Andhra HC (Pre-Telangana)
Official Liquidator, Business ... vs Bank Of India And Anr. on 2 March, 1994
Equivalent citations: [1998]91COMPCAS434(AP)
JUDGMENT S. Dasaradharama Reddy, J.
1. This is an application filed under section 529, sub-section (2) of the Companies Act, 1956 (for short, "the Act"), by the official liquidator seeking a direction to the respondents, Bank of India, Tirupathi (the bank) and the A.P. Industrial Development Corporation, Hyderabad (APIDC), which are secured creditors of Business Machines (India) Pvt. Ltd., which has been wound up, to pay the salaries of the watch and ward staff including the arrears from February 1, 1992. According to the application, by an order dated April 22, 1988, in Company Petition Nos. 15 and 59 of 1987 this court directed winding up of the company. The bank filed a suit for recovery of the money due to it and also obtained leave of this court to stay outside the winding up proceedings. On the other hand, APIDC has not informed the applicant about the course of action it has adopted or proposes to adopt. Pursuant to the orders of this court in C.A. Nos. 251 and 252 of 1988, the Advocate Commissioner, who had custody of the assets of the company by the date of order of winding up, delivered possession of the assets other than those hypothecated to the bank, to the official liquidator in December, 1989. It is further stated that all the assets of the company are retained in the premises of the company along with the assets that were hypothecated to the bank. The bank accepted to meet the salaries of the watch and ward staff numbering four, appointed to safeguard the assets of the company and, accordingly, it paid salaries at the rate of Rs. 450 per month till the month of January, 1992, and that, thereafter, discontinued the payment on the ground that the official liquidator could not sell the assets of the company and reimburse the amount it had incurred towards the salaries. The affidavit is vague and does not give any particulars regarding the amounts due by the company to the bank and the APIDC, the approximate value of the assets hypothecated to the bank which were redelivered to the official liquidator by the Advocate Commissioner in December, 1989.
2. The bank has filed counter saying that it filed suit O.S. No. 156 of 1986 in the Court of the Subordinate Judge, Tirupathi, against the company for recovery of Rs. 29,37,851, that it has obtained leave of this court to remain outside the winding up proceedings to prosecute the suit, that the APIDC has not taken any steps to approach this court for suitable directions with regard to its security, that the bank had a second charge over the block of fixed assets of the company, the first charge being in favour of the APIDC, that the bank had a first charge on the current assets of the company, that on the request of the official liquidator, the bank had agreed to pay the salaries to the watch and ward staff for a temporary period and so far paid an amount of Rs. 1,09,981 and that neither the APIDC nor the official liquidator has done anything for the past three years to dispose of the assets or permitted the bank to sell the current assets hypothecated in favour of the bank.
3. The APIDC has filed a counter stating that an amount of Rs. 1,52,87,043 inclusive of interest, is due to it from the company and that under the proviso to section 529, sub-section (2) of the Act, the bank which has proceeded to realise its security is liable to pay the expenses to cover salaries of the staff for preservation of the security.
4. Sri Raviprasad, learned counsel for the official liquidator, contends that under section 529, sub-section (2) of the Act, the bank and the APIDC, which are the secured creditors of the company, are liable to pay the expenses incurred for preservation of the security.
Section 529 of the Act reads as follows :
"529. Application of insolvency rules in winding up of insolvent companies. - (1) In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to - ...
Provided 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, and, where a secured creditor, instead of relinquishing his security and proving his debt, opts to realise his security, -
(a) the liquidator shall be entitled to represent the workmen and enforce such charge;
(b) any amount realised by the liquidator by way of enforcement of such charge shall be applied rateably for the discharge of workmen's dues; and
(c) so much of the debt due to such secured creditor as could not be realised by him by virtue of the foregoing provisions of this proviso or the amount of the workmen's portion in his security, whichever is less, shall rank pari passu with the workmen's dues for the purposes of section 529A.
(2) All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the winding up, and make such claims against the company as they respectively are entitled to make by virtue of this section :
Provided that if a secured creditor instead of relinquishing his security and proving for his debt proceeds to realise his security, he shall be liable to pay his portion of the expenses incurred by the liquidator (including a provisional liquidator, if any) for the preservation of the security before its realisation by the secured creditor."
5. Sri S. Suryaprakash Rao, learned counsel for the bank, and Sri Sriram Reddy, learned counsel for the APIDC, on the other hand, contend that the section applies only to winding up of an insolvent company but not to a company which may show surplus. They also contend that even if the section applies, the official liquidator has to incur the expenses in the first instance and later claim reimbursement from the secured creditors. As regards the liability to bear the expenses, learned counsel for the bank contends that it is not just to mulct the bank with the entire liability and that the APIDC, which is the other secured creditor, must also share the burden. This is opposed by learned counsel for the APIDC on the ground that the APIDC has not yet exercised its option to stand outside the winding up proceedings and hence is not liable to bear the expenses.
6. Interpreting analogous provisions of the English Companies Act (section 317), Justice Vaisey of the Chancery Division in Fine Industrial Commodities Ltd., In re [1955] 3 All ER 707 held that until it is proved that the company has a surplus, the rules applicable to insolvent companies have to be applied. The same view has been reiterated in Rolls Royce Ltd., In re [1974] 3 All ER 646 (Ch D).
7. Following these decisions, I reject the contention of the bank that section 529, sub-section (2), of the Act does not apply to the instant case since whether the company is insolvent or is capable of yielding a surplus cannot be determined at this stage.
8. The technical plea raised by the respondents that the official liquidator has to meet the expenses first and later claim reimbursement from the secured creditor, is not correct as held by the Gujarat High Court in New Swadeshi Mills of Ahmedabad Ltd., In. re [1985] 58 Comp Cas 86; [1987] 1 Comp LJ 151. In the latter case, it was held by the Gujarat High Court as follows (page 93) :
"In my view, it would be taking too truncated and unrealistic a view of the provisions of section 529(2), proviso, to even contend that even though ultimately the secured creditor standing outside the winding up would be liable to reimburse all the expenses incurred by the liquidator for preservation of the security, in the process of preservation, no contribution can be asked for from such secured creditor."
The proviso was added on the following recommendation of the Companies Act Amendment Committee (page 93) :
"The insolvency law contained in Schedule II to the Presidency Towns Insolvency Act and section 47 of the Provincial Insolvency Act relating to the rights of a secured creditor is applicable in the winding up of an insolvent company. It has been pointed out by an official liquidator that a secured creditor who realises his security should be made liable to reimburse the liquidator all amounts spent by the latter for the preservation or protection of the asset before it is sold by or at the instance of the secured creditor. If the secured creditor does not relinquish the security and prove for his debt and proceeds to realise the asset given as security, it is proper that he should pay the expenses of preservation or protection of the asset during the pendency of the liquidation proceedings and before the sale of the asset."
9. Accordingly, I reject this contention of the respondents. As regards the last contention, learned counsel for the bank contends that as the APIDC is also a secured creditor, the bank cannot be asked to bear the entire expenses of the salaries for preservation of the assets. Learned counsel for the APIDC contends that as the APIDC has not yet opted to stand outside the winding up proceedings, it is not liable to share the expenses incurred by the official liquidator and that as the bank has not relinquished the security and has proceeded to realise the debt by filing the suit, it is liable to bear the expenses under the proviso to section 529, sub-section (2). He relies on the judgment in New Swadeshi Mills of Ahmedabad Ltd., In re [1985] 58 Comp Cas 86 (Guj); [1987] 1 Comp LJ 151.
10. The counter filed by the APIDC is silent on the question whether it opts to stand outside the winding up proceedings or not, nor has it indicated its intention either way to the official liquidator. As there is no period of limitation for it to exercise this option, it may, at any time opt to proceed to realise its security by remaining outside the winding up proceedings by invoking section 29 of the State Financial Corporations Act, or by filing a suit, if within limitation. In such a case, it would be deriving the benefit of getting the security preserved at the cost of the bank. No doubt, as held by the Gujarat High Court in New Swadeshi Mills of Ahmedabad Ltd., In re [1985] 58 Comp Cas 86; [1987] 1 Comp LJ 151 the question of the creditor's liability to pay salaries of staff for the preservation of the security arises only in case the creditor proceeds to realise the debt without relinquishing its security. But, at this stage, it is not possible to say that section 529, sub-section (2) does not apply to the APIDC since it has not taken any definite stand whether it opts to stand outside the winding up proceedings or not. Further, the APIDC has a first charge on the block and fixed assets of the company. Hence, it is just and proper that both the secured creditors are made to bear the liability of meeting the expenses of salaries. In fact, in the Gujarat case relied on by the APIDC, this is exactly the course adopted by the court. Hence, I am of the opinion that the APIDC is also liable to contribute to the expenses along with the bank until it opts to relinquish its security and realise its debt through the official liquidator.
11. Then the next question is in what proportion the two creditors, the bank and the APIDC, have to bear the expenses. The bank and the APIDC have filed memos showing the original amounts advanced by them and the interest accrued thereon till December 31, 1993. As per their memos, the amounts due to the bank and the APIDC as on December 31, 1993, are about Rs. 48 lakhs and Rs. 120 lakhs respectively, the principal amounts being about Rs. 15 lakhs and 36 lakhs. So the ratio in which the bank and the APIDC have to bear the expenses can be fixed as 2 : 5 (48 : 120). I accordingly direct the bank and the APIDC to pay the official liquidator amounts to cover salaries payable from the March of 1994 in the ratio of 2 : 5. However, as regards the arrears of salary payable from February, 1992, to February, 1994, as the bank had already spent an amount of Rs. 1,09,981 to meet the salaries up to the month of January, 1992, I think it just and fair to direct the APIDC to pay the expenses to meet the arrears of salaries payable from February, 1992, to February, 1994. It is made clear that as and when the APIDC chooses not to remain outside the winding up proceedings, it is open to it to move this court for appropriate directions from this court exempting it from the liability to meet the salaries for the watch and ward staff. It is also made clear that it is open to the bank to claim by separate application any amount reimbursable to it by the APIDC in respect of expenses already incurred by it up to January, 1992, in excess of the amount payable by it as per the ratio 2 : 5. Accordingly, I direct the APIDC to pay the official liquidator Rs. 45,000 equivalent to the arrears of salaries for the period February, 1992, to February, 1994, (2 years, 1 month) payable to four members of the watch and ward staff at the rate of Rs. 450 per month for each member, within two weeks from the date of this order. I also direct the Bank of India and the APIDC to pay at the rate of Rs. 515 and Rs. 1,285 respectively to the official liquidator by the end of every month beginning from the month of March, 1994, to cover the salaries of the staff till the assets of the company are sold.
12. The company application is, accordingly, allowed. No. costs.