TMI Blog2006 (1) TMI 260X X X X Extracts X X X X X X X X Extracts X X X X ..... pany Application No. 362 of 2004, the applicants have sought for a direction to the official liquidator of Gujarat Steel Tubes Limited (in liquidation) to disburse an amount of Rs. 12 crores realised from the sale of plant and machinery amongst the employees as a part payment towards their legal dues, claim for which is pending with the official liquidator. 3. In Company Application No. 232 of 2005, a declaration was sought for from this court to the effect that the members of the applicant-union are entitled to the entire amount of Rs. 58,37,77,872 as admissible claims and have priority above all other creditors including secured creditors. The applicants have also sought for a direction to the official liquidator to disburse an amount of Rs. 58,37,77,872 amongst the workers, claim for which is pending with the official liquidator, from the amount realised from the sale of plant and machinery, building and land. The applicants have also sought for a direction to the secured creditors/banks to return the amount which they have received under order dated November 4, 2004, passed by this court with interest. 4. Company Application No. 375 of 2004 is filed by the Gujarat Steel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because the learned advocates appearing in all these matters on behalf of their respective parties have made their submissions on the common issue which is referred to above and after deciding the said issue, the office is directed to place these matters for further orders before the appropriate court. 11. In Company Application No. 362 of 2004, it is the case of the applicant-union that the company, namely, Gujarat Steel Tubes Limited was ordered to be wound up by this court by an order dated 27-12-2001, passed in Company Petition No. 7 of 2001 and the official liquidator attached to this court has been appointed as the liquidator with all the powers under the provisions of the Companies Act, 1956. This court vide its order dated 5-2-2003, has constituted a sale committee consisting of the official liquidator as its chairman and representatives of the secured creditors and workers-union as its members for disposing of the assets of the company as per the provisions of section 457 of the Companies Act, 1956, read with rules 272 and 273 of the Companies (Court) Rules, 1959, by issuing advertisement in newspapers and conducting public auction. This court vide its order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crisis. 14. In Company Application No. 375 of 2004, it is the case of the applicant-union that the applicant-union has been registered on 27-7-2000, and has a large chunk of members consisting of 1,010 out of total 1,200 permanent workmen employed in Gujarat Steel Tubes Limited (in liquidation). It is also the case of the applicant-union that each workman member be made available the amount to the extent of Rs. 75,000 out of the amount realised on sale of plant and machinery in question. It is also contended in the said application that section 529A of the Companies Act, 1956, mandates preference to be given to the legal dues of the workmen. 15. Considering both these applications, this court has passed an order on 4-11-2004, observing that after having heard the parties and taking into consideration the fact that the State Bank of India, viz., respondent No. 3 in Company Application No. 362 of 2004 has not lodged its claim with the official liquidator and the further fact that the ratio regarding entitlement of the workmen qua the secured creditors has not been worked out, has held that it would be in the fitness of things if a direction is made to the official liquid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company-in-liquidation and the rights of the other creditors including the secured creditors can be settled only after the claims of workmen are settled. In support of this submission, he has invited the court s attention to the decision of the Hon ble Supreme Court in the case of Andhra Bank v. Official Liquidator [2005] 124 Comp. Cas. 453 1 wherein doubt was raised about the correctness of the statement of law contained in para 76 of the judgment of the Hon ble Supreme Court in the case of Allahabad Bank v. Canara Bank [2000] 101 Comp. Cas. 64 , and the matter was placed before the Bench of three Judges of the Hon ble Supreme Court. The Hon ble Supreme Court after considering the provisions contained in sections 529, 529A has observed that the secured creditors have two options ( i ) they may desire to go before the company Judge, or ( ii ) they may stand outside the winding up proceedings. The secured creditors of the second category, however, would come within the purview of section 529A(1)( b ) read with proviso ( c ) appended to section 529(1). The workmen s portion as contained in proviso ( c ) to sub-section (3) of section 529 in relation to the security of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch a question did not arise in the case as the Allahabad Bank was indisputably an unsecured creditor. The court, therefore, took the view that such an observation was neither required to be made keeping in view the fact situation obtaining therein nor does it find support from the clear and unambiguous language contained in section 529A(1)( a ). The court, therefore, has no hesitation in holding that finding of the Hon ble Supreme Court in the case of Allahabad Bank ( supra ) to the aforementioned extent does not lay down the correct law. The court further observed that reliance was wrongly placed on National Textile Workers Union v. P.R. Ramakrishnan [1983] 53 Comp. Cas. 184 (SC) as the question which arose therein was only as regards the right of the workers to be heard in the winding up proceeding. The said decision was, therefore, not applicable. 18. Based on the aforesaid judgment of the Hon ble Supreme Court, Dr. Sinha has strongly urged before the court that the secured creditors have come before this court meaning thereby they have not exercised their option to remain outside the winding up and they have relinquished their security. He has, therefore, submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 529A has still not come. The secured creditors remained outside the winding up proceedings. Simply because they participate in the proceedings for the sake of convenience, it does not amount to relinquishment of their securities. Reliance was placed on the decision of the Bombay High Court in the case of Canfin Homes Ltd. v. Lloyds Steel Industries Ltd. [2001] 106 Comp. Cas. 52 1 . The issue before the court was whether the winding up petition filed by the secured creditor is maintainable. The court has observed that the secured creditor who seeks to prove the whole of his debt in the course of the proceedings of winding up must, before he can prove his debt, relinquish his security for the benefit of the general body of the creditors. If he surrenders his security for the benefit of the general body of creditors, he may prove the whole of his debt. If the secured creditor has realised his security, he may prove the balance due to him after deducting the net amount that has been realised. The stage for relinquishing security arises when a secured creditor seeks to prove the whole of his debt in the course of winding up. If he elects to prove in the course of winding up th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale agent or sale committee. A sale committee is a creation of the courts. The sale committee is appointed by the court with a view to see that the interests of the secured creditors as well as the labourers and unsecured creditors are fully protected and achieved. The sale committee is appointed in order to see that the maximum possible price for the property to be sold is received. There is another purpose in appointing the sale committee and that is to avoid allegations against the official liquidator or single agent, who is directed to sell the property and to avoid investigation of the allegations against such persons. Generally, representatives of the secured creditors are taken on the sale committee with a view to see that the property which is hypothecated or mortgaged fetches proper and good value so that their dues are fully recovered. The appointment of a sale committee is always in the interest of all persons who are interested in securing their dues and it is also in the interest of the company which has gone into liquidation. There could not be any legal objections to such appointment because it could not be said that by appointing a sale committee any prejudice is ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... realise the security without proving his debt in the winding up proceedings. The court further held that clauses ( a ), ( b ) and ( c ) of the proviso to section 529(1) come into operation only when a secured creditor instead of relinquishing his security and proving his debt opts to realise the security. It is on exercise of this option by the secured creditor that the liquidator becomes entitled to represent the workmen and enforce the charge under clause ( a ) of the proviso to section 529(1), that the liquidator becomes responsible for rateable distribution of amounts realised by enforcement of such charge and it is only if as a result of enforcement of such charge on realisation of the security, any part of the debt due to such secured creditor could not be realised by him, that to that extent, he ranks pari passu with the workmen s dues under section 529A as per the provisions of sub-clause ( c ) of the proviso to sub-section (1) of section 529. In case the secured creditor does not opt to realise the security, the liquidator by dint of the proviso to section 529(1) does not become a charge holder in the estate of the company so as to exercise the right of a simple mortgag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial Corpn. [2003] 114 Comp. Cas. 614 1 ; and the Hon ble Supreme Court has observed that the reasoning of the Gujarat High Court that in case the secured creditor does not opt to realise the security, the liquidator, by dint of the proviso to section 529, does not become a charge holder in the estate of the company so as to exercise the right of a simple mortgagee as envisaged under section 100 of the Transfer of Property Act, 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 State Financial Corporation as a secured creditor opts to stand outside the winding up and seeks to realise its security that the conflict, if any, can arise. The fact that the liquidator or the workmen do not have a right independently to enforce the ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the benefit of the mortgagee and not to his detriment. He can follow any one of the three procedures suggested in the section. A mortgagee cannot relinquish his rights except by an instrument provided for the relinquishment of rights under law. There cannot be an implied surrender in terms of sub-section (3) of section 47 and the surrender referred to therein should be construed as a surrender in accordance with law. The court further held that the facts showed that the bank had first stood outside the winding up and the sale was requested by the official liquidator. It was in that circumstances, that the court gave notice to the bank and the bank stated that the property might be sold subject to the security being transferred to the sale price received. Hence section 47(3) of the Provincial Insolvency Act, 1920, would not apply and the bank was entitled to realise the amount due to it as a secured creditor. 26. Reliance is also placed on the decision of the Karnataka High Court in the case of Karnataka State Financial Corpn. v. Patil Dyes Chemicals (P.) Ltd. [1991] 70 Comp. Cas. 38 wherein the court has held that the first proviso to section 529(1) is clear, i.e, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elying on the security, if there was a deficiency by sale of the securities, the applicant would be excluded from all share in any dividend that may be declared by the official liquidator except and to the extent provided for under section 529A of the Companies Act; ( c ) in the event of the applicant being declared a secured creditor in the above suit, the applicant could realise the security and appropriate the same subject to the right of workmen under sections 529 and 529A of the Companies Act, 1956. The creditor has challenged these conditions by filing an appeal before the Division Bench and the Division Bench has held ( i ) that so far as condition ( a ) was concerned, no objection could be raised thereto, since after the winding up order was passed, the creditor could not by itself initiate any action against the assets which are held by the official liquidator as the custodian of the company court ; ( ii ) That there being no prohibition on a secured creditor s realization of its security and for the balance due to it, condition ( b ) which stated that the creditor would be "excluded from all share in any dividend except to the extent provided for under section 529A of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y-in-liquidation in priority to all other creditors secured as well as unsecured is not tenable. The court is also of the view that simply because the secured creditors participate in the sale proceedings 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 (not) 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 requires 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 proceeding 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 realisation takes place, their securities are converted from the specified assets into cash and they have equal right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egal position, the relief prayed for in the Judge s summons cannot be granted. On the contrary, directions are required to be given to the official liquidator to get the claim re-verified by the chartered accountant in light of the submissions made. The members of the applicant-unions do not have any first right over the amount realised by way of sale of property of the company-in-liquidation and that the rights of the other creditors can be settled only after the claims of the workmen are settled as per the provisions of Companies Act, 1956. The interpretation sought to be putforth by the applicants-unions regarding the provisions of law and the authority is absolutely baseless, ill-founded, misconceived and misplaced and deserves to be rejected forthwith. The applicants have miserably failed to appreciate the relevant provisions of law and the judgment in the proper perspective. 32. Considering the above facts and submissions and the legal position, the court hereby disposes of Company Application Nos. 375 of 2004 and 362 of 2004 as the said two applicants have subsequently filed two other applications being Company Application Nos. 232 and 233 of 2005 wherein the claims of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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