IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 18/04/2006
CORAM
THE HON'BLE MR.A.P.SHAH, CHIEF JUSTICE
and
THE HON'BLE MR. JUSTICE M.JAICHANDREN
O.S.A.No. 214 of 2005
and O.S.A.No.215 of 2005
and
C.M.P.Nos.15340 to 15343 of 2005
Asset Reconstruction
Company (India) Limited,
Rep. by its Vice President,
17th Floor, Express Towers,
Nariman Point,
Mumbai 400 021. ..Appellant in both the appeals.
-Vs-
The Official Liquidator,
High Court, Madras
as the liquidator of SIV Industries Ltd.
(in liquidation) ..Respondent in both the appeals.
PRAYER: Original Side Appeals filed under Order 36 Rule II of O.S.
Rules read with Clause 15 of the Letters Patent against the order of the
learned single Judge dated 05.07.2005 made in Company Application Nos.712 and
713 of 2005 in C.P.No.17 of 2004.
!For Appellant :: Mr.A.L.Somayaji, Senior Counsel
For M/s.Rangarajan & Prabhakaran
^For Respondent :: Mr.Arvind P.Datar, Senior Counsel
For Official Liquidator, High Court, Madras
:J U D G M E N T
THE HONBLE THE CHIEF JUSTICE
Whether an Asset Reconstruction company formed under the
Securitisation and Re-construction of Financial Assets and Enforcement of
Security Interest Act, 2002, hereinafter referred to for brevitys sake as
Securitisation Act, is entitled to be associated in the process of the sale
of assets of a company under liquidation along with the Official Liquidator is
the question which falls for our consideration in these appeals.
2. The facts leading to this appeal are that SIV Industries Limited
(formerly South India Viscose Limited) run into financial difficulties and was
declared as a sick industrial company within the meaning of Section 3(1)(o) of
the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter
called SICA) by order dated 09.07.2002. Attempts at re-habilitate proved
unsuccessful. BIFR ultimately recommended that SIV Industries Limited should
be wound up under Section 20(1) of SICA vide order dated 25.09.2003. Before
BIFR, ICICI requested permission to take possession of the assets under
Section 20(4) of the SICA. Accordingly, BIFR appointed ICICI as selling agent
to dispose of the properties of SIV Industries Limited under Section 20(4) of
the Act and to deposit the sale proceeds to the concerned High Court for
distribution under Section 529-A and other provisions of the Companies Act,
1956. However, it appears that ICICI did not take any steps to sell the
property. Meanwhile, by order dated 28.04.2004 SIV Industries Limited was
ordered to be wound up by the Company Court and the Official Liquidator was
appointed as Liquidator. The Official Liquidator has taken possession of the
assets and has sold certain movables on 21.02.2005 and 11.05.2005. The
Official Liquidator has also got the valuation done of certain properties and
an application for sale has been filed for the sale of two residential flats
belonging to the company under liquidation.
3. The appellant Asset Reconstruction Company (India) Limited is a company
formed under the Securitisation Act and has been registered under the
Companies Act as required under Section 3 of the Securitisation Act and in
terms of Section 5 of the said Act, the appellantcompany steps into the shoes
of the banks or financial institutions empowered to take possession of the
assets of the borrower including the right of transfer by way of lease,
assignment, sale and realize the sale proceeds of the secured assets and to
take over the management of the business of the borrower. The majority of the
creditors have given consent for the appellant-company to formulate the
modalities of the sale and also to appoint the appellant as Chairman of the
Assets Sale Committee along with the Official Liquidator to dispose of the
assets of the company in liquidation. The appellant has moved Company
Application Nos.712 and 713 of 2005 before the Company Court seeking to
appoint the appellant as agent of the Official Liquidator to complete the
modalities of the sale along with the Official Liquidator. By the impugned
order, both the applications were rejected by the Company Court holding that
once the winding up of the company is ordered the assets and effects of the
company shall be deemed to be in the custody of the High Court from the date
of the order of winding up. The Official Liquidator on whom the assets rest
could only act as per the directions of the Company Court and cannot act
independently. In such event when the power to deal with the property is
entrusted to the Official Liquidator by the Company Court in its discretion
the power of the appellant company by its incorporation for the purpose of
reconstruction under the Securitisation Act, cannot override the power of the
Official Liquidator under the Companies Act.
4. Mr.A.L.Somayaji, learned Senior Counsel appearing for the
appellant submitted that the appellant has special rights under the
Securitisation Act and since there was no notice to them of the proceedings in
liquidation and they were no parties to the order of winding up, they were
entitled to proceed with the sale of the assets along with the Official
Liquidator and the Company Court was not justified in rejecting the
applications of the appellant. The learned Senior Counsel submitted that the
decision in Allahabad Bank Vs. Canara Bank, 2000 (4 ) SCC 406 was an
authority in support of the proposition that the provisions of Securitisation
Act would prevail over the provisions of Companies Act, since Securitisation
Act being a special enactment made for protecting the interests of banks and
financial institutions. Learned Senior Counsel submitted that the decision of
the Supreme Court in Rajasthan State Financial Corporation and Another Vs.
Official Liquidator and Another, (2005) 8 SCC 190 also support the stand of
the appellant that the appellant-company which is a securitisation company and
having purchased the security interest from ICICI Bank Limited and also having
obtained consent from other secured creditors of the company under liquidation
is entitled to be associated in the sale of assets along with the Official
Liquidator. The learned Senior Counsel submitted that in the vent of
inconsistency between Section 457 of the Companies Act and second proviso to
Section 13(9) of the Securitisation Act, the Securitisation Act shall prevail
and the secured creditor/securitisation company is entitled to take over the
assets and sell the same. He submitted that the Securitisation Act being the
later enactment overrides the provisions of Companies Act in respect of sale
of assets and the provisions of the Securitisation Act are meant to safeguard
the interests of the secured creditors and the securitisation companies formed
under the Securitisation Act.
5. In reply, Mr.Arvind P.Datar, learned Senior Counsel for the
respondent submitted that the power under Section 9 of the Securitisation Act
is without prejudice to the provisions contained in any other law. In other
words, such power does not override the provisions of the Companies Act.
Section 37 of the Securitisation Act states that the provisions of the said
Act are in addition to and not in derogation, inter alia, of the companies
Act. Therefore, according to Mr.Datar the power of the liquidator to take
charge of the assets and sell the same is not in any way affected or diluted
by the formation of an Assets Reconstruction Company. According to Mr.Datar
once the company is wound up, all the assets are to be taken into custody of
the Official Liquidator under Section 456 of the Companies Act. Under Section
457 (1)(c) of the Companies Act only Official Liquidator has the power to sell
movable and immovable properties of the company. He submitted that under
Section 457(2)(v) of the Companies Act Official Liquidator can appoint an
agent to do any business which he is unable to do himself . Therefore,
where the Official Liquidator is capable of completing a particular task,
there is no question of appointing an agent. He further submitted that in the
instant case the Official Liquidator has taken custody of the assets and
completed valuation, and there is no reason or justification for appointing a
Sale Committee with the appellant herein. He submitted that the appellant has
failed to sell the assets despite an order by the BIFR on 24.09.2003, and it
has now approached the Company Court only to claim commission from the sale
proceeds. According to Mr.Datar there is no conflict between the
Securitisation Act and the Companies Act. If the financial institution has
not taken steps before the DRT its only remedy is to approach the Company
Court for proper directions for realizing its securities. In such a case, the
Assets Reconstruction Company has no locus standi even to apply for being
appointed as an agent to sell the property.
6. In order to appreciate the contentions raised at the bar, it would
be necessary to note the relevant provisions of the Securitisation Act. It is
seen from the preamble of the said Act that it has been enacted with a view to
regulate the securitisation and reconstruction of financial assets and
enforcement of security interest and for matters connected there to. The Act
enables the banks and financial institutions to realize long term assets,
manage problems of liquidity to the assets liability, and to improve recovery
by exercising powers to take possession of security, sell them and reduce
non-performing assets by adopting measures for recovery or reconstruction.
The Act further enables for setting up of Assets Reconstruction Companies
which are empowered to take possession of the secured assets of the borrower
including the right to transfer by way of lease, assignment or sale and
realize the secured assets and take over the management of the business of the
borrower. The validity of the provisions of the said Act was upheld by the
Supreme Court in Mardia Chemicals Limited Vs. Union of India, AIR 2004 SC
2371 except that of sub section 2 of Section 17 which provides deposit of 75%
before entertaining an appeal by the DRT under Section 17 of the Act. In
Mardia Chemicals (supra) the Supreme Court observed as follows:
Para-35: As referred to above, the Narasimham Committee was
constituted in 1991 relating to the Financial System prevailing in the
country. It considered wide ranging issues relevant to the economy, banking
and financing etc. Under Chapter V of the Report under the heading Capital
Adequacy, Accounting Policies and other Related Matters it was opined that a
proper system of income recognition and provisioning is fundamental to the
preservation of the strength and stability of banking system. It was also
observed that the assets are required to be classified, it also takes note of
the fact that the Reserve Bank of India had classified the advances of a bank,
one category of which was bad debts/doubtful debts. It then mentions that
according to the international practice, an asset is treated as non-performing
when the interest is overdue for at least two quarters. Income of interest is
considered as such, only when it is received and not on the accrual basis.
The Committee suggested that the same should be followed by the banks and
financial institutions in India and an advance is to be shown as
non-performing assets where the interest remains due for more than 180 days.
It was further suggested that the Reserve Bank of India should prescribe clear
and objective definitions in respect of advances which may have to be treated
as doubtful, standard or substandard, depending upon different situations.
Apart from recommending to set up of Special Tribunals to deal with the
recovery of dues of the advances made by the Banks, the Committee observed
that impact of such steps would be felt by the banks only over a period of
time, in the meanwhile, the Committee also suggested for re-construction of
assets saying Committee has looked at the mechanism employed under similar
circumstances in certain other countries and recommends the setting up of, if
necessary by special legislation, a separate institution by the Government of
India to be known as Assets Reconstruction Fund (ARF) with the express purpose
of taking over such assets from banks and financial institutions and
subsequently following up on the recovery of dues owed to them from the
primary borrowers. While recommending for setting up of Special Tribunals,
the Committee observed:
Banks and financial institutions at present face considerable
difficulties in recovery of dues from the clients and enforcement of security
charged to them due to the delay in the legal processes. A significant
portion of the funds of banks and financial institutions is thus blocked in
unproductive assets, the values of which keep deteriorating with the passage
of time. Banks also incur substantial amounts of expenditure by way of legal
charges which add to their overheads. The question of speeding up the process
of recovery was examined in great detail by a Committee set up by the
Government under the Chairmanship of the late Shri Tiwari. The Tiwari
Committee recommended, inter alia, the setting up of Special Tribunals which
could expedite the recovery process.
The Committee also suggested some legislative measures to meet the
situation.
Para 36: In its Second Report, the Narasimham Committee observed
that the NPAs in 1992 were uncomfortably high for most of the public sector
banks. In Chapter VIII of the Second Report of Narasimham Committee deals
about legal and legislative framework and observed:
8.1: A legal framework that clearly defines the rights and
liabilities of parties to contracts and provides for speedy resolution of
disputes is a sine qua non for efficient trade and commerce, especially for
financial intermediation. In our system, the evolution of the legal framework
has not kept pace with changing commercial practice and with the financial
sector reforms. As a result, the economy has not been able to reap the full
benefits of the reforms process. As an illustration, we could look at the
scheme of mortgage in the Transfer of Property Act, which is critical to the
work of financial intermediaries..
One of the measures recommended in the circumstances was to vest the
financial institutions through special statutes, the power of sale of the
asset without intervention of the Court and for reconstruction of the assets.
It is thus to be seen that the question of nonrecoverable or delayed recovery
of debts advanced by the banks or financial institutions has been attracting
the attention and the matter was considered in depth by the Committees
specially constituted consisting of the experts in the field. In the
prevalent situation where the amount of dues are huge and hope of early
recovery is less, it cannot be said that a more effective legislation for the
purpose was uncalled for or that it could not be resorted to. It is again to
be noted that after the report of the Narasimham Committee, yet another
Committee was constituted headed by Mr.Andhyarujina for bringing about the
needed steps without the legal framework. We are, therefore, unable to find
much substance in the submission made on behalf of the petitioners that while
the Recovery of Debts Due to Banks and Financial Institutions Act was in
operation it was uncalled for to have yet another legislation for the recovery
of the mounting dues. Considering the totality of circumstances the financial
climate world over, if it was thought as a matter of policy, to have yet
speedier legal method to recover the dues, such a policy-decision cannot be
faulted with nor it is a matter to be gone into by the Courts to test the
legitimacy of such a measure relating to financial policy.
7. Sections 34 and 35 of the Securitisation Act read as under:-
Section 34: Civil Court not to have jurisdiction:-
No Civil Court shall have jurisdiction to entertain any suit or proceeding in
respect of any matter which a Debts Recovery Tribunal or the Appellate
Tribunal is empowered by or under this Act to determine and no injunction
shall be granted by any Court or other authority in respect of any action
taken or to the taken in pursuance of any power conferred by or under this Act
or under the Recovery of Debts Due to Banks and Financial Institutions Act,
1993.
Section 35: The provisions of this Act to override other laws:-
The provisions of this Act shall have effect, notwithstanding anything
inconsistent therewith contained in any other law for the time being in force
or any instrument having effect by virtue of any such law.
8. The relevant provision of the Securitisation Act about the rights
of secured creditor in Section 13 is as under:-
Section 13: Enforcement of Security Interest:-
(1) Notwithstanding anything contained in Section 69 or Section 69-A of the
Transfer of Property Act, 1882, any security interest created in favour of any
secured creditor my be enforced, without the intervention of the Court or
tribunal, by such creditor in accordance with the provisions of this Act.
(2) Where any borrower, who is under a liability to a secured creditor under a
security agreement, makes any default in repayment of secured debt or any
instalment therefore, and his account in respect of such debt is classified by
the secured creditor as non-performing asset, then, the secured creditor may
require the borrower by notice in writing to discharge in full his liabilities
to the secured creditor within sixty days from the date of notice failing
which the secured creditor shall be entitled to exercise all or any of the
rights under sub-section (4).
(3) The notice referred to in sub-section (2) shall give details of the amount
payable by the borrower and the secured assets intended to be enforced by the
secured creditor in the event of non-payment of secured debts by the borrower.
(3-A) If, on receipt of the notice under sub-section (2), the borrower makes
any representation or raises any objection, the secured creditor shall
consider such representation or objection and if the secured creditor comes to
the conclusion that such representation or objection is not acceptable or
tenable, he shall communicate within one week of receipt of such
representation or objection the reasons for non-acceptance of the
representation or objection to the borrower:
Provided that the reasons so communicated or the likely action of the secured
creditor at the stage of communication of reasons shall not confer any right
upon the borrower to prefer an application to the Debts Recovery Tribunal
under Section 17 or the Court of District Judge under Section 17-A.
(4) In case the borrower fails to discharge his liability in full within the
period specified in sub-section (2), the secured creditor may take recourse to
one or more of the following measures to recover his secured debt, namely:-
(a) take possession of the secured assets of the borrower including the right
to transfer by way of lease, assignment or sale for realizing the secured
asset;
(b) take over the management of the business of the borrower including the
right to transfer by way of lease, assignment or sale for realizing the
secured asset:
Provided that the right to transfer by way of lease, assignment or sale shall
be exercised only where the substantial part of the business of the borrower
is held as security for the debt:
Provided further that where the management of whole of the business or part of
the business is severable, the secured creditor shall take over the management
of such business of the borrower which is relatable to the security for the
debt.
(c) appoint any person (hereafter referred to as the manager), to manage the
secured assets the possession of which has been taken over by the secured
creditor;
(d) require at any time by notice in writing, any person who has acquired any
of the secured assets from the borrower and from whom any money is due or may
become due to the borrower, to pay the secured creditor, so much of the money
as is sufficient to pay the secured debt.
(5) Any payment made by any person referred to in clause (d) of subsection (4)
to the secured creditor shall give such person a valid discharge as if he has
made payment to the borrower.
(6) Any transfer of secured asset after taking possession thereof or take over
of management under sub-section (4), by the secured creditor or by the manager
on behalf of the secured creditor shall vest in the transferee al rights in,
or in relation to, the secured asset transferred as if the transfer had been
made by the owner of such secured asset.
(7) Where any action has been taken against a borrower under the provisions of
sub-section (4), all costs, charges and expenses which, in the opinion of the
secured creditor, have been properly incurred by him or any expenses
incidental thereto, shall be recoverable from the borrower and the money which
is received by the secured creditor shall, in the absence of any contract to
the contrary, be held by him in trust, to be applied, firstly, in payment of
such costs, charges and expenses and secondly, in discharge of the dues of the
secured creditor and the residue of the money so received shall be paid to the
person entitled thereto in accordance with his rights and interests.
(8) If the dues of the secured creditor together with all costs, charges and
expenses incurred by him are tendered to the secured creditor at any time
before the date fixed for sale or transfer, the secured asset shall not be
sold or transferred by the secured creditor, and no further step shall be
taken by him for transfer or sale of that secured asset.
(9) In the case of financing of a financial asset by more than one secured
creditors or joint financing of a financial asset by secured creditors, no
secured creditor shall be entitled to exercise any or all of the rights
conferred on him under or pursuant to sub-section (4) unless exercise of such
right is agreed upon by the secured creditors representing not less than
three-fourth in value of the amount outstanding as on a record date and such
action shall be binding on all the secured creditors:
Provided that in the case of a company in liquidation, the amount, realized
from the sale of secured assets shall be distributed in accordance with the
provisions of Section 529-A of the Companies Act, 1956:
Provided further that in the case of a company being wound up on or after the
commencement of this Act, the secured creditor of such company, who opts to
realize his security instead of relinquishing his security and proving his
debt under proviso to sub-section (1) of Section 529 of the Companies Act,
1956, may retain the sale proceeds of his secured assets after depositing the
workmens dues with the liquidator in accordance with the provisions of
Section 529-A of that Act:
Provided also that the liquidator referred to in the second proviso shall
intimate the secured creditor the workmens dues in accordance with the
provisions of Section 529-A of the Companies Act, 1956 and in case such
workmens dues cannot be ascertained, the liquidator shall intimate the
estimated amount of workmens dues under that section to the secured creditor
and in such case the secured creditor may retain the sale proceeds of the
secured assets after depositing the amount of such estimated dues with the
liquidator:
Provided also that in case the secured creditor deposits the estimated amount
of workmens dues, such creditor shall be liable to pay the balance of the
workmens dues or entitled to receive the excess amount, if any, deposited by
the secured creditor with the liquidator:
Provided also that the secured creditor shall furnish an undertaking to the
liquidator to pay the balance of the workmens dues, if any.
Explanation:- For the purposes of this sub-section, –
(a) record date means the date agreed upon by the secured creditors
representing not less than three-fourth in value of the amount outstanding on
such date;
(b) amount outstanding shall include principal, interest and any other dues
payable by the borrower to the secured creditor in respect of secured asset as
per the books of account of the secured creditor.
(10) Where dues of the secured creditor are not fully satisfied with the sale
proceeds of the secured assets, the secured creditor may file an application
in the form and manner as may be prescribed to the Debts Recovery Tribunal
having jurisdiction or a competent Court, as the case may be, for recovery of
the balance amount from the borrower.
(11) Without prejudice to the rights conferred on the secured creditor under
or by this section, the secured creditor shall be entitled to proceed against
the guarantors or sell the pledged assets without first taking any of the
measures specified in clauses (a) to (d) of sub-section (4) in relation to the
secured assets under this Act.
(12) The rights of a secured creditor under this Act may be exercised by one
or more of his officers authorized in this behalf in such manner as may be
prescribed.
(13) No borrower shall, after receipt of notice referred to in subsection (2),
transfer by way of sale, lease or otherwise (other than in the ordinary course
of his business) any of his secured assets referred to in the notice, without
prior written consent of the secured creditor.
9. It may be mentioned here that after Securitisation Act, amendment
has been made to Section 15 of the SICA as under:
Section 15: Reference to Board:-
(1) Where an industrial company has become a sick
industrial company, the Board of Directors of the company, shall, within sixty
days from the date of finalisation of the duty audited accounts of the company
for the financial year as at the end of which the company has become a sick
industrial company, make a reference to the Board for determination of the
measures which shall be adopted with respect to the company.
Provided that if the Board of Directors has sufficient reasons
even before such finalisation to form the opinion that the company had become
a sick industrial company, the Board of Directors shall, within sixty days
after tit has formed such opinion, make a reference to the Board for the
determination of the measures which shall be adopted with respect to the
company.
Provided further that no reference shall be made to the Board
of Industrial and the Financial Reconstruction after the commencement of the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002. Where a financial assets have been acquired by
any securitisation company or reconstruction company under sub-section (1) of
Section 5 of that Act.
Provided also that on or after the commencement of
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 were a reference is pending before the Board for
Industrial & Financial Reconstruction, such a reference shall abate if the
secured creditors representing not less than three fourth in value of the
amount outstanding against financial assistance disbursed to the borrower of
such secured creditors, have taken any measures to recover their secured debt
under the sub-section (4) of Section 13 of that Act.
10. Amendment on similar lines has been made to Section 424-A of the
Companies Act, 1956. Amended Section is as under:-
424-A. Reference to Tribunal:-
(1) Where an industrial company has become sick
industrial company, the Board of Directors of such company shall make a
reference to the Tribunal and prepare a scheme of its revival and
rehabilitation and submit the same to the Tribunal along with an application
containing such particulars a may be prescribed, for determination of the
measures which may be adopted with respect to such company;
Provided that nothing contained in this sub-section shall
apply to a Government Company;
Provided further that a Government Company, may with the prior
approval of the Central Government or a State Government, as the case may be,
make a reference to the Tribunal in accordance with the provisions of this
sub-section and thereafter, all the provisions of this Act apply to such
Government Company;
Provided also that in case any reference had been made before
the Tribunal and a scheme for revival and rehabilitation submitted before the
commencement of the Enforcement of Security Interest and Recovery of Debts
Laws (Amendment) Ordinance, 2004, such a reference shall abate if the secured
creditors representing three fourth in value of the amount outstanding against
financial assistance disbursed to the borrower have taken measures to recover
their secured debt under subsection (4) of Section 13 of the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002;
Provided also that no reference shall be made under the
Section if the secured creditors representing three fourth in value of the
amount outstanding against financial assistance disbursed to the borrower have
taken measures to recover their secured debt under sub-section (4) of Section
13 of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002.
11. At this stage we may also refer to the judgment of the
Supreme Court in Allahabad Bank Vs. Canara Bank, (2000) 4 SCC 406. In that
case, the question of jurisdiction of the Debts Recovery Tribunal under the
Recovery of Debts Due to Banks and Financial Institutions Act, 1993, vis-`-vis
the Company Court arose for decision. The Supreme Court held that even where
a winding-up petition is pending, or a winding-up order has been passed
against the debtor company, the adjudication of liability and execution of the
certificate in respect of debts payable to banks and financial institutions,
are respectively within the exclusive jurisdiction of the Debts Recovery
Tribunal and the Recovery Officer under that Act and in such a case, the
Company Courts jurisdiction under Sections 442, 537 and 446 of the Companies
Act stood ousted. Hence, no leave of the Company Court was necessary for
initiating proceedings under the Recovery of Debts Act. Even the priorities
among various creditors, could be decided only by the Debts Recovery Tribunal
in accordance with Section 19(19) of the Recovery of Debts Act read with
Section 529-A of the Companies Act and in no other manner. The Court took
into account the fact that the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 was a legislation subsequent in point of time to the
introduction of Section 529-A of the Companies Act by Act 35 of 1985 and it
had overriding effect. But it noticed that by virtue of Section 19(19) of the
Recovery of Debts Act, the priorities among various creditors had to be
decided by the Recovery Tribunal only in terms of Section 529-A of the
Companies Act and Section 19(19) did not give priority to all secured
creditors. Hence, it was necessary to identify the limited class of secured
creditors who have priority over all others in accordance with Section 52 9-A
of the Companies Act. The Court also held that the occasion for a claim by a
secured creditor against the realization by other creditors of the debtor
under Section 529-A read with proviso (c) to Section 529(1) of the Companies
Act could arise before the Debts Recovery Tribunal only if the creditor
concerned had stood outside the winding up and realized amounts and if it is
shown that out of the amounts privately realized by it, some portion had been
rateably taken away by the Liquidator under Clauses (a) and (b) of the proviso
to Section 529 (1). The Court has not held that Section 529-A of the
Companies Act will have no application in a case where a proceeding under the
Recovery of Debts Act has been set in motion by a financial institution. The
Court there was essentially dealing with the jurisdiction of the Debts
Recovery Tribunal in the face of Sections 442, 537 and 466 of the Companies
Act.
12. In Rajasthan State Financial Corporation Vs. Official
Liquidator, (supra) the question that fell for consideration before the
Supreme Court was as to the right of State Financial Corporation under Section
29 of the State Financial Corporations Act, 1951 against debtor company to
sell assets of company and realize security, when the company is under winding
up. The Supreme Court held that in such a case the said power can be
exercised by the State Financial Corporation only after obtaining appropriate
permission from Company Court and acting in terms of directions issued by
Company Court as regards conduct of the sale and distribution of proceeds
thereof in terms of Sections 5 29 and 529-A of the Companies Act. Paragraphs
17 and 18 of the said decision are important for the purpose deciding the case
of hand and read as follows:
Para- 17: Thus, on the authorities what emerges is that once
a winding-up proceeding has commenced and the Liquidator is put in charge of
the assets of the company being wound up, the distribution of the proceeds of
the sale of the assets held at the instance of the financial institutions
coming under the Recovery of Debts Act or of financial corporations coming
under the SFC Act, can only be with the association of the Official Liquidator
and under the supervision of the Company Court. The right of a financial
institution or of the Recovery Tribunal or that of a financial corporation or
the court which has been approached under Section 31 of the SFC Act to sell
the assets may not be taken away, but the same stands restricted by the
requirement of the Official Liquidator being associated with it, giving the
Company court the right to ensure that the distribution of the assets in terms
of Section 529-A of the Companies Act takes place. In the case on hand,
admittedly, the appellants have not set in motion any proceeding under the SFC
Act. What we have is only a liquidation proceeding pending and the secured
creditors, the financial corporations approaching the Company Court for
permission to stand outside the winding up and to sell the properties of the
company-in-liquidation. The Company Court has rightly directed that the sale
be held in association with the Official Liquidator representing the workmen
and that the proceeds will be held by the Official Liquidator until they are
distributed in terms of Section 529-A of the Companies Act under its
supervision. The directions thus, made, clearly are consistent with the
provisions of the relevant Acts and the views expressed by this Court in the
decisions referred to above. In this situation, we find no reason to
interfere with the decision of the High Court. We clarify that there is no
inconsistency between the decisio ns in Allahabad Bank Vs. Canara Bank,
(2000) 4 SCC 406 and in International Coach Builders Ltd. Vs. Karnataka
State Financial Corporation, (2003) 10 SCC 482 in respect of the applicability
of Sections 529 and 529-A of the Companies Act in the matter of distribution
among the creditors. The right to sell under the SFC Act or under the
Recovery of Debts Act by a creditor coming within those Acts and standing
outside the winding up, is different from the distribution of the proceeds of
the sale of the security. 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
529-A read with Section 529 of the Companies Act. After all, the Liquidator
represents the entire body of creditors and also holds a right on behalf of
the workers to have a distribution pari passu with the secured creditors and
the duty for further distribution of the proceeds on the basis of the
preferences contained in Section 530 of the Companies Act under the directions
of the Company Court. In other words, the distribution of the sale proceeds
under the direction of the Company Court is his responsibility. To ensure the
proper working out of the scheme of distribution, it is necessary to associate
the Official Liquidator with the process of sale so that he can ensure, in the
light of the directions of the Company Court, that a proper price is fetched
for the assets of the company in liquidation. It was in that context that the
rights of the Official Liquidator were discussed in International Coach
Builders Ltd. (supra). The Debts Recovery Tribunal and the District Court
entertaining an application under Section 31 of the SFC Act should issue
notice to the Liquidator and hear him before ordering a sale, as the
representative of the creditors in general.
Para- 18: In the light of the discussion as above, we think it proper to sum
up the legal position thus:
(i)A Debts Recovery Tribunal acting under the Recovery of Debts Due to Banks
and Financial Institutions Act, 1993 would be entitled to order the sale and
to sell the properties of the debtor, even if a company in liquidation,
through its Recovery Officer but only after notice to the Official Liquidator
or the Liquidator appointed by the Company Court and after hearing him.
(ii)A District Court entertaining an application under Section 31 of the SFC
Act will have the power to order sale of the assets of a borrower company in
liquidation, but only after notice to the Official Liquidator or the
Liquidator appointed by the Company Court and after hearing him
(iii)If a financial corporation acting under Section 29 of the SFC Act seeks
to sell or otherwise transfer the assets of a debtor company in liquidation,
the said power could be exercised by it only after obtaining the appropriate
permission from the Company Court and acting in terms of the directions issued
by that Court as regards associating the Official Liquidator with the sale,
the fixing of the upset price or the reserve price, confirmation of the sale,
holding of the sale proceeds and the distribution thereof among the creditors
in terms of Section 529-A and Section 529 of the Companies Act.
(iv)In a case where proceedings under the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993 or the SFC Act are not set in motion, the
creditor concerned is to approach the Company Court for appropriate directions
regarding the realization of its securities consistent with the relevant
provisions of the Companies Act regarding distribution of the assets of the
company in liquidation.
13. In the light of the law laid down by the Rajasthan State Financial
Corporation Case (supra) it is clear that where the bank or the financial
institution has initiated proceedings under the Recovery of Debts Due to Banks
and Financial Institutions Act, 1993, the Debts Recovery Tribunal would be
entitled to order sale even if a company is under liquidation through its
Recovery Officer, but only after notice to the Official Liquidator or the
Liquidator appointed by the Company Court and after hearing him. Where,
however, no proceedings have been initiated under the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993 the case would fall under paragraph
18 (iii) of the judgment of the Supreme Court in Rajasthan State Financial
Corporation Case, (supra). In that event if the securitisation company acting
under Section 13 of the Securitisation Act seeks to sell or otherwise transfer
the assets of a debtor company in liquidation, the said power could be
exercised by it only after obtaining the appropriate permission from the
Company Court and acting in terms of the directions issued by that Court as
regards associating the Official Liquidator with the sale, the fixing of the
upset price or the reserve price, confirmation of the sale, holding of the
sale proceeds and distribution thereof among the creditors in terms of Section
529-A and 529 of the Companies Act.
14. In the instant case, the Official Liquidator has taken possession of the
assets and certain movables have already been sold. The Official Liquidator
has also got valuation of some of the assets by ITCOT Consultancy Services,
Chennai. A sum of Rs.2 lakhs has been paid as valuation fee for valuation of
the assets. In our opinion, the ends of justice would be served if the
Official Liquidator is directed to associate the appellant-company in sale of
the assets in terms of paragraph 18(iii) of the Rajasthan State Financial
Corporation Case, ( supra). The appellant through its counsel makes a
statement that in view of the facts and circumstances of the case the
appellant shall not claim any commission on the sale of the assets. The
appeals are accordingly disposed of. No costs. Consequently, connected
C.M.Ps. are closed.
sm
O.S.A.Nos. 214 & 215 of 2005
The Honble Chief Justice
and
M.Jaichandren,J
——————————–
(The Order of the Court was made by Honble The Chief Justice)
A further bid was held in the Court. Mr.M.Palanisamy residing at
Coimbatore, has bid for a sum of Rs.27.50 crores for C-1, Viscose Towers,
which is accepted. The successful bidder agrees to pay the balance amount
within a period of three months from to-day, failing which the EMD will be
forfeited.
2. As regards the property located at C-2, Mettupalayam is concerned, one
Mr.P.Shanmugam, residing at Sankari-632 301, has bid for a sum of Rs.1.55
crores, which is accepted. The successful bidder agrees to pay the balance
amount within a period of three months from to-day, failing which the EMD will
be forfeited.
3. The EMDs of unsuccessful bidders shall be returned to them by
today itself.
4. M/s.Asset Reconstruction Company (India) Limited and the Official
Liquidator are directed to approach the learned Company Judge for further
directions in the matter.
pv/