JUDGMENT
J. Chalameswar, J.
1. C P. No. 219 of 1998 is filed by a company claiming to be the creditor of M/s. Ismit Medical Technology Limited under Section 433 of the Companies Act, 1956 (hereinafter referred to as “the Act”), praying that the said Ismit be wound up as the same is not able to pay its debts. The petition was admitted on July 17, 2001, and the appropriate publication as required under Rule 99 of the Companies (Court) Rules was directed to be made.
2. C A. No. 312 of 2001 is filed by one Mr. B. Suresh, who claims to be another creditor of the above-mentioned M/s. Ismit Medical Technology Limited praying that he may be impleaded as party respondent to Company Petition No. 219 of 1998. Along with the implead petition two more applications C. A. Nos. 310 of 1998 and 311 of 1998 are filed by Mr. Suresh with the prayers as follows :
“. . . to declare the proposed sale of assets of respondent No, 2-com-pany by respondent No. 1-bank in pursuance of the notice dated May 23, 2001, as void and accordingly restrain the respondent-bank from effecting sale of the said property without obtaining the permission of the hori’ble court ; and pass such other orders as are deemed fit and proper.
‘. . . to stay all the sale proceedings initiated by respondent No. 1-bank including the proposed advertisement of sale of assets on June 6, 2001, or any subsequent date : and pass such other orders as are deemed fit and proper in the circumstances of the case’.”
3. The case of the abov-mentioned Suresh is that the first respondent in all the three above-mentioned applications, i.e., A. P. Mahesh Co-operative Urban Bank Limited caused an advertisement in Eenadu daily on May 23, 2001, informing the public that all the movables, etc., belonging to M/s. Ismit would be put to auction on June 14, 2001, and such sale would be detrimental to the interests of the applicant, and other unsecured creditors.
4. As it appeared from the tenor of the advertisement that some of the assets of a company against which a petition to wind up is pending in this court are proposed to be sold, pursuant to attachment obtained by A. P. Mahesh Cooperative Bank Limited (the first respondent in the above-mentioned three applications), the details of which are not given in the advertisement, this court thought it fit to enquire into the matter; and passed an interim order in C. A. No. 311 of 2001 as prayed for and ordered notice in the other two applications. The notices are served.
5. The first respondent co-operative bank filed an application C. A. No. 431 of 2001 praying that the interim order granted on June 6, 2001, referred to earlier be vacated. In substance, the case of the respondent-co-operative bank is that the bank sanctioned a loan of Rs. 97.45 lakhs to the second respondent-company herein as a term loan and also there is another sanction of an amount of
Rs. 20 lakhs as OCC loan. According to the affidavit these loans are secured by certain hypothecations in favour of the said co-operative bank. It is further alleged that as the second respondent-company failed to repay the loans in terms of the agreement between the bank and the second respondent, proceedings under the Andhra Pradesh Co-operative Societies Act were initiated, presumably under Section 61 of the Co-operative Societies Act. It appears that the arbitrator passed an award dated July 23, 2001; in fact a copy of the award dated February 16, 2001, is filed in the material papers. The relevant portion of the award reads as follows :
“In view of the above facts and documents verified by me an award under Section 62(4) of the Andhra Pradesh Co-operative Societies Act 7 of 1964 is hereby issued in favour of the plaintiff-bank for recovery of the outstanding amount of Rs. 32,48,181.91 which was accumulated as on December 31, 1999, with further interest at 21 per cent. per annum from January 1, 2000, from the defendants, whereas D3 Sri N.N. Rao shall make good his liability as per the compromise deed entered with the bank on October 23, 2000, and filed before the undersigned on November 6, 2000, after adjusting subsequent payments made after that date December 31, 1999, and the same amount shall be paid by the defendants to the plaintiff-bank immediately. If the defendants fail to repay the outstanding amount immediately, after receipt of this award, the same shall be recovered from all the defendants jointly and severally in person or by attaching their movable and immovable properties or both.”
6. The first respondent claims that he is only seeking to enforce the said award in accordance with the provisions of the Andhra Pradesh Co-operative Societies Act. The respondent further submitted that Applications Nos. 310, 311 and 312 are collusive in nature, as according to the first respondent, the petitioner therein is a very close associate of the company against which winding up proceedings are pending and Applications Nos. 310 to 312 are a mere abuse of the process of this court and that the applicant has not produced any material whatsoever to show that he is in fact a creditor of the company which is sought to be wound up ; therefore, he does not have the requisite “locus standi” to approach the court, therefore the above-mentioned applications are required to be dismissed and interim order granted earlier is required to be vacated.
7. The second respondent also filed a counter wherein the company admitted the averment made by the applicant that the company had borrowed an amount of Rs. 10 lakhs from the applicant. The petitioner in C. P. No. 219 of 1998 also filed a counter objecting for the grant of any relief sought in the three applications mentioned above. Various allegations are made in the affidavit, the details of which may not be necessary for the purpose of these applications.
8. On behalf of the applicant, Sri S. R. Ashok, senior counsel argued that the applicant is an unsecured creditor of the company, which is prayed to be wound up in C. P. No. 219 of 1998, i.e., the second respondent in these applications, and that he is not seeking any adjudication of his rights in the present application except objecting to the sale of the assets of the company whose affairs are pending consideration before the court under Section 433 of the Companies Act at the instance of another creditor of the said company. Eventually, if the said company is wound up, the sale of the assets of the company during the pendency of the proceedings would adversely affect the rights of various persons like creditors, contributors, etc. Apart from that irrespective of the fact that whether the applicant has the requisite “locus standi” or not in view of the mandate contained under Section 537 of the Companies Act that any attachment, distress and execution put in force without the leave of the company court against the estate or effects of the company after the commencement of the winding up or any sale held without the leave of the court, of any properties or effects of the company after such commencement, to be void, the question of “locus standi” of the applicant pales into insignificance and this court is required to examine the matter, once the basic facts like a company is being wound up under the supervision of the company court and the assets of such company are being disposed of during the pendency of the winding up proceedings are established.
9. On the other hand, Sri Murali Narayan, learned counsel appearing for the first respondent argued that the requirement of obtaining the leave of this court, contemplated under Section 446 of the Act is only in those cases where the winding up order is passed or in cases where a provisional liquidator is appointed pending consideration of the winding up of a company. Learned counsel further argued that the language of Section 537 of the Act indicates that the consequence stipulated therein would be attracted only in those cases where any attachment or execution, etc., is enforced subsequent to an order of winding up of a company being passed, but not otherwise. Learned counsel also submitted that as the first respondent is a secured creditor, he is entitled to seek the enforcement of his security and in any event, leave to proceed with the execution of the decree passed by the arbitrator could still be granted by this court even at this stage upon his oral application.
10. Learned counsel for the applicant submitted that notwithstanding the assertion made by the first respondent-bank that it is a secured creditor, in view of the fact that the bank chose to obtain only a money decree from an arbitrator constituted under the Andhra Pradesh Co-operative Societies Act, it is not open for the first respondent-bank now to claim that it is a secured creditor and it must be deemed to have waived its security. Therefore, the first respondent-bank has no option, but to go before the official liquidator as an unsecured creditor and stand in the queue for the recovery of the amounts due to it.
11. To examine these rival contentions, an analysis of the scheme of Sections 446, 537 and 441 of the Act is required.
12. Section 446 of the Act mandates that whenever an order of winding up is passed with reference to a company or a provisional liquidator is appointed by the court even before a formal winding up order is passed no suit or other legal proceeding shall either be commenced or if already pending by then, shall be proceeded further against the said company except with the leave of the company court. Sub-sections (2) and (3) deal with the powers of the company court vis-a-vis such pending proceedings, the details of which may not be necessary for the purpose of this case.
13. On the other hand, Section 537 of the Act declares that any attachment, distress or execution put in force without leave of the company court against the estate or effects of a company before such a company is being wound up under the supervision of the court, to be void. In fact, the relevant portion of Section 537 of the Act reads as follows :
“(1) 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 . . .”
14. In my view, while Section 446 of the Act deals with the effect of the winding up order or an order appointing a provisional liquidator on the pending suits or “other legal proceedings” which expression must necessarily be understood in the light of the preceding expression “suit” wherein the rights of the parties are pending adjudication before either a court or any other authority which is vested with the power to make such an adjudication. Section 537 of the Act deals with the situation where such adjudication is already made under the provisions of any law, and an attachment or distress or execution is sought to be made to give effect to such an adjudication or if permissible even during the pendency of such adjudication. Section 537(1)(a) declares such execution, etc., if put in force without the leave of the company court wherein the winding up proceedings are pending–to be void.
15. Sub-section (b) of Section 537 of the Act deals with the consequences of the sale of the properties or effects of the company in liquidation, it does not speak about the sale as a consequence of any adjudication nor does it say that such a sale should be held at the instance of a third party. The language of Section 537 of the Act, in my view, could even take a sale of the assets of the company by itself or a sale brought about by third parties in execution of an adjudicated right.
16. Section 531A of the Act deals with certain sales or transfers of the properties by the company held within a period of one year before the presentation of the winding up application. That section only has application to the sales voluntarily made by a company within a limited period of one year immediately preceding the date of the presentation of the winding up application. So, the expression “sale held” occurring in Section 537 of the Act takes within its sweep whether it is voluntary sale by the company or a sale brought by a third party for whatever reason, to be void if made without the leave of the company court during the pendency of the winding up proceedings.
17. Thus, the distinction between Sections 446 and 537 of the Act is that while a person can proceed to have his rights against the company that is being wound up/adjudicated with the leave of the company court, no person is entitled to enforce such rights against such company during the pendency of the winding up proceedings although such rights have been determined by a competent court or tribunal without once again obtaining the leave of the court. Further, the adjudication proceedings can go on until a winding up order or an order of the appointment of a provisional liquidator is made, without the necessity of obtaining the leave of the company court whereas enforcement of any right adjudicated or otherwise, cannot be made the moment the company is faced with a winding up proceeding. The logic is not difficult to understand while an adjudication only declares the rights of the parties execution directly affects the assets of the company and takes away the assets from the possession or custody of the company and creates rights in favour of third parties and thereby result in the proliferation of litigation if eventually the company is directed to be wound up. It must be remembered that Section 446(1) does not declare that any adjudication made in contravention of the said section to be void ; whereas Section 537 declares–obviously, the reason is that though it is desirable that the leave of the company court is to be obtained even at the stage of the adjudication, the non-compliance of the requirement of Section 446(1) may not really affect the assets of the company in liquidation as the enforcement of the rights so adjudicated is still required to be done with the leave of the company court under Section 537.
18. It is a settled legal position that a secured creditor, though in law is entitled to enforce his security against a company which is facing winding up proceedings, is still required to obtain the leave of the company court to remain outside the liquidation proceedings and enforce his security. Obviously, the purpose of insisting on such leave is to keep the company court, which is dealing with the liquidation of the company, posted as a matter of fact, as to what is happening to the assets of the company.
19. The submission of learned counsel for the first respondent that the expression “being wound up” occurring in the opening clause of Section 537(1) must mean only that the proceedings subsequent to the actual winding up order,
and, therefore, as such an order is not yet passed, Section 537 has no application is not supported either by any authority in law or logic–section 537 speaks of a company that “is being wound up” and Section 441(2) of the Act creates a fiction and declares that the winding up of the company shall be deemed to have commenced at the time of the presentation of an application for winding up of a company. Therefore, in my view, it must be understood that a company is undergoing the process of winding up from the date of the presentation of the company petition in all these cases where Section 441(2) applies.
20. The next submission of learned counsel for the first respondent is that since the first respondent is a secured creditor, his oral application for leave to proceed with the execution of the award made in his favour, may be considered by this court even at this stage, requires some examination.
21. It cannot be said that as a matter of an absolute rule that an application for grant of leave of the court either under Section 446 or 537 of the Act, should be rejected only on the ground that it is not a written application. The fact that the first respondent is a secured creditor is disputed and from the award made in favour of respondent No. 1 creditor, which is already extracted above, it appears to me, to be, purely in the nature of a money decree. The award does not indicate that any specific liability created against any one of the assets of the company. In fact, the last sentence of the award, which reads :”…. the same shall be recovered from all the defendants jointly and severally in person or by attaching their movables or immovable properties or both” in my view, it leaves no scope for any doubt that the award is in the nature of a money decree. In which case, the view taken by the Delhi High Court in Syndicate Bank v. Official Liquidator, Prashant Engineering Co. P. Ltd., fully supports the stand taken by learned counsel for the applicants. It was a case where a bank advanced certain monies to a company on the basis of a hypothecation agreement ; the company subsequently went into liquidation. In the meanwhile, the bank obtained a simple money decree for recovery of the amounts due to it. Subsequently, the bank approached the Delhi High Court praying that the official liquidator be directed to hand over to it the machinery which was hypothecated. In those circumstances, the Delhi High Court held as follows (page 305) :
“Unlike a mortgage, a pledge or hypothecation does not have the effect of transferring any ‘interest’ in the property in favour of the pledgee or the hypothecatee. The pledge and hypothecation, however, create a special property in the goods in favour of the pledgee or the hypothecatee. In the case of a pledge, the special property is to keep possession of the pledged goods and to dispose them of for the realisation of the debt for which it is held as security. In the case of hypothecation, possession remains with the hypothecator but the hypothecatee has the right to take possession of the hypothecated
property and to sell it for the realisation of the debt secured by hypothecation. It was open to the bank to take possession of the hypothecated property on its own or through the court but it failed to do so. It was also open to the bank to enforce the security by the suit that it filed but there again the bank chose to seek a simple money decree. Mere mention of hypothecation in the suit was not sufficient. The bank would, therefore, be deemed to have waived its right as hypothecatee and was satisfied with a simple money decree. The bank having filed a suit for the recovery of money and having failed to make a claim on the security, any claim on the security or the sale proceeds thereof would now be barred under Order 2, Rule 2 of the Civil Procedure Code, 1908, with the result that the bank has no subsisting claim on the machinery or any part of the sale proceeds thereof and must rank as an unsecured creditor along with the other creditors of the company, and prove its claim before the official liquidator at the appropriate time. See Official Assignee of Bombay v. Chim-niram Motilal, AIR 1933 Bom 51, and Official Assignee of Bombay v. Abdul Hayee, AIR 1933 Bom 437. The bank is itself to blame for the course that it chose to adopt.”
22. In my view, the same legal position applies to the facts of the present case also. In which case, the first respondent-bank remains only an unsecured creditor’.
23. No doubt, even an unsecured creditor who obtained a decree for the recovery of amounts due to him, may proceed against a company in liquidation with the leave of the company court as can be seen from the language of Section 537 of the Act, but having regard to the overall scheme of the Act, more particularly, the provisions dealing with the liquidation of a company and the various competing claims in the context of liquidation of a company and the priorities created in favour of certain claims by the law, it is required to first ascertain as to what are the claims against a company in liquidation and what is the nature of those claims and whether they are secured or unsecured. Without ascertaining the same permitting an unsecured creditor to enforce the decree obtained by him against a company might result in defeating the superior claims of others like the secured creditors, if any, and the workmen who have a superior claim over an unsecured creditors. Therefore, in my view, it is not desirable at this stage, to grant leave to the first respondent-bank to enforce the award obtained by it.
24. The only other submission which is required to be dealt with, is that the applicant in the above mentioned three applications has hot placed any material before this court that he is a creditor whether secured or unsecured except for the assertion in the affidavit filed in support of the present applications and, therefore, he does not have the requisite “locus standi” to pursue these applications. I my view, this submission of the first respondent must be rejected, for the reason, that when Parliament mandated certain transactions
described under Section 537 of the Act–to be void if carried on without the leave of the company court, this court cannot simply throw out these applications on the ground that it is doubtful whether the applicants have the necessary “locus standi”. Because by rejecting such an application, the court would be permitting an illegality to be perpetrated in contravention of the mandate of Parliament, I therefore see no force in the said submission.
25. For all the above-mentioned reasons, C. A. No. 312 of 2001 is allowed.
26. The interim order granted in C. A. No. 311 of 2001 on June 6, 2001, shall continue until further orders of this court.
27. C. A. No. 431 of 2001 filed by the first respondent is dismissed.
28. In view of the orders passed in the above applications, no separate orders in C. A. No. 310 of 2001 are required to be passed.
29. Post the matter on August 20, 2001.