IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 19-01-2011
CORAM:
THE HONOURABLE MR. JUSTICE V. RAMASUBRAMANIAN
C.A.No.1038 of 2006 in C.P.No.229 of 2004
and
C.A.No.2486 of 2006 in C.P.No.229 of 2004
and
O.A.Nos.253 and 254 of 2005
C.A.No.1038 of 2006:
Indian Renewable Energy
Development Agency Ltd.,
Core-4A, East Court,
1st Floor, Indian Habitat Centre,
Lodi Road,
New Delhi 110 003 represented by
its Deputy General Manager
Mr.S.K.Bhargava .. Applicant
vs.
1.The Official Liquidator,
High Court, Madras, as the Provisional
Liquidator of Arunachalam Sugar Mills Ltd.
2.M/s.Sundaram Finance Ltd.,
Old No.21, New No.4,
Pattulos Road,
Chennai-600 002.
3.City Union Bank,
No.53, 55, Mission Road,
Pondicherry-605 001.
4.M/s.Vijaya Bank,
No.114, Jawaharlal Nehru Street,
Pondicherry-605 001.
5.V.Kannan
6.V.Baskaran
7.K.Usha
8.B.Bhavani
9.New Horizon Sugar Mills Ltd., having
its Regional Office at Ariyur,
Kandlanagar, Pondicherry represented
by Mr.V.Kannan, Director.
10.M/s.Bharat Heavy Electricals Ltd.,
having its Registered Office at
BHEL House, Siri Fort,
New Delhi-110 004
(Respondents 5 to 8 impleaded as per order
dated 4.9.2007 in C.A.No.14910 of 2006
time extended dated 22.10.2007 in C.A.No.1038
of 2006)
(9th Respondent impleaded as per order dated
4.9.2007 in C.A.No.1472 of 2006 time extended
dated 22.10.2007 in C.A.No.1038 of 2006)
(10th Respondent impleaded as per order dated
4.9.2007 in C.A.No.586 of 2007 time extended
dated 22.10.2007 in C.A.No.1038 of 2006) .. Respondents
For Applicant : Mr.Jose John for
M/s.King and Partridge
For Respondent-1 : The Deputy Official Liquidator
For Respondent-2 : Mr.S.Vasudevan
For Respondent-3 : Mr.T.K.Ramkumar
For Respondent-4 : Mr.R.Umasudan
For Respondents-5 to 8 : Mr.C.Harikrishnan, Sr. Counsel
For Respondent-9 : Mr.T.K.Seshadri, Sr. Counsel
For Respondent-10 : Dr.Anita Sumanth
C.A.No.2486 of 2006:
M/s.Walchandnagar Industries Ltd.,
No.3, Walchand Terraces, Tardeo Road,
Mumbai-400 034 represented by its
Deputy General Manager (Commercial)
Mr.R.J.Prakash Joyce .. Applicant
vs.
1.The Official Liquidator,
Kuralagam Block 1st Floor,
Esplanade, Chennai-600 108.
2.Indian Renewable Energy Development
Agency Ltd., New Delhi, Core 4-A,
East Court First Floor,
India Habitat Centre Complex,
Lodhi Road,
New Delhi-110 003. .. Respondents
For Applicant : Mr.Krishna Shrinivas
for M/s.S.Ramasubramaniam and
Associates.
For Respondent-1 : Deputy Official Liquidator
For Respondent-2 : Mr.Jose John for
M/s.King and Partridge
O.A.Nos.253 and 254 of 2005
M/s.Bharat Heavey Electricals Ltd.,
having its Registered Office at
BHEL House, Siri Fort,
New Delhi-110 004,
and an Office at EVR Buildings,
474, Anna Salai, Nandanam,
Chennai-600 035. .. Applicant
vs.
M/s.Arunachalam Sugar Mills Ltd.,
Registered Office Ariyur,
Post Kandamangalam,
Pondicherry-605 102. .. Respondent
For Applicant : Dr.Anita Sumanth
For Respondent : M/s.Gupta and Ravi
COMMON ORDER
While C.A.No.1038 of 2006 is an application filed by a secured creditor of the company in liquidation, seeking a direction to the Official Liquidator to jointly advertise for the sale of the assets of the company, C.A.No.2486 of 2006 is by a company which supplied boiler to the company in liquidation, seeking to exclude the same from the list of properties sought to be sold by the secured creditor. The other two applications O.A.Nos.253 and 254 of 2005 are under Section 9 of the Arbitration and Conciliation Act, 1996, seeking interim measures pending initiation of arbitration proceedings by an unsecured creditor.
2. I have heard Mr.Jose John, learned counsel for the applicant, Mr.C.Harikrishnan, learned Senior Counsel appearing for the company in liquidation and its promoters-shareholders (respondents 5 to 8), Mr.T.K.Seshadri, learned Senior Counsel appearing for the ninth respondent (New Horizon Sugar Mills Ltd.), Mr.S.Vasudevan, learned counsel appearing for one of the secured creditors, Mr.Krishna Srinivas, learned counsel appearing for the applicant in C.A.No.2486 of 2006, Dr.Anita Sumanth, learned counsel appearing for Bharat Heavy Electricals Ltd. (applicant in O.A.Nos.253 and 254 of 2005) and Mr.Sundar Narayan, learned counsel appearing for the association of depositors of a Nidhi Company, promoted by the same persons who promoted the company in liquidation.
3. The applicant herein granted financial assistance to the total tune of Rs.49,35,28,000/- to the company in liquidation (Arunachalam Sugar Mills Ltd.), under the loan agreements dated 10.9.1998, 29.10.1999 and 06.12.1999, (i) for setting up a 14 MW Bagasse based Co-generation Captive Power Plant (ii) for the enhancement of its capacity to 19 MW and (iii) for the purchase of energy efficient equipment. The applicant also granted financial assistance to the ninth respondent, viz., New Horizon Sugar Mills Ltd., to the total extent of Rs.15,54,10,000/- under separate loan agreements dated 21.7.1999 and 03.12.1999, for the purchase of energy efficient equipment, to be installed in juice extraction and juice concentration sections at the factory of the company in liquidation. New Horizon Sugar Mills Ltd., in turn, gave these equipment on lease to the company in liquidation and they were also installed in the factory of the company in liquidation. The company in liquidation also hired certain equipment from Sundaram Finance Ltd., which is the second respondent herein. The company in liquidation also had facilities with Vijaya Bank and City Union Bank.
4. The factory of the company in liquidation is situate in agricultural lands measuring an extent of about 33.98 acres out of a total extent of 125 acres in Malapampadi and Palliampattu Villages of Thiruvannamalai District. It is claimed that in the remaining land, sugarcane and paddy are being cultivated. The factory commenced commercial production on 19.02.2001.
5. Within a few months of commencement of production, the company started losing altitude, leading to their failure to service the credit facilities availed by them. Therefore, the applicant herein (referred to in brief as IREDA) filed three applications in O.A.Nos.112, 113 and 114 of 2004 before the Debts Recovery Tribunal, New Delhi, claiming recovery of a total amount of more than Rs.72.00 crores. While the first O.A. was against New Horizon Sugar Mills Ltd., the other two were against the company in liquidation.
6. In the meantime, one of the creditors of the company in liquidation filed the above C.P.No.229 of 2004 for winding up. It was filed on 12.7.2004, along with an application in C.A.No.1393 of 2004, for the appointment of the Official Liquidator as the Provisional Liquidator to take over the assets and management of the company in liquidation. That application was allowed by D.Murugesan,J, by an order dated 22.7.2005, appointing the Official Liquidator as the Provisional Liquidator to take charge of all the properties and effects of the company.
7. In the meantime, Sundaram Finance Ltd., the second respondent herein filed an application in O.A.No.4401 of 2004 under Section 9 of the Arbitration and Conciliation Act, 1996 seeking the appointment of an Advocate Commissioner to seize and deliver the machinery available in the premises of the company in liquidation. By an order dated 08.12.2004, a Commissioner was appointed. By a further order dated 19.3.2005, passed in the next application A.No.1448 of 2005 taken out by Sundaram Finance Ltd., the Commissioner was directed to sell the machineries. Thereafter, the applicant herein and Sundaram Finance Ltd., entered into a Memorandum of Understanding dated 27.9.2005, in and by which it was agreed that the applicant would sell all the properties on or before 31.3.2006 and pay the amounts due to Sundaram Finance Ltd. It was also agreed that if the applicant was not able to sell the properties before 31.3.2006, Sundaram Finance would be at liberty to approach this Court.
8. In the meantime, the Indian Bank, Pondicherry, from whom also the ninth respondent herein, viz. New Horizon Sugar Mills Ltd., had availed credit facilities, initiated proceedings under the SARFAESI Act, 2002 by issuing a notice under Section 13(2) on 25.9.2004, demanding a sum of Rs.27,19,15,465/-. In pursuance of the said notice, Indian Bank also took possession of the assets of the ninth respondent located in their factory at Ariyur, Pondicherry, on 01.01.2005, under Section 13(4) of the Act. Thereafter, the Authorised Officer of the Indian Bank issued a tender notice on 16.02.2005 for the sale of the possessed assets. M/s. EID Parry Ltd., became the highest bidder in the auction and the sale in their favour got confirmed.
9. At around the same time, Bharat Heavy Electricals Ltd., which supplied and commissioned a 8400 KW Capacity Extraction cum Backpressure Turbo Generator in the factory of the company in liquidation and to whom payment was defaulted, initiated proceedings by invoking the arbitration clause contained in the agreement that they had with the company in liquidation. Since the company in liquidation did not appoint an arbitrator, Bharat Heavy Electricals Ltd., filed two applications before this Court in O.A.Nos.253 and 254 of 2005 praying for interim orders of injunction, restraining the company in liquidation from selling, transferring or alienating its properties. On 19.3.2005, an interim order of injunction was granted in both the applications.
10. In another track, IREDA (the applicant herein) which had already filed O.A.Nos.112, 113 and 114 of 2004 on the file of the DRT, New Delhi filed applications in I.A.Nos.698 and 699 of 2005 seeking liberty to initiate steps under the SARFAESI Act, 2002. The applications were allowed on 03.10.2005. However, the applicant later filed I.A.No.872 and 874 of 2005, seeking the leave of the Tribunal to withdraw O.A.Nos.113 and 114 of 2004. During the pendency of these applications, which were wholly unnecessary, the applicant herein had issued two notices dated 17.01.2005 and 18.01.2005 under Section 13(2) of the SARFAESI Act, 2002 and also took possession of the secured assets on 05.10.2005. Thereafter, the applicant also issued a tender on 20.01.2006, for the sale of the assets under Section 13(4)(a) of the Act.
11. Challenging the measures taken by the applicant herein under Section 13(4) of the Act, the promoters-Directors of the company filed an application in S.A.No.3 of 2006 on the file of the DRT-I, Chennai under Section 17 of the Act. By an order dated 16.02.2006, the DRT stayed the opening of the tenders, but permitted the applicant herein to receive the tenders and keep them in a sealed box. Thereafter, the applicant filed I.A.No.31 of 2006 before the Tribunal for vacating the stay. By an order dated 24.3.2006, the Tribunal permitted the applicant to open the tenders and retain only the highest bid and return the EMD to the other bidders.
12. In the meantime, the Official Liquidator, who was appointed as the Provisional Liquidator by order dated 22.7.2005 passed in C.A.No.1393 of 2004 in C.P.No.229 of 2004, realised that the applicant had taken possession under the SARFAESI Act. Therefore, the Official Liquidator filed an application in C.A.No. 1786 of 2005 seeking various directions, including a direction to the applicant herein to hand over possession of the properties. This claim was made by the Official Liquidator on the ground that the action of the applicant was in violation of Sections 446 and 456 of the Companies Act, 1956 as well as Sections 13(2) and 37 of the SARFAESI Act, 2002.
13. By an order dated 24.4.2006, the application C.A.No.1786 of 2005 was allowed and the applicant herein was directed to hand over possession of the properties, on or before 28.4.2006 to the Provisional Liquidator. However, this Court also directed that the security posted by the applicant herein shall continue and that the Official Liquidator should file a report regarding the valuation of the properties, so that further steps could be taken to auction the properties for sale.
14. In pursuance of the said order passed in C.A.No.1786 of 2005, the applicant herein handed over possession of the assets of the company in liquidation, to the Official Liquidator on 27.4.2006. After handing over possession, the applicant filed the above application (C.A.No.1038 of 2006) seeking an order for fresh publication, for the sale of the assets of the company in liquidation, by joining (i) the Official Liquidator, (ii) the applicant herein and (iii) Sundaram Finance Ltd. (second respondent herein). In the affidavit in support of the application, it is stated by the applicant herein that on the basis of a valuation done by them, through ITCOT Consultancy Services Private Ltd., an upset price was fixed at Rs.96.80 crores and that in the bid cum auction held on 20.02.2006, the highest bid received was for Rs.135.50 crores.
15. Along with the present application C.A.No.1038 of 2006, the applicant herein had taken out one more application in C.A.No.1039 of 2006, praying for confirmation of sale in favour of the highest bidder who offered Rs.135.50 crores in the bid cum auction held on 20.02.2006.
16. In or about the same time, the promoters-Directors of the company in liquidation and their respective wives, who are respondents 5 to 8 herein also took out an application in C.A.No.1033 of 2006, praying for the transfer of their SARFAESI appeal (under Section 17) in S.A.No.3 of 2006 from the file of the DRT-I, Chennai, to the file of this Court, to be heard along with the above C.P.No.229 of 2004.
17. All the three applications, viz., C.A.No.1033, 1038 & 1039 of 2006 were taken up together for hearing and by an order dated 03.7.2006, Chitra Venkataraman, J, (i) directed fresh publication for sale in C.A.No.1038 of 2006; (ii) dismissed C.A.No.1039 of 2006, as a consequence thereof; and (iii) dismissed C.A.No.1033 of 2006 on the sole ground that by the order passed on 24.4.2006 in C.A.No.1786 of 2005, the possession taken under the SARFAESI Act was already directed to be handed over to the Official Liquidator and that therefore, nothing survived in the SARFAESI appeal, requiring the same to be transferred to this Court.
18. The respondents 5 to 8 herein (promoters-Directors and their wives) did not challenge the orders passed in C.A.No.1033 & 1039 of 2006, but filed an appeal in OSA No.226 of 2006, only as against the order passed in C.A.No.1038 of 2006, directing fresh paper publication to be made for the sale of the properties. The said appeal was disposed of by a Division Bench, by order dated 25.7.2006. In view of the nature of the controversy now raised, it is necessary to extract the order of the Division Bench and hence, it is extracted as follows:
“Having heard the learned counsel for the parties, as well as the interveners, and with their consent, we remit the matter back to the Company Court for fresh consideration with the following directions:-
1) All the objections of the Appellants regarding the sale of the Company’s properties including maintainability of such application shall be considered by the Company Court.
2) The objections of the respondents regarding the locus-standi of the appellants shall also be considered by the Company Court.
3) The objections raised by Bharath Heavy Electricals Limited, regarding their claim over certain machineries as well as the pending arbitration proceedings and the interim orders passed in the same under Section-9 of the Act, shall also be considered by the Company Court along with the objection of City Union Bank Limited, the fourth respondent herein and any further secured creditor who may so choose to oppose.
4) M/s. Ambika Sugar mills Limited, who are interveners in this appeal, waive their legal objections to the auction and they are permitted to participate in the fresh auction and to adjust the EMD of Rs.5 crores deposited by them pursuant to the earlier auction conducted by the first respondent.
5) The Company Court shall also hear the application filed by the appellants seeking for setting the order appointing the Provisional Liquidator in C.A.(D)No.6007/2006.
6) The Official Liquidator (second respondent herein) is permitted to receive all bids in sealed covers made pursuant to the tender notice published subsequent to the orders of the Company Court dated 03.07.2006. Such bids shall not be opened until the Company Court hears all the parties and passes fresh orders on issues raised in clause 1 to 5 above. Depending on the outcome of the issues raised above the Company Court may proceed further with the tender.
It is needless to say that the respondent/ interveners/ banks and finance companies are entitled to be heard on their objections to the auction sale, and the order under appeal shall be subject to further orders to be passed by the learned single Judge. The Company Court is requested to decide the matter expeditiously preferably within a period of three weeks.
19. Thereafter, C.A.No.1038 of 2006 was taken up for hearing. In that application, as it was originally filed, the Official Liquidator, Sundaram Finance Ltd., City Union Bank and Vijaya Bank alone were the respondents. But, since the Division Bench by its order dated 25.7.2006 passed in OSA No.226 of 2006 permitted the interested parties to intervene and file their objections to the auction sale, the promoters and their wives filed an application in C.A.No.1471 of 2006 for impleading them as respondents 5 to 8 in C.A.No.1038 of 2006. Mr.V.Kannan, who is the fifth respondent herein and who is also the Chairman of the company in liquidation, filed a separate application in C.A.No.1472 of 2006 for impleading New Horizon Sugar Mills Ltd., as the ninth respondent to this application C.A.No.1038 of 2006. Both these applications were allowed by order dated 04.9.2007, impleading the promoters-Directors and their wives as respondents 5 to 8 herein and impleading New Horizon Sugar Mills Ltd., as the ninth respondent herein. Simultaneously, another application taken out by Bharat Heavy Electricals Limited (who had already obtained interim orders of injunction in O.A.Nos.253 and 254 of 2005 under section 9 of the Arbitration and Conciliation Act, 1996) was also allowed and they were also impleaded as the tenth respondent.
20. In the meantime, a company by name Walchandnagar Industries Ltd., filed an application in C.A.No.2486 of 2006, seeking to exclude a boiler sold and supplied to the company in liquidation, from the list of properties, whose sale was sought by the applicant in C.A.No.1038 of 2006. The case of Walchandnagar Industries Ltd., the applicant in C.A.No.2486 of 2006, is that they sold and supplied a Bagasse and Neyveli Lignite Fired Boiler and Auxiliaries on 20.10.2001, to the company in liquidation, at a total cost of Rs.7,32,52,043/- and that the company in liquidation paid an amount of Rs.6,26,70,411/-, leaving a balance of Rs.1,05,81,632. According to Walchandnagar Industries Ltd., they have a lien on the boiler, for the balance amount due and that they have already obtained a decree from a Civil Court and that execution proceedings are pending. Therefore, they seek the exclusion of this boiler from the list of machineries. Since the prayer in C.A.No.2486 of 2006 is also inextricably intertwined with the application for sale, the same is also tagged along with C.A.No.1038 of 2006.
21. After the order of remand passed in C.A.No.1038 of 2006, the fifth respondent (V.Kannan) started sending letters to the creditors, offering to have a one time settlement, on the basis of the amount reflected as due, as per the books of accounts as on 31.3.2004. Taking shelter under the correspondence initiated by him suo motu, the fifth respondent also filed an affidavit into Court in August 2007 enclosing all the correspondence and seeking further time to negotiate with the creditors. Simultaneously, the respondents 5 to 8 on the one hand and the ninth respondent on the other hand also filed counter affidavits to the present application C.A.No.1038 of 2006.
22. In order to convince this Court to stall the sale of the properties, the fifth respondent also filed an affidavit of one Mr.M.R.Ramchander, claiming to be the Chairman and Managing Director of a company incorporated in Singapore. It was stated in the said affidavit that he had agreed to give a loan of USD 30 million, equivalent to Rs.120 crores for the rehabilitation of the company in liquidation.
23. Lured by the carrot held in front of them, the applicant herein issued a letter dated 27.02.2008 agreeing to accept a sum of Rs.100.81 crores payable in 120 days, as full and final settlement. Similar letters of acceptance of the proposals for one time settlement were issued by all other secured creditors including Sundaram Finance Ltd. On that basis, the fifth respondent filed an affidavit into Court in March 2008. In para 2 of the affidavit, he indicated that all secured creditors had given confirmed OTS acceptance letters, making the total liability as Rs.158.92 crores. In para 3 of the affidavit, the fifth respondent also made a commitment, which reads as follows:
“I submit that the investor identified by the Respondent has agreed to the increased investment required which is confirmed by the email which annexed herewith. Based on the commitments made by the investor, we agree and confirm to make payment to the secured and unsecured creditors in the following manner:-
(a) The payments due to the three petitioning creditors will be settled within a period of three to four weeks from today.
(b) The entire dues payable to M/s. IREDA, Vijaya Bank, City Union Bank and Sundaram Finance Ltd. will be settled on or before 24/06/2008.
(c) The principal claimed by M/s. BHEL will be deposited before this Hon’ble Court in the pending OA on or before 24/06/2008 with liberty to contest the arbitration initiated by BHEL.
(d) The dues payable to cane growers and other unsecured creditors, if any, will also be paid before 24/06/2008.
24. But the above promise turned out to be an empty promise and a period of more than 2 years was lost in this process, from the date of the order of the Division Bench remanding the application to this court. Therefore, after realising that it was a case of hide and seek, an order was passed on 02.9.2008 in the present C.A.No.1038 of 2006 by Chitra Venkataraman, J, directing the Official Liquidator to bring the properties, viz., land of the extent of about 125 acres, buildings, plant and machinery and other movables. The learned Judge also fixed the upset price of the land at Rs.11.44 crores, the buildings at Rs.9.00 crores and the plant and machinery and other movable assets at Rs.66.00 crores (totalling to Rs.86.44 crores) on the basis of the valuation done by ITCOT Consultancy Services Private Ltd.
25. By another order passed on the same date, viz. 02.9.2008, the learned Judge dismissed O.A.Nos.253 and 254 of 2005 filed by Bharat Heavy Electricals Ltd., (tenth respondent herein) under Section 9 of the Arbitration and Conciliation Act, on the ground that they are only unsecured creditors and that therefore, the sale of the properties alone would bring relief to all the parties. Thus, the injunction order passed on 19.3.2005 in O.A.Nos.253 and 254 of 2005 got vacated and Bharat Heavy Electricals Ltd. were directed to lodge their claim with the Official Liquidator.
26. Thereafter, the applicant herein filed an affidavit listing out the machineries financed to Arunachalam Sugar Mills Ltd., and the machineries financed to New Horizon Sugar Mills Ltd. and also pointing out that the machineries financed to New Horizon Sugar Mills are also installed in the same factory and that the removal and sale of those belonging to the company in liquidation, after the removal of the machineries belonging to the other company, would cause damage. Therefore, an order was passed on 08.9.2008 in the present C.A.No.1038 of 2006 directing the Official Liquidator to indicate separately the value of the assets financed to these companies separately and also permitting the sale of the machineries belonging to New Horizon Sugar Mills Ltd. (ninth respondent herein).
27. As against the order dated 02.9.2008 passed in the present application C.A.No.1038 of 2006, directing the Official Liquidator to sell the properties, New Horizon Sugar Mills Ltd. (ninth respondent herein) filed an appeal in OSA No.321 of 2008. A similar appeal was filed by the promoters and their wives (respondents 5 to 8 herein) in OSA No.345 of 2008.
28. As against the order dated 02.9.2008 dismissing O.A.Nos.253 and 254 of 2005 (applications under Section 9 of the Arbitration and Conciliation Act), Bharat Heavy Electricals Ltd. filed two appeals in OSA Nos.341 and 342 of 2008. Therefore, all the four appeals, viz. OSA Nos.321, 341, 342 and 345 of 2008, two of which arose out of the direction for the sale of the properties issued in C.A.No.1038 of 2006 and two arising out of the orders in O.A.No.253 and 254 of 2005, were taken up together by the Division Bench.
29. Before the Division Bench, the respondents 5 to 8 and the ninth respondent herein raised a preliminary objection to the effect that the order dated 02.9.2008 directing the sale of the properties was not in accordance with the directions issued by the Division Bench on 25.7.2006 in OSA No.226 of 2005. In the said order dated 25.7.2006, the Division Bench had directed the Company Court to consider all objections, including the objection relating to the maintainability of the present application. Therefore, it was contended before the Division Bench on behalf of the respondents 5 to 9 that the order dated 02.9.2008, which did not reflect the consideration of any objections raised by any of the parties, was vitiated.
30. Accepting the above preliminary objection, the Division Bench allowed all the appeals, viz. OSA Nos.321, 341, 342 & 345 of 2008, by an order dated 27.10.2009. The operative portion of the order, found in paragraphs 8 and 9 are extracted here under, for easy appreciation.
“8. In these circumstances, we must set aside the impugned order in O.S.A.No.321 of 2008 and send it back to the Company Court requesting the learned Single Judge to decide the matter expeditiously as per the order passed on 25-07-2006 in O.S.A.No.226 of 2005. The submissions and/or objections of all the parties including the respondents 9 and 10, who are now impleaded shall be considered by the Company Court. Since the counsel for the first respondent raised a complaint that the matter has been unnecessarily dragged, the learned Senior Counsel appearing for the appellant submitted that they would fully co-operate with the expeditious disposal of the matter.
9. The appellants in O.S.A.No.345 of 2008 were the appellants in O.S.A.No.226 of 2005 where the directions were issued. So their appeal viz., O.S.A.No.345 of 2008 is allowed for the same reasons as above. Therefore, both O.S.A.Nos.321 and 345 of 2008 must be allowed so that orders are passed in compliance with the directions given by the First Bench earlier.
(i) As regards the O.S.A.Nos.341 and 342 of 2008, they have been filed by the 10th respondent herein. Their injunction restraining the sale of the assets of the Company in liquidation was dismissed directing them to lodge their claim before the Official Liquidator.
(ii) In any event, now there cannot be any sale without the permission of the Court. However, since all the matters are interconnected, O.A.Nos.253 and 254 of 2005 are also to be heard along with the other matters. However, the interim order originally granted in these applications will not continue. The parties can jointly file a memo before the learned Single Judge for early hearing.”
31. In pursuance of the above order of the Division Bench dated 27.10.2009 passed in OSA Nos.321, 341, 342 & 345 of 2008, the applications C.A. No.1038 of 2006 in C.P.No.229 of 2004 and O.A.Nos.253 and 254 of 2005, have come back to the Company Court for a fresh hearing, as it would normally happen in a game of snakes and ladders, putting all the secured and unsecured creditors back to square one and making the borrower to have the last laugh, due to the pitfalls in the system.
32. Therefore, in the light of the emphasis laid on the necessity to consider all the objections of all parties, including the objection relating to maintainability of the application C.A.No.1038 of 2006, let me now take up the objections one after another.
33. Mr.C.Harikrishnan, learned Senior Counsel appearing for the respondents 5 to 8 raised the following objections to the prayer in C.A.No.1038 of 2006:
(i) since only a Provisional Liquidator has been appointed to take charge of the affairs of the company in liquidation, the sale of the properties of the company cannot be ordered at this stage;
(ii) an application in Diary No.6007 of 2006, filed by respondents 5 to 8, seeking to set aside the order appointing Provisional Liquidator is still pending without even getting numbered and that therefore, further proceedings for sale cannot go on, till the disposal of the set aside petition;
(iii) since the applicant IREDA has surrendered possession to the Official Liquidator in pursuance of an order of this Court, the applicant is deemed to have given up the security and hence, would no more be a secured creditor;
(iv) in view of the pendency of the applications O.A.Nos.113 and 114 of 2004 under Section 19 of the Recovery of Debts due to Banks and Financial Institution Act, 1993, parallel proceedings cannot go on;
(v) since the leasehold equipment are not severable, the applicant cannot seek the sale of the equipment;
(vi) since the respondents 2 and 10 stake their claims on the basis of agreements which contain arbitration clauses, these respondents do not have a say in this application; and
(vii) the claim of the applicant over New Horizon Sugar Mills Ltd. (R9) could have got satisfied if the applicant had lodged a claim with the Indian Bank, which sold the properties under SARFAESI Act and which had surplus funds available after the sale.
34. Mr.T.K.Seshadri, learned Senior Counsel appearing for the ninth respondent raised the following objections:
(i) the ninth respondent is not a company in liquidation and hence, the Official Liquidator has no jurisdiction over its properties, since it is a public limited company and a distinct and separate legal entity by itself;
(ii) the main petition C.P.No.229 of 2004 itself is only for winding up Arunachalam Sugar Mills Ltd., and the Provisional Liquidator was also appointed only for that company and hence, the powers are limited under Section 450(3) of the Companies Act, 1956;
(iii) the powers of the Provisional Liquidator are well defined under Sections 446(1) and 456(1) and the provisions of Section 443(1)(c) applies only if the petitioning creditor (and not third party creditors) invokes the same;
(iv) the present application filed in pursuance of an understanding reached between the applicant and the second respondent on 27.9.2005, is contrary to law in view of the fact that under Section 441(2) of the Companies Act, the winding up of the company is deemed to have commenced on 12.7.2004, the date of presentation of the petition for winding up and that therefore, no understanding could be reached between the creditors outside the Court ; and that therefore, the application C.A.No.1038 of 2006 should be dismissed.
35. Dr.Anita Sumanth, learned counsel appearing for the tenth respondent opposed the application on the ground that the sale of the properties including the Turbo Generator manufactured and installed by them, would jeopardise their claim before the Arbitral Tribunal.
36. Since all others support the present application for the sale of the properties and it is only the respondents 5 to 8, the ninth respondent and the tenth respondent, who oppose the sale tooth and nail, I have extracted in detail, the objections raised by these respondents. Now I shall consider each one of them.
OBJECTIONS OF RESPONDENTS 5 TO 8
37. As pointed out earlier, the first objection of the learned Senior Counsel for respondents 5 to 8 is that this Court has appointed only a Provisional Liquidator to take charge of the affairs of the company and that he is actually like a Receiver on whom the property has not so far vested, so as to enable him to sell the properties. Relying upon the Division Bench judgment of this Court in Sri Chamundi Theatre Mysore Talkies Ltd vs. S.Chandrasekara Rao {1975 (45) Com. Cases 60}, it was contended by the learned Senior Counsel for the respondents 5 to 8 that in insolvency proceedings, there is an automatic vesting of the properties of the proposed insolvent in the Official Assignee by reason of the specific provisions of law and that in contrast, there is no such vesting in the Provisional Liquidator, in proceedings for winding up. Therefore, the learned Senior Counsel contended that the Provisional Liquidator can only take possession of, collect and protect all the properties and effects of the company, but not to distribute or sell the same.
38. In order to test the veracity of the above objection, we may have to refer to the provisions of Section 450 of the Companies Act. Under sub-Section (1) of Section 450, the Official Liquidator can be appointed to be the Liquidator provisionally, at any time after the presentation of a winding up petition, but before the making of a winding up order. Sub-Section (2) mandates the Company Court to give notice to the company and to afford a reasonable opportunity, before appointing a Provisional Liquidator, though there is no bar for the Court to dispense with such notice, for special reasons to be recorded in writing. Sub-Section (3) of Section 450 is what actually speaks about the powers of such a Liquidator. It reads as follows:
“(3) Where a Provisional Liquidator is appointed by the (Tribunal), the (Tribunal) may limit and restrict his powers by the order appointing him or by a subsequent order; but otherwise he shall have the same powers as a Liquidator.”
39. A bare perusal of sub-Section (3) of Section 450 makes it clear that a Provisional Liquidator would have the same powers as a Liquidator, unless the Court which appointed him, limited and restricted his powers, by the very order appointing him or by a subsequent order. In the case on hand, the Provisional Liquidator was appointed by an order dated 22.7.2005 passed in C.A.No.1393 of 2004. Neither the order of appointment dated 22.7.2005 nor any subsequent order passed by this Court contained a restriction/limitation on the powers of the Provisional Liquidator. Therefore, the Provisional Liquidator has the same powers as that of the Liquidator and the same cannot be belittled. In any case, the Provisional Liquidator has not sold the properties of the company in liquidation. He has not even come up with any application for the sale of the properties. It is not the Provisional Liquidator, but one of the secured creditors (the applicant herein) who has come up with the application for the issue of a fresh advertisement for the sale of the properties of the company in liquidation. There is nothing in the Companies Act, 1956, which restricts or limits the power of this Court to order the sale of the properties through the Official Liquidator and hence, the objection based upon the power of the Official Liquidator is of no relevance to the situation on hand. In the application on hand filed by one of the secured creditors, we are concerned only with the power of this Court and not the power of the Provisional Liquidator to order the sale. Under Section 451(1), the Liquidator is obliged to perform such duties as the Court may impose. Therefore, we are primarily concerned with the question whether the Court can order the sale or not.
40. The fact that the powers of the Provisional Liquidator are just the same as the powers of the Liquidator, can be inferred even from the provisions of Section 456, which enable the Liquidator or the Provisional Liquidator to take into his custody and under his control, all the property, effects and actionable claims to which the company is entitled. Section 457(1)(c) empowers the Liquidator, with the sanction of the Court, to sell the immovable and movable property of the company by public auction or by private contract, with power to transfer the whole thereof to any person or body corporate or to sell the same in parcels. He is even entitled to sell the whole of the undertaking as a going concern, under Section 457(1)(ca).
41. In Panchmahals Steel Limited vs. Universal Steel Traders {1976 (46) Com. Cases 706 (Guj.)}, D.A.Desai, J., held that while appointing a Provisional Liquidator it is open to the Court to limit or restrict his powers and that if limitation on the power of the Provisional Liquidator is not specifically prescribed in the order appointing him or in any subsequent order, the Provisional Liquidator will have all the powers of a Liquidator. In M/s.Bakemans Industries Pvt. Ltd. vs. New Cawnpore Flour Mills {AIR 2008 SC 2699}, the Supreme Court held in paras-45 and 63 as follows:-
“45. There cannot be any doubt whatsoever that in the matter of control over the assets of a company in liquidation, the Courts exercise a wide jurisdiction. It may not only take recourse to the sale of the assets of the company whether before or after it is wound up, but also would be entitled to, nay obligated to, if the situation so warrants, to attempt to rehabilitate the company itself.
63. The power and functions of the provisional official liquidator for all intent and purport would be the same as that of the Official Liquidator and, therefore, it was not necessary for the Company Judge to wait till the Company was wound up.”
42. In paragraph 58 of its decision in Bakemans, the Supreme Court expressly rejected the contention that the Provisional Liquidators have no statutory powers in relation to effecting the sale of the movable or immovable property. All that is required of this Court, while ordering the sale, was to involve the Provisional Liquidator in the sale. Therefore, there are no impediments for the Court to order the sale of the properties. Therefore, the reliance placed by the learned Senior Counsel for the respondents 5 to 8 on the decision of the Division Bench of this Court in Sri Chamundi Theatre (1975 (45) Com. Cases 60}, is of no avail to him, in the light of the law laid down by the Apex Court in Bakemans. It is relevant to point out that the decision in Sri Chamundi Theatre was actually taken note of by the Supreme Court in Bakemans, in the very same paragraph 58 itself.
43. In Reinz Talbros Ltd vs. Kostub Investments Ltd {2009 (96) SCL 108 (Del.)}, the order passed by the Company Judge for an auction sale of the properties of the company involved in winding up proceedings, came under challenge before a Division Bench of the Delhi High Court, on two grounds. The first ground related to the validity of the valuation report. The second ground of challenge was that the Provisional Liquidator had no authority to sell the property. But the said contention was rejected by the Division Bench on the basis of Section 450(3) of the Companies Act, 1956. A similar view was expressed much earlier by a Division Bench of the High Court of Punjab and Haryana in Altos India Ltd vs. Bharti Telecom Ltd {2001 (103) Com. Cases 6 (P&H)}.
44. The second objection of the respondents 5 to 8 is that an application to set aside the order appointing a Provisional Liquidator is pending in D.No.6007 of 2006 and that therefore, till it is disposed of, the properties cannot be sold. This objection is to be stated only to be rejected. The order appointing the Provisional Liquidator was passed on 22.7.2005. More than a period of five years have passed. Till date, the application to set aside has not seen the light of the day. In the course of hearing of this application, I gave opportunities to the learned counsel to bring up the set aside petition for hearing. He could not even trace it. However, the learned counsel filed an affidavit sworn to by the fifth respondent on 12.12.2009. As per this affidavit, the set aside petition in D.No.6007 of 2006 was returned on 5.4.2006 by the Registry and that it was re-presented by the counsel for the respondents 5 to 8 on 26.6.2006 along with an application in Diary No.16392 of 2006 for condonation of the delay in re-presentation. It is stated further in the affidavit of the firth respondent that the condone delay petition alone was returned on 5.6.2008 and that the set aside petition could not be traced.
45. What is stated in the affidavit filed by the fifth respondent on 12.12.2009, is nothing but an apology of a reason. It sounds more like the excuse offered by a patient for not taking the medicine, on the ground that the prescription was lost. During the period of 4 years from 22.7.2005, the respondents could have taken steps either to get the papers in D.No. 6007 of 2006 reconstructed or filed a fresh application for setting aside the order dated 22.7.2005. Their failure to do so, disentitles them to raise a plea at this stage that till that set aside petition is decided, the sale of the assets cannot be ordered. To say that the properties cannot be sold till the set aside petition is disposed of, is itself obnoxious. It is still worse if the said application is filed and not even numbered. Interestingly, a copy of the affidavit and Judges summons in the set aside petition in D.No.6007 of 2006 is enclosed to the affidavit filed on 12.12.2009. Not even an apology of a reason is stated therein, to enable this Court to allow the application for setting aside the order dated 22.7.2005. Therefore, the second objection cannot be sustained.
46. The third objection of the respondents 5 to 8 is that the applicant herein had given up the security that it had, over the assets of the company in liquidation, by surrendering possession to the Provisional Liquidator. Therefore, according to the learned Senior Counsel for the respondents 5 to 8, the applicant has actually become an unsecured creditor and hence, the properties cannot be sold at their instance.
47. The above objection stems out of a mix up, intentional or otherwise, as to what constitutes a secured asset, in terms of different enactments. Section 2(1)(zc) of the SARFAESI Act, 2002 defines a “secured asset” to mean the property on which security interest is created. Section 2(1)(zf) defines a “security interest” to mean the right, title or interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in Section 31. Section 2(1)(zd) defines a “secured creditor” to mean any bank or financial institution. The expression “financial institution” is defined under Section 2(1)(m) to mean a public financial institution within the meaning of Section 4A of the Companies Act, 1956. The applicant herein is a public financial institution within the meaning of Section 4A of the Companies Act, 1956 and hence, it is a secured creditor within the meaning of Section 2(1)(zd). Therefore, the right, title and interest created by the company in liquidation, by way of mortgage/charge/hypothecation of their properties, in favour of the applicant, would fall within the meaning of the expression “secured interest” under Section 2(1)(zf). Consequently, the property of the company is a “secured asset” in terms of Section 2(1)(zc).
48. Neither the manner of creation of a charge/mortgage/hypothecation nor the manner of its redemption, is made dependant either upon the act of the secured creditor taking possession of the secured asset under Section 13(4) or the act of the secured creditor in not taking or surrendering possession of the secured asset. The Act keeps the creation of a charge, hypothecation or mortgage and the extinguishment of the same, distinct and separate from the enforcement of the security interest under Section 13. As a matter of fact, SARFAESI Act, 2002 does not deal either with the creation of a charge, hypothecation or mortgage and/or the extinguishment of the same. The creation and extinguishment are still governed by the provisions of the Transfer of Property Act and the Contract Act, as the case may be. SARFAESI Act, 2002 merely provides a special method for the enforcement of the security interest by a bank or financial institution, without going through the rigmarole of a suit for foreclosure. The power conferred by Section 13 of the SARFAESI Act is akin to the power conferred by Sections 69 and 69A of the Transfer of Property Act, even upon private individuals, in terms of the deed of mortgage.
49. Neither the Transfer of Property Act, 1882 nor the Contract Act, 1872 nor even the SARFAESI Act, 2002 suggest even remotely that a secured creditor would be deemed to have given up his security, by merely surrendering possession. Actually possession is not a sine quo non for the creation of a charge/mortgage, except where it is a possessory mortgage. In fact sub-Section (8) of Section 13 of the SARFAESI Act stipulates that if the dues of the secured creditor, together with all costs, charges and expenses are tendered at any time before the date fixed for sale or transfer, the secured asset shall not be sold and no further step shall be taken for the transfer or sale of the secured asset. Section 13(8) does not take the issue any further by stipulating that the bank or financial institution shall then issue a no due certificate and a certificate of redemption, since all these acts fall outside the scope of the SARFAESI Act. Therefore, the third objection that the security interest was given up, by the applicant surrendering possession to the Official Liquidator, is not well founded.
50. It is well settled that a secured creditor is entitled to stand outside the winding up proceedings and can proceed to realise his security without the leave of the Winding up Court, if by the time he initiated the action, the company had not been wound up. This position in law, settled in one of the earliest cases before the Supreme Court in M.K.Ranganathan v. Government of Madras [AIR 1955 SC 604] was followed in Industrial Credit and Investment Corporation v. Srinivas Agencies [1996 (4) SCC 165]) and even as late as in 2005 in Andhra Bank vs. Official Liquidator {2005 (5) SCC 75}. It was held in Andhra Bank, that the secured creditors have two options (i) they may desire to go before the Company Judge or (ii) they may stand outside the winding up proceedings. The secured creditors of the second category would come within the purview of Section 529-A(1)(b) read with Proviso (c) appended to Section 529 (1). Therefore, the applicant herein is even entitled to stand outside these proceedings, in view of the fact that the company had not yet been wound up. The applicant has not given up his right to stand outside the winding up proceedings. Therefore, the third objection of the respondents 5 to 8 cannot be accepted.
51. In fact, Section 529 (1) of the Companies Act, 1956, declares that the rules that are in force under the law of insolvency, are applicable to the winding up of an insolvent company, with regard to the matters covered by clauses (a), (b) and (c) of sub section (1) of Section 529. I will be adverting to this provision in the later part of this judgment, in greater detail. However, for the purpose of testing the correctness of the contention of the learned Senior Counsel for the respondents 5 to 8, it is necessary even at this stage, to refer in brief, to the rules that are in force under the law of insolvency. Therefore, let me now have a look at the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920, to see if what the applicant, who is a secured creditor, had done, would amount to relinquishment of the security.
52. Under Section 28(6) of the Provincial Insolvency Act, 1920, nothing contained in Section 28 as to the effect of an order of adjudication, will affect the power of any secured creditor to realise or otherwise deal with his security, in the same manner as he would have been entitled to, if this Section had not been passed. A similar provision is found in the Proviso to Section 17 of the Presidency Towns Insolvency Act, 1909.
53. Section 47 of the Provincial Insolvency Act, 1920, which is almost in pari materia with Rules 9 to 11 of The Second Schedule to the Presidency Towns Insolvency Act, 1909, enables a secured creditor to do one of the three things viz., (i) he may enforce his security and prove for the balance due to him (ii) he may relinquish his security for the benefit of the general body of creditors and prove the whole debt or (iii) he may value his security and receive a dividend for the balance that may be due to him, subject to the right of the Court/Official Assignee to redeem the security. Interestingly, Section 47(2) of the 1920 Act, uses the expression “relinquishes his security”, while Rule 10 of The Second Schedule to the 1909 Act, uses the expression “surrenders his security”. As a matter of fact, these provisions correspond to Rule 10 of The Second Schedule to the (English )Bankruptcy Act, 1883 (later Rule 11 of The Second Schedule to Bankruptcy Act, 1914). The English Rule uses the expression “surrenders or gives up”. Therefore, Rule 10 of The Second Schedule to the Presidency Towns Insolvency Act, 1909, also uses the very same expression “surrenders”, though Section 47(2) of the 1920 enactment uses the expression “relinquishment”. But both are intended to convey the same meaning and hence let me now see how the Courts have interpreted these expressions.
54. In Union Bank of Bijapur vs. Bhimrao Shrinivas Rao {AIR 1929 Bom. 258}, the expression “relinquishment” was held sufficient to cover an abandonment by conduct. A secured creditor will not be deemed to have surrendered the security unless he has really elected to abandon it, that is omitted to value it deliberately and on purpose. Where the omission is accidental, the Court should relieve the secured creditor on terms. {See Re Safety Explosives Ltd {1904 (1) Ch. 226}, Re King {1885 (2) Morr. 119, Re Henry Lister & Co. {1892 (2) Ch. 417}.
55. In an unreported judgment of the Division Bench of the Gujarat High Court in Gujarat Steel Tube Employees Union vs. O.L., extracted in page-287 of Justice P.S.Narayana’s Law of Insolvency (Asia Law House, 6th Edition-2007) it was held as follows:-
“……..The Court is also of the view that simply because the secured creditors participate in the sale proceedings undertaken by the Court and they also became the members of the Sale Committee constituted pursuant to the directions issued by the Court does not mean that they have exercised their option of remaining outside the winding up and they have relinquished their security. As a matter of fact, relinquishment of security by the secured creditors require a positive action on the part of the secured creditors. They have never stated in any of the proceedings that they are relinquishing their securities. On the contrary, they have made it clear that they remain outside the winding up and they participate in the sale proceeds only with a view to facilitate the sale proceeds so as to get the auction proceedings completed as expeditiously as possible. There is also substance in the say of the secured creditors that as soon as the assets of the companies are sold and realization is taken place, their securities are converted from the specified assets into cash and they have equal right in cash which is realized on sale of the assets of the company in liquidation………..”
The above passage from the decision of the Division Bench of the Gujarat High Court was quoted with approval by the Supreme Court in ICICI Bank vs. SIDCO Leathers Ltd {2006(10) SCC 452}.
56. In ICICI Bank vs. SIDCO Leathers Ltd {2006(10) SCC 452}, a first charge was created on the assets of the borrower, in favour of ICICI Bank, IFCI and IDBI and a second charge was created in favour of Punjab National Bank. The first charge holders went before the Civil Court which got transferred to the Debts Recovery Tribunal. In the meantime, the borrower company was wound up and the Official Liquidator took charge. The Debts Recovery Tribunal granted liberty to ICICI Bank (first charge holder) to obtain permission of the Company Court under Section 446. The Company Court gave permission to them to prosecute the proceedings before the DRT by standing outside the winding up. The Punjab National Bank which was a second charge holder, had also filed a suit. In the meantime, the Official Liquidator sold the assets of the company and issued a notice in Form 63 under Rule 148 (1) of the Companies (Court) Rules, 1959. ICICI Bank lodged a claim with the Official Liquidator. All the first charge holders also filed an application before the Company Court, seeking payment on pro rata basis, to the exclusion of the claim of the Punjab National Bank. Though the claim for payment on pro rata basis was allowed by the Company Court, the prayer of the first charge holders to exclude the Punjab National Bank, was rejected by the Company Court, on the ground that since ICICI Bank, IFCI and IDBI had joined the winding up proceedings and submitted proof of their debts before the Official Liquidator, they should be taken to have given up their securities. In other words, the Company Court at Allahabad accepted a similar contention as is now raised by the learned Senior Counsel for the respondents 5 to 8 that the security was given up. An Intra Court Appeal filed against the said order of the Company Court was also dismissed by the Division Bench, on the ground that since ICICI Bank did not opt to remain outside the liquidation proceedings, in terms of Section 47 of the Provincial Insolvency Act, 1920, Section 48 of the Transfer of Property Act, would have no application. Therefore, challenging these concurrent orders of the Company Court and the Division Bench, the ICICI Bank went on appeal to the Supreme Court. Before delving deep into the issues framed for consideration in para 20 of its decision, the Supreme Court took note of certain legal propositions, in paras 22 and 23, which were not in controversy. They are as follows:-
“22. There are two categories of secured creditors, namely, (i) those who are desirous of going before the Company Court; and (ii) those who stand outside the winding-up proceeding.
23. Corporate insolvency procedures serve a variety of functions which include collective execution by unsecured creditors, facilitation of corporate rescue and the enforcement of security which would include certain public goals, as for example, corporate morality. In an insolvency proceeding, the fundamental questions, which go to the root of the procedure, are:
(i) which parties are involved;
(ii) which assets are to be included; and
(iii) how proceedings are to be funded.”
The Court also pointed out in para 32 of the said judgment that the decision in Allahabad Bank is not an authority for the proposition that in terms of Section 529-A of the Companies Act, 1956, the distinction between the two classes of secured creditors did not survive any longer.
57. After enunciating the general principles as above, the court referred to the provisions of the Provincial Insolvency Act,1920 and considered question as to when a secured creditor will be deemed to have “relinquished his security”, for the purpose of Section 47(2) of the 1920 Act and held in paragraphs 52 and 53 of its decision in ICICI Bank Ltd vs. SIDCO Leather Ltd as follows:-
“52. Section 47 of the Provincial Insolvency Act is attracted by virtue of Section 529(1) of the Companies Act. Sub-section (2) of Section 47 would become applicable where a secured creditor voluntarily relinquishes his security for the general benefit of the creditors.
53.The expression “relinquish” has a different connotation. In P.Ramanatha Aiyar’s Advanced Law Lexicon at page 4047, it is stated:
“Relinquish: To give over possession or control of; to leave off.”
It envisages a conscious act, i.e., an act where a person was aware of his right and then relinquishes the same. The same must be for the general benefit of the creditors. His action must lead to a conclusion that he, for one reason or the other, intended to stand in the queue for receiving money owed to him. It, however, does not stand obliterated only by the filing of an affidavit or proof of claim with the Official Liquidator. Such a claim had been filed pursuant to a notice issued by the Official Liquidator. If the creditor does not respond to the said notice, he would not be in a position to bring to the notice of the Official Liquidator, the existence of his right.”
Therefore, it is clear from the law laid down by the Apex Court in ICICI Bank, that a secured creditor cannot be very lightly held to have relinquished his security, unless there was a conscious act on his part. The mere act on the part of the applicant herein in handing over possession to the Provisional Liquidator in pursuance of an order of this court and in seeking the assistance of this Court for the sale of the secured asset, would not tantamount to relinquishment of security. This is made clear even by paragraphs 26 to 28 of the decision in ICICI Bank vs. SIDCO Leathers. The Court pointed out therein that the secured creditors who opt to stand outside the winding up can also in certain circumstances come before the Company Court. Therefore, the mere fact that the secured creditor has come up with the above application cannot lead to a presumption that the security has been given up.
58. Moreover, by its letter dated 6.10.2005 and 6.1.2006, addressed to the Deputy Official Liquidator, the applicant has made it very clear that the applicant is keeping out of the winding up proceedings and that they were prepared to deposit the workmen’s dues as per the Proviso to Section 13(9) of the SARFAESI Act. Hence, the third contention of the learned Senior Counsel for the respondents 5 to 8 cannot hold water.
59. The fourth objection that there cannot be parallel proceedings when the applications O.A.Nos.113 and 114 of 2004 filed by the applicant herein under Section 19 of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 are still pending, cannot any more stand, in view of the decision of the Supreme Court in Transcore v. Union of India [2008 (1) SCC 125]. It was pointed out by the Apex Court in the said decision that the SARFAESI Act was inspired by the provisions of Sections 29 and 31 of the State Financial Corporations Act, 1951 and that the secured creditors are provided cumulative remedies, with an option to choose one or more. If the applicant had opted to stand outside the winding up proceedings, they were entitled to avail the remedies under both the enactments, viz., RDB Act, 1993 and SARFAESI Act, 2002, by virtue of the decision in Transcore. Therefore, by the same logic, their decision to come before the Winding up Court, cannot be treated as a recourse to parallel proceedings. Hence, the fourth objection is also rejected.
60. The fifth objection that the lease hold equipment are not severable, can be dealt with conveniently, while dealing with the objections of the learned Senior Counsel for the ninth respondent, as they overlap to some extent.
61. The sixth objection, arising out of a provision for arbitration in the agreements that the company in liquidation had with respondents 2 and 10, is not actually directed against the applicant herein. This objection can at the most be placed in response to a prayer, as and when made by the respondents 2 and 10. There is no averment that the loan agreements that the applicant had with the company in liquidation contained an arbitration clause. Therefore, the claim of the applicant cannot be defeated, on the basis of an arbitration clause contained in the agreements that the company had with other lenders.
62. The seventh objection of the learned Senior Counsel for respondents 5 to 8 is that the claim of the applicant on the ninth respondent could have been satisfied out of the surplus funds available with the Indian Bank, which sold the properties held by them as security interest.
63. I do not know how this objection is raised by respondents 5 to 8. To show that they have no locus standi to raise this objection and that at any rate there are no bona fides on their part in raising this objection, a little background to what happened between Indian Bank and the ninth respondent is necessary. Therefore, at the cost of a little digression, I may now refer to the proceedings between the Indian Bank and the ninth respondent (New Horizon Sugar Mills Ltd.).
64. For the credit facilities availed by the ninth respondent, the Indian Bank issued a notice dated 25.9.2004 under Section 13(2) of the SARFAESI Act. It was followed by a possession notice dated 01.01.2005 under Section 13(4). A notice of tender was issued on 18.3.2005 for the sale of the secured assets and an auction was held on 24.3.2005. The successful bidder, viz., EID Parry India Limited remitted an amount of Rs.12.50 crores on the same day towards part payment.
65. Further proceedings pursuant to the auction were stalled due to a batch of writ petitions filed by various persons including PNL Depositors’ Welfare Association, a trade union, a co-operative bank and one of the persons who participated in the auction. Those writ petitions were disposed of by an order dated 12.7.2005. One of the issues that arose for consideration in those writ petitions was about the benefits payable to the workmen under Section 25-FF of the Industrial Disputes Act, 1947.
66. After the disposal of the writ petitions, a sale certificate was issued on 10.8.2005 to the highest bidder. But, it could not be registered in view of the order of attachment passed by the competent authority under the Pondicherry Protection of Interests of Depositors in Financial Establishments Act, 2004. Thereafter, a fresh batch of three writ petitions were filed, in which, an interim order was passed appointing a retired Judge of this Court to process the claims of the workmen and directing the Indian Bank to deposit Rs.6.00 crores in a no-lien account for the purpose of eventual disbursement to the workmen. The orders so passed became the subject matter of a batch of writ appeals in W.A.Nos.1788 and 1919 of 2005 etc. batch. They were disposed of by a common order dated 27.3.2007 directing the workmen to go before the Commissioner of Labour, Puducherry, for the purpose of adjudication of their claims. The said order of the Division Bench became the subject matter of two appeals before the Supreme Court in C.A.Nos.6381 and 6382 of 2009. These appeals were disposed of by the Apex Court by an order dated 31.8.2009. In paragraph 9 of its order, the Supreme Court directed the Indian Bank to transfer an amount of Rs.6.00 crores from out of the sale proceeds to a no-lien account, for the purpose of disbursement to the workers. The balance amount, if any remaining in the no-lien account, after the settlement of the workers dues, was directed be paid to the ninth respondent, without prejudice to the contentions of the Bank. I do not know if the ninth respondent, who was represented by the fifth respondent herein, even brought to the notice of the Apex Court that in the light of the claims that the applicant and other secured creditors had, the ninth respondent was not entitled to take the balance amount.
67. In pursuance of the aforesaid orders, the process of computation of the claims of the workmen was commenced by the Commissioner of Labour. When the workmen and the Commissioner of Labour took the date 31.10.2006 as the date upto which the workmen will be deemed to have been in service, for the purpose of computation of the benefits under Section 25-FF of the Industrial Disputes Act, 1947, the ninth respondent protested, contending that the bank had taken possession on 01.01.2005 itself under Section 13(5) of the SARFAESI Act. Thereafter, the ninth respondent also filed a writ petition in W.P.No.11881 of 2010 on the file of this Court. As destiny would have it, the said writ petition also came up before me and disposed of by me by order dated 29.6.2010.
68. What is relevant for our present discussion is the fact that in those proceedings, the ninth respondent never roped in the applicant herein and requested this Court (in those writ proceedings) to pay the balance amount remaining in the hands of the Indian Bank to the applicant herein either towards part payment or towards full satisfaction of the claim of the applicant on the ninth respondent. On the contrary, the ninth respondent got a direction from the Court, without appraising the Court of the pendency of the present proceedings that out of the amount of Rs.6.00 crores deposited by the Indian Bank in a no-lien account, any balance remaining after payment to the workmen should be paid to the ninth respondent. Therefore, it is not open to respondents 5 to 8 herein to contend that the applicant could have sought payment of the surplus funds available with the Indian Bank from out of the sale of the assets of the ninth respondent. Hence, the seventh objection of respondents 5 to 8 is also bound to fail.
OBJECTIONS OF THE NINTH RESPONDENT
69. The first and second objections of the learned counsel for the ninth respondent are that since the ninth respondent is not a company in liquidation, its properties cannot be sought to be sold, in a petition for winding up against Arunachalam Sugar Mills Ltd.
70. It is true that the present proceedings are for the winding up of the company Arunachalam Sugar Mills Ltd. It is also true that the Official Liquidator was appointed as the Provisional Liquidator, by an order dated 22.7.2005, only in respect of the said company. Therefore, the objection now raised appears very attractive at first blush, at least to the brain, if not to the conscience of the Court.
71. In the counter affidavit filed by the fifth respondent, for and on behalf of the ninth respondent, it is admitted by him that the ninth respondent availed certain credit facilities from the Indian Bank, Pondicherry and committed default. Therefore, a notice under Section 13(2) of the SARFAESI Act was issued on 25.9.2004 demanding a sum of Rs.27,19,15,465/-, followed by a possession notice under Section 13(4) dated 01.01.2005. The properties of the ninth respondent at their factory premises at Ariyur, which were taken possession of, have already been sold to EID Parry India Limited, in an auction held on 24.3.2005 and sales certificate has also been issued subsequently. The attempts made by the ninth respondent, the promoters of the ninth respondent, the workers of the ninth respondent as well as the association of depositors of two non-banking finance companies promoted by the very same respondents 5 to 8, to stall the sale by Indian Bank, failed. There were several litigations at several levels and all of them have now got reduced only to a small area of conflict, which relates to the distribution of the workmen’s dues. I have given elsewhere in this judgment, a brief summary of those litigations.
72. It is also admitted by the ninth respondent in their counter affidavit that they obtained credit facilities from the applicant herein for the purchase of energy efficient sugar mill equipment and that those equipment were leased by the ninth respondent to the company in liquidation and also installed in their factory premises. It is further admitted in para 7 of the counter affidavit of the ninth respondent that the applicant holds the first charge over these assets. Therefore, it is still open to the applicant to take possession and bring the energy efficient sugar mill equipment purchased by the ninth respondent and leased out to the company in liquidation to sale, in terms of the provisions of the SARFAESI Act, 2002. What they are entitled to do by themselves, is what they seek to be done through this Court and through the Provisional Liquidator.
73. As a matter of fact, the applicant has indicated in para 3 of the affidavit in support of C.A.No.1038 of 2006, in precise terms, that the plant and machinery and equipment installed in the factory premises of the company in liquidation, can be categorised as follows:-
(i) Co-generation unit financed by the applicant to the company;
(ii) Energy efficient equipment financed by the applicant to the company;
(iii) Energy efficient equipment financed by the applicant to the ninth respondent, which is given on lease to the company in liquidation and installed in the factory of the company in liquidation; and
(iv) Equipment leased by the Sundaram Finance Ltd to Arunachalam Sugars Ltd.
Though in paragraphs 16, 17 and 18 of the counter affidavit filed by the fifth respondent, (Chairman of the company in liquidation as well as the ninth respondent) he has responded to the averments contained in para 3 of the affidavit of the applicant, the respondents 5 to 8 have not chosen to challenge the above categorisation. Even in the counter affidavit filed by the ninth respondent, the categorisation of the plant and machinery and equipment into 4 types, as given in para 3 of the affidavit in support of C.A.No.1038 of 2006 is not disputed. Therefore, this categorisation has to be taken as correct. Once this categorisation is found to be correct, the validity of the objection raised by the ninth respondent can easily be tested.
74. Out of the 4 categories of plant and machinery and equipment listed above, two were actually financed by the applicant herein to the company in liquidation. Therefore, the objections raised by the respondents 5 to 8 and 9, relating to these two categories of plant and machinery and equipment, are covered by my discussion in the other portions of this order.
75. In so far as the equipment leased out by Sundaram Finance Ltd (second respondent herein) to the company in liquidation is concerned, the company in liquidation cannot claim ownership, since these equipment are given on lease by Sundaram Finance Ltd to the company in liquidation. Therefore they have the right of re-possession. As a matter of fact, Sundaram Finance Ltd., has already obtained orders in the applications (A.Nos.4401 of 2004 and 1448 of 2005) filed under Section 9 of the Arbitration and Conciliation Act, 1996, for re-possession and sale. The application A.No.4401 of 2004, was closed on 7.12.2005 after the applicant and Sundaram Finance Ltd., entered into a Memorandum of Understanding on 27.9.2005. Therefore, the sale of the third category of plant and machinery and equipment, leased out by Sundaram Finance Ltd., to the company in liquidation, cannot be objected to for two reasons viz., (i) that Sundaram Finance Ltd., is the owner and (ii) that there are already orders for re-possession and sale.
76. Now we are left only with the fourth category of plant and machinery and equipment. It is the energy efficient equipment, financed by the applicant to the ninth respondent, who in turn leased out the same to the company in liquidation. These equipment are admittedly installed in the factory premises of the company in liquidation. Therefore, the present objection could at best, be raised in respect of this fourth category of movable property.
77. But as pointed out earlier, the applicant had already initiated proceedings under the SARFAESI Act, 2002 against the company in liquidation and taken possession of the properties. In so far as the ninth respondent is concerned, the applicant had filed O.A.No.112 of 2004 on the file of the Debts Recovery Tribunal-I, Delhi. Subsequently, the applicant filed I.A.No.697 of 2005 and obtained an order from the DRT-I, Delhi, on 3.10.2005, giving liberty to take steps under Section 13(4) of the SARFAESI Act, 2002. Therefore, what stands between the applicant and the equipment financed to the ninth respondent, is the fact that these equipment are installed in the factory of the company in liquidation, which is under the control of the Provisional Liquidator. Hence, the present objection of the ninth respondent will actually lose its vigour and vitality, if a direction is issued to the Provisional Liquidator to sell only the assets of the company in liquidation, leaving it open to the applicant to sell the assets of the ninth respondent under the SARFAESI Act. In such an event, the plant and machinery of the company in liquidation and the equipment of the ninth respondent would get segregated, perhaps resulting in damage and reduction in value of both. Except the sadistic pleasure of having deprived the creditors of their legitimate dues, the ninth respondent may not gain anything out of it, since the sale of the plant and machinery and equipment, belonging to the company in liquidation and to the ninth respondent, partly by the Provisional Liquidator and partly by the applicant, cannot be really be stopped by the ninth respondent. There is no legal impediment for a secured creditor, who has initiated proceedings under SARFAESI Act, to sell the properties which are the subject matter of those proceedings and at the same time, seek the sale of the properties of the company which is in liquidation, through the Company Court. If both of them issue advertisements at the same time in the same newspapers and conduct the sale simultaneously, the objection of the ninth respondent will become meaningless. But it would involve unnecessary expenditure, which should be avoided. Therefore, the first and second objections of the ninth respondent cannot hold water.
78. The third objection of the ninth respondent relates to the powers of this Court and of the Provisional Liquidator, when the winding up petition is still pending. To be precise, the contention of the ninth respondent is that the power of this Court to order the sale of the properties of a company, which is sought to be wound up, can be traced only to Section 443(1). Clauses (a) to (d) of sub-section (1) of Section 443 empowers this Court only to make any interim order that it thinks fit. Therefore, according to the ninth respondent, the sale of the properties of the company, during the pendency of a winding up petition, which would virtually be in the nature of a final order, ought not to be passed by this Court.
79. It is the further contention of the ninth respondent that even the powers of the Provisional Liquidator are stipulated in Sections 450 and 456(1). Neither Section 450 nor Section 456(1) empowers the Provisional Liquidator to sell the properties in the course of the proceedings for winding up. Therefore, it is their contention that the sale cannot be ordered.
80. But the above contention cannot be countenanced in view of the fact that one must read the provisions of Sections 443, 446, 450, 456 and 457 conjointly to arrive at a meaningful interpretation of the powers of the Provisional Liquidator and the powers of this Court. In Ramakrishna Industries Pvt. Ltd. Vs. P.R.Ramakrishnan {1988 (64) Company Cases 425 (Mad-DB)}, this Court held that it has the inherent power to do that which is necessary to prevent the abuse of the process of the Court or to advance the cause of justice or make such orders which are necessary to meet the ends of justice and that such power is not taken away or in any way restricted by Section 443 (1). Following the said decision of the Division Bench of this Court, it was held by K.Jagannatha Shetty, J., (as he then was) in Smt. Usha R. Shetty vs. Radeesh Rubber P. Ltd {1995 (84) Com. Cases 602 (Kar.)}, that there is no inherent indication in Section 536 (2) to warrant the conclusion that the power to order the sale of assets can be exercised only after the winding up is ordered. The learned Judge further held that the fact that the order (for sale) would become otiose, if the application for winding up is ultimately rejected, did not take away the jurisdiction to order the sale.
81. In Demaglass Holdings Ltd., Re. {2001 (2) BCLC 633}, the Chancery Division held that the foundation of the Court’s jurisdiction to deal with a winding up petition is its discretion under Section 125(1) of the Insolvency Act, 1986, to “dismiss or adjourn the hearing conditionally or unconditionally or make an interim order or any other order it thinks fit”. Therefore, this Court has the power to pass appropriate orders necessary to meet the ends of justice.
82. Rule 6 of the Companies (Courts) Rules, 1959 stipulates that save as otherwise provided by the Act or the Rules, the practice and procedure of the Court and the provisions of the Code of Civil Procedure, 1908, so far as applicable, shall apply to all proceedings under the Act and these Rules. Rule 9 makes it clear that nothing in the Rules shall be deemed to limit or otherwise affect the inherent powers of the Court to give such directions or to pass orders as may be necessary for the ends of justice or to prevent abuse of the process of Court.
83. Order XXXIX Rule 6 of the Code of Civil Procedure, 1908, empowers a Civil Court to order the sale of any movable property, which is subject to speedy and natural decay or which for any other just and sufficient cause it may be desirable to have sold at once. By virtue of Rule 6 of the Companies (Courts) Rules, 1959, the power conferred by Order XXXIX Rule 6, CPC is also available to this Court.
84. Rule 106(1) of the Companies (Courts) Rules, 1959, enables this Court to appoint a Provisional Liquidator, upon such terms as in the opinion of the Court shall be just and necessary. Sub-rule (2) of Rule 106 stipulates that the order appointing the Provisional Liquidator shall set out the restrictions and limitations, if any, on his powers imposed by the Court. The order of appointment is required to be in Form No.49. The substantive portion of Form No.49 reads as follows :
“Order appointing Provisional Liquidator
Upon the application of …………………….., and upon hearing Shri. ……………. advocate for the applicant and Shri…………………….., advocate for the company and upon reading the petition and affidavit filed the …………day of ………….19……., and the affidavit of the applicant herein filed the …………day of ………19…………
This Court doth appoint the Official Liquidator attached to this Court to be Provisional Liquidator of the above named company;
And the Court doth hereby limit and restrict the powers of the said Provisional Liquidator to the following acts, that is to say :
(here describe the acts, which the Provisional Liquidator is authorised to do.)
And the Court doth order that the Provisional Liquidator do forthwith take charge of all the property and effects of the company;
And that the costs of this application shall be costs in the petition.
(By the Court)
Registrar
Note : It will be the duty of such of the persons as are liable to make out or to concur in making out a statement of affairs under Section 454 to attend on the Provisional Liquidator at such time and place as he may appoint and to give him all information he may require.
Where the Court directs that the Provisional Liquidator is to take possession of any specific properties, the clause should be suitably modified and the particulars of such properties should be set out in a schedule to the order.”
85. Rule 107 states that the Rules relating to Official Liquidator shall apply to Provisional Liquidators, so far as applicable, subject to such directions as the Court may give in each case. Rule 272 prescribes that “unless the Court otherwise orders, no property belonging to a company which is being wound up by the Court shall be sold by the Official Liquidator without the previous sanction of the Court and every sale shall be subject to confirmation by the Court.” The expression “company which is being wound up” appearing in Rule 272, clears any air of confusion over the power of the Court to order sale of the properties, in the course of the hearing of the petition for winding up.
86. Therefore, the power of the Court to order the sale of the properties, pending the hearing of a winding up petition, cannot be doubted. As a matter of fact, if the secured creditors had opted to stand outside the winding up proceedings, they would have been free to bring these properties to sale. But, the applicant herein who is a secured creditor has come up before this Court, on account of a decision of the Division Bench of this Court in Asset Reconstruction Company (India) Limited Vs The Official Liquidator {2006 (3) SCC 529} and also in view of the order passed by this Court directing the applicant to surrender possession to the Official Liquidator.
87. The decision of the Division Bench of this Court in Asset Reconstruction Company case, followed the law laid down in Allahabad Bank Vs. Canara Bank {2000 (4) SCC 406} and Rajasthan State Financial Corporation Vs. The Official Liquidator {2005 (8) SCC 190}. The question that arose for consideration in Allahabad Bank related to the jurisdiction of the Debts Recovery Tribunal under the RDDB Act, 1993 vis-a-vis the Company Court. The Supreme Court held therein that even where a winding up petition is pending, the adjudication of liability and execution of the certificate in respect of the debts due to banks and financial institutions, fell within the exclusive jurisdiction of the Debts Recovery Tribunal and that in such cases, the Company Court’s jurisdiction under Sections 442, 446 and 537 of the Companies Act stood ousted. Therefore, it was held therein that the leave of the Company Court was not necessary for initiating proceedings under the 1993 Act. But, the decision in Allahabad Bank was explained in the next decision of the Supreme Court in Andhra Bank Vs. Official Liquidator {2005 (59) SCL 239}.
88. In Rajasthan State Financial Corporation, the question that arose for consideration was as to the right of the State Financial Corporation under Section 29 of the State Financial Corporations Act, 1951 to sell the assets of the company and realise the security, when the company is under winding up. The Court held that once a winding up proceeding has commenced and the Liquidator is put in charge of the assets of the company, the distribution of the proceeds of the sale can be done only by associating the Official Liquidator and also under the supervision of the Company Court. In other words, the Supreme Court held that the power to sell the assets available under Section 31 of the State Financial Corporations Act is not taken away, but the question of distribution of the proceeds of the sale stood restricted by the provisions of Section 529A of the Companies Act. In paragraph 18 of its decision in Rajasthan State Financial Corporation, the Supreme Court summed up the legal position as under :
“(1) 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.
(2) 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.
(3) 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.
(4) 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 realisation of its securities consistent with the relevant provisions of the Companies Act regarding distribution of the assets of the company in liquidation.”
89. Therefore, following the above ratio, the Division Bench held in Asset Reconstruction Company that when the securitisation company acting under Section 13 of the SARFAESI Act seeks to sell or otherwise transfer the assets of a debtor company in liquidation, the said power is to be exercised only after obtaining 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. Therefore, it is in pursuance of this decision that the applicant, who is undoubtedly a secured creditor, has come up with the above application and hence, no exception can be taken to the same.
90. Even in an unreported decision of P.Sathasivam,J (as he then was), in CA.Nos.10 of 2002 batch in CP.No.39 of 1994, relied upon by the learned Senior Counsel appearing for the ninth respondent, the learned Judge made it clear in paragraph 26 that when the property is in the custody of the Official Liquidator, leave of the Company Court having jurisdiction had to be obtained. This is what the applicant has sought to do in this application.
91. In Bakemans Industries Pvt. Ltd vs. New Cawnpore Flour Mills {AIR 2008 SC 2699}, the Supreme Court was confronted with a case whose factual matrix was as complicated, if not more, as the case on hand. In that case, a State Financial Corporation issued a notice under Section 29 of the State Financial Corporations Act, 1951 and took possession. In the meantime, winding up petitions were filed. Around the same time, arbitration proceedings were initiated, an award was passed and execution was laid. There were also petitions under Section 9 of the Arbitration Act as well as proceedings before the Debts Recovery Tribunal under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. A sale of the properties took place before the Company Court, whose validity was challenged before the Supreme Court in that case. Most of the issues which arose for consideration before the Supreme Court in that case, identified in para-38 of its decision, related to the powers of the Company Court vis-a-vis Section 29 of the State Financial Corporations Act.
92. After holding in paras-39 and 40 of its decision (in Bakemans) that the S.F.C. Act, 1951, is a special enactment, which will prevail over the general powers of the Company Court under the Companies Act, 1956, the Supreme Court pointed out that the State Financial Corporation, which originally invoked Section 29 (in that case), later submitted itself to the jurisdiction of the Company Court. That the State Financial Corporation was entitled to do so, was also pointed out by the Supreme Court in the same paragraph, by holding that “SICOM (The State Financial Corporation in that case) indisputably had a statutory power, but it could waive the same”. Therefore, by the same logic, the applicant herein who invoked Section 13 of the SARFAESI Act, 2002, was also entitled not to proceed further with the other measures prescribed under Section 13(4), but to come up before the Company Court. This is what the applicant had chosen to do by filing this application, especially in view of the order passed by this Court, directing the applicant to hand over possession to the Official Liquidator. Therefore, the reliance placed by the learned Senior Counsel for the ninth respondent in the decision of a learned Judge of the Bombay High Court in Divya Chemicals Ltd., In re {2005 (64) SCL 429 (Bom.)}, is of no assistance to the ninth respondent, in view of the fact that in the case before the Bombay High Court, the Official Liquidator sought permission of the Company Court to sell the properties and the same was opposed by the Banks and Financial Institutions on the ground that they had already obtained certificates of recovery from the Debts Recovery Tribunal and that they have opted to stand outside the winding up proceedings.
93. Ultimately, the Supreme Court pointed out (para-63) in Bakemans that the Company Court cannot ignore the role to be played by the Official Liquidator and that it is not necessary for the Company Court to wait till the company is wound up. The over all purport of the decision in Bakemans is that the power of the Court to order the sale of the assets of the company in liquidation, has to be exercised, by involving the Provisional Liquidator and after taking into account the interests of all the secured and the unsecured creditors, as well as the interests of the company itself.
94. It is true that in para 53 of its decision, the Supreme Court answered in the negative the question whether the Court should have exercised its jurisdiction for directing the sale of the prime property at the initial stage itself. But nevertheless, the Court ultimately permitted the Company Judge only to hold a fresh auction. Even in M.V.Janardhan Reddy vs. Vijaya Bank {2008 (7) SCC 737}, it was held in para 28 that when the company is in liquidation and the Official Liquidator was in charge of the assets of the company, he should be associated with the auction proceedings. Therefore, there can be no impediment for this Court to order the sale of the assets, by involving the Official Liquidator and after taking note of the interests of all secured and unsecured creditors as well as the company in liquidation.
95. The next objection of the ninth respondent is that the present application is in pursuance of a Memorandum of Understanding dated 27.9.2005 reached between the applicant and the second respondent and that therefore, it is contrary to law, in view of the fact that the petition for winding up was presented on 12.7.2004 itself. Under Section 441(2) of the Companies Act, 1956, the winding up proceedings are deemed to have commenced from the date of presentation of the petition and hence, no arrangement could have been entered into by the creditors outside this Court. It is the contention of the ninth respondent that since the present application is actually for enforcement of the understanding reached between the applicant and the second respondent outside this Court after the commencement of the proceedings, the Court shall not pass any order, which would give effect to such an understanding.
96. But the above contention of the ninth respondent is fallacious. At the outset, I do not think that there is any bar for two creditors to join together and work out a strategy to be followed before the Company Court while participating in the proceedings for winding up. Even without the MOU dated 27.9.2005, it was open to the applicant to have sought the concurrence of the second respondent, for the sale of the assets, in view of the fact that they also have stakes in the matter. For instance, Vijaya Bank, which is the fourth respondent in this application did not enter into any MOU with the applicant. Nevertheless, they have supported the application in the course of its hearing. It does not mean that after the commencement of the proceedings for winding up under Section 441(2), they have reached an understanding outside the Court unlawfully.
97. More over, the present application has been filed not at the instance of the second respondent nor in pursuance of the MOU dated 27.9.2005. It was filed only as a result of the order passed by this Court directing the applicant to surrender possession. In any event, the parameters for considering an application of this nature, are different and the MOU dated 27.9.2005 is not one of the parameters. Therefore, the ninth respondent cannot make much ado about this MOU.
98. Under Section 529(1) of the Companies Act, 1956, the Rules which are in force under the Law of Insolvency, with respect to the Estates of persons adjudged as insolvents, shall apply even to the winding up of an insolvent company, in so far as 3 aspects are concerned viz., (i) debts provable (ii) valuation of annuities and future and contingent liabilities and (iii) the respective rights of secured and unsecured creditors. The Proviso to Section 529 makes it clear 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. It is further stipulated by the Proviso that if the secured creditor opts to realise his security, instead of relinquishing his security and proving his debt, there must be ratable distribution and that the Liquidator would be entitled to represent the workmen.
99. Section 529(1) uses the expression “Insolvent Company”. While Section 3 of the Companies Act, 1956, defines the expressions “Company”, “Existing Company”, “Private Company” and “Public Company” and Section 4 defines the expressions “Holding Company” and “Subsidiary”, there is no provision in the Act, which defines an insolvent company. Therefore, it was held in K.Saradambal vs. Jagannathan and Bros. {1972 (42) Com. Cases 359 (Mad.)}, that every company in liquidation may presumably be treated as coming under Section 529 (1) unless its assets are shown to be sufficient to meet its liabilities in full, including interests and expenses of the winding up. The Court clarified that a company which is being wound up on account of its inability to pay its debts, is an insolvent company.
100. Section 529-A makes it mandatory that (i) the workmen’s dues and (ii) debts due to secured creditors, to the extent that they rank pari passu under clause (c) of the Proviso to Section 529(1), shall have the right of preferential payment, notwithstanding any law for the time being in force. These debts are also required to be paid in full, unless the assets are insufficient to meet them. If they are insufficient, they shall abate in equal proportions.
101. The preferential treatment to be given to the workmen’s dues and the debts due to secured creditors, by virtue of Section 529-A of the Companies Act, 1956, is also recognised and inserted as sub-section (19) of Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.
102. Since Section 529(1) makes the rules relating to the law of insolvency, applicable to the proceedings for winding up of an insolvent company, in so far as 3 aspects are concerned viz., (i) debts provable (ii) valuation of annuities and future and contingent liabilities and (iii) the respective rights of secured and unsecured creditors, let us now take a look at the provisions of the Provincial Insolvency Act, 1920 and Presidency Towns Insolvency Act, 1909.
103. While the Provincial Insolvency Act, 1920, consolidates and amends the law relating to insolvency as administered by Courts having jurisdiction outside the Presidency Towns, the Presidency Towns Insolvency Act, 1909, amends the law relating to insolvency in Presidency Towns. Section 2(e) of the 1920 Act, defines a “secured creditor” to mean “a person holding a mortgage, charge or lien on the property of the debtor or any part thereof, as a security for a debt due to him from the debtor.” In contrast, Section 2(g) of the 1909 Act, contains only an inclusive definition of the expression “secured creditor”. It includes a landlord who has a charge on land for the rent of that land, under any enactment.
104. Section 47 of the 1920 Act, contemplates 3 situations viz., (i) where a secured creditor realises his security and still left with some more amount to be recovered from the insolvent (ii) where a secured creditor relinquishes his security for the general benefit of the creditors and (iii) where a secured creditor neither realises nor relinquishes his security.
105. In so far as the first contingency is concerned, the secured creditor is obliged to prove the balance due to him, after deducting the net amount realised by him from the security. Under the second contingency, he must prove the whole of his debt. Under the third contingency, he is entitled to receive only a dividend in respect of the balance due, after deducting the value assessed by him about the security held by him.
106. Where a secured creditor values his security in his statement of proof, for the purpose of having his debt entered in the schedule, the Court is empowered at any time, under sub-section (4) of Section 47 (of the 1920 Act) to redeem the security, by paying the assessed value to such creditor.
107. The question as to when a secured creditor will be deemed to have relinquished his security, has already been dealt with by me in paragraph-57 above, with reference to the law laid down in ICICI Bank Ltd vs. SIDCO Leather Ltd {2006 (10) SCC 452}. It is clear from the law laid down therein that a secured creditor cannot be very lightly held to have relinquished his security, unless there was a conscious act on his part. Till the secured creditor exercises any one of the options available under sub section (1) or sub section (2) of Section 47, his case would only fall under sub section (3). Therefore, Section 47 not only answers the contention of the learned counsel for the ninth respondent, but also answers the contention of the learned counsel for respondents 5 to 8 that the applicant is deemed to have given up his security.
108. Coming to the Presidency Towns Insolvency Act 1909, it is interesting to note that there is no provision therein, which corresponds to Section 47 of the 1920 Act. On the other hand, the 1909 Act contains two Schedules, the First Schedule traceable to Section 26 and the Second Schedule traceable to Section 48. Section 26 deals with the meeting of creditors, convened by order of Court, at the instance of either a creditor or the Official Assignee. The purpose of the meeting is to consider the circumstance of insolvency and the mode of dealing with the property of the insolvent. The First Schedule contains rules relating to the summoning of and the proceedings at a meeting of creditors.
109. Rules 11and 13 of the First Schedule, deal with secured creditors. In essence, Rules 11 and 13 are similar to sub sections (1) to (4) of Section 47 of the 1920 Act. Rule 11 of the First Schedule contains two limbs. The first limb requires the secured creditor, who has not surrendered his security, to file a proof containing the particulars of his security and the value at which he assesses the security. In such a case, he is entitled to vote only in respect of the balance due to him, after deducting the value of his security. The second limb of Rule 11 contains a deeming fiction, by which a secured creditor will be deemed to have surrendered his security, if he votes in respect of the whole debt. Virtually Rule 11 of the First Schedule to the 1909 Act, is akin to sub sections (1) and (2) of Section 47 of the 1920 Act.
110. Rule 13 of the First Schedule to the 1909 Act, empowers the Official Assignee to require the creditor to give up his security, for the benefit of the general body of creditors, upon payment of the value estimated. In other words, it is an act of redemption. Therefore, Rule 13 is akin to sub section (4) of Section 47 of the 1920 Act.
111. While Sections 49 and 61 of the 1920 Act (Provincial Insolvency Act) deal with “mode of proof” and “priority of debts” respectively, Sections 48 and 49 of the 1909 Act (Presidency Towns Insolvency Act) deal with “rules as to proof of debts” and “priority of debts” respectively. The Second Schedule to the 1909 Act, is traceable to Rule 48, relating to proof of debts. Rules 9 to 16 and 18 of the Second Schedule to the 1909 Act, contain provisions relating to proof by secured creditors and the kind of enquiry to be conducted by the Court into the mortgage of any part of the insolvent’s real estate. A perusal of these rules may be necessary, since Section 529 (1) of the Companies Act, 1956 makes the rules relating to the law of insolvency, applicable to the proceedings before the Company Court. Therefore, let us now take a look at these rules.
112. Rule 9 of the Second Schedule to the 1909 Act, is in pari materia with Section 47(1) of the 1920 Act. It enables a secured creditor who realises his security, to prove only the balance due to him. Rule 10 of the 1909 Act, is in pari materia with Section 47(2) of the 1920 Act. It gives an option to the secured creditor to surrender his security to the Official Assignee for the general benefit of the creditors and to prove the whole of his debt. Similarly, Rule 11 of the 1909 Act, is in pari materia with sub section (3) Section 47 of the 1920 Act. This rule deals with a situation where the secured creditor neither realises nor surrenders his security. Rule 12(1) is in pari materia with Section 47(4).
113. But there is a small difference between Rules 10 and 12(1) of the Second Schedule to the 1909 Act and Sections 47 (2) and (4) of the 1920 Act. The difference is that under Rule 10, the surrender of security is to the Official Assignee. Under Rule 12(1), the right to redeem the security vests with the Official Assignee. But under Section 47(4) of the 1920 Act, it is the Court which is entitled to redeem the security.
114. While Rule 12(1) of the Second Schedule to the 1909 Act, is similar to Section 47(4) of the 1920 Act (except the small difference pointed out in the preceding paragraph), Rule 12(2) confers more powers upon the Official Assignee. As per this rule, if the Official Assignee is dissatisfied with the value at which the security is assessed by the secured creditor, he can require the property to be offered for sale on such terms and conditions as agreed between the creditor and the Official Assignee. If there was no agreement on the terms and conditions, the Court itself may fix the terms and conditions. Rule 12(2) goes to the extent of enabling the creditor and the Official Assignee to bid and purchase the security, if it is sold in a public auction. The Proviso to Rule 12(2) also fixes a period of limitation for the Official Assignee to exercise the right to the equity of redemption.
115. Rule 18 of the Second Schedule to the 1909 Act, an equivalent of which is not found in the 1920 Act, deals with the power of the Court to inquire into a claim of mortgage on the insolvent’s real estate. Since it is of some significance for the discussion on hand, it is extracted as follows:-
“18. Inquiry into mortgage, etc. :-Upon application by any person claiming to be a mortgagee of any part of the insolvent’s real or leasehold estate and whether such mortgage is by deed or otherwise, and whether the same is of a legal or equitable nature, or upon application by the Official Assignee with the consent of such person claiming to be a mortgagee as aforesaid, the Court shall proceed to inquire whether such person is such mortgagee, and for what consideration and under what circumstances; and if it is found that such person is such mortgagee, and if no sufficient objection appears to the title of such person to the sum claimed by him under such mortgage, the Court shall direct such accounts and inquiries to be taken as may be necessary for ascertaining the principal, interest and costs due upon such mortgage, and of the rents and profits, or dividends, interest or other proceeds received by such person, or by any other person by his order or for his use in case he has been in possession of the property over which the mortgage extends, or any part thereof and the Court, if satisfied that there ought to be a sale, shall direct notice to be given in such newspapers as the Court thinks fit, when and where, and by whom and in what way, the said premises or property, or the interest therein so mortgaged, and to be sold, and that such sale be made accordingly, and that the Official Assignee (unless it is otherwise ordered) shall have the conduct of such sale; but it shall not be imperative on any such mortgagee to make such application. At any such sale the mortgagee may bid and purchase.”
116. A reading of Rule 18 extracted above, would show that an inquiry into a mortgage can be conducted (i) either on an application by the person claiming to be the mortgagee of the insolvent’s real estate (ii) or on an application by the Official Assignee with the consent of such person. The inquiry so conducted by the Court, shall be directed at finding out whether such person is a mortgagee and if so, for what consideration. Once such a person is found to be a mortgagee and there is no sufficient objection to the amount claimed by him as due under the mortgage, the Court shall direct the accounts and inquiries to be taken for ascertaining the principal, interest and costs due on the mortgage. Thereafter if the Court is satisfied that there should be a sale, it may direct notice to be given in such newspapers as it thinks fit, for the sale of the property. In such an event, the Official Assignee, unless otherwise ordered, shall conduct the sale and the mortgagee himself is entitled to bid and purchase in such a sale.
117. Thus it is seen that the scope of Rule 18 is very wide and it provides a complete answer to the contentions raised on behalf of the company in liquidation as well as to the contentions raised on behalf of respondents 5 to 8 and 9. Speaking of the rights of the mortgagee, the Supreme Court held in para 49 of its decision in ICICI Bank vs. SIDCO Leathers, as follows:-
“While enacting a statute, Parliament cannot be presumed to have taken away a right in property. Right to property is a constitutional right. Right to recover the money lent by enforcing a mortgage would also be a right to enforce an interest in the property.”
Therefore, the right of the applicant as a secured creditor, to recover the money lent to the company in liquidation, by enforcing the mortgage, cannot be very lightly obliterated. As a matter of fact, the Supreme Court in ICICI Bank vs. SIDCO Leathers, quoted with approval the decision of the Karnataka High Court in State Bank of Mysore vs. Official Liquidator {1985 (58) Com. Cases 609}, wherein it was held that Section 47 of the Provincial Insolvency Act, 1920 is intended for the benefit of the mortgagee and not to his detriment. In that decision, the Karnataka High Court held that Section 47 (3) does not come in the way of the Official Liquidator entertaining the application of the bank for payment of secured loans in accordance with the hypothecation agreement and the mortgage by deposit of title deeds. It was also held therein that the secured creditor was entitled to realise the amount on a preferential basis, notwithstanding the fact that it filed the affidavit indicating that it stands within liquidation, but subject to the reservation of its security being continued.
118. Therefore, none of the objections raised either on behalf of respondents 5 to 8 or on behalf of the respondent-9, are valid. As a matter of fact, respondents 5 to 8 repeatedly gave assurances to this Court to bring investors so that the dues of the secured creditors could be paid and the company could be revived. It is only after this Court realised that those assurances were part of tiring out tactics adopted by respondents 5 to 8 that this Court ordered the sale on the earlier occasion. But that was assailed by respondents 5 to 8 on the ground that their objections were not considered. Therefore, I have now considered each and every one of the objections and I have found that there is no legal or factual impediment for ordering the application in C.A.No.1038 of 2006.
119. Incidentally, in the course of hearing of these applications, the counsel for the second respondent even brought to my notice, the conduct of respondents 5 to 8 and the details of the litigations in which they are involved. Though I have not based my conclusions on this small background score, played by the learned counsel for the second respondent, it would nevertheless add pepper and salt to the meat on hand. Therefore, let me place even the same on record.
120. It is on record that the respondents 5 to 8 not only promoted Arunachalam Sugar Mills Ltd and New Horizon Sugar Mills Ltd, but also promoted two non-banking finance companies by name (i) Pondicherry Nidhi Ltd., and (ii) PNL Nidhi Ltd. These finance companies committed default in payment of the deposits on maturity. Therefore, when Indian Bank sought to enforce its security against New Horizon Sugar Mills Ltd., by issuing a notice under Section 13 (2) of the SARFAESI Act, 2002, on 25.9.2004, the same was challenged by the company in W.P.No.33700 of 2004. But the writ petition was disposed of, directing the company to pay the loan amount in 3 instalments. Since the company failed to make payment, the bank took possession on 1.1.2005 and issued an auction sale notice. Apprehending that the sale of the properties of New Horizon Sugar Mills Ltd., would leave them high and dry, the association of depositors of the finance company, viz., PNL Depositors Welfare Association filed a writ petition challenging the auction sale. The workers of the Mill also filed a writ petition challenging the proposed auction sale. The writ petitions were disposed of on 12.7.2005, leaving it open to the depositors to work out their remedies under the Pondicherry Protection of Interests of Depositors in Financial Establishments Act, 2004. In the meantime, criminal complaints were also registered against the respondents 5 and 6, at the instance of the depositors, on the allegation that they misappropriated more than Rs.12.5 crores invested by the depositors. The respondents 5 and 6 and their other family members were arrested by the police in August 2005 and were in judicial custody till December 2005. In the meantime, the Chief Judicial Magistrate, Pondicherry, passed an order, attaching the properties standing in the names of the respondents 5 and 6 and their mother. The Government of Pondicherry also issued a notification in G.O. Ms.No.12, dated 18.2.2006, attaching the properties, in terms of the provisions of the Pondicherry Protection of Interests of Depositors in Financial Establishments Act, 2004. The validity of this Government Order was challenged in a batch of writ petitions, one filed by the auction purchaser from Indian Bank, another filed by the respondents 5 to 8 and a few more filed by the applicant as well as the Indian Bank and the company in liquidation. This batch of writ petitions came to be disposed of on 23.8.2006, by Elipe Dharma Rao, J., by a common order. The said order became the subject matter of challenge before the Division Bench, along with a challenge to two other sets of orders, one passed by F.M.Ibrahim Kalifulla, J., and another passed by A.Kulasekaran, J., in other connected cases. All the writ appeals in W.A.Nos.1788 and 1919 of 2005 batch of cases arising out of all the orders passed in three batches of cases by 3 different learned Judges, were disposed of by a common order dated 27.3.2007. As against the orders passed by the Division Bench on 27.3.2007, two appeals came to be filed in the Supreme Court in C.A.Nos.6381 and 6382 of 2009. The issue raised in both the appeals related only to the claims of workmen and the balance amount payable to New Horizon Sugar Mills Limited.
121. Therefore, though the order of the learned Judge dated 23.8.2006 stood modified by the Division Bench on certain legal issues, nevertheless, a finding recorded by the learned Judge towards the end of the discussion, which was not set aside by the Division Bench, is of importance and hence it is extracted as follows:-
“It is seen from the materials placed on record that while Pondicherry Nidhi Ltd., was a registered financial establishment under the provisions of the Reserve Bank of India Act, M/s.PNL Nidhi Ltd., is an unregistered financial establishment. Both the financial establishments are carrying on their business activities in the very same address, viz., 189, Mission Street, Pondicherry. M/s.V.Kannan and V.Bhaskaran and their close relatives/associates are major shareholders of PNL Nidhi Ltd. It is also pertinent to note that the said persons are also major shareholders/directors of New Horizon Sugar Mills Ltd., and Arunachalam Sugar Mills Ltd., and as such they are persons interested in the management and affairs of the said companies and the financial establishment. Though these companies and the financial establishment are separate legal entities, as contended by learned counsel for the parties concerned, and, therefore, the properties standing in the names of the respective companies and the individuals are distinct and independent from each other, but the real beneficiaries behind the corporate mask are one and the same persons. It is also pleaded in the counter-affidavits filed by the Government of Pondicherry that M/s.V.Kannan and V.Baskaran, who are said to be the major shareholders and directors of Pondicherry Nidhi Ltd/PNL Nidhi Ltd., as well as directors of New Horizon Sugar Mills Ltd and Arunachala Sugar Mills Ltd., have misappropriated huge sums of money deposited by the general public in PNL Nidhi Ltd., and diverted the said amount to their own trade and business of the said sugar mill companies. In such circumstances, when the very object and purpose of Act 1 of 2005 is to protect the interests of the depositors of the financial establishment and particularly when Section 4(2) empowers the Government to order attachment of properties not only standing in the name of the financial establishment, but also the personal assets of the persons in charge of the management and affairs of the financial establishment, I find no illegality in the impugned notification dated February 18, 2006. However, in view of my discussions and findings in the civil revision petition and the connected writ petitions, the impugned order of attachment passed vide G.O.Ms.No.12 dated February 18, 2006, is interfered with only to the limited extent in so far as it related to the properties against which proceedings under the SARFAESI Act, has already been initiated. Therefore, the attachment in respect of those properties alone are lifted and in other respects, the impugned notification stands legally valid.”
122. The respondents 5 to 8 who promoted Arunachalam Sugar Mills Ltd., New Horizon Sugar Mills Ltd., and PNL Nidhi Ltd., are facing prosecution under the Pondicherry as well as Tamil Nadu Protection of Interest of Depositors Act, on the allegation that thousands of depositors have been cheated. Even admittedly, they were arrested and detained in custody from 9.8.2005 to 10.12.2005. The news item published in The Hindu in its edition dated 10.8.2005, reported that the total number of depositors of the Nidhi were 13,295 and that it was a scam of the magnitude of Rs.68.5 crores. As per the news item published in The Hindu, dated 21.7.2009, several senior citizens who were retired officials, had invested their retirement benefits in the Nidhi and the number of depositors from Pondicherry alone were 6,000, whose deposits totalled to Rs.57 crores. The Express newspaper also carried the sad tale of thousands of depositors. Therefore, I am convinced that the respondents 5 to 8 are just attempting to stall the sale, only with a view to protect themselves from the depositors. If the sale is postponed, the hopes of thousands of depositors would be kept alive and the noose around the neck of the respondents 5 to 8 would not get tightened. On the other hand, if the sale takes place, the secured creditors may take away a major chunk of the proceeds, exposing the respondents 5 to 8 to the risk of being proceeded against personally, by the depositors. Therefore, to my mind, the objection of the respondents 5 to 8 to the proposed sale is only with a view to keep the secured creditors, unsecured creditors and the depositors as well as the long (if not mutilated) arm of the law at bay. As a matter of fact, a reasonably good offer appears to have been received from a leading sugar mill, for buying the properties in question. After it was stalled, the movable properties such as plant and machinery and co-generation and Energy Efficient Equipment have only depleted in value. By raising all sorts of objections and fighting several litigations against every move initiated by the creditors and depositors, for over 6 years, the respondents 5 to 8 have merely converted this Court into a R&D (Legal) Wing of the company in liquidation, at the cost of innumerable creditors and poor depositors. The respondents 5 to 8 and 9 have fought SARFAESI proceedings from this Court upto the Supreme Court. They have been fighting these liquidation proceedings before the Company Court and before the Division Bench, back and forth. They have fought the proceedings initiated under the Protection of Interest of Depositors Act, upto the Supreme Court. They have fought the question of payment of workmen’s dues upto the Supreme Court once and also fought the issue relating to the date upto which the workmen’s dues were to be paid. The only benefit that appears to have accrued out of this series of litigation by the respondents 5 to 9, is a little development of the law through contributions from the best of legal brains that they could afford to engage, though in the process, the creditors and the depositors are left high and dry. Therefore, all the objections raised by the respondents 5 to 8 and 9, not only lack legal tenability, but also lack bona fides.
123. Once the objections raised by respondents 5 to 8 and 9 to C.A.No. 1038 of 2006, are found to be unsustainable, what is now left for my consideration are the applications A.No.2486 of 2006 and O.A.Nos.253 and 254 of 2005. Therefore, let me now turn on to those applications.
C.A.No.2486 of 2006:
124. As pointed out earlier, this is an application taken out by Walchandnagar Industries Ltd., seeking to exclude a boiler sold and supplied by them to the company in liquidation, from the list of properties, whose sale was sought by the applicant in C.A.No.1038 of 2006. The case of Walchandnagar Industries Ltd., the applicant in C.A.No.2486 of 2006, is that they sold and supplied a Bagasse and Neyveli Lignite Fired Boiler and Auxiliaries on 20.10.2001, to the company in liquidation, at a total cost of Rs.7,32,52,043/- and that the company in liquidation paid an amount of Rs.6,26,70,411/-, leaving a balance of Rs.1,05,81,632. According to Walchandnagar Industries Ltd., they have a lien on the boiler, for the balance amount due and that they have already obtained a decree from a Civil Court and that execution proceedings are pending. Therefore, they seek the exclusion of this boiler from the list of machineries.
125. The applicant in C.A.No.2486 of 2006 has produced a copy of the contract that they had with the company in liquidation. In clause 3.11 under Section III of the contract containing the “General Conditions of Contract”, it is stipulated that the title and ownership in goods shall, immediately on these being handed over to the transporter, pass on to the purchaser and these shall become the property of the purchaser. However the Proviso states that the supplier shall have a “particular possessory lien” on the goods to the extent of the value remaining to be realised from the purchaser.
126. The applicant has also filed a copy of the plaint filed by them in civil suit No.19 of 2005 on the file of the Court of the Civil Judge, Senior Division, Baramati, for recovery of a sum of Rs.1,12,32,150/-, from the company in liquidation. But in the suit, the applicant did not seek to exercise or enforce their so called lien on the boiler. A reading of the plaint would show that the applicant had conceded the passing on, of the title in the boiler to the company in liquidation. The suit claim was not made on the claim of unpaid vendor’s lien. It was a simple suit for recovery of money, without anything more. Therefore, the decree was also just for payment of money and nothing more. Hence, the applicant cannot now seek the exclusion of the boiler, on the ground that they are unpaid vendors, who have a lien.
127. An “unpaid seller” is defined under Section 45(1) of the Sale of Goods Act, 1930, to mean a seller of goods (i) if the whole of the price has not been paid or tendered to him or (ii) if a bill of exchange or other negotiable instrument was received as conditional payment and the condition on which it was received had not been fulfilled by reason of dishonour of the instrument. An unpaid seller has certain rights, indicated in Section 46 of the Sale of Goods Act, 1930. They fall under two categories viz., (i) the rights available when the property in the goods have passed on and (ii) the rights available when the property in the goods have not passed on to the buyer.
128. If the property in the goods have passed on to the buyer, the unpaid seller would have (i) a lien on the goods, while he is in possession of the goods (ii) a right to stop the goods in transit, despite parting with possession, if the buyer had become insolvent and (iii) a limited right of re-sale.
129. If the property in the goods have not passed on to the buyer, the unpaid seller would have an additional right (apart from the other remedies) of withholding the delivery. This right would be similar to and co-extensive with his rights of lien and stoppage in transit.
130. Under Section 49 (1) of the Sale of Goods Act, 1930, an unpaid seller loses his lien, under 3 circumstances viz., (i) when he delivers the goods to a carrier or other bailee for transmission to the buyer, without reserving the right of disposal; (ii) when the buyer or his agent lawfully obtains possession of the goods and (iii) by waiver. Under sub section (2) of Section 49, an unpaid seller, if he has a lien, would not lose it, merely on account of the fact that he had obtained a decree for the price of the goods.
131. In the light of the above provisions, if we examine the application on hand, it is clear (i) that the title in the goods (boiler) had already passed to the company in liquidation; (ii) that the company in liquidation took delivery of the boiler lawfully, without the applicant reserving the right of disposal. Therefore, the applicant had lost its lien on the boiler. Consequently, the applicant had become merely an unsecured creditor, who holds a decree in its favour (for whatever it is now worth) and can only stand in the long queue of unsecured creditors, behind all those secured creditors and workmen. In such circumstances, the prayer made in A. No.2486 of 2006 for excluding the boiler sold by Walchandnagar Industries Ltd., to the company in liquidation, cannot be granted.
O.A.Nos.253 and 254 of 2005
132. As pointed out elsewhere, O.A.Nos.253 and 254 of 2005 are filed by Bharat Heavy Electricals Ltd., under Section 9 of the Arbitration and Conciliation Act, 1996 praying for interim orders of injunction restraining the company in liquidation from alienating or encumbering or disposing of the land and building comprising of the factory of the company at Arunachalam Nagar, Malapampadi Village, Tiruvannamalai Taluk and the plant and machineries lying thereon.
133. It is contended by Dr.Anita Sumanth, learned counsel for the applicant Bharat Heavy Electricals Ltd., that the company in liquidation entered into two contracts with the applicant herein. By these contracts, the applicant agreed to supply a 8,400 KW capacity Extraction cum Back Pressure Turbo Generator with its auxiliaries and a 4,280 KW capacity Low Pressure Straight Condensing Turbo Generator with all its accessories. While the value of the former contract was Rs.3,00,00,000/- together with USD 470,500/-, the value of the later contract was Rs.4,85,75,000/-, together with USD 1,37,647/-.
134. In respect of the former contract, the entire equipment was supplied and commissioned on 9.6.2001. In respect of the later contract, the billing schedule was not approved and a despatch clearance was not made. However, in order to avoid the blame being shifted to them, the applicant despatched all the equipments except the Gear Box to the company in liquidation.
135. Despite the supply and commissioning, the amounts due under the contracts were not paid. Therefore, the applicant invoked the arbitration clause, in clause No.4.18 of the Special Conditions of Contract. The applicant also named an Arbitrator. But the company in liquidation did not name an Arbitrator. Therefore, the applicant filed the above original applications under Section 9, seeking interim measures of protection, pending arbitration.
136. An interim order of injunction was granted in both the applications, in March 2005. But these orders were vacated on 2.9.2008, to facilitate the sale by the Official Liquidator. Challenging the order dated 2.9.2008, the applicant filed O.S.A.Nos.341 and 342 of 2008. By a common order passed on 27.10.2009 in these appeals as well as in other appeals, the Division Bench directed these applications also to be heard afresh. However, the Division Bench made it clear that the interim orders originally granted in these applications will not continue. It is in the background of these facts that I may now have to look into the merits of the claim in these applications.
137. It is contended by the learned counsel for the applicant-Bharat Heavy Electricals Ltd., that the Turbo Generators and auxiliaries supplied by them to the company in liquidation in pursuance of two contracts, cannot be sold by the Official Liquidator. It is their further contention that the fifth respondent in C.A.No.1038 of 2006, who is the Chairman of the company in liquidation, had acknowledged his liability to the applicant herein and that therefore, these Turbo Generators cannot be sold.
138. But unfortunately for the applicant herein, they stand in no better footing than the applicant in C.A.No.2486 of 2006. In pursuance of two contracts, the applicant manufactured two sets of Turbo Generators and supplied them to the company in liquidation. The company had taken possession lawfully. The title in the goods had passed on to the buyer. In as much as title as well as possession had passed on to the buyer, the applicant herein has no right to claim any lien over the goods. As an unsecured creditor, the applicant has only one remedy viz., to prove their claim before the Official Liquidator and wait in the queue for a miracle to happen. Therefore, the objection of the applicant herein to the sale of the Turbo Generators supplied by them to the company in liquidation, cannot be sustained and their applications under Section 9 deserve to be dismissed.
CONCLUSION:
139. In the light of the above discussion –
(i) C.A.No.2486 of 2006 is dismissed with liberty to the applicant to lodge its claim with the Official Liquidator. No costs.
(ii) O.A.Nos.253 and 254 of 2005 are dismissed with liberty to the applicant to lodge its claim with the Official Liquidator. No costs.
(iii) C.A.No.1038 of 2006 is allowed. The Official Liquidator is directed to effect publication in one edition of the English Daily ‘Indian Express’ (All India Edition) and one edition of the Tamil Daily ‘Daily Thanthi’ (All India Edition), inviting sealed tenders for the purchase of the assets, both movable and immovable, belonging to the company in liquidation and financed by the applicant as well as the second respondent. The publication shall indicate that it is issued by the Official Liquidator both on his behalf and on behalf of the applicant (IREDA) as well as the second respondent (Sundaram Finance Ltd), in respect of the assets of the company in liquidation as well as that of the ninth respondent, now lying in the factory premises of the company in liquidation. The paper publication shall be effected on or before 6.2.2011. The last date for receipt of tenders shall be indicated as 27.2.2011 and the date of the auction shall be fixed as 7.3.2011. The cost of the Tender Forms is fixed at Rs.1,000/-. The publication shall indicate that the Tender Forms shall be accompanied by Demand Drafts/Pay Orders for an amount representing 5% of the bid amount towards Earnest Money Deposit. The publication shall indicate that the Tender Forms along with the Demand Draft/Pay Order shall be sent in sealed cover addressed to the Registrar General of this Court, on or before the date indicated above, viz., 27.2.2011. The upset price shall be indicated in the paper publication as follows:-
(1) Land (120.70 Acres) - Rs.11.00 crores (2) Land (4.96 Acres) - Rs. 0.44 crores (3) Building - Rs. 9.00 crores (4) Plant and Machinery & other movable assets - Rs.66.00 crores ---------------------- Rs.86.44 crores =============
The paper publication shall also indicate that the intending purchasers who wish to inspect the properties may give an indication to the Official Liquidator and that upon an intimation being delivered by the intending purchasers, the Official Liquidator will arrange an inspection on 12th and 13th February, 2011. If necessary the Official Liquidator shall seek adequate police protection from the Superintendent of Police of the District, on the dates of inspection. Upon production of a copy of this order by the Official Liquidator, the Superintendent of Police of the concerned District shall provide adequate police protection to ensure smooth inspection on the dates indicated above. It is open to the Officials of the applicant, the Officials of the second respondent and the representatives of the company in liquidation to accompany the Official/Deputy Official Liquidator, on the dates of the inspection, along with the intending purchasers. The cost of the paper publication in the English Daily and the Vernacular Daily, shall be borne equally by the applicant (IREDA) and the second respondent (Sundaram Finance Ltd), by making payment of the amount, as and when claimed by the Official Liquidator. Apart from issuing paper publications, the Official Liquidator shall also send intimation of the proposed sale to some of the leading sugar mills in the country, including (i) the sugar mills which already evinced interest in buying these properties by tendering letters of offer and (ii) the sugar mill which purchased the properties of the ninth respondent.
140. In order to avoid any confusion, it is made clear at the cost of repetition that the news paper publications inviting tenders, should contain the following details:-
(i) The upset price of the land, building, plant and machinery and other movables, as detailed in the preceding paragraph.
(ii) The cost of the Tender Forms, the last date for submission of tenders, the dates for inspection and the date of the auction.
(iii) The fact that the Tender Forms should be accompanied by Demand Draft/ Pay Order representing 5% of the bid amount quoted by the tenderer towards Earnest Money Deposit.
(iv) The fact that the sealed tenders are to be submitted along with the Pay Order/Demand Draft, addressed to the Registrar General of this Court, on or before 27.02.2011.
(v) The fact that it is issued by the Official Liquidator both on his behalf and on behalf of the applicant (IREDA) as well as the second respondent (Sundaram Finance Ltd), in respect of the assets of the company in liquidation as well as that of the ninth respondent, now lying in the factory premises of the company in liquidation.
Registry to call this application 7-3-2011 for the conduct of auction. It is open to the applicant/ O.A/Second respondent to seek any clarification, if necessary.
19-01-2011
Index : Yes.
Internet: Yes.
Svn
V. RAMASUBRAMANIAN, J.
Svn Common Order in C.A.No.1038 of 2006 in C.P.No.229 of 2004 and C.A.No.2486 of 2006 in C.P.No.229 of 2004 and O.A.Nos.253 and 254 of 2005 19-01-2011
