TMI Blog2008 (5) TMI 399X X X X Extracts X X X X X X X X Extracts X X X X ..... balance due to them, which is in excess of ₹ 350 lakhs, has necessarily to be treated as unsecured debt and, in accordance with sections 47(3), 48 and 61(6) of the Provincial Insolvency Act, 1920, read with rule 179 of the Companies (Court) Rules, 1959, the Industrial Development Bank of India would be entitled for payment of interest at 6 per cent, per annum, or 4 per cent, per annum, as the case may be, from the date of winding up, in case any surplus is available after payment in full of the principal due to both the secured and the unsecured creditors. The official liquidator's request that he be permitted to pay 86.56 per cent, to the unsecured creditors, without paying interest at the contracted rate of 15 per cent, per annum to the State Bank of India (the sole charge holder of the fixed assets of the company under liquidation and buildings), from the date of winding up till the date of sale of assets must, therefore, be rejected. In view of the proviso to section 529(1), the security of the secured creditor is deemed to be subject to a pari passu charge in favour of the workmen also. For all practical purposes, a workman is treated as a co-chargeholder along with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 739 of 2007, before the Debts Recovery Tribunal, Visakhapatnam on December 18, 2001, for the recovery of Rs. 1,6940,978.62 paise, (the then outstanding dues), and for interest thereon at 15 per cent, per annum compounded quarterly from the date of the application till realisation, for the sale of the immovable properties of the company under liquidation charged in their favour by way of first charge, and to pay them the sale proceeds. The Industrial Development Bank of India (IDBI) filed O. A. No. 382 of 2001 before the Debts Recovery Tribunal, Hyderabad, against the company under liquidation impleading the guarantors of the sanctioned loan as defendants Nos. 3 to 5. The State Bank of India was impleaded as the sixth defendant. The Debts Recovery Tribunal, in its order in O. A. No. 382 of 2001 dated December 16, 2003, allowed the application filed by the Industrial Development Bank of India subject to the rights of the State Bank of India. C. A. No. 1457 of 2007 is filed by the official liquidator seeking permission of this court to declare 100 per cent, dividend to the secured/preferential creditors, 86.56 per cent, dividend to the unsecured creditors of the company in li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 100 per cent, to all the secured and preferential creditors and at 86.56 per cent, to the unsecured creditors. This court, in its order dated September 3, 2007, noted the appearance of Sri P. V. Markandeyulu, learned counsel for the Industrial Development Bank of India and issued notice to the other secured creditors. In his affidavit of proof of service dated September 14, 2007, the official liquidator stated that notice was served on the Industrial Development Bank of India through special messenger and that notice was sent to the State Bank of India, Visakhapatnam by speed post on September 12, 2007. This court, in its order dated October 25, 2007, directed that the name of Sri K. Gopalakrishna Murthy, standing counsel for the State Bank of India be printed in the cause list and posted the application to October 29, 2007. It is necessary to note that the State Bank .of India had earlier filed C. A. No. 1400 of 2006 requesting this court to pay them Rs. 1,87,24,709.22, (being the outstanding dues as on the date of winding up, i.e. , on April 9, 2002), the balance of Rs. 1,66,84,572.19 paise due and payable by the company under liquidation as on the date of sale of the secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by way of publication in the newspapers, that 23 claims were received and that neither had the State Bank of India submitted a revised claim nor had they made any additional claim before him. The official liquidator states that he had issued a notice in Form No. 68 dated January 9, 2007, for investigation of the claims and production of further evidence, that a copy of Form No. 68 was also issued to the State Bank of India, that the claims were decided on the basis of the proof filed as also the charge particulars available with the Registrar of Companies, that the entire claim of the State Bank of India of Rs. 1,87,24,709.22 paise was admitted to proof, that notice of admission in Form No. 70 dated February 14, 2007, was issued to them, that they did not prefer any appeal and as such the adjudication had attained finality. The official liquidator would further state that he had filed Form No. 71, in C. A. No. 1276 of 2007, which was taken on record by order dated July 24, 2007, and was notified on the notice board of the High Court. The official liquidator further states that the entire claim of the State Bank of India was admitted, that they did not choose to seek variation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd hypothecation of the State Bank of India, that the deed of hypothecation of plant and machinery was executed in their favour on October 29, 2007, and presented before the Registrar of Companies, but the mortgage of land and buildings was not created as the State Bank of India had not honoured its ceding in principle of the pari passu charge issued earlier, that as such they had reduced the loan to Rs. 200 lakhs, that the said amount was disbursed to the company under liquidation, that the official liquidator had since adjudicated the claim/proof of debt and had proportionately allotted to them Rs. 83,35,042.72 paise as secured debt and Rs. 1,16,64,957.28 paise as unsecured debt, that they had filed proof of debt for Rs. 438.66 lakhs (principal outstanding of Rs. 200 lakhs plus Rs. 238.66 lakhs as interest and others), and that the secured claim of the State Bank of India had been fully satisfied as on the date of winding up. Sri K. Gopalakrishna Murthy, learned standing counsel appearing for the State Bank of India, would contend that, since the State Bank of India was a secured creditor, and the land and buildings of the company under liquidation had been mortgaged with it, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the date of winding up till the date of sale of the assets, the official liquidator would state that the secured creditor was entitled, along with the workmen and the other unsecured creditors, for payment of interest at 4 per cent, per annum/from the surplus available, if any, after the principal dues of the unsecured creditors have been paid in their entirety. He would submit that, in view of section 529(1)( c ), the statutory provisions of the Provincial Insolvency Act, 1920, would apply in the winding up of an insolvent company. He would rely on sections 47(3) and 48 of the Provincial Insolvency Act, 1920, to contend that the secured creditor may, at best, prove for interest at a rate not exceeding 6 per cent, per annum and that, in any event, they were not entitled for payment of interest at the contracted rate of 15 per cent, per annum for the period subsequent to the date of winding up. Sri P. V. Markandeyulu, learned counsel appearing for the Stressed Assets Stabilization Fund, would fairly state that, in view of the failure on the part of the State Bank of India to cede pari passu charge with regards to the land and buildings, the Industrial Development Bank of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of insolvency rules in the winding up of insolvent companies and, under section 529(1)( c ), in the winding up of an insolvent company, the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent. Under the proviso thereunder, the security of 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 realise his security ( a ) the liquidator shall be entitled to represent the workmen and enforce such charge ; ( b ) any amount realised 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 realised by him by virtue of the provisions of the 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 purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates to payment of subsequent interest and, thereunder, in the event of there being a surplus after payment in full of all the claims admitted to proof, the creditors whose proofs have been admitted shall be paid interest from the date of winding up upto the date of the declaration of the final dividend, at a rate not exceeding 4 per cent per annum, on the admitted amount of the claim, after adjusting against the said amount the dividend declared as on the date of the declaration of dividend. It must be borne in mind that, in the case on hand, the State Bank of India was the sole charge holder of the land and buildings of the company under liquidation and the Industrial Development Bank of India, whose debts were later assigned to M/s. Stressed Assets Stabilization Fund, was the sole charge holder of the plant and machinery and it did not have pari passu charge over the land and buildings of the company under liquidation. The amount realised on the sale of land and buildings, which is in excess of Rs. 446.65 lakhs, is more than sufficient not only to meet the dues of the State Bank of India towards their principal with interest thereon till the date of winding up but, even afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved. As noted above, a secured creditor is entitled to submit proof of his debt only in cases where the security is insufficient to meet their dues in full. Where a secured creditor submits proof of any amount due to them, after adjusting the value of the security, they would then, under section 48, be entitled to prove for interest at a rate not exceeding 6 per cent, per annum. The payment of interest at 6 per cent, per annum would arise only where the security, on its realisation, is insufficient to repay the dues of the secured creditor in full, i.e. , principal plus the contracted rate of interest from the due date till the date of repayment. ( Canara Bank v. Official Liquidator [1991] 70 Comp Cas 295 (Mad)). The claim of the secured creditors for repayment of their debt is or. the strength of their security, and they are entitled to realise the interest due to them, in terms of the agreement, from the proceeds realised on the sale of the secured assets. However, such realisation would be subject to the dues of the workmen (SBP 2). Section 48, which prescribes the rate of interest at 6 per cent, per annum, cannot be understood to mean that even where the sale proceeds of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of winding up, at 6 per cent, per annum or 4 per cent, per annum, as the case may be. Sri P.V. Markandeyulu, learned counsel appearing for M/s. Stressed Assets Stabilization Fund, would, however, place reliance on section 61(6) to contend that, after the date of winding up, even a secured creditor is entitled only for interest at 6 per cent, per annum on par with all other creditors, both secured and unsecured, that too only when there is a surplus. Under the head "distribution of property", section 61 prescribes the priority of debts. Under sub-section (5) thereof, subject to the provisions of the Act, all debts entered in the schedule shall be paid rateably according to the amount of such debts respectively and without any preference. As noted above, the question of entering the debt of the secured creditor in the schedule would arise only if any portion of their debt remains due after the security is realised and the proceeds applied in the discharge of their debt. It is only in cases where the security is insufficient to meet the dues of the secured creditor in its entirety, i.e. , principal plus interest at the contracted rate from the date the debt fell due till the da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is entitled to represent only for the workmen's dues for enforcement of such a charge and not for the other unsecured creditors. It is only if any amount is still due to the secured creditor, even after the sale proceeds of the security has been utilised in its entirety, on account of its ceding pari passu charge to the workmen, shall it rank pari passu with the workmen's dues for the purpose of section 529A. Where the security is sufficient to meet the entire debt of the secured creditor (both principal and interest), the official liquidator's duty is only to protect the interests of the workmen who, by virtue of their dues being ranked pari passu with the debt of the secured creditor, are entitled to be paid their proportionate share. It is only after the dues of the secured creditor and the workmen are paid in full can, any amount available thereafter from the sale proceeds of the security, be utilised for payment of the dues of the unsecured creditors. Since the provisions of the Companies Act confer such a right on the secured creditor, it needs no emphasis that the Companies (Court) Rules, 1959, made in exercise of the powers conferred under section 643(1) and (2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t claimed exceeds Rs. 1.67 crores. This contention of estoppel and waiver urged by the official liquidator must be rejected and, since a sum in excess of Rs. 2.40 crores is still available from the sale proceeds of the land and buildings, even after the principal and interest due till the date of winding up has been paid, the State Bank of India must be held entitled to interest at the contracted rate of 15 per cent, per annum from the date of winding up till the date of sale of the assets, as the sum realised on the sale of the land and buildings, of which they were the sole charge holder, is more than sufficient to meet their entitlement. The plant and machinery of the company under liquidation was hypothecated in favour of the Industrial Development Bank of India. They assigned their debt later to Stressed Assets Stabilization Fund. Rupees 83.35 lakhs, realised from the sale of plant and machinery, has been paid to them in its entirety. The balance due to them, which is in excess of Rs. 350 lakhs, has necessarily to be treated as unsecured debt and, in accordance with sections 47(3), 48 and 61(6) of the Provincial Insolvency Act, 1920, read with rule 179 of the Companies (Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld and the proceeds realised, the debts by way of workmen's dues, and that of the secured creditors, have to be paid in full if the assets are sufficient to meet them and if they are not sufficient then in equal proportions. 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. The liquidator represents the entire body of the creditors and also holds a right on behalf of the workers to have a distribution pari passu with the secured creditors ( Rajasthan Financial Corporation v. Official Liquidator, Jaipur Spinning and Weaving Mills Ltd. ( in liquidation ) [1997] 88 Comp Cas 192 (Raj)). The purpose of section 529A is to ensure that the workmen are not deprived of their legitimate claims in the event of the liquidation of the company. By this provision, the workmen are statutorily allowed to recover their dues from the securities. If the securities are insufficient, the claims of the workmen and the secured creditor abate in equal proportion. In other words, by section 529A, the workmen of the company in liquidation have been made the secured creditors in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serting section 529A, to treat workmen's dues on par with the dues of the secured creditors, would be defeated thereby. It must, therefore, be held that since the workmen are entitled to have their dues ranked pari passu with the debts of the secured creditor they shall, on par with the secured creditor, be entitled for payment of interest at the contracted rate of interest which the secured creditor is entitled to claim from the sale proceeds of the assets of the company under liquidation to the extent to which it holds a charge over such assets. In case a surplus is available, after payment of the dues of the secured creditor (which consists of the principal along with interest at the contracted rate till the date of winding up), and the workmen dues (which consists of the principal along with interest, i.e. , the contracted rate of interest of the secured creditor, till the date of winding up), then, from the surplus available, both the secured creditor and the workmen are entitled for payment of interest on par with each other from the date of winding up till the date of sale of the assets. Such an interpretation, of section 529A of the Companies Act, 1956, would further t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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