Kerala High Court
Official Liquidator, High Court Of ... vs Federal Bank Ltd., Aluva And Ors. on 19 July, 1997
Equivalent citations: AIR1997KER352, [1997]88COMPCAS178B(KER), AIR 1997 KERALA 352, ILR(KER) 1998 (1) KER 188, 1999 (5) COM LJ 232 KER, (1997) 2 KER LJ 226, (1997) 2 KER LT 339, (1999) 1 BANKCAS 1, (1999) 96 COMCAS 474, (1999) 2 BANKCLR 524
ORDER C.S. Rajan, J.
1. C.P. No. 3 of 1984 was filed on 18-1-1984 under Section 439 of the Companies Act by a contributor for winding up of the Travancore Ogale Glass Manufacturing Company (hereinafter referred to as 'the Company"), on the ground that it was commercially insolvent. A provisional Liquidator was appointed on 7-2-1984. The applicant in M.C.A. No. 65/96, the Federal Bank Limited, a secured creditor, was impleaded in the winding-up proceedings as per order dated 17-2-1984 in C.A. No. 37/84. In C.A. No. 46/84 the employees' Association representing the workers was impleaded on 1-3-1984. The Federal Bank filed a statement on 13-3-1984 informing the Court that the Bank was keeping outside the winding-up proceedings. On 7-6-1985 the Bank filed another statement staling that if the Company was ordered to be wound up, necessary direction might be given to safeguard the rights of the Bank to proceed against the assets of the Company for realisation of the amount due to the Bank. The Bank also filed C.A. No. 29 1/84 under Section 446 of the Companies Act for sanction to institute a civil suit to enforce their security. By order dated I 1-2-1985 the above request was granted. In the meanwhile, this Court ordered the winding-up of the Company on 10-6-1985. The Bank instituted O.S. No. 3/86 before the Sub Court of Ernakulam against the Company. According to the learned Counsel for the Bank, this Court permitted the Official Liquidator to compromise the suit and accordingly a decree was passed on 30-1-1988. The suit was decreed to the tune of Rs. 1,48,23,388.73. The decree further allowed the Bank to realise interest at the rate of 10% per annum on the amount from the date of the suit till realisation.
2. Thereafter the Bank filed E.P. No. 275/90 in the Sub Court. The sale which was conducted by the Sub Court was the subject-matter of certain petitions before this Court. Finally this Court set aside the sale conducted by the Sub Court. The Official Liquidator was permitted to take steps to conduct a fresh sale. This Court also fixed the upset price at Rs. 3.5 crores (Please see the ruling reported Penta Properties v. Official Liquidator, 1995 (2) Ker LT 376).
3. Thereafter a sale was conducted which fetched Rs. 6.75 crores. Out of the sale proceeds, the decree amount was paid to the Bank. Future interest at the rate of 4% per annum from the date of the decree was also paid to the Bank. The workers were also paid their dues with interest at the rate of 4% per annum.
4. In M.C.A. No. 78/95, the Official Liquidator has prayed for limiting the payment of interest from 10% to 4% per annum on the amount due to the creditors of the Company in the event of there being surplus of funds after payment in full settlement of all the claims admitted to prove as provided under Rule 179 of the Company (Courts) Rules, 1959. In C.A. No. 65/96 the Bank has claimed interest at the rate of 10% per annum as perthe decree. In M.C.A. No. 66/95 the work men have claimed interest at the same rate at which interest has to be paid to the secured creditor.
5. It is now admitted that there is surplus amount. Therefore the question is whether the interest at the rate of 4% per annum as enjoined under Rule 179 of the Company (Courts) Rules oral the rate of 10% per annum as decreed by the Civil Court is to be paid to the secured creditors who are the Federal Bank and the workers under Section 529A of the Companies Act. Before deciding the above controversy regarding the rate of interest to be paid to the secured creditors, another fundamental question is to be decided on which there are conflicting claims put forward by either side. The question is whether any secured creditor can stand outside the winding-up proceedings. Sri Thomas V. Jacob, learned Counsel for the Federal Bank submitted that a secured creditor is free to stand outside the winding-up proceedings. One of the earliest decisions of the Supreme Court reported in AIR 1955 SC 604 (M. K. Ranganuthan v. Govt. of Madras) supports the above stand of the secured creditor :
"Even apart from this intendment there are certain canons of construction which also tend support the same conclusion. Prior to the amendment the law was well-settled both in England and in India that the secured creditor was outside the winding-up and he could realise his security without the intervention of the Court by effecting a sale of the mortgaged premises by private treaty or by public auction.
It was only when the intervention of the Court was sought either by putting in force any attachment, distress or execution within the meaning of Section 232(1), as it stood before the amendment or proceeding with or commencing a suit or other legal proceedings against the company within the meaning of Section 171 that leave of the Court was necessary and if no such leave was obtained the remedy could not be availed of by the secured creditor."
The learned Counsel also brought to my notice a latest decision of the Supreme Court reported in Industrial Credit and Investment Corpn. v. Srinivas Agencies, (1996) 4 SCC 165, wherein the view expressed by the Supreme Court in Ranganathan's case, AIR 1955 SC 604 was reiterated in the following words :
"2. The foundational premise of the aforesaid points is that it is a settled position by now that a secured creditor stands outside the winding-up proceeding and under the law he can proceed to realise his security without the leave of the winding-up Court, if by the time he initiated the action the Company has not been wound up. This view has been holding field ever since a three-Judge Bench decision of this Court in M. K. Ranganathan v. Govt. of Madras, AIR 1955 SC 604. As this legal position has not been assailed by any of the parties, we need not advert to the reasons which led this Court in Ranganathan case to hold the above. Despite this being the legal position, there were some provisions in the Indian Companies Act, 1913, which enactment preceded the present Companies Act, 1956 (hereinafter 'the Act') in which also parallel provisions find place, which put some restrictionson the aforesaid power."
6. Sri K. Moni, learned Counsel appearing for the Official Liquidator took the stand that no secured creditor can stand outside the winding-up proceedings. According to him if one secured creditor is allowed to stand outside the liquidation proceedings, then he will be in an advantageous position which will adversely affect the other creditors. The learned Counsel relied on a ruling of this Court reported in (1996) 87 Com Cas 183 (Kerala Financial Corporation v. Official Liquidator). This Court expressed the view that it was doubtful whether one can stand outside the winding-up and walk away with the security after the amendment of 1985 adding the proviso to Section 129 and the enactment of Section 529A by which the claims of the workers are treated in parity with the claims of the secured creditors. In the above ruling this Court also took the view that if there is surplus after payment in full settlement of the claims admitted to prove, the interest claimed can only be at the rate of 4% per annum as enjoined under Rule 179 of the Companies (Courts) Rules, 1959.
7. The learned Counsel for the Bank also cited the ruling reported in Haryana Financial Corporation v. PNB Auto Ancillary (India) Ltd., (1994) 81 Com Cas 588 (of the Delhi High Court). That was a case where the workers of a Company in liquidation claimed interest as that of secured creditors. While dealing with the above question, the Delhi High Court held that future interest could be paid in terms of any decree held by the secured creditor in case any surplus is available for distribution after meeting the claims of the workers for their wages and those of other creditors.
8. Another ruling relied on by the learned Counsel for the Bank is AIR 1931 Mad 729 (Venkataraju v. Lakshmanaswami). That case, which arose under the Provincial Insolvency Act, discussed and decided the distribution of the surplus among the secured creditors and others. The above case was relied on by the learned Counsel in order to reinforce his argument that he is entitled to get interest at the contract rate. The following observations in the above judgment indicate the above stand point:
"Cases of surplus in the administration of an insolvent's estate are not matters of frequent occurrence. When such cases occurred in England, learned Judges there have held that the creditor is entitled to interest at the contract rate till date of actual payment, if there were sufficient assets in the hands of the Official Receiver. ......... In case a of winding-up of companies by order of Court, though interest ceases to run from the date of the winding-up order, yet interest at contract rate is payable if there are sufficient surplus assets."
9. The learned Counsel also relied on a decision of the Karnataka High Court reported in State Bank of Mysore v. Official Liquidator, (1985) 58 Com Cas 609. In that case the State Bank of Mysore first stood outside the winding-up proceedings. Thereafter the Bank agreed to sell the property subject to the security being transferred to the sale price received. Therefore it was argued that the Bank lost its priority in the distribution of the assets. But the Court took the view that the Bank is entitled to realise the amount on a preferential basis as a secured creditor, notwithstanding the fact that it agreed to stand within the liquidation but subject to the reservation of its security being continued.
10. Sri K. P. Vijayan, learned Counsel appearing for some of the contributors submitted that after the amendment of Section 529, a secured creditor who can realise his security by remaining outside the winding-up will now act in association with the Official Liquidator who will represent the workmen. After the amendment the workmen are also entitled to press their claims along with the secured creditors. Therefore even if the Bank remained outside the winding-up proceedings, the workmen's claims will have to be deducted and it must be distributed equally,
11. Though Ranganathan's case, AIR 1955 SC 604 was rendered before the Companies Act came into force and also long before the amendment inserting Section 529-A was enacted, the ICIC's case, (1996) 4 SCC 165 was rendered after noticing the amended Sections 529 and 529-A of the Companies Act. Not only that, the dictum in Ranganathan's case was approved by the Supreme Court. Therefore I do not think now it can be safely contended that a secured creditor cannot stand outside the winding-up proceedings and that he cannot realise his security amount by his own action. In this case the position of the secured creditor is more well-founded. This Court granted permission to the Bank to institute the suit and the Official Liquidator conducted the case. A decree was also passed with the Official Liquidator in the party array representing the Company. Thereafter this Court also intervened with the sale of the properties. Thereafter a sale was conducted which was later confirmed by this Court. Under these circumstances it cannot be said that the institution of the suit and the subsequent proceedings are without any sanction from this Court. After considering the powers of this Court under Sections 446, 529, 529A and 537, there cannot be any doubt that the action taken by the secured creditor in filing the original suit and the subsequent events are with jurisdiction.
12. But the real bone of contention is with regard to the rate of interest to be paid to the secured creditors. When learned Counsel for the Official Liquidator as well as the learned Counsel for the contributors take the stand that Rule 179 of the Companies (Courts) Rules stand in the way of granting interest more than 4% per annum to the secured creditor when a surplus is available, the answer to the above argument by the secured creditor is that when he is standing outside the winding-up proceedings, he is not bound by the provisions contained in Rule 179. The further submission is that when the decree provides for the payment of 10% interest, that must be respected and followed. In such contingencies, according to the secured creditors. Rule 179 does not operate. The learned Counsel appearing for the Bank also brought to my notice an observation of this Court on an earlier occasion in C.A. No. 552/89 and 553/88 wherein it was held that the value of the secured creditor, the Federal Bank, will be the value of the decree in O.S. No. 3/86.
13. Therefore this Court has to exercise its power after taking into consideration all the aspects of the matter while allowing the prayer of the secured creditor or accepting the request of the Official Liquidator. As held by the Supreme Court there is no hard and fast rule in the matter of tackling such a situation by this Court. The discretionary power to be exercised by this Court will depend upon the facts and circumstances of each case. The only condition is that the approach must be reasonable and based on sound principles.
It also must advance the interest of justice and equality. The interest of other secured creditors also must be protected. The sole seemed creditor should not be allowed to walk away with the plum of the surplus. In this connection it is advantageous to notice the plea of the Official Liquidator that if the Federal Bank is allowed payment at the rate of 10% per annum as decreed in the suit, almost the entire surplus amount will have to be paid to the secured creditor. If that he so, the workers who also stand in a similar situation also must be paid at the same rate. For the above purpose, no amount will be available. Moreover, the question of payment of capital gains tax also has to be decided by this Court. Ultimately the contributors will be left without any payment. These are the circumstances which have to be weighed with by this Court in exercising the power to decide whether 4% interest or 10% has to be paid to the secured creditor. I feel that interest of justice will be sufficiently met if this Court adopts a via media in the matter of payment of interest. Reducing the claim of the secured creditor from 10% to 6% will be advantageous to all the parties. I am fortified to adopt such a course by the observations of the Supreme Court in ICIC's case, (1996) 4 SCC 165, wherein it was held that it is for the Court to decide the matter depending upon the facts and circumstances of each case. Under these circumstances the Federal Bank and the workers are entitled to 6% interest on the amount paid to them for the period during which the interest is payable. It is made clear that this is subject to the liability, if any, to be cleared by way of the capital gains lax.
The M.C.As. are disposed of as above.