Punjab-Haryana High Court
Industrial Finance Corporation Of ... vs Rama Fibres Ltd. (In Liquidation) And ... on 21 January, 1998
Equivalent citations: [1999]97COMPCAS80(P&H), (1998)118PLR520
Author: Swatanter Kumar
Bench: Swatanter Kumar
JUDGMENT
Swatanter Kumar J.
1. This common order would dispose of two company petitions, being C.P. No. 157 of 1997 and C.P. No. 163 of 1997.
2. Rama Fibres Ltd. was ordered to be wound up, vide order of the learned company judge dated July 11, 1996, passed in Company Petition No. 55 of 1996 and, consequently, the official liquidator attached to the Punjab and Haryana High Court was appointed as official liquidator of the company. The official liquidator is stated to have taken over the assets of the company, Rama Fibres Ltd., hereinafter referred to as "the respondent-company", had approached various financial institutions for seeking financial assistance and loans, etc. The four petitioners/applicants, namely, the Industrial Finance Corporation of India Ltd., the Industrial Credit and Investment Corporation of India Ltd., the Industrial Development Bank of India and the Industrial Investment Bank of India Ltd., had advanced to the respondent-company financial assistance for setting up the spinning mill. The request of the respondent-company for financial assistance was accepted by these financial institutions and loans were advanced. A pari passu charge was created in favour of the petitioners except petitioner No. 3 who was on the second charge basis and subservient to the first charges on a pari passu basis in favour of the petitioners. The respondent-company had executed mortgage deeds and deeds of hypothecation in relation to immovable and movable properties of the company to secure repayment of the financial assistance extended by the petitioners. Respondents Nos. 2 to 4 (in C.P. No. 157 of 1997) had executed individual and personal/guarantee bonds for repayment of the loans. The respondent-company is stated to have defaulted in relation to discharge of its liabilities to repay the loans to petitioners, thus, compelling the petitioners to take recourse to legal-proceedings. As a result of default of the respondent-company, the following amounts are stated to be outstanding against the respondent-company :
Outstanding Lender amount (in Rupees) Industrial Finance Corporation of India Ltd.
(in respect of its said first and second loans) : 4,10,72,066 Industrial Credit and Investment Corporation of India Ltd. (in respect of its said first and second loans) : 4,58,59,710 Industrial Development Bank of India (in respect of its said first and second loans) : and 9,78,07,084 (in respect of its said IDBI special loan) : 56,08,743 Industrial Investment Bank of India Ltd. (in respect of its said IDBI loan) : 77,20,958
3. To recover these outstanding amounts, the petitioners filed an original application, being 318 of 1997, before the Debt Recovery Tribunal, at New Delhi, against respondents Nos. 1 to 4 (in this petition) on or about June 7, 1997. The said application was jointly filed by all the petitioners. The petitioners though claimed that they were not obliged in law to seek permission of the company court under section 446(1) of the Companies Act, 1956, but as precautionary measure, they filed the petition under the said provision for seeking the leave to continue/proceed with the Original Application No. 318 of 1997 before the Debt Recovery Tribunal, which has been registered as C.P. No. 157 of 1997.
4. Similarly, Rama Fibres Ltd. had approached the State Bank of India for financial assistance and had secured different limits from the State Bank of India. On the request of the respondent-company the State Bank of India had granted the following limits to the company :
Original Enhanced/
limit Reduced Limit
(Rupees) (Rupees)
(i) Cash credit (hypothe- 40 lakhs 75 lakhs
cation) limit.
(ii) Bills discounting/pur- 17 lakhs 30 lakhs
chase limit with D.D.
purchase sub-limit of
Rs. 5 lakhs.
(iii) Letters of credit limit 20 lakhs 50 lakhs
(iv) Bank guarantee 10 lakhs 2.50 lakhs
5. As the accounts of the respondent-company became irregular as a result of defaults in repayment of the loans, the bank was constrained to file an application under section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, hereinafter referred to as "the Debts Recovery Act", before the Debts Recovery Tribunal at Delhi for the recovery of Rs. 2,96,44,894.52. This application was filed by the State Bank of India on August 29, 1996. According to the bank, section 34 of the Debts Recovery Act has overriding effect over the provision of the Companies Act, 1956, and they were not obliged to seek permission of the company court under section 446(1) of the Companies Act, 1956. They had proceeded to file the said application before the Debts Recovery Tribunal. However, as abundant precaution, they have filed the present petition seeking permission of the court to continue and proceed further with their application before the Debts Recovery Tribunal, Delhi, under section 446(1) of the Companies Act, 1956. This application came to be registered as C.P. No. 163 of 1997.
6. In C.P. No. 157 of 1997 though all the respondents were served, no reply has been filed on behalf of any of the respondents. Learned counsel appearing for the respondents only submitted that permission should not be granted to the financial institutions and all. the cases and applications filed before the Debts Recovery Tribunal may be transferred to this court. He further contended that the proceedings have been initiated after the order of winding up passed by the company court on July 11, 1996, without leave of this court, as such the proceedings are a nullity or are void ab initio in law. While, in C.P. No. 163 of 1997, no reply has been filed on behalf of respondents Nos. 1 to 5 who are the respondent-company's directors, guarantors and carriers, etc.
7. A joint reply has been filed on behalf of respondents Nos. 6, 7 and 8 who are petitioners Nos. 1, 2 and 3, respectively in C.P. No. 157 of 1997. These respondents have disputed the correctness of the amounts claimed by the banks but have clearly stated in para. 6 of their reply that grant of permission under section 446(1) of the Companies Act is primarily a matter between the court and the petitioners and they have nothing much to say.
8. The contention of the petitioners-financial institutions-banks in both these petitions is that before initiating the proceedings for the recovery of their dues, they were not required to take any prior permission of the court under section 446(1) of the Companies Act as the provisions of the Debts Recovery Act, 1993, will have precedence over the provisions of the Companies Act, 1956, being a special Act. In the alternative it is argued that in any case leave can be granted even at this stage without in any way affecting the proceedings for the recovery against the respondent-company already initiated by the banks and financial institutions before the Debts Recovery Tribunal.
9. Thus, it would be clear that on somewhat similar facts identical questions arise for consideration in both these petitions and, therefore, it will be more appropriate to deal with both these petitions by a common order.
10. The status of a company attains distinct and different dimensions in law prior to and after the passing of an order of winding up of the company. Prior to the passing of such an order the company is in control and supervision of its business assets and management. While, after the winding up, the 'assets of the company continue to be its property, the management, control and supervision of the company over its assets vest in the official liquidator, under the direct control of the concerned company court. In other words, liberally it could be construed that the property and assets of the company are in custodia legis though not in the strict sense of the term. Protection of these assets and properties becomes the paramount duty of the official liquidator under the control and supervision of the company court. Another well accepted consideration which the company court has to keep in mind is that the assets, while being effectively controlled and expensive litigation should be avoided, still simultaneously ensure that all the matters/cases relating to the affairs of the company should be dealt with expeditiously and disposed of. If such matters cannot be very expeditiously dealt with by the company court and complete adjudication of various disputes arising in the jurisdiction of different forum is not possible then the question of granting the leave arises.
11. Chapters (i) to (v) of Part VII of the Companies Act, 1956, hereinafter referred to as "the Act", can be simply termed as a self-contained code for winding up of a company and control over its properties. The provisions clearly stipulate all possible situations which can arise in regard to the winding up of a company. It deals from the presentation of a petition to its decision, control and distribution of its assets, entertainment of claims of secured creditors and the protected class of persons. Thus, it can safely be termed as a self-contained code within an Act. The object of winding up of a company by the court, more particularly is to facilitate the protection and realisation of its assets with a view to ensure equitable distribution thereof among those entitled and to prevent the administration from being embarrassed by a general scramble among creditors and others. Once the court passes an order of the winding up of a company and/or has taken the assets of the company under its control, it will be proper to allow proceedings of various kinds against the company or involving its assets, with the leave of the company court. This intention of the Legislature is fully/clearly indicated in the provisions of section 446(1) of the Companies Act, with which the present case is concerned. The relevant provisions are reproduced hereunder :
"446. Suits stayed on winding up order. - (1) When a winding up order has been made or the official liquidator has been appointed as provisional liquidator, no suit or other legal proceeding shall be commenced, or if pending at the date of winding up order, shall be proceeded with, against the company, except by leave of the court and subject to such terms as the court may impose."
12. The noticeable expression in section 446 used by the Legislature is "suit or other legal proceeding". The suit identifies a specific meaning while the expression "other legal proceeding" is a term of wide magnitude and would cover in its ambit probably most of other proceedings. The other legal proceedings have been held to be wide enough to include proceedings under the Income-tax Act where penalties are imposed or recoveries are effected after the commencement of the winding up. Reference can be made to Union of India v. Seth Spinning Mills Ltd. (In liquidation) [1962] 32 Comp Cas 801 (Punj) and Ram Achhyavar v. J. K. Manufacturers [1981] TLR 2600 (All). Even proceedings under the Indian Arbitration Act have been held to be covered under this expression. The proceedings arising from an arbitration clause of an agreement to which the company is a party, could continue after the winding up provided the leave of the court concerned is sought for under the above provisions. Goetze India Ltd. v. Pure Drinks (New Delhi) Ltd. (No. 1) [1994] 80 Comp Cas 340 (P&H), a judgment of this court.
13. The proceedings under the Land Acquisition Act being quasi-judicial in their nature could not be excluded from the purview of section 446 of the Companies Act and the award so passed was set aside in the case of Madhu Industries (P.) Ltd. v. State of Rajasthan [1982] Tax LR (NOC) 122 (Raj). In the case of Shri Ram Narain v. Simla Banking and Industrial Co. Ltd. [1956] 26 Comp Cas 280; AIR 1956 SC 614, the Hon'ble Supreme Court of India held that the applicability of section 446 of the Companies Act (old section 171 of the Act) to the winding up of the banking company was in no way affected and the provisions of the Banking Companies Act, 1949, would not override the provisions of the Companies Act (section 446). In Joshi Trading Co. (P.) Ltd. v. Essa Ismail Sait [1980] 50 Comp Cas 801, the Kerala High Court held that though the Rent Control Court has exclusive jurisdiction in respect of eviction proceedings, it in no way derogates the power of the company court to grant or not to grant sanction under section 446 of the Companies Act.
14. The above decisions clearly indicate that power of the company court under section 446 is very wide and takes precedence in its implementation. In order to protect and safeguard the property and assets of the company and subsequently for their appropriate distribution among the creditors in accordance with law including the secured creditors is a prime consideration before the company court. Looking into the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, it is clear that the scheme of the Act is more to substitute the process of courts in relation to recovery suits. Under section 17 of the Debt Recovery Act, the Tribunal has to exercise power and authority to entertain and decide the application from the banks and financial institutions for recovery of debts due to such banks and financial institutions. The jurisdiction of the civil court is barred under section 18 of the Act with the exceptions spelled out in that section. Section 31 of the Act reads as under
"31. Transfer of pending cases. - (1) Every suit or other proceeding pending before any court immediately before the date of establishment of a Tribunal under this Act, being a suit or proceeding the cause of action whereon it is based is such that it would have been, if it had arisen after such establishment, within the jurisdiction of such Tribunal, shall stand transferred on that date to such Tribunal :
Provided that nothing in this sub-section shall apply to any appeal pending as aforesaid before any court.
(2) Where any suit or other proceeding stands transferred from any court to a Tribunal under sub-section (1), -
(a) the court shall, as soon as may be after such transfer, forward the records of such suit or other proceeding to the Tribunal; and
(b) the Tribunal may, on receipt of such records, proceed to deal with such suit or other proceedings, so far as may be, in the same manner as in the case of an application made under section 19 from the stage which was reached before such transfer or from any earlier stage or de novo as the Tribunal may deem fit."
15. It is clear that under section 31 of the Act all the suits or proceedings pending in the courts immediately before the date of establishment of the Tribunal under the Act shall stand transferred on that date to the Tribunal, with the exception of pending appeals. The provisions of this section clearly indicate the basic purpose of the Act, i.e., to provide an alternative process of law for recovery of bank dues. It is to substitute the entire procedure which was adopted by the courts under the Code of Civil Procedure for recovery suits relating to the banks and financial institutions. These proceedings. are proceedings of the first instance and are analogous to the suit instituted. The proceedings before the Debt Recovery Tribunal are nothing more than a suit, but are simply in the nature of a suit, though the same commences by presentation of an application drawn in consonance with the provisions of the Debt Recovery Act rather than a plaint under the Code of Civil Procedure. Such proceedings which are analogous to a suit must be construed to mean or come under the expression "other legal proceedings". At this stage it may be appropriate to refer to the observations of the Full Bench of the Allahabad High Court in Rahmat Ali Fatehullah v. Calcutta National Bank Ltd. [1955] 25 Comp Cas 112, 117; AIR 1955 All 169, 171, wherein it was held as under :
"After the decision of the Federal Court it must now be held that the meaning of the words 'other legal proceedings' must not be confined within narrow limits and need not necessarily be proceedings analogous to a suit initiated by means of a petition similar to a plaint. Whenever a matter comes up before a court and an objection is taken, that leave under section 171 of the Companies Act had not been obtained, the court has to decide whether it is a suit or other legal proceeding against the company. If the words 'against the company' merely mean that the company is arrayed as the opposite party, as was held by Braund J., permission of the company judge would be necessary whenever any legal proceeding has to be instituted or continued against the company."
16. Primarily it is the nature of the proceedings under a statute, which would lead to a rational view or conclusion whether permission under section 446 of the Companies Act is necessary or not. If the proceedings Would ultimately have the effect of taking away the assets of the company after the winding up order has been passed, then permission of the company court would normally be mandatory for initiation or continuation of such proceedings. The property or assets which are directly under the control and supervision of the court cannot be taken outside its jurisdiction or disposed of without leave and approval of the company court. If this was not followed, a claim accepted under a statute (under section 529A of the Companies Act) would stand defeated merely in execution of a decree or a recovery certificate issued by the court of competent jurisdiction which certainly does not appear to be the legislative intent behind these statutes nor would such an interpretation be in consonance with the settled principles of interpretation of statutes.
17. This discussion now brings me to an ancillary question raised on behalf of the petitioners. The contention that there is apparent conflict between the provisions of the Debt Recovery Act and the Companies Act and that the provisions of the Debt Recovery Act must prevail and taken precedence over the provisions of the Companies Act appears to be not well founded. This argument need not detain me any longer, as in a recent judgment, the Delhi High Court in the case of Industrial Development Bank of India v. Mayur Syntex Ltd. (C. A. No. 414 of 1996 in C.P. No. 169 of 1992, decided on May 28, 1997) - since reported in [1999] 96 Comp Cas 974 after a detailed discussion rejected this argument. In the said judgment, non-obstante clauses of the Companies Act as well as the Debt Recovery Act were discussed by the court. After a detailed discussion based upon various judgments of the Hon'ble Supreme Court the aforestated view was expressed by the court. While adopting the reasoning given in the said judgment and respectively agreeing with the view expressed, I consider it appropriate to refer to the following relevant conclusions of the court in Mayur Syntex Ltd.'s case (C. A. No. 414 of 1996 in C. P. No. 169 of 1992 decided on May 28, 1997 since reported in [1999] 96 Comp Cas 974 (pages 989 and 982) :
"In my considered and careful opinion, the provisions laid down under section 446 of the Companies Act do not operate in the same field as that of the Debt Recovery Act and in case there is some conflict in between the provisions of the two Acts, the endeavour of the court should be to harmoniously construct the said provisions so as to give effect to the objects of both the Acts and in doing so, if necessary, to read down the provisions of one of the said Acts. Even in respect of conflicting statutory provisions, it has been held by the Supreme Court in State of Rajasthan v. Gopi Kishan Sen, AIR 1992 SC 1754, that the role of harmonious construction of apparently conflicting statutory provisions is well established for upholding and giving effect to all the provisions as it may be possible, and for avoiding an interpretation which may render any of them ineffective or otiose. The said law, in my opinion, is squarely applicable to the present case. On consideration of the provisions of the two Acts, I am of the firm opinion that not only do the provisions of the winding up operate in a different fields altogether from that of the Debt Recovery Act but also the provisions relating to the winding up of the company, particularly the provisions of section 446(1) are a special law as it specifically deals with the nature, procedure and the manner of winding up of a company and for distribution of the assets of a company which has been wound up ...
In the light of the aforesaid discussions and also in terms of the decisions of the Supreme Court in Industrial Credit and Investment Corporation of India Ltd. v. Srinivas Agencies [1996] 86 Comp Cas 255; [1996] ISJ (Banking) 479, and taking note of the observations made by the Full Bench of this court in Life Insurance Corporation of India v. Asia Udyog (P.) Ltd. [1982] I ILR Delhi 582; [1984] 55 Comp Cas 187, I am of the conclusive view that each case has to be adjudged on its own facts. The approach of the company court under such circumstances in each case should be in the light of the observations made by the Supreme Court in paragraph 12 of the said judgment. In my considered opinion, therefore, there is no conflict in between the provisions of the Debt Recovery Act and the provisions of section 446 of the Companies Act and that each case has to be adjudged on its facts and merits and the company court shall have the full power and jurisdiction to consider the best interest of the creditors, both secured and unsecured, as also the workman who has been equated at par with the secured creditors and other attending circumstances, and then pass necessary orders under the provisions of section 446."
18. While giving harmonious construction to the aforestated statutes it must be concluded that there is no conflict between the provisions of these legislations. These provisions operate in different and distinct affairs and do not defeat the object of either of the legislation. Expeditious recovery of debts due to the banks and banking institutions would no way come in conflict with the provisions of section 446 of the Act as the provisions of the latter itself-refer and make a special provision for the secured creditors. Equibalance between the provisions of the two enactments can only lead to satisfaction of the legislative intent and the object behind these Acts.
19. The doctrine of harmonious construction understood in its true liberal sense always would tend to achieve common weal while keeping in mind the precept of avoiding conflict between the statutes, more particularly when such conflict read into the statutory provisions is likely to destroy the object of legislation. The court must predicate a normal interpretation in consonance with common understanding rather than to look for an approach which is curio in its substance and implementation.
20. In view of the above discussion, I have no hesitation in coming to the conclusion that even a secured creditor who intends to initiate proceedings under the Debt Recovery Act against the company after it is ordered to be wound up must seek the leave of the company court in accordance with the provisions of section 446 of the Companies Act. The provisions of the Debt Recovery Act are in no way derogative of the powers of the company court under section 446 of the Companies Act. Therefore, the petitioners were and are obliged in law to seek permission of the court for commencing or continuing the present proceedings against the respondent-company.
21. It is an admitted case that the banks had initiated the proceedings in September, 1996, while the company had been ordered to be wound up, vide order dated July 11, 1996. It is also admitted that the proceedings were commenced without the leave of the company court which had passed the order of winding up. The necessary consequence of absence of such leave is not that the proceedings would be rendered void ab initio. The orders passed in the present proceedings would be voidable at the option of the official liquidator. The final decree/recovery certificate cannot be executed against the company as it would be ineffective and not binding upon the company. In other words seeking leave of the company court for prosecution of remedies before other forums like the Debt Recovery Tribunal is necessary. Its being necessary would not ipso facto declare such leave as a condition precedent. Leave of the company court in the present case could not be considered as a condition precedent, noncompliance with which would render the proceedings before the Debt Recovery Tribunal as without jurisdiction or a nullity in the eyes of law. This controversy is considered to be no more res integra and has been settled in no uncertain terms by the Hon'ble Supreme Court of India in the case of Bansidhar Shankarlal v. Mohd. Ibrahim [1971] 41 Comp Cas 21, 25. In this case while dealing with conflicting decisions of various High Courts the apex court observed, as under :
"We do not think that there is anything in the Act (the same will apply to the 1956 Act also) which makes the leave a condition precedent to the institution of a proceeding in execution of a decree against the company and that failure to obtain leave before institution of the proceeding entails dismissal of the proceeding. The suit or proceeding instituted without leave of the court may, in our judgment, be regarded as ineffective until leave is obtained, but once leave is obtained the proceeding will be deemed instituted on the date granting leave."
22. The Madras High Court in the case of Asian Travels India Ltd., In re 1993 13 Comp LJ 114 (Mad), while following the above judgment, held that leave to institute suit can be obtained subsequent to the institution of the suit but at best it could be said that it is effective from the date the leave is granted. Once a winding up order is passed, the suit or like proceedings in addition to other legal proceedings could be commenced and continued only with the leave of the court. Where a winding up petition was pending, but no provisional liquidator has been appointed, but at a later date a winding up order was passed, a Bench of this court held that suit or other proceedings could not continue without the leave of the court in Punjab National Bank v. Punjab Finance Pvt. Ltd. [1973] 43 Comp Cas 350 (P & H).
23. The jurisdiction of the company court to grant leave to the parties to continue a suit or proceedings which had been instituted without leave of the company court after the winding up order was passed cannot be a question of debate any longer. The various High Courts have taken a similar view and in view of the observations of the Supreme Court in the case of Bansidhar Shankarlal's case [1971] 41 Comp Cas 21 leaves no doubt that grant or refusal of the leave by the company court is a discretion vested in the court which has to be exercised in accordance with the settled principles of law. The mere fact that a suit or proceedings which are akin to suit or other legal proceedings like the proceedings of the Debt Recovery Tribunal have been initiated without leave of the court would neither render the proceedings so instituted void ab initio nor would it in any way affect the discretion of the company court to grant leave subsequent thereto. The proceedings per se cannot be termed extra jus. In this regard reference can be made to the case of Smt. Bhagwati Devi Bubna v. Dhanraj Mills Pvt. Ltd. [1969] 39 Comp Cas 1023; AIR 1969 Patna 206, and Balaji Patehar v. Official Liquidator [1967] 2 Comp LJ 262; [1968] 38 Comp Cas 16 (All).
24. The cumulative effect of the above discussion is that the petitioners were required to take the leave of the company court for commencing and/or continuing with their petitions for recovery of money as secured creditors filed before the Debt Recovery Tribunal. As they have approached the company court, though at a subsequent stage, I find no reason as to why the leave prayed for should not be granted to the petitioners. The petitioners are secured creditors and have advanced huge amounts as already noticed. The amounts of the petitioners are secured by mortgage and hypothecation deeds executed in their favour. Such security is obviously subject to the statutory charge under section 529A of the Companies Act. The contesting respondents have not filed any reply to oppose these applications in spite of various opportunities. The proceedings before the Debt Recovery Tribunal can be concluded expeditiously without offending any provisions of the Companies Act. No statute can be understood to have the effect of throttling the proceedings which spring from another legislation and legislations must be permitted to achieve their respective object while operating in their respective fields. The judicial pronouncements would always tend to help to further the cause of the legislation rather than to frustrate the same. Veritably established principles clearly indicate that the petitioners should be granted the leave to prosecute the remedies available to them before the Debt Recovery Tribunal. Consequently, while allowing these petitions, the petitioners banks/financial institutions are granted leave under the provisions of section 446(i) of the Companies Act to prosecute their petitions before the Debt Recovery Tribunal in accordance with law. However, any execution of the decree/recovery certificate so issued in favour of the petitioners would not be executable against the company and its assets, without the leave of this court. In the facts and circumstances of the case, there shall be no orders as to costs.