Karnataka High Court
Chaitra Fertilizers And Chemicals ... vs The Manager, Karnataka State Financial ... on 14 February, 2007
Equivalent citations: AIR2007KANT72, 2007(4)KARLJ66, AIR 2007 KARNATAKA 72, 2007 (3) ALL LJ NOC 523, 2007 (2) AIR KAR R 526, (2007) 4 KANT LJ 66, (2007) 4 ICC 211, (2007) 57 ALLINDCAS 616 (KAR), (2007) 139 COMCAS 404, (2008) 1 BANKCLR 869, 2007 (3) ALJ (NOC) 523 (KAR.) = AIR 2007 KARNATAKA 72
Bench: R. Gururajan, Anand Byrareddy
JUDGMENT
1. Heard the learned Counsel for the appellant and the learned Counsel for the respondents.
2. The facts in brief leading upto this appeal are as follows:
M/s Metallic Soaps & Chemicals (Pvt.) Ltd. (herein after called 'the Company" for brevity), a Company registered under the Companies Act, 1956 (herein after called "the Companies Act" for brevity), had obtained a loan from M/s Karnataka State Financial Corporation, Mysore (herein after called "KSFC" for brevity), a statutory corporation under the State Financial Corporations Act, 1951 (herein after "SFC Act" for brevity), on the security of its assets by the execution of the mortgage and the hypothecation deeds. It transpires that the said Company having defaulted in repayment of the loan, KSFC had taken possession of the assets of the Company in terms of Section 29 of the SFC Act, as on 25.4.1992.
The assets of the company were brought to sale by auction and ultimately were agreed to be sold to the Appellant herein for a sale price of Rs. 7,75,000/-. A sum of Rs. 4,00,000/- was payable immediately on the execution of an agreement of sale and the balance of the sale price was payable on before 10.9.1994. An agreement of sale was executed on 21.2.1994 and the Appellant had paid the advance amount aforesaid. KSFC had handed over possession of the assets of the Company to the Appellant on the same day. All statutory dues payable were cleared by the Appellant in terms of the agreement.
By an application dated 28.10.1994 the Official Liquidator (herein after called "OL", for brevity), numbered as Company Application 420/1994 in Company Petition Numbers 90/57 and 74/89 before the Company Court, contended that the above Company had been ordered to be wound up by an order dated 13.8.1993. Notice of the order could not be served on the ex-Directors of the Company.
In the year 1994, immediately preceding the filing of the application, the Official Liquidator learnt that the appellant was in possession of the assets of the Company and that the same had been facilitated by KSFC.
Hence the OL sought the intervention of the Company Court to declare the transfer of the assets as void under Section 537(1)(b) of the Companies Act as no leave was obtained from the Court under Section 446 of the Companies Act.
The appellant contested the said application and also filed Company Applications CA No. 160/2002 and CA 250/2006 seeking permission to deposit the balance sale price before the Court and for a direction to KSFC and the OL to execute and register appropriate deeds of transfer in its favour, respectively.
The three applications namely CA 410/1994, CA 160/2002 and CA 250/2006 were heard and disposed of by a common order. The learned Single Judge has held that KSFC, a secured creditor, has transferred the assets under an agreement, subsequent to the order of winding-up. That in terms of Section 537(1)(b) no sale can be held without the leave of the Court, of any properties or effects of the Company. And in any event the sale not having been completed by the execution of appropriate documents, the Court has declared the "sale" as being void and has directed the appellant to hand over the possession of the assets of the Company to the OL. The Single Judge has proceeded to reject the applications of the appellant. The Single Judge has also vacated an interim order of stay granted in favour of the appellant in yet another application questioning a demand notice issued by KSFC. It is this order which is under challenge.
3. We have examined the order in the light of the legal position resting with the judgment of the Supreme Court in the case of Rajasthan State Financial Corporation and Anr. v. Official Liquidator and Anr. . In that case the appellants were financial institutions covered under the SFC Act. They were secured creditors of a company which was in liquidation. The said company was ordered to be wound up by an order dated 14.6.1994. The appellants were said to have been unaware of the petition for winding up. Immediately on coming to know of the same the appellants approached the Court seeking permission to stand outside the winding up proceedings and to realise the securities and apportion the same amongst themselves along with another secured creditor. While undertaking to pay over the dues of the workman on the same being adjudicated by the Official Liquidator. The Company Court rejected their application. On appeal before Division Bend) of the High Court, the same was dismissed following the judgment in Maharashtra State Financial Corporation v. Official Liquidator . And the appellants therein were thus before the Supreme Court.
The appeal coming up before a bench of two Judges, in view of a seeming conflict between the decisions in Allahabad Bank v. Canara Bank and in International Coach Builders Limited v. Karnataka State Financial Corporation 2003 AIR SCW 1524, the appeal was directed to be placed before a larger bench.
On a close examination and on a review of the case law, the Supreme Court has held as follows:
17. Thus, on the authorities what emerges is that once a winding-up proceedings has commenced and the liquidator is put in charge of the assets of the company being wound up, the distribution of the proceeds of the sale of the asset held at the instance of the financial institutions coming under the Recovery of Debts Act or of financial corporations coming under the SFC Act, can only be with the association of the Official Liquidator and under the supervision of the Company Court. The right of a financial institution or of the Recovery Tribunal or that of a financial corporation or the court which has been approached under Section 31 of the SFC Act to sell the assets may not be taken away, but the same stands restricted by the requirement of the Official Liquidator being associated with it, giving the Company Court the right to ensure that the distribution of the assets in terms of Section 529-A of the Companies Act takes place. In the case on handy admittedly, the appellants have not set in motion any proceeding under the SFC Act. What we have is only a liquidation proceeding pending and the secured creditors, the financial corporations approaching the Company Court for permission to stand outside the winding up and to sell the properties of the company-in-liquidation. The Company Court has rightly directed that the sale be held in association with the Official Liquidator representing the workmen and that the proceeds will be held by the Official Liquidator until they are distributed in terms of Section 529-A of the Companies Act under its supervision. The directions thus, made, clearly are consistent with the provisions of the relevant Acts and the views expressed by this Court in the derisions referred to above. In this situation, we find no reason to interfere with the decision of the High Court. We clarify that there is no inconsistency between the decisions in Allahabad Bank v. Canara Bank and in International Coach Builders Ltd. v. Karnataka State Financial Corporation in reaped of the applicability of Sections 529 and 529-A of the Companies Act in the matter of distribution among the creditors. The right to sell under the SFC Act or under the Recovery of Debts Act by a creditor coming within those Acts and standing outside the winding up, is different from the distribution of the proceeds of the sale of the security. The distribution in a case where the debtor is a company in the process of being wound up, can only be in terms of Section 529-A read with Section 529 of the Companies Act. After all, the Liquidator represents the entire body of creditors and also holds a right on behalf of the workers to have a distribution part passu with the secured creditors and the duty for further distribution of the proceeds on the basis of the preferences contained in Section 530 of the Companies Act under the directions of the Company Court. In other words, the distribution of the sale proceeds under the direction of the Company Court is his responsibility. To ensure the proper working out of the scheme of distribution, it is necessary to associate the Official Liquidator with the process of sale so that he can ensure, in the light of the directions of the Company Court that a proper price is fetched for the assets of the company-in-liquidation. It was in that context that the rights of the Official Liquidator were discussed in International Coach Builders Ltd. The Debts Recovery Tribunal and the District Court entertaining an application under Section 31 of the SFC Ad should issue notice to the Liquidator and hear him before ordering a sale, as the representative of the creditors in general
18. In the light of the discussion at above, we think it proper to sum up the legal position thus:
(i) Debts Recovery Tribunal acting under the Recovery of Debts Due to Banks and financial Institutions Act, 1993 would be entitled to order the sale and to sell the properties of the debtor, even if a company-in-liquidation, through its Recovery Officer but only after notice to the Official Liquidator or the Liquidator appointed by the Company Court and after hearing him.
(ii) A District Court entertaining an application under Section 31 of the SFC Act will have the power to order sale of the assets of a borrower company-in-liquidation, but only after notice to the Official Liquidator or the Liquidator appointed by a Company Court and after hearing him.
(iii) If a financial corporation acting under Section 29 of the SFC Act seeks to sell or otherwise transfer the assets of a debtor company-in-liquidation, the said power could be exercised by it only after obtaining the appropriate permission from the Company Court and acting in terms of the directions issued by that court as regards associating the Official Liquidator with the sale, the fixing of the upset price or the reserve price, confirmation of the sate, holding of the sale proceeds and the distribution thereof among the creditors in terms of Section 529-A and Section 529 of the Companies Act.
(iv) In a case where proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 or the SFC Act are not set in motion, the creditor concerned is to approach the Company Court for appropriate directions regarding the realisation of its securities consistent with the relevant provisions of the Companies Act regarding distribution of the assets of the company-in-liquidation
4. Having regard to the above legal position, the transfer of the assets in the case on hand having taken place under an agreement executed before the order of winding-up, the same could not have been invalidated by the Company Court. It was however necessary that the Official Liquidator be associated in the completion of the transfer of assets in favour of the appellant, to ensure that the sale proceeds are distributed in terms of Section 529-A and Section 529 of the Companies Act.
5. Accordingly, the order of the learned Single Judge is set aside. The parties shall obtain appropriate directions from the Company Court in the light of this judgment.