ORDER
1. This is an application under Sections 441 and 537 of the Companies Act, 1956 by the Official Liquidator with the prayer as follows :
(a) kindly consider and pass appropriate orders declaring the sale of assets conducted by the Andhra Pradesh State Financial Corporation as null and void.
(b) direct the APSFC, the respondent No.1 herein to deposit the sale proceeds of Rs.50.50 lakhs with the Official
Liquidator immediately.
(c) Direct the APSFC, respondent No.1 herein to furnish a copy of panchanama prepared at the time of taking possession of the assets of the company and also a list of assets disposed off by it and also a list of assets if any remaining in their hands unsold.
2. The facts leading to filing of the present application are:
The Company called as M/s. Sporolac Laboratories Private Limited was directed to be wound up by this Court by order dated 23-7-1998 in Company Petition No.22 of 1996, which was filed by M/s. Biotech Pharms (P) Limited. The Official Liquidator attached to this Court has been appointed as Official Liquidator of the said Company. When the Official Liquidator proceeded to take custody of the assets of the said Company, he was informed that the company in liquidation was purchased by M/s. Biotech Pharms (P) Limited (R3) from the Andhra Pradesh State Financial
Corporation. The said sale, effected by the State Financial Corporation, is in exercise of its powers conferred under Section 29 of the State Financial Corporation Act, 1951 (for short ‘the SFC Act’). Incidentally, it is to be mentioned that the State Financial Corporation sold the assets of the Company in liquidation for consideration of Rs.50.50 lakhs.
3. In the background of the above facts, the present application with the prayer as extracted above came to be filed.
Company Application No.698 of 1998 is filed by the second respondent herein, State Bank of India, seeking permission of the Court to continue the proceedings in OA No.122 of 1997 on the file of the Debts Recovery Tribunal at Bangalore, now transferred to the Debts Recovery Tribunal at Hyderabad.
4. The learned Counsel for the Official Liquidator submitted that, the creditor of the Company in liquidation on 21-3-1996 presented Company Petition No.22 of 1996. Subsequently the Court passed an order dated 23-7-1998 directing that the company be wound up. The sale in favour of the third respondent herein took place on 30-4-1997 and the sale agreement was executed on the same date. On 5-5-1997 the property, which is the subject matter of sale, was given possession of, by the State Financial Corporation to the third respondent. The learned Counsel for the applicant, therefore, submitted that the sale made during the pendency of the winding up proceedings is illegal and void in view of the declaration contained in Section 537 of the Companies Act, 1956. The learned Counsel for the applicant submitted that in view of the provisions in Sections 441, 446 and 537 of the Companies Act, the sale without the leave of this Court is illegal.
5. The learned Counsel for the second respondent supported the submissions made by the learned Counsel for the Official Liquidator, although on slightly different grounds, which I shall discuss later.
6. On behalf of the third respondent, the purchaser, Sri S. Ravi, learned Counsel submitted that in view of the provisions of Section 29 of the SFC Act, 1951 and in view of the law laid down by the Supreme Court in M.K. Ranganathan v. Govt. of Madras, , the sale in favour of his client, is a valid sale, and does not call for any intervention at the instance of the Official Liquidator.
7. Section 537 of the Companies Act, reads as follows:
“537 (t) Where any Company is being wound up by or subject to the supervision of the Court:
(a) any attachment, distress or execution put in force, without leave of the Court, against the estate or effects of the Company, after the commencement of the winding up; or
(b) any sale held, without leave of the Court of any of the properties or effects of the company after such commencement; shall be void.
(2) Nothing in this section applies to any proceedings for the recovery of any tax or impost or any dues payable to the Government.”
8. From the language of the section, it appears that, whether, the Company which is sought to be wound up is actually wound up by the order of the High Court, or the necessary proceedings for securing such order are pending, any attachment, distress or execution put in force against the estate or effects, or any sale of the properties of such company without the leave of the Court, are void.
9. The legal implications of Section 232 of the Companies Act (1913),
which was the corresponding Section to Section 537 of the present Act were considered by the Supreme Court, in M.K. Ranganathan ‘s case (supra). Their Lordships, while interpreting that section, held that during the course of winding up of the company, any secured creditor of the company is entitled to stay out of the winding up proceedings and enforce, the security for the purpose of securing the payment of the debt due to him, but however, declared that if such secured creditor seeks enforcement of security, through intervention of the Court, then Section 232 of the Companies Act comes into operation and if he enforces the security, by bringing the security to sate without intervention of the Court, the Section 232 has no application.
10. In Ranganathan’s case (supra), their Lordships were not concerned with the claims of the rival secured creditors. At Para 7 of the judgment, their Lordships summarised the grounds on which the sale was attacked in the following words :
“…. that it was prejudicial to the interests of the General body of unsecured creditors, that the same had been concluded with undue haste and without adequate publicity and in violation of respondent 2’s said undertaking to the Court…..”
11. Therefore, their Lordships were only dealing with those legal objections, whereas two judgments of this Court and Kamataka High Court dealt with a specific situation of the legal position, in the context of there being more than one secured creditor.
12. The legal position declared by the Supreme Court in the above judgment still remains to hold the field.
13. However, in view of the large number of judgments, placed by the learned Counsel appearing for the various parties, more particularly, in view of the submission made by the learned Counsel for the applicant, and the second respondent, that the impact of Sections 529 and 529-A of the Companies Act and implications of the existence of other secured creditors with reference to the same property were not examined by the Supreme Court in the above judgment. It becomes necessary for me to examine the matter further.
14. Property can be the subject matter of various kinds of encumbrances known to law like mortgage, lease, pledge, charge etc. Encumbrances like mortgage, pledge, charge, hypothecation etc., are created to protect the rights of the persons who advance monies on the basis of such transactions. In each one of these cases, the legal nature of encumbrance changes and consequently the rights and obligations of the parties involved in that transactions vary. It is settled principle of law that whenever disputes arise with regard to rights or obligations arising out of such transaction a party claiming, that he is entitled to recover money by enforcing the security arising out of such encumbrance is required to approach the Court of law for enforcement of his right.. For example when mortgage is created over the property, the mortgagee who is entitled to receive money from the mortgagor, for which the mortgage is a security for the payment, the mortgagee is required to seek the aid of the Court for bringing the mortgaged property to sale for the purpose of realising the debt due to the mortgagee. The only exception to the general rule is that in the case of pledge, the pledgee is entitled to put the property under pledge to sale directly without intervention of the Court. In one more class of cases, recognised under Section 69 of the Transfer of Property Act, the mortgagee is authorised by law to bring the mortgaged property to sale without intervention of the Court.
The details of the class of cases contemplated under Section 69 of the Act may not be relevant for the purpose of this case, except to say that Section 69 is an exception to the general principles of law.
15. In the modern industrial economy, the State or its instrumentalities, finance private enterprise, as a matter of industrial policy. The Parliament thought that, such financial institutions under the control of the State should not be driven to the civil Courts for the purpose of recovery of loans advanced to the industrial concerns. Some of these institutions were authorised, by law, to directly deal with the property given as security. Section 29 of the SFC Act, 1951, is one such provision.
29. Rights of Financial Corporation in case of default :– (1) Where any industrial concern, which is under a liability to the Financial Corporation under an 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, the Financial Corporation shall have the (right to take over the management or possession or both of the industrial concern) as well as the (right to transfer by way of lease or sale) and realise the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation.
(2) Any transfer of property made by the Financial Corporation, in exercise of its powers under sub-section (1) shall vest in the transferee all rights in or to the property transferred (as if the transfer) had been made by the owner of the property.
(3) The Financial Corporation shall have the same rights and powers with respect to goods manufactured or produced wholly or partly from goods forming part of the security held by it as it had with respect to the original goods.
(4)…..
(5)…..”
16. An analysis of Section 29(1) of the SFC Act indicates that whenever an industrial concern is under a liability to make any repayment of any loan or advance obtained by it from a Financial Corporation as defined under Section 2(b) of the Act, and defaults in repayment of the same, the Financial Corporation is empowered to take over either the management or possession or both of the industrial concern. A further right is created in favour of the Financial Corporation to transfer by way of lease or sale of the assets of such industrial concern for the purpose of realising the amount due.
17. It is pertinent to note here that Section 29 of the SFC Act creates a larger right in favour of the Financial Corporation than a right known to the general law of property in favour of a secured creditor. Section 29 empowers the Financial Corporation to bring to sell the properties of the debtor industrial concern without the intervention of the Court whenever such property is pledged, mortgaged hypothecated or assigned to the Financial Corporation.
18. Therefore, by virtue of Section 29 of the SFC Act, one more class of persons is created, which can bring to sale the properties of the debtors without the intervention of the Court.
19. Therefore, the principle laid down in Ranganathan’s case referred to above, should normally apply to the sales effected by the Financial Corporations without the intervention of the Court. However, the learned Counsel for the applicant submitted
that in view of the provisions contained in Sections 529 and 529-A of the Companies Act, the principle laid down in Ranganathan’s case referred to above, would still govern the field or not – is a matter to be considered by this Court, as, such provisions did not fall for the consideration of the Supreme Court when their Lordships decided Ranganathan ‘s case (supra).
20. Section 529 of the Companies Act, provides for the rules by which the claims of various classes of persons who are entitled to receive payments from a company when such a company is wound up. ‘Workmen’s dues’ and debts due to secured creditors are declared to be paid on priority over other creditors.
21. Section 529-A of the Companies Act, introduced by way of amendments in the year 1985 in the Companies Act which reads as follows:
“Overriding preferential payments
529-A(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 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.”
22. The effect of these amendments fell for the consideration of a Division Bench of the Karnataka High Court reported in KSIIDC Ltd. v. M/s. Shivomoni Steel Tubes Ltd. . It was a case where by the time the Financial Corporation completed the transaction of the sale of the assets of a debtor, the Kamataka High Court in exercise of its jurisdiction had passed a winding up order and appointed Official Liquidator. However, there were some dues to the tune of Rs.80 lakhs payable to the workmen of the company in liquidation. The Division Bench held :
“…. Because of the proviso to subsection (1) of Section 529 of the Act, KSIIDC is not only the secured creditor entitled to sell the security by invoking Section 29 of the SFC Act, KSIIDC has to contend with the pari passu charge in favour of the workmen’s dues, the workmen being represented by the Official Liquidator. Official Liquidator would thus be an interested party in the sale of security. The proviso to sub-section (1) of Section 529 as also Section 529-A of the Act, having created pari passu charge in favour of the workmen, same would affect the right ofthe appellant KSIIDC to sell the security directly by itself by invoking Section 29 of the SFC Act. The appellant is required to join the Official Liquidator in the sale, and, the property cannot be sold ignoring pari passu charge holder. Similarly, though the Official Liquidator by virtue of Section 457(1) of the Act has the power to sell the property of the company in winding up, and as a pari passu charge holder under Section 529 of the Act, he has the power to sell the said property with the sanction of the Court to realise the charge, he cannot sell the property all by himself ignoring the secured creditors like KSIIDC. Thus both ihe secured creditor namely KSIIDC as also the Official Liquidator as the representative of the workmen, are to exercise the power to sell wider the directions of the Court…..
The power to sell which has been given to KSHDC under Section 29 of the SFC Act has to be exercised consistently with the right ofpari passu charge holder who, in the case of a company under liquidation, would be Official Liquidator, whose consent can be subject to sanction of the Court. Therefore, the statutory right given to the appellant KSIIDC under Section 29 of the SFC Act being required to be exercised consistently with the right of pari passu charge holder in whose favour statutory charge is created by the proviso to sub-section (1) of Section 529 of the Act when the company is in liquidation, and the said pari passu charge holder being Official Liquidator who is required to act under the directions of the Court, leave of the Court would be necessary, and, any sale without such leave would be void under Section 537 of (he Act. Learned Company Judge was therefore, right in declining to approve the sale in favour of respondent No.7 and giving fresh directions for resale of the property by the appellant KSIIDC by standing outside the winding up in association with the Official Liquidator right from the time of settling the terms of advertisement, and making the said resale subject to confirmation by the Court.”
23. The other case reported in KSII & D Corpn. Ltd. v. Intermodel Transport Technology Systems, , deals with the sale of assets of the company by the BIFR, under the provisions of Sick Industrial Companies Act and the effect of Sections 529 and 529-A of the Companies Act and therefore may not throw any light in the context of the controversy in this Court.
24. In A.P. State Financial Corporation v. Official Liquidator, , a Division Bench of this Court dealt with the issue whether a learned single Judge exercising jurisdiction under the Companies Act is justified in imposing conditions while granting permission under Section 446 of the Companies Act in favour of the Financial Corporation to stay outside the winding up proceedings. The Division Bench after analysing the various provisions of the Companies Act, State Financial Corporations Act and the relevant case law on the subject, while justifying the imposition of the conditions, held that the right of the State Financial Corporation under Section 29 of the SFC Act ”’ceases to be an absolute right the moment it comes on the record of the case that there is a pari passu charge in respect of workmen’s dues on the assets and properties of the Company in liquidation” and further held that the insertion of new Section 529-A of the Companies Act “confers upon the Court a duty to ensure that the workmen’s dues are paid in priority to all other debts in accordance with the provisions of newly added Section 529-A of the Companies Act and the Court acquires jurisdiction to impose reasonable conditions for this purpose.”‘
25. The other case where the provisions of Section 29 of the SFC Act and Sections 529 and 529-A of the Companies Act, fell for the consideration of a Division Bench of this Court reported in APS Financial Corporation v. Electrothermic Pvt. Ltd., 1996 (2) ALD 213, Chief Justice Mishra speaking for the Division Bench at Para 12 held as follows :
“Section 529-A of the Companies Act has put workmen’s dues as well as 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, on the same priority and in the case of an insolvent company, when assets are going to be subjected to the claim of the creditors, it
is indeed necessary to reckon that a secured creditor who does not have the advantage of a provision like Section 29 of the Act cannot be thrown out and all assets, subject, of course, to the change of the workmen, will be left for the benefit of the Financial Corporation. Once it comes to the notice, as rightly held in the case of A.P. State Financial Corporation v. Official Liquidator, (supra) that the workmen’s claims are unpaid, the liquidator has a duty to realise from the assets which are under a debt charge of the Financial Corporation, their claims. The same, on principle, being pari passu with the dues of the Financial Corporation, has to be applied to the claims of any other secured creditor provided, of course, when the assets of the company are insufficient to meet all pari passu claims.”
26. In view of the above two judgments of this Court of two Division Benches and the judgment of the Karnataka High Court, the legal position appears to be that whenever it is brought on the record of this Court that there are “workmen dues” as defined under Section 529(3)(b) of the Companies Act the right of the Financial Corporation under Section 29 of the SFC Act stands circumscribed to the extent that the right cannot be exercised except in association with the Official Liquidator.
27. On the facts of the case, there is nothing on record to show that there are “workmen dues”.
28. The learned Counsel appearing for the Official Liquidator submitted that such a fact could not be brought on record for the reason that the statement contemplated under Section 454 of the Companies Act required to be filed by the former directors of the Company has not yet been filed and until such a statement is filed, it is not possible for the Official Liquidator to place on the record whether there are any workmen’s dues which are entitled for pari passu under Section 529 of the Companies Act.
29. In view of the Scheme of the Companies Act and the judgment of this Court A.P. State Financial Corporation’s case, (supra), that once it is brought on the record of the Court that there are “workmen’s dues”, the right conferred under Section 529 of the Companies Act stands curtailed to the extent that any sale contemplated under Section 29 of the SFC Act could be held only in association with the Official Liquidator and in view of the fact that the Official Liquidator cannot place such material on the file of this Court without his receiving the information as contemplated under Section 454 of the Companies Act, I am of the opinion that the exercise of the right by the Financial Corporations under Section 29 of the SFC Act to bring to sell the assets of the debtor industrial concern, without the leave of the Court during the pendency of winding up proceedings would be illegal as such a step might in a given case result in defeating the statutorily protected right of the workmen to receive their dues on priority basis.
30. Coming to the submissions made by Mr. Narendra Reddy for the second respondent, who claims to be the secured creditor; his case also is squarely covered by the above mentioned judgment of this Court A.P.S. Financial Corporation v. Electrothermic Pvt. Ltd., 1996 (2) ALD 213.
31. Hence I am of the humble opinion that the law declared by Ranganathan ‘s case (supra), must be understood in the light of the later statutory changes as interpreted by the High Courts.
32. The logical sequel to such a conclusion is that, any sale of the property
of a company in liquidation by the secured creditor, without the leave of the ‘Court’, would be hit by Section 537 of the Companies Act and void in view of Section 529-A of the Act, if such a sale were to be held before the Official Liquidator determines, the question whether there are ‘workmen’s dues’ or not.
33. Equally such sales would be void and hit by Section 537 of the Act if held without the leave of the ‘Court’ when there are more than one secured creditor.
34. However, in view of the fact that the sale of the assets of the company in liquidation in the present case took place almost two years back and the third respondent purchaser was put in possession of the assets on 5-5-1997, to declare the sale illegal in the instant case would result in undue hardship to the third respondent purchaser and in view of the decision of the Division Bench reported in APS Financial Corpus case, 1996 (2) ALD 213 (supra), in similar situation where the Division Bench directed :
“….. We are, however, informed that
the assets of the Company which were under the charge of the APSFC have been disposed of. It will not be possible to put the clock back for the liquidator to play his role on behalf of the secured creditors beyond proceeding to realise, from the sale proceeds of the assets which are in the hands of the APSFC, the claims of the workmen and proportionate share of the other secured creditors, in the instant case the State Bank of Hyderabad. This can be achieved by keeping the sale proceeds available for the claims of the workmen and other secured creditors until the order in this behalf by the Court which has ordered the winding up. The liquidator shall proceed accordingly. The Financial Corporation shall keep the sale proceeds ready for such claims which, besides its claims,
are pari passu.”
I deem it appropriate to direct the second respondent State Financial Corporation to make the sale proceeds of the assets of the Company in liquidation, available for the claims of the workmen, if any, subject to the orders to be passed by this Court in that regard.
35. For the same reasons assigned in deciding the issue with reference to the workmen’s dues, I am not inclined to set aside the sale made in favour of the third respondent, but direct the second respondent to be bound by the same direction as was given in the case of the “workmen’s dues”.
36. Having regard to the general importance of the issue as such matters are likely to come up frequently, more particularly, in view of the law declared by the Division Bench in A.P.S. Financial Corpn’s case, 1996 (2) ALD 213 (supra), it is declared that the State Financial Corporation or any other body which has a right similar to the right conferred on the State Financial Corporation under Section 29 of the SFC Act shall not bring to sale the assets of any debtor industrial concern without the leave of this Court once the winding up proceedings are initiated under the Companies Act, 1956 with respect to such an industrial concern.
37. This petition is disposed of
accordingly.