JUDGMENT
D.Y. Chandrachud, J.
1. By a letter dated 24th February, 1992, the petitioner agreed to grant to the respondent-company in the present case. M/s. Lloyds Steel Industries Ltd., a term loan of Rs. 5.52 crores for the purpose of enabling the respondent to construct dwelling units for its employees at Wardha. The respondent executed various documents in favor of the petitioner, including a Demand Promissory Note dated 21st August, 1992, promising to pay to the petitioner an amount of Rs. 5.52 crores with interest at the rate of 22% per annum for value received. A loan agreement dated 17th August, 1992 and a supplementary loan agreement also of the same date were executed by the Company. On 27th August, 1992, the Chairman of the company and one of its Directors executed Guarantee Agreements by which they guaranteed the due repayment of the amount disbursed by the petitioner.
2. A letter dated 24th February, 1992 issued by the petitioner sanctioning the term loan, inter alia, stipulated that the rate of interest would be as per the guidelines of the National Housing Bank for NHB refinanceable loans and that there would be a service charge of 2%. The letter, inter alia, provided that penal interest at 2% over and above the interest charged on the loan would be payable in the event of the repayment schedule not being adhered to. The loan agreement which was executed on 17th August, 1992, provided that the applicable rate of interest would be 22% or as prescribed by the NHB on the applicable portion of the loan. The loan was repayable in 120 equal monthly installments over a period of 10 years.
3. On the basis of the documents which were executed by the respondent, the petitioner disbursed to the respondent an amount of Rs. 5.52 crores-Rs. 1 crore on 21st August, 1992, Rs. 1.85 crores on 18th August, 1993, Rs. 1.15 crores on 10th September, 1993, Rs. 1 crore on 19th October, 1993 and Rs. 52 lakhs on 7th January, 1994. By its letters dated 1st April, 1995 and 1st April, 1998, the company has acknowledged the out standings which are due and payable to the petitioner. In the second of those letters, the company has acknowledged its liability of Rs. 4,42,15,834/- as being amount due and payable to the petitioner. On 27th August, 1999, a demand notice came to be addressed on behalf of the petitioner by its Advocate to the respondent claiming repayment of an amount of Rs. 5,72,18,397/- together with further interest and it was also stated that the said notice was a statutory notice prior to the institution of winding up proceedings. In a reply dated 21st September, 1999 it was inter alia stated on behalf of the company that the company had made an offer to furnish additional security in favour of the petitioner in respect of the properties of the company situated at Wadala, Shivaji Park, Mahalaxmi and Sion but, that there was no favorable response from the petitioner.
4. The company has created an equitable mortgage of its immovable property admeasuring 25.15 Hectares situate at Wardha and the reference thereto is contained in a Memorandum entered into on 17th August, 1992, a copy whereof is annexed at Exh. H to the Company petition.
5. The Company petition has been instituted on the basis that, as on 27th September, 1999 when the petition was filed, an amount of Rs. 4,11, 66,156/- was due and outstanding on account of the principle and that together with the interest and other charges, a total amount of Rs. 6,10,15,192/- is due to the petitioner.
6. An affidavit in reply has been filed to the Company petition on behalf of the respondent. In setting out the defense of the company to the petition, the following submissions were urged on behalf of the respondent:
(i) By November 1997, the Company had paid to the petitioner an amount of Rs. 4.52 crores towards the repayment of the loan. This fact has not been adverted to in the company petition, nor is there any reference in the particulars of the claim to the payments which have been made by the respondent to the petitioner from time to time;
(ii) under the provisions of section 434(1)(a) of the Companies Act, 1956, the Company would be deemed to have been unable to pay the debt if within the stipulated period of the receipt of a notice of winding up, it had failed either to pay or to secure the debt due and outstanding to the petitioner. In the present case the petitioner has available to it valuable security in the form of an equitable mortgage of immovable property of the company. Consequently, it cannot be stated that the company has failed to secure the petitioner;
(iii) A secured creditor must, in the first instance, relinquish its security if it wants to be a part of the process of winding up of the company from whom a debt is due and payable. Unless the security is relinquished in the first instance, the petition for winding up cannot be maintained. In any event, the petition does not contain any disclosure of whether the security is or is not sufficient to meet the dues of the petitioner; and
(iv) The petitioner has instituted a suit being Suit No. 237 of 2000 in this Court after the Company petition was filed. The petitioner having taken recourse to its remedies by filing a civil suit, the company petition ought not to be entertained.
6-A. The principal point on which the arguments were addressed to the Court was on the question as to whether the petitioner as a secured creditor is entitled to maintain the petition for winding up without relinquishing the security had by it as a secured creditor. The submission on the part of the respondent company, which has already been noted earlier, is that unless the petitioner were to relinquish the security prior to the institution of or in any event by an express statement in the petition for winding up, the petition itself would not be maintainable. Having given my anxious consideration to the submissions urged on behalf of the respondent, I am of the view that there is no merit in the submissions.
7. At the outset, it must be noticed that section 439 of the Companies Act, 1956 itself postulates that the petition for winding up of a company may be presented by a secured creditor. Under Clause (b) of sub-section (1) of section 435 a petition for winding up of a company can be presented by any creditor or creditors including any contingent or prospective creditor or creditors. Sub-section (2) of section 439 provides that a secured creditor, the holder of any debentures including debenture stock, whether or not any trustee or trustees have been appointed in respect of such and other like debentures and the trustee for the holder of debentures shall be deemed to be creditors within the meaning of Clause (b) of sub-section (1). Consequently, as a matter of first principle, there can be no doubt about the proposition that it is open to a secured creditor, as indeed it is open to any creditor, to petition the Company Court for the winding up of a company.
8. The issue indeed is not res integra since a Division Bench of this Court in Bharat Overseas Bank Ltd. v. Shree Arcee Steels P. Ltd., 1986 Bank.J. 357(Bom.) : 1985(58) Com.Cas. 174, had occasion to consider this question. The Division Bench considered the judgment of the Madras High Court in Karnatak Vegetable Oils and Refineries Ltd v. Madras Industrial Investment Corporation Ltd., 1954(24) Comp.Cas. 249 (Mad.) and two judgments of learned Single Judges of the Calcutta High Court in India Electric Works Ltd., In re, A.I.R. 1970 Cal. 393 and Calcutta Safe Deposit Co. Ltd. v. Ranjit Mathuradas Sampat, 1971(4) Comp.Cas. 1063(Cal.). The learned Single Judge exercising company jurisdiction had come to the conclusion that the petition for winding up could not be maintained at the instance of the Bharat Overseas Bank which was a secured creditor. Allowing an appeal of the Bank and setting aside the dismissal of the petition for winding up, the Division Bench held that the Company Court was not justified in dismissing the petition for winding up at the stage of admission on the ground that the petitioner was a secured creditor. While allowing the appeal, the Division Bench has held as follows:
“We are of the opinion that bearing in mind the clear provisions of the Companies Act and the principles which have been discussed in detail in the Madras High Court and the Calcutta High Court judgments above cited, the rejection of the petition in this case at the stage of admission was not at all justified. The petition was required to be admitted and advertised and it is at that stage that the Court could go into the question as to whether the security is sufficient or not and exercise its discretion to accept the petitioning creditor’s claims and request for winding up or to reject the same on judicial consideration.”
A similar view, it may be noted, has been taken by a Division Bench of the Calcutta High Court in Techno Metal India (P.) Ltd. v. Prem Nath Anand, 1973(43) Company Cases 556. The Court held thus:
“It is now too late to argue that a secured creditor cannot successfully prosecute an application for winding up, especially in view of sub-section (2) of section 439 of the Companies Act, 1956, a provision which was lacking in the Indian Companies Act of 1913. Apart from the fact that for the purpose of winding up, the term “creditor” includes a secured creditor, there are judicial precedents established in cases decided under the earlier Act where it was held that a secured creditor is fully competent to make such an application. In this connection, reference may be made to the case of Karnatak Vegetable Oils and Refineries Ltd. v. Madras Industrial Investment Corporation Ltd. Reference may also be made to two decisions of learned Single Judges of our Court in the matter of India Electric Works Ltd. and Calcutta Safe Deposit Co. Ltd. v. Ranjit Mathuradas Sampat. These were cases decided under the Act of 1956. The precedents as well as the provisions of section 439(2) of the Companies Act, 1956, are against the contention of Mr. Sen and we cannot accept the proposition that the respondent being a secured creditor is not entitled to apply for winding up unless he abandons his security or satisfied the Court as to its inadequacy”
9. As a matter of first principle, having regard to the scheme which emerges from the various provisions contained in the Companies Act, 1956 for winding up, there is no reason to exclude a secured creditor from the purview of petitioning creditors who can move a Company Petition for winding up. Section 433 of the Companies Act is a part of Chapter II of Part VII which deals with winding up by the Court. Section 433 furnishes a list of circumstances in which a company may be wound up by the Court. Section 434 provides a deeming definition of when a company is deemed to be unable to pay its debts. Section 439 which has already been adverted to earlier expressly contemplates that the petition for winding up can be presented by a secured creditor. Under Section 441, the winding up of a company is deemed to commence at the time of presentation of the petition for winding up. Where the Court makes an order of winding up of a company, section 444 mandates that intimation thereof shall be sent to the official liquidator and the Registrar of Companies. Under sub-section (1) of section 446 when a winding up order has been made or the Official Liquidator has been appointed as provisional Liquidator, no suit or other legal proceeding shall be commenced or if pending at the date of the winding up order, shall be proceeded with, against the company, except by leave of the Court. Under section 447 an order for winding up of a company operates in favour of all the creditors and of all the contributories of the company as if it had been made on the joint petition of a creditor and of a contributory. The provisions in regard to the Official Liquidator are made in the group of sections commencing with section 448. Under section 466(1), the Court is empowered to stay the proceedings for winding up. Section 467 deals with the settlement of a list of contributories and application of the assets of the Company. Sub-section (1) provides that as soon as may be after making a winding up order, the Court shall settle a list of contributories, with power to rectify the register of members in all cases where rectification is required and shall cause the assets of the Company to be collected and applied in discharge of its liabilities. Chapter III of Part VII makes provisions in regard to voluntary winding up and Chapter IV, in respect of winding up subject to supervision of Court. Chapter V of the Act prescribes provisions which are applicable to every mode of winding up. Section 528 provides as follows :
“Section 528. Debts of all descriptions to be admitted to proof :-
In every winding up (subject, in the case of insolvent companies, to the application in accordance with the provisions of this Act of the law of insolvency), all debts payable on a contingency and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company, a just estimate being made, so far as possible, of the value of such debts or claims as may be subject to any contingency, or may sound only in damages, or for some other reason may not bear a certain value.”
Section 529 deals with the application of insolvency rules in the winding up of insolvent companies. Sub-sections (1) and (2) of section 529 provides as follows:
“Section 529. Application of insolvency rules in winding up of insolvent companies.—(1) In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to –
(a) debts provable;
(b) the valuation of annuities and future and contingent liabilities; and
(c) 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:
Provided that 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 foregoing provisions of this 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 purposes of section 529A.
(2) All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the winding up, and make such claims against the company as they respectively are entitled to make by virtue of this section ;
Provided that if a secured creditor instead of relinquishing his security and proving for his debt proceeds to realise his security, he shall be liable to pay his portion of the expenses incurred by the liquidator including a provisional liquidator, if any for the preservation of the security before its realization by the secured creditor.
Explanation—for the purposes of this proviso, the portion of expenses incurred by the liquidator for the preservation of a security which the secured creditor shall be liable to pay shall be the whole of the expenses less an amount which bears to such expenses the same proportion as the workmen’s portion in relation to the security bears to the value of the security.”
10. The scheme of the provisions relating to winding up, particularly those of sections 528 and 529 of the Act, is that the stage of proving of a claim on debt arises after an order of winding up is passed. A secured creditor, as a matter of general rule, is outside winding up, unless he expressly abandons his security. The Supreme Court in a judgment in M.K. Ranganathan v. Govt. of Madras, , considered the position of a secured creditor in the winding up of a Company and referred to the dictum of Lord Wrenbury in Food Controller v. Cork, 1923 A.C. 647 (A). In para 15 of its judgment the Supreme Court held thus :
(15) The position of a secured creditor in the winding up of a company has been thus stated by Lord Wrenbury in Food Controller v. Cork, 1923 A.C. 647 (A):
The phrase outside the winding up is an intelligible phrase if used, as it often is, with reference to a secured creditor, say a mortgagee. The mortgage of a company in liquidation is in a position to say “the mortgaged property is to the extent of the mortgage my property. It is immaterial to me whether my mortgage is in winding up or not. I remain outside the winding up and shall enforce my rights as mortgage.” This is to be contrasted with the case in which such a creditor prefers to assert his right, not as a mortgage, but as a creditor. He may say I will prove in respect of my debt. If so, he comes into the winding up.
11. A secured creditor is thus as contemplated by these settled legal principles. Outside the proceedings for the winding up of a company. He is outside winding up in the sense that unlike an unsecured creditor, the law does not mandate that he must, to use a colloquial expression. “stand in line” with the general body of the creditors, who must prove their claims in winding up and receive pro-rata to the extent of the surplus available for distribution. The secured creditor is entitled to realize his security and does not stand amidst the general body of creditors who share in the available surplus. Though a secured creditor is outside the scope of winding up proceedings, the law equally does not mandate that he shall not enter the proceedings for winding up. Should he choose to become a part of the proceedings for winding up, the law permits him to do so. The options then available to the secured creditor in such a case have been summarized in a passage in Pennington’s Company Law (Fourth edition, page 762) thus :
“Secured creditors :
A creditor who has a mortgage, charge or lien on the property of the company as security for his debt may either :
(a) sell the property subject to his security and prove in the winding up for the balance of his debt after deducing the amount realized, or
(b) surrender his security to the liquidator and prove for the whole of his debt as an unsecured creditor : or
(c) estimate the value of the property subject to his security, and prove for the balance of his debt after deducting the estimated value: or
(d) rely on his security and not prove in the winding up.”
12. The same position would exist, in any event at least broadly speaking, in our law. By the provisions of section 529 of the Companies Act, 1956, the insolvency rules are attracted in regard to the proof of claims of creditors in the proceedings for winding up. These rules are contained in Part III of the Presidency Towns Insolvency Act, 1909. Section 48 of the Act provides that with respect to the mode of proving debts, the right or proof by secured and other creditors, the admission and rejection of proofs, and the other matters referred to in the Second Schedule, the rules in that Schedule shall be observed. Rule 9 of the Second Schedule enunciates that if a secured creditor realizes his security, he may prove for the balance due to him, after deducting the net amount which has been realized. Rule 10 provides that if a secured creditor surrenders his security to the official assignee for the general benefit of the creditors, he may prove for his whole debt. Rule 11 provides that if a secured creditor does not either realize or surrender his security he shall, before ranking for dividend, state in his proof the particulars of his security, the date when it was given 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. Similar provisions are contained in section 47 of the Provincial Insolvency Act, 1920.
13. In its judgment in Allahabad Bank v. Canara Bank, 2000 Bank.J. (S.C.)663 : A.I.R. 2000 S.C. 1535, the Supreme Court while considering the interface between the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 on the Companies Act, 1956, noted that secured creditors fall in two categories : Those who desire to go before the Company Court and those who like to stand outside the winding up. In so far as the first category was concerned, the Supreme Court held thus:
“62. The first category of secured creditors mentioned above are those who go before the Company Court for dividend by relinquishing their security in accordance with the insolvency rules mentioned in section 529. The insolvency rules are those contained in sections 45 to 50 or the Provincial Insolvency Act. Section 47(2) of that Act states that a secured creditor who wishes to come before the official liquidator has to prove his debt and he can prove his debt only if he relinquishes his security for the benefit of the general body of creditors. In that event, he will rank with the unsecured creditors and has to take his dividend as provided in section 529(2).”
In so far as the second category of secured creditors consisting of those who stand outside winding up is concerned, the position of this category of secured creditors was explained as follows in para 63 of the judgment of the Supreme Court:
“63. The second class of secured creditors referred to above are those who come under section 529A(1)(b) read with proviso (c) to section 529(1). These are those who opt to stand outside the winding up to realize their security. Inasmuch as section 19(19) permits distribution to secured creditors only in accordance with section 529A, the said category is the one consisting of creditors who stand outside the winding up. These secured creditors in certain circumstances can come before the Company Court (here the Tribunal) and claim priority over all other creditors for release of amounts out of the other monies lying in the Company Court (here, the Tribunal). This limited priority is declared in section 529A(1) but it is restricted only to the extent specified in Clause (b) of section 529A(1).”
14. The position of the secured creditor has, in this regard, been considered by three early judgments and these may be adverted to at this stage since they express a consistent strand of thought which has been followed since. In Ram Chand v. Bank of Upper India Ltd., Delhi. I.L.R 1922 Lah. 59, the position of the secured creditor was elucidated in the following words :
“As far as possible the Rules of bankruptcy are applicable to liquidation matters. When a company goes into liquidation, a secured creditor may realize his security and prove for any balance there may be outstanding. The remaining assets of the company would in that case only be liable for such principal and interest as was due on the date of the winding up order. A secured creditor in the case of a liquidation is on the same footing as in that of insolvency proceedings. The property hypothecated is thus liable for the whole claim, principal and interest upto the date of realization, and it is only the liability of the remaining assets that could be affected by the winding up order.”
The same view was taken in Sharfuzzman v. H. Hunter., A.I.R. 1980 Oudh 20, which is thus :
“A secured creditor who has advantages of security may remain outside the Act. He can realize upon his security. The extent to which he realizes on his security will reduce the estate in insolvency. But he obtains at first no part in the dividend and is unaffected by the proceedings. Should, however, the amount of realization be less then the amount due to him he is given the special privilege of proving for the balance. This balance is the difference between the decretal amount and the amount realized. When he has proved he will not obtain any more than his proportionate share in the estate. He will be put then on the footing of an unsecured creditor.”
These judgments have been referred to with approval in a judgment of a learned Single Judge of the Madras High Court in Canara Bank v. Official Liquidator, reported in 1991 Bank.J. 364(Mad.) : 1991(70) Company Cases 295.
15. 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 realized his security, he may prove for the balance due to him after deducting the net amount that has been realized. 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 for winding up the whole of the debt due and owing to him, he has to necessarily surrender his security for the benefit of the general body creditors. Therefore, in my view, it would be wholly inappropriate and inapposite to require the secured creditor at the stage when he files Company Petition for winding up to exercise the option of relinquishing his security since that stage does not arise until the debt is to be proved.
16. In the present case, the petitioner has evinced a clear intention to enforce the security by filing a suit in this Court for the recovery of its dues and the enforcement of its securities. There can be no doubt about the proposition that the object of a petition for winding up is to realize the property of the Company for distribution to all the creditors in accordance with the applicable rules. This has been laid down by a Division Bench of this Court in Harinagar Sugar Mills v. M.W. Pradhan, 67 Bom.L.R. 294. A secured creditor who seeks to prove the whole of his deot in the course of the winding up proceedings is necessarily required to relinquish the security. That however, cannot be construed to mean that when he files a petition for winding up, a secured creditor must relinquish his security. In the present case, the petitioner has filed a suit in this Court and made it clear, therefore, that he seeks to enforce the security. When the stage for the proving its of debt does arise, the petitioner would necessarily have to prove for the balance of the debt which is due and owing to it after the security in respect of which the petitioner is a secured creditor is realized.
17. There is no merit in the other contentions which have been urged. The learned Counsel appearing on behalf of the petitioner stated that the last payment which was made by the respondent Company was in 1997 after which on 1st April, 1998 it has acknowledged that there are outstanding dues of Rs. 4.42 crores to the petitioner. Thereafter, various amounts have been paid by the Company in pursuance of the ad-interim order which was passed by this Court. The fact that the Company has offered additional security to the petitioner is one indicator of the fact that the security which has been made available to the petitioner is inadequate to meet the dues. This question, however, need not detain the Court any further since in my view the acknowledgment of the liability in the present case shows that there are substantial dues owing to the petitioner at least to the extent of Rs. 4.42 crores as on 1st April, 1998. In these circumstance, the Company petition is required to be admitted.
18. The Company petition is accordingly admitted and made returnable on 4th July, 2001. Respondent waives service.
19. The petition to be advertised in Free Press Journal. Navshakti and Maharashtra Government Gazette. The petitioner to deposit a sum of Rs. 2,000/- with the Prothonotary & Senior Master within a period of four weeks from today.
On the request of the learned Counsel for the respondents. Advertisement not to be issued for a period of three weeks from today.
Certified copy expedited.