any event a quasi-judicial discretion, cannot be arbitrary, vague or fanciful : it must be guided by relevant considerations. It is not possible to enumerate exhaustively the various relevant considerations which may legitimately weigh with the Commission in exercising its discretion, nor would it be prudent or wise to do so, since the teeming multiplicity of circumstances and situations which may arise from time to time in this kalcidoscopic world cannot be cast in any definite or rigid mould or be imprisoned in any strait-jacket formula. . . ." (p. 551) 53. The question came up for consideration before a learned Single Judge of Karnataka High Court in State Bank of Mysore v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs undertaken by the Court and they also became the members of the Sale Committee constituted pursuant to the directions issued by the Court does not mean that they have exercised their option of remaining outside the winding up and they have relinquished their security. As a matter of fact relinquishment of security by the secured creditors require a positive action on the part of the secured creditors. They have never stated in any of the proceedings that they are relinquishing their securities. On the contrary, they have made it clear that they remain outside the winding up and they participate in the sale proceeds only with a view to facilitate the sale proceeds so as to get the auction proceedings completed as expeditiously as possible. There is also substance in the say of the secured creditors that as soon as the assets of the companies are sold and realization is taken place, their securities are converted from the specified assets into cash and they have equal right in cash which is realized on sale of the assets of the Company in liquidation..." We agree with the said view. 55. For the aforesaid reasons, we are of the view that the High Court has overlooked salient ..... X X X X Extracts X X X X X X X X Extracts X X X X
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