Karnataka High Court
Canara Bank vs Sri R.D Singh on 12 April, 2023
Author: Hemant Chandangoudar
Bench: Hemant Chandangoudar
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RP No. 157 of 2018
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 12TH DAY OF APRIL, 2023
BEFORE
THE HON'BLE MR JUSTICE HEMANT CHANDANGOUDAR
REVIEW PETITION NO. 157 OF 2018
IN
WRIT PETITION NOS.56378-413/2013 (L-TER)
BETWEEN:
1. CANARA BANK
A PUBLIC LIMITED COMPANY OF
GOVERNMENT OF INDIA,
(H.O. BANGALORE),
CUNNINGHAM ROAD,
BANGALORE-560 052 ,
REPRESENTED BY ITS
AUTHORIZED SIGNATORY
CURRENTLY AT ITS ARM
BRANCH CIRCLE OFFICE AT 86,
MAHATMA GANDHI ROAD,
ASHOK NAGAR,
BENGLAURU - 560 001
Digitally signed by
... PETITIONER
R HEMALATHA (BY SMT. NAVITHA RATHORE, ADVOCATE AND
Location: HIGH
COURT OF
KARNATAKA
SRI R.C. THIRUVENGADAM, ADVOCATE)
AND:
1. SRI R.D SINGH
S/O SEMURTHY SINGH,
AGED 52 YEARS
2. SRI M U BHEEMANNA
S/O URGEE GOWDA,
AGED 38 YEARS
3. SRI B R SATHEESH
S/O RANGANATHA GOWDA,
AGED 42 YEARS
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RP No. 157 of 2018
4. SRI S N NAGARAJ
S/O NINGAIAH,
AGED 42 YEARS
5. SRI V KARUNAKARAN
S/O VENUGOPAL
AGED 43 YEARS
6. SRI CHANDRAIAH
S/O GANGABHARIAH,
AGED 46 YEARS
7. SRI MUDDARANGAIAH
S/O SREE RANGAIAH,
AGED 40 YEARS
8. SRI C S SURESH BABU
S/O SATISH GUPTA,
AGED 50 YEARS
9. SRI B N NAGESH RAO
S/O NARAYANA RAO
AGED 42 YEARS
10. ARAVIND KUMAR SINGH
S/O VASUDEV SINGH,
AGED 44 YEARS
11. SRI H MANJUNATH
S/O V HANUMANTHAIAH,
AGED 41 YEARS
12. SRI BASAVARAJAIAH
S/O GAYAPPA,
AGED 46 YEARS
13. SRI RAMACHANDRA
S/O CHIKKANNA,
AGED 40 YEARS
14. SRI T G NAGARAJ
S/O GUNDAIAH,
AGED 44 YEARS
15. SRI S MANOHAR
S/O SHAMANNA,
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RP No. 157 of 2018
AGED 45 YEARS
16. SRI C GANGARAJU
S/O CHIKKAHANUMAIAH,
AGED 41 YEARS
17. SRI P PENCHALAIAH
S/O PENCHALAIAH,
AGED 50 YEARS
18. SRI C H SANJEEVARAJU
S/O HANUMANTHAIAH,
AGED 43 YEARS
19. SRI MUNNANAIK
S/O RABHINDRA NAYAK,
AGED 36 YEARS
20. SRI CHIKKATHIMMAIAH
S/O THIMMAIAH,
AGED 46 YEARS
21. SRI RAMARAO
S/O VASUDEV,
AGED 37 YEARS
22. SRI H B VIJAYAKUMARA
S/O H S BASAVARAJ,
AGED 45 YEARS
23. SRI JAGANNATH
S/O LAKSHMIPATHY,
AGED 41 YEARS
24. SRI CHIKKAMUDHAGOWDA
S/O CHIKKAHANUMAIAH,
AGED 49 YEARS
25. SRI NARAYAN
S/O VENKATACHALAIAH,
AGED 44 YEARS
26. SRI RAJU
S/O SIDDEGOWDA,
AGED 47 YEARS
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RP No. 157 of 2018
27. SRI SREEKANTAMURTHY
S/O NANJUNDASWAMY,
AGED 45 YEARS
28. SRI H N NARASARAJU
S/O NARASIMHARAJAIAH,
AGED 45 YEARS
29. SRI V KUMAR
S/O A VENKATESH,
AGED 43 YEARS
30. SRI N R LOKESH
S/O RAJAPPA,
AGED 33 YEARS
31. SRI K P ERAPPA
S/O K T PUTTAIAH,
AGED 47 YEARS
32. SRI T PRASANNA
S/O THAMMAYANNA,
AGED 47 YEARS
33. SRI HONNAMUTHAIAH
S/O HOLASAIAH,
AGED 45 YEARS
34. SRI K V N MURTHY
S/O URAGAPPA,
AGED 58 YEARS
35. SRI KALLAPPACHARI
S/O KODDAGANNAPPA,
AGED 47 YEARS
36. SRI RAM BAHADUR SINGH
S/O ESHWARPAL SINGH,
AGED 52 YEARS
ALL RESPONDENTS 1 TO 36 R/AT
NO.71/72, 2ND CROSS, VINAYAKANAGAR,
NEAR GANESH TEMPLE, PIPELINE ROAD,
CHIKKABANAVARA,
BANGALORE-560 090
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RP No. 157 of 2018
37. THE MANAGEMENT OF
RELIANCE ENGINEERS LIMITED,
HAVING ITS REGISTERED OFFICE AT
NO.120, CUNNINGHAM ROAD
BENGALURU - 560 052
REPRESENTED BY ITS
MANAGING DIRECTOR
38. OFFICIAL LIQUIDATOR
HIGH COURT OF KARNATAKA,
NO.26/27, 12TH FLOOR,
RAHEJA TOWERS,
MG ROAD,
BANGALORE - 560 001
ALL RESPONDENTS NO.1 TO 36 CAN BE SERVED
THROUGH RESPONDENT NO.15,
SRI. S. MANOHAR,
S/O SRI SHAMANNA,
AGED 45 YEARS,
R/AT NO.71/72, 2ND CROSS,
VINAYAKANAGAR,
NEAR GANESH TEMPLE,
PIPELINE ROAD,
CHIKKABANAVARA
BANGALORE - 560 090.
... RESPONDENTS
(BY SRI. SHRISHAIL NAVALGUND, ADVOCATE FOR R38;
SRI SRIDHAR R., ADVOCATE FOR R3, R7, R8, R10, R14,
R15, R25, R29 & R36;
SRI MOHAN B.K., ADVOCATE FOR R2, R4, R5, R9, R12,
R13, R16, R18, R20, R22, R23, R24, R27, R28 & R35;
SRI PRAMOD R., ADVOCATE FOR R4, R9, R10, R26,
R32, R33 & R36[NOC], R1, R6, R11, R17, R19,
R21, R30, R31, R34;
V/O DATED 14.09.2021, NOTICE TO R37 IS DISPENSED WITH)
THIS REVIEW PETITION IS FILED UNDER ORDER 47 RULE 1 OF
CPC, PRAYING TO REVIEW THE ORDER DATED 10/11/2014 PASSED
IN WP NOS.56378-413/2013(L-TER), ON THE FILE OF THE HON'BLE
HIGH COURT OF KARNATAKA, BENGALURU.
THIS REVIEW PETITION COMING ON FOR DICTATING ORDERS,
THIS DAY, THE COURT MADE THE FOLLOWING:
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RP No. 157 of 2018
ORDER
ORDER This review petition is filed for setting aside the order dated 10.11.2014 passed in WP No.56378/2013, by which, the 38th respondent herein was directed to recover the monies due to the respondents No.1 to 36 towards retrenchment compensation from the petitioner herein and make over the same in the light of the Section 529 of the Companies Act providing for preferential treatment to workmen's due.
2. The respondent No.37 was classified as a non performing asset under the provisions of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short `SARFAESI Act').
3. The winding up proceedings were initiated against the respondent No.37 in Company Petn. No.128/2008.
4. Thereafter, the petitioner - Bank initiated proceedings for recovering the loan amount due from the respondent No.37 under Section 13 of the SARFAESI Act, 2002. The petitioner -Bank sold the mortgaged property in an auction conducted on 25.1.2011 for an amount of Rs.6,96,00,000/-, and in pursuance of the same, the sale certificate was issued in favour of the successful bidder. Thereafter, the impugned order was passed holding that the petitioner - Bank to be the custodian of the amount thus making it answerable to the official liquidator.
-7- RP No. 157 of 20185. Sri B C Thiruvengadam, learned Senior counsel for the petitioners' counsel would submit that as on the date when the auction or sale certificate was issued, the Official Liquidator was not appointed. Hence, there is no question of distribution of the amount realized from the sale of secured assets as specified under Section 529-A of the Companies Act, 1956. The provisos to Clause-9 of Section 13 of the SARFAESI Act, 2002 are applicable only when the company is in liquidation and not otherwise. In the instant case, as on the relevant date, the winding up of proceedings had commenced,but Official Liquidator was not appointed for managing and selling off company assets in order to pay the creditors. In support, he places reliance on the decision of the Hon'ble Supreme Court in the case of Bank of Maharashtra -vs- Pandurang Keshav Gorwardkar and others (2013) 7 SCC 754 and decision of the Hon'ble Supreme Court in the case of Pegasus Assets Reconstruction Pvt. Ltd. -vs- M's.Haryana Concast Ltd. and anr. (Civil Appeal No.3646/2011)(DD 29.12.2015).
6. He further submits that the SARFAESI Act, 2002 is a subsequent enactment, and the provisions of the Act have got overriding effect, notwithstanding anything inconsistent therewith contained in any other law as specified under Section 35 of the SARFAESI ACT, 2002.
7. On the other hand, the learned counsel for the respondent - workmen would submit that the winding up proceedings had commenced prior to the mortgage property was brought for sale, hence, Section 529-A of the Companies -8- RP No. 157 of 2018 Act comes into operation and statutory charge is created in favour of workmen in respect of the dues over such proceeds. He further submits that the relevant date for creating statutory charge is the date of commencement of the winding up proceedings and not the appointment of Official Liquidator. In support, he also places reliance on the decision of the Hon'ble Supreme Court in the case of Bank of Maharashtra v. Pandurang Keshav Gorwardkar, (2013) 7 SCC 754.
8. Considered the submissions of the learned counsel for the parties.
9. The only question that arises for consideration in this petition is, whether the security of every secured creditors is subject to pari paasu charge in favour of the workmen to the extent of their dues as on the date when the secured asset was brought for sale.
10. To consider the question , it is necessary to refer to the following provisions of law.
11. Section 529-A of the Companies Act reads thus:
"[529-A. Overriding preferential payments.--(1) Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company,--
(a) workmen's dues; and
(b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of Section 529 pari passu with such dues, shall be paid in priority to all other debts.
(2) The debts payable under clause (a) and clause (b) of sub- section (1) shall be paid in full, unless the assets are insufficient -9- RP No. 157 of 2018 to meet them, in which case they shall abate in equal proportions.]"
12. A reading of the said provision indicates that on the winding up of the company, the workmen's dues shall be paid in priority to all other debts, notwithstanding anything contained in any other provisions of the Act or any other laws in force.
13. Section 19(19) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 reads as follows:
"19. Application to the Tribunal.--(1) Where a bank or a financial institution has to recover any debt from any person, it may make an application to the Tribunal within the local limits of whose jurisdiction--
*** (19) Where a certificate of recovery is issued against a company registered under the Companies Act, 1956 (1 of 1956), the Tribunal may order the sale proceeds of such company to be distributed among its secured creditors in accordance with the provisions of Section 529-A of the Companies Act, 1956 and to pay the surplus, if any, to the company.
14. The Hon'ble Supreme Court in the case of Bank of Maharashtra (supra) while examining the effect of Section 529- A of the Companies Act and Section 529(1) proviso of the Companies Act, 1956 in relation to Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (for short `RDDB Act') at para-67.1 to 6 has held as follows:
67.1. If the debtor company is not in liquidation nor any provisional liquidator has been appointed and merely winding-up proceedings are pending, there is no question of distribution of sale proceeds among secured creditors in the manner prescribed in Section 19(19) of the 1993 Act.
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RP No. 157 of 201867.2. Where a company is in liquidation, a statutory charge is created in favour of workmen in respect of their dues over the security of every secured creditor and this charge is pari passu with that of the secured creditor. Such statutory charge is to the extent of workmen's portion in relation to the security held by the secured creditor of the debtor company.
67.3. The above position is equally applicable where the assets of the debtor company have been sold in execution of the recovery certificate obtained by the bank or financial institution against the debtor company when it was not in liquidation but before the proceeds realised from such sale could be fully and finally disbursed, the company had gone into liquidation. In other words, pending final disbursement of the proceeds realised from the sale of security in execution of the recovery certificate issued by the Debts Recovery Tribunal, if debtor company becomes company in winding up, Section 529-A read with Section 529(1) proviso come into operation and statutory charge is created in favour of workmen in respect of their dues over such proceeds.
67.4. The relevant date for arriving at the ratio at which the sale proceeds are to be distributed amongst workmen and secured creditors of the debtor company is the date of the winding-up order and not the date of sale.
67.5. Conclusions 67.2 to 67.4 shall be mutatis mutandis applicable where provisional liquidator has been appointed in respect of the debtor company.
67.6. Where the winding-up petition against the debtor company is pending but no order of winding up has been passed nor has any provisional liquidator been appointed in respect of such company at the time of order of sale by DRT and the properties of the debtor company have been sold in execution of the recovery certificate and proceeds of sale realised and full disbursement of the sale proceeds has been made to the bank or financial institution concerned, the subsequent event of the debtor company going into liquidation is no ground for reopening disbursement by DRT.
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RP No. 157 of 201815. The SARFAESI Act, 2002 is a subsequent enactment and provisos to Clause-9 of Section 13 reads thus:
"Provided that in the case of a company in liquidation, the amount realised from the sale of secured assets shall be distributed in accordance with the provisions of Section 529-A of the Companies Act, 1956 (1 of 1956):
Provided further that in the case of a company being wound up on or after the commencement of this Act, the secured creditor of such company, who opts to realise his security instead of relinquishing his security and proving his debt under proviso to sub-section (1) of Section 529 of the Companies Act, 1956 (1 of 1956), may retain the sale proceeds of his secured assets after depositing the workmen's dues with the liquidator in accordance with the provisions of Section 529-A of that Act: xxx"
16. A cumulative reading of the said provisos indicates that the rights of any other creditors are taken care of post sale of secured assets. If the borrowed company is in liquidation or when the company is wound up, the sale proceeds have to be distributed in accordance with the provision of Section 529-A of the Companies Act, 1956. To put it simply, the pari paasu charge in favour of the workmen is created, in the event, the Official Liquidator is appointed for winding up of the company or the company is wound up under the provisions of the Companies Act, 1956.
17. The provisions of SARFAESI Act, 2002 have got an overriding effect over the provisions of the Companies Act, 1956 and applicability of Section 529-A is subject to provisos to Clause-9 of Section 13 of the SARFAESI Act, 2002. The Hon'ble Supreme Court in the case of Bank of Maharashtra (supra) with reference to Section 19(19) of the RDDB Act, has held that if the debtor company is not in liquidation nor any
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RP No. 157 of 2018provisional Official Liquidator has been appointed and merely, winding up proceedings are pending, there is no question of distribution of sale proceeds among secured creditors in the manner prescribed in Section 19(19) of the RDDB Act.
18. Clause-9 of Section 13 of the SARFAESI Act, 2002 does not contemplate that pari paasu charge is created in favour of the workmen merely because, winding up proceedings had commenced against the borrower of the bank and the said charge is created only in case the company was in liquidation or was wound up for the purpose of distribution of sale proceeds under Section 529-A of the Companies Act, 1956. In the instant case, the winding up proceedings commenced before the petitioner - Bank brought the secured asset for sale for recovering the loan amount due from the borrower company, but the sale process was completed and the sale consideration was appropriated towards the loan amount due from the borrower before the appointment of Official Liquidator or before the company was wound up.
19. In view of the preceding analysis, the sale proceeds recovered from the sale of secured assets are not liable for distribution in the manner prescribed in the provisos to Clause- 9 of Section 13 of the SARFAESI Act, 2002. Accordingly, I pass the following:
ORDER
i) Review petition is allowed.
ii) The order dated 10.11.2014 passed in WP No.56378/2013 insofar relates to directing the 38th
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respondent herein to recover the monies due to the respondents No.1 to 36 towards retrenchment compensation from the petitioner herein and make over the same in the light of the Section 529 of the Companies Act providing for preferential treatment to workman's due is hereby set aside, and consequently, the writ petition as against the Petitioner is dismissed .
Sd/-
JUDGE bkm