Andhra HC (Pre-Telangana)
Vaishu Engineering Industries Ltd. (In ... vs A.P. Industrial Development Corpn. on 5 June, 2006
Equivalent citations: [2008]81SCL368(AP)
JUDGMENT S. Ananda Reddy, J.
1. The first company application is filed by the Official Liquidator, representing the company under liquidation, viz., Vaishu Engineering Industries Ltd., under Section 537(2) read with Sections 456 and 458 of the Companies Act (for short "the Act") and Rules 9 and 114 of the Companies (Court) Rules, 1959 (for short "the Rules"), seeking relief of the declaration that the sale of the assets of the company in liquidation by A.P. Industrial Development Corporation (for short "the APIDC"), the first respondent, under Section 29 of the State Financial Corporations Act, 1951 (for short "the SFC Act") in favour of the fourth respondent during the pendency of the winding up proceedings, without the leave of this Court, as void, and consequentially direct the APIDC to forthwith deliver the vacant possession of the company's properties to the Official Liquidator. The second company application CA No. 521 of 2003, is filed by the employees union of the company under liquidation, viz., Vaishu Engineering Industries Ltd., under Section 529A of the Act read with Rule 9 of the Rules, seeking a direction to respondent Nos. 2 to 4, who were the secured creditors, to deposit the amount received by them, before the Official Liquidator to enable him to disburse the same to the creditors, including the workmen.
2. Since both these applications are filed with reference to the same company, under identical circumstances, they were heard and disposed of by this common order.
According to the Official Liquidator, by order dated 22-7-1999, made in RCC No. 14 of 1998, the company, viz., M/s. Vaishu Engineering Industries Ltd., was ordered to be wound up and the Official Liquidator, attached to this Court was appointed as a liquidator of the said company, to take over the assets of the said company. It is stated that originally the company had approached the Board for Industrial and Financial Reconstruction (for short "the BIFR") for its rehabilitation in view of its huge accumulated losses. The BIFR, after conducting necessary enquiry under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 (for short "the SICA") passed an order dated 20-1 -1997, declaring that the company is not likely to make its net worth exceeded its accumulated losses within a reasonable time, while meeting all its financial obligations, and that the company, as a result thereof, is not likely to become viable in future, and, hence, it should be wound up under Section 20(1) of the SICA, therefore, the said opinion was ordered to be communicated to the concerned High Court for necessary action, according to law. It is stated that the said order, along with the letter of the registry of the BIFR dated 5-2-1997, was received by the registry of this Court and the same was taken on record on 12-2-1997. Accordingly, winding up proceedings were registered in RCC No. 14 of 1998, and finally winding up orders were passed on 22-7-1999.
3. It is stated that the first respondent as a secured creditor, exercising its powers under Section 29 of the SFC Act, seized the assets of the company on 15-2-1997. Thereafter, the seized assets were sold by the first respondent in favour of the fourth respondent on 20-8-1998, for a consideration of Rs. 109 lakhs. Since the said sale was effected by the first respondent-corporation after the commencement of the winding up proceedings on 12-2-1997, without the leave of this Court, the same is hit by Section 537(2) of the Act and is liable to be declared as void. It is further stated that the respondents/secured creditors including the first respondent were the parties before the BIFR and in fact, the proceedings of the BIFR dated 20-1-1997, shows that the first respondent sought for permission of the BIFR that it may be allowed to seize the assets of the company. The said request was specifically rejected by the BIFR, directing the first respondent to approach this Court, in view of its conclusion that the company was recommended for winding up. But, contrary to the said order, the first respondent, without approaching this Court, seeking leave of this Court to proceed against the assets of the company, seized and sold the assets of the company, therefore, the said action is not only in violation of the orders of the BIFR, but also in violation of the mandatory provisions of the Act. The first respondent, being party to the said proceedings, is bound by the orders. Further, it is stated that the workmen of the company under liquidation and the creditors in whose favour, in fact, even the Industrial Tribunal passed awards, even quantifying the liability of the company in their favour and in terms of Sections 529 and 529A of the Act, they are co-mortgagees along with other unsecured creditors, therefore, the first respondent cannot effect the sale of the assets, without their consent or making them as parties to the sale proceedings, therefore, sought for set aside the same.
4. To the same effect are the pleadings in CA No. 521 of 2003, where the workers union is the applicant, where they have even stated that the sale was effected by the first respondent in collusion with the purchaser. It was also stated that they have even filed EP No. 3 of 1998, in ID No. 91 of 1996, for realisation of the awarded amount of Rs. 77,83,623. It was also stated that subsequently as per the orders of this Court, the Official Liquidator invited claims of the workmen and the Official Liquidator determined the claims of the workmen by an order dated 22-4-2003, admitting their claim at Rs. 99,44,457 of which Rs. 80,98,359.58 as secured claim and Rs. 18,46,097.66 as unsecured claim. The said adjudication has become final. Therefore, sought for appropriate orders, directing respondent Nos. 2 to 4 in CA No. 521 of 2003, to deposit the sale proceeds with the Official Liquidator for distribution.
5. In response to the notices, a counter is filed by the deputy general manager (legal) on behalf of the first respondent. In the counter, it is stated that the unit was seized by the first respondent on 15-2-1997, by exercising its powers under Section 29 of the SFC Act, since the company owes an amount of Rs. 179.84 lakhs as on 28-2-1998. The company under liquidation became sick and went before the BIFR on 31-7-1989, and it was registered as Case No. 107 of 1989, and finally order recommending for winding up of the company was passed on 20-1 -1997. An appeal was filed against the said order of the BIFR by the workmen in Appeal No. 132 of 1997, before the AAIFR, which was dismissed on 15-7-1997. This respondent also stated that he had advertised the sale in the newspapers (though did not give specific dates of publication in the counter) and confirmed the sale in favour of the fourth respondent, viz., M/s. Thermal Systems (Hyderabad) (P.) Ltd., for a total consideration of Rs. 109 lakhs to be shared by respondent Nos. 1 to 3 (CA No. 1071 of 2005). It is also stated that the first respondent received an initial payment of Rs. 38.15 lakhs on 20-4-1998, and the balance amount was agreed to receive in instalments. The unit was handed over to the purchaser on 20-8-1998. According to the first respondent, he had initiated and completed seizure and sale of the unit of the company, prior to the appointment of the Official Liquidator and winding up of the said company. Therefore, the sale and receipt of the sale proceeds cannot be considered as having effected while the company was under winding up. It was also stated that the sale transaction was completed prior to the invocation of the provisions of Section 529(1) of the Act and, thus, the said amount cannot be considered for the purpose of apportionment in terms of Section 529(1) of the Act. It is also stated that the adjudication by the Official Liquidator, with reference to the employees claim, could not have been taken as proved without calling for objections from this respondent. This respondent ought to have permitted to file objections to the claims made by the employees' union and the adjudication was made without following the due process of law, therefore, the same is void ab initio.
6. Coming to the application filed by the Official Liquidator, seeking to set aside the sale, it is stated that the applicant failed to disclose as to how the provisions referred to in the application are applicable for declaring the sale as void. It was also stated that except Sections 529 and 529A, no other provisions of the Act will have any effect upon the action taken by the respondents, in view of the provisions of Section 46B of the SFC Act. It is stated that since seizure and sale was effected after the order of the BIFR before the winding up orders passed by this Court and appointment of the liquidator, the sale is not effected by any of the provisions of the orders. It is also stated that after the BIFR proceedings and prior to the winding up order, no leave is required as contemplated under Section 537(2) of the Act, therefore, the sale is not effected and the same is also not violative of any provisions of the Act. The counter is specifically silent about the reference made by the Official Liquidator to paragraph 5.1 of the order passed by the BIFR.
7. On behalf of the second respondent-Corporation, i.e., APSFC, the assistant general manager of the said Corporation filed a separate counter, almost on identical lines. It is stated that as per the judgment of the Apex Court in International Coach Builders Ltd. v. Karnataka State Financial Corporation [2003] 114 Comp. Cas. 6141 the sale effected by the first respondent on behalf of the participating financial institutions cannot be impeached since the sale was effected before winding up order. This respondent also claimed that the determination of the workers claimed by the Official Liquidator was without notice to the secured creditors and therefore the said adjudication is not binding on them. It is also stated that even after attachment of the sale proceeds among the secured creditors, still there is outstanding dues to the secured creditors, hence sought for dismissal of the application.
8. A separate counter is filed by the purchaser/fourth respondent. It is stated that the first respondent published advertisement in daily newspapers "Eenadu" and "Deccan Chronicle" for the sale of the assets of the company under liquidation on 3-2-1998, with reference to which this respondent participated in the auction and offered Rs. 109 lakhs, which was accepted. It is stated that he paid Rs. 38.15 lakhs being 35 per cent of the amount offered was paid initially, the balance amount was paid in instalments. It is stated that the fourth respondent is engaged in the business of designing, detailed engineering, procurement fabrication, erection and commissioning of boilers. It is stated that as on 31 -3 -2005, this respondent has a turnover of Rs. 106.94 crores, having employed 450 workmen, in addition to, the indirectly employed persons are in 300 families. It is stated that this respondent is a bona fide purchaser of the property in good faith for a valuable consideration, further incurred huge amounts not only towards the sale consideration, but also further invested in the buildings and machinery by taking up loan to the tune of Rs. 1,266 lakhs, It is stated that the first respondent being a public sector undertaking, the fourth respondent with a good intention, purchased the said property. Further it is stated that the present application is filed after 7 years, even though the Official Liquidator was aware of the sale as early as in the year 1999. It is further stated that the applicant was a party in WP No. 7462 of 1999, filed by the first respondent, praying for the lifting of the attachment dated 18-1 -1999, and the said writ petition was dismissed. It is stated that since this respondent has purchased the property bona fide and invested further amounts, it would be inequitable to disturb the sale in his favour at this stage.
9. The learned official liquidator, in support of his application contended that as the sale effected by the first respondent-APIDC is not only contrary to the expressed order passed by the BIFR, but also in violation of the mandatory provisions of the Act, the same is liable to be set aside. The official liquidator also relied upon apart from various decisions cited at the time of hearing, a decision of this Court in WA No. 126 of 1999 and CA No. 53 of 1999, where sale, effected by the APIDC under identical circumstances without the leave of this Court, was set aside. The learned official liquidator also referred to the provisions of Sections 537, 441 and contended that in view of the said express provisions a sale of assets of the company under liquidation, after the commencement of the winding up proceedings, without leave of the court, is void, therefore, the sale conducted by the APIDG is clearly in violation of the above said mandatory provisions. The official liquidator also brought to the notice of this Court the express order passed by the BIFR, where the first respondent sought for permission to proceed against the assets of the company, which was specifically rejected. Therefore, the action of the first respondent, violating the express orders of the BIFR, is liable to be set aside.
10. Sri V. Hari Haran, learned Counsel appearing for the workers union of the company under liquidation, supported the contentions advanced by the official liquidator. Learned Counsel also contended that even the purchase made by the auction purchaser is not without notice. It was contended that when the first respondent issued sale publication, a notice was sent by the workers union, therefore, the sale in favour of the auction purchaser is liable to be set aside. Alternatively, learned Counsel contended that the sale proceeds realised by the first respondent by the sale of the assets, be directed to be deposited with the official liquidator so as to distribute the same, in accordance with the provisions of the Act.
11. Learned Counsel appearing for the first respondent, while reiterating the counter averments, sought to contend that since the seizure and sale of the assets of the company were effected after the BIFR orders but before the winding up order was passed by this Court, the same is not effected. Learned Counsel also tried to explain away the observations made by the BIFR while rejecting his request to proceed against the assets of the company, stating that the necessity for the first respondent to approach this Court would arise only in case this Court comes to the conclusion that the winding up order is to be passed against the company. Since that stage has not reached by the date, the first respondent seized the assets of the company and effected sale, the same is not in contravention to any of the order or the provisions of the Act. Learned Counsel also contended that though Section 441 read with Section 537 of the Act shows that after the commencement of the winding up proceedings, since no application was filed by any of the parties, therefore, the commencement of the winding up proceedings could be only when a winding up order is passed by this Court. Learned Counsel also contended that Section 446 has no application since the said provision would come into operation only when a winding up order has been made or the official liquidator is appointed as a provisional liquidator. Since the sale was effected before a winding up order and no provisional liquidator was appointed in the present case, therefore the said provision has no application, therefore, sought to dismiss the application.
12. Learned Counsel for the second respondent-APSFC, while supporting the arguments for counsel for the first respondent, referred to and relied upon the decision of the Supreme Court in International Coach Builders Ltd.'s case (supra). According to learned Counsel, the requirement for seeking permission of the court arises only when a winding up order is passed. As long as there is no winding up order, the right conferred under Section 29 of the SFC Act can be unilaterally exercisable against the debtor. Therefore, there is no obligation on the part of the first respondent-Corporation to seek permission of the company court. Learned Counsel also relied upon a decision of the learned Single Judge of this Court in T. Rajive v. AP State Financial Corporation [2001] 105 Comp. Cas. 350, where similar applications were filed seeking to set aside the sale that was effected by the State Financial Corporation. In that case the BIFR's order dated 26-12-1995, was received by the registry of this Court on 29-8-1998, and a winding up order was passed on 16-11-1998, while the State Financial Corporation took possession of the assets of the company and issued a paper publication on 23-10-1996, 24-10-1996, in three daily newspapers and the sale was conducted on 23-6-1997, for a sum of Rs. 2.2 crores and sale deed was executed in favour of the purchaser oh 30-8-1997. In those circumstances, since the sale was effected by the Corporation even before the case was registered as RCC No. 18 of 1998, the court held that the provision of Section 446 would not cover the situation and the application was filed.
13. Counsel appearing for the, third respondent-State Bank of India, adopted the arguments of respondent Nos. 1 and 2, while counsel for the fourth respondent/purchaser contended that the fourth respondent is a bona fide purchaser for valuable consideration. Since 7 years have elapsed from the date of the sale and since the applicant though aware of the sale in the year 1999, itself, has approached this Court only after six years, the application is liable to be dismissed on the ground of laches. It is also contended that since the applicant is a bona fide purchaser for a valuable consideration without notice of the pendency of the proceedings, the sale in his favour is not liable to be interfered with.
14. From the above rival contentions, the issues to be considered are:
(1) Whether the sale effected by the first respondent is void in view of the provisions of Sections 537 and 441; and (2) Whether the sale of the assets of the company under liquidation by the first respondent is liable to be set aside.
The admitted facts of the case are that the company under liquidation became sick and approached the BIFR under Section 15 of the SICA for getting benefit of rehabilitation. The matter was pending before the BIFR for about 5 years. The BIFR conducted necessary enquiry under Section 16 of the SICA and finally passed an order on 20-1-1997, recording its findings as under:
M/s. Vaishu Engineering Industries Ltd., is not likely to make its net worth exceed its accumulated losses within a reasonable time while meeting all its financial obligations and that the company as a result thereof is not likely to become viable in future and hence it should be wound up under Section 20(1) of the Act. This opinion may be forwarded to the concerned High Court for necessary action according to law.
15. The said opinion was communicated by the registry of the BIFR to the registry of this Court by a letter dated 5-2-1997. The said matter was taken on record on 12-2-1997, and registered as RCC No. 14 of 1998, and finally winding up order was passed on 22-7-1999.
When the matter was pending before the BIFR, the first respondent-APIDC sought permission of the BIFR to seize the assets of the company. The said request of the APIDC was rejected by the BIFR. The relevant portion of the order of the BIFR reads as under:
The Bench clarified that at a stage when the winding up of the company is being considered, the Corporation cannot be granted permission for taking action under Section 29 of the SFC's Act and they should approach the concerned High Court in case it is decided to confirm the prima facie opinion of winding up the company.
16. Though such an order was passed, the first respondent seized the unit on 15-2-1997, and an advertisement was issued on 3-2-1998, for effecting the sale, and the sale was conducted on 9-2-1998, and the same was stated to have been confirmed on 18-4-1998. Sale consideration was received on 19-8-1998, and physical possession of the unit was delivered to the fifth respondent on 20-8-1998. In fact, even before taking possession of the assets by the APIDC, an appeal was filed by the employees union on 15-2-1997, vide Appeal No. 132 of 1997, and the said appeal was heard and dismissed on 15-7-1997. In spite of the rejection of the request made by the BIFR, while directing the APIDC to approach this Court, by violating the said direction, even though the winding up proceedings have been initiated since RCC No. 14 of 1998, was registered in pursuance of the communication sent by the BIFR, the APIDC not only seized the assets of the company, but also effected sale of the same, without seeking permission of this Court. Therefore, the Official Liquidator has come up with the present application, claiming that the action of the APIDC is in violation not only of the order passed by the BIFR, but also the mandatory provisions of Section 537 of the Act and hence the sale is void.
17. Before proceeding further, it would be appropriate to refer the relevant provision of Section 537(1)(a) and (b) as under:
537. Avoidance of certain attachments, executions, etc., in winding up by or subject to supervision of court.--(1) Where any company is being wound up by or subject to the supervision of the court:
(a) any attachment, distress or execution put in force, without leave of the court, against the estate or effects of the company, after the commencement of the winding up; or
(b) any sale held, without leave of the Court, of any of the properties or effects of the company after such commencement; shall be void.
A perusal of the above provision shows that where any company is being wound up by or subject to the supervision of the court, any attachment, distress or execution put in force against the estate or assets of the company or any sale held, without the leave of the court, after the commencement of the winding up, shall be void, therefore, any action intended by any party either creditor secured or otherwise or any other party intends to get attached any execution or any proceedings or to effect the sale, leave of the court is mandatory, once winding up proceedings are commenced.
18. Then with reference to the meaning of the expression "commencement of the winding up" is defined in Section 441(2) of the Act, which reads as under:
In any other case the winding up of a company by the Court shall be deemed to commence at the time of presentation of the petition for the winding up.
So, the presentation of the petition would amount to commencement of winding up. In the present case, an argument was advanced that since no company petition is presented, therefore, the said provision may not be applicable. The said contention is clearly devoid of merit. Since a petition for winding up is registered on receipt of the proceedings from the BIFR, therefore, when once proceeding is received by the registry and the same is taken on file, the same has to be construed as presentation of a petition for winding up. If so construed, once proceeding of the BIFR is received, the proceeding for winding up is deemed to have commenced and pending before this Court.
19. Apart from that, an appeal was filed against the order of the BIFR and it was pending till it was disposed of on 15-7-1997, and during the pendency of the said appeal, the provisions of Sub-section (1) of Section 22 of the SICA applies, where there is prohibition from taking any proceedings against the assets of the company. The relevant portion of Section 22(1) of the SICA reads thus:
Suspension of legal proceedings, contracts, etc.--Where in respect of an industrial company, an inquiry under Section 16 is pending or any scheme referred to under Section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where on appeal under Section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the appellate authority.
20. From the above provision also it is clear that without obtaining necessary consent of the Board or the Appellate Authority, the APIDC, which is one of the secured creditors, is not entitled to proceed against the assets of the company. Therefore, the action of the APIDC is also in contravention of the provisions of the SICA.
On behalf of the applicant, reliance is placed in the following decisions:
In Mysore Surgical Cottons (P.) Ltd. v. Karnataka State Financial Corpn. [1988] 1 Comp. LJ 63 (Kar.), wherein, both the Official Liquidator as well as the State Finance Corporation filed applications. The Official Liquidator sought the relief of handing over the possession of the assets, effects, books and records of the company forthwith since a winding up order was passed by the court on 9-8-1985, while the finance corporation sought the permission of the court to sell the assets of the company as a secured creditor by staying outside the liquidation proceedings. The Official Liquidator contended that since the winding up order has been passed, the properties of the company in liquidation vested in the court and the Official Liquidator would be incharge on behalf of the court as custodian of the property on behalf of the court, hence sought for taking possession of the properties. This was contested by the finance corporation, stating that Section 29 of the SFC Act empowered the Corporation to take charge of all the assets of the company, mortgaged to it, whether movable or immovable, and thereafter bring them to sale and realise its security. In exercising of that power, the Corporation took over the assets of the company in liquidation, therefore, the liquidator cannot possibly have any objection for permitting the Corporation to sell the properties. Though the Corporation relied upon the decision of the Apex Court in M.K. Ranganathan v. Government of Madras [1955] 25 Comp. Cas. 344; the learned Judge distinguished the said judgment since the facts in that case are totally different and negatived the claim of the financial corporation to have the right to proceed against the assets of the company.
In K.S. Shivappa v. State Bank of Mysore [1986] 60 Comp. Cas. 229 (Kar.), wherein a guarantor of the company in liquidation filed the application, seeking to set aside the sale that was effected in execution of a mortgage decree, obtained by a secured creditor. It was claimed that the secured creditor, who has obtained decree in a Civil Court filed the EP and brought the property to sale and sale was effected for a sum of Rs. 1,75,000 though the property would fetch Rs. 5 lakhs. Further, as the said sale was effected during the pendency of the company petition for winding up, whereas a winding up order was passed on 15-4-1982, since the said sale is void in terms of Section 537, sought to set aside the same. The learned Company Judge of the Karnataka High Court allowed the said application and set aside the sale since the sale was effected without seeking leave of the court, and, therefore, the sale is void, in terms of Section 537 of the Act.
In B. Suresh v. A.P. Mahesh Co-operative Urban Bank Ltd. [2002] 108 Comp. Cas. 283 [2001] 34 SCL 939 (AP), wherein a company petition CP No. 219 of 1998, was filed by a creditor, seeking winding up of the company. In that company petition, Company Application No. 312 of 2001, was filed by B. Suresh, who claims to be another creditor of the company, against which winding up order was sought for. He filed another two applications to declare the proposed sale of the assets of the company by the first respondent-bank in pursuance of the notice for sale as void and, accordingly, to restrain the respondent-bank from effecting sale without obtaining permission of the court as well as to stay of all the sale proceedings, initiated by the respondent-bank. The relief sought for by the applicant B. Suresh was granted, restraining the bank from proceeding with the sale as the said bank was only an unsecured creditor, who is not entitled to proceed for the sale of the assets without obtaining permission of the Court, as contemplated under the provisions of the Companies Act.
In Sporolac Laboratories (P.) Ltd. v. AP State Financial Corporation [2000] 27 SCL 559 (AP), wherein an application was filed by the official liquidator under Sections 441 and 537 of the Act, seeking declaration that the sale of the assets, conducted by the AP State Financial Corporation is null and void and to deposit the sale proceeds with the Official Liquidator. In that case, the company petition was filed, seeking winding up of the company on 21-3-1996, which was registered as CP No. 22 of 1996, winding up order was passed on 23-7-1998. The sale was effected by the Corporation, exercising its powers conferred under Section 29 of the SFC Act on 30-4-1997, and sale agreement was executed on the same day and possession was delivered on 5-5-1997. Since the sale was effected after the company petition was presented, the same is void in terms of Section 537 of the Act.
21. The learned Company Judge, after hearing elaborately, passed orders setting aside the sale made in favour of the third party. In that case there was a specific declaration made by way of a direction not only to the State Financial Corporation, but also any other institutions that are exercising the powers under Section 29 of the SFC Act, not to bring the sale of the assets of any debtor industrial concern without the leave of the court. The relevant portion of the order reads as under:
Having regard to the general importance of the issue as such matters are likely to come up frequently, more particularly, in view of the law declared by the Division Bench in A.P. State Financial Corporation's case, it is declared that the State Financial Corporation or any other body which has a right similar to the right conferred on the State Financial Corporation under Section 29 of the SFC Act shall not bring to sale the assets of any debtor industrial concern without the leave of this Court once the winding up proceedings are initiated under the Companies Act, 1956, with respect to such an industrial concern.
22. Sri V. Hari Haran, learned Counsel, appearing for the applicant in CA No. 521 of 2003, relied upon the following decisions:
In Rajasthan Financial Corporation v. Official Liquidator [1963] 2 Comp. LJ 309 (Raj.), where almost identical issue fell for consideration as to the commencement of the winding up proceedings. In that case, four creditors of the company filed an application on 25-11 -1958, before the learned Company Judge for winding up of the company under Section 433 of the Act. The appellant-Corporation, exercising its powers under the SFC Act, moved the district court on 27-3-1959, under Section 31 of the SFC Act to enforce its claim as a creditor for the sale of the mortgaged properties. The mortgaged properties were sold in auction in December, 1959, and possession was delivered in January, 1960. Subsequently, the Corporation made an application under Section 446 of the Act before the Company Judge, seeking leave to continue its proceedings against the company and sought for the transfer of the proceedings from the District Court to the company court. The official liquidator opposed the application filed by the Corporation under Section 446 of the Act, contending that in terms of Section 537 of the Act, the winding up of the company should be deemed to commence on the date of the application, i.e., on 25-11-1958, and any attachment or sale held after that date without leave of the court of any of the properties of the company shall be void, and the State Financial Corporations Act does not override the provisions of the Companies Act. The company court accepted the said contention and declared that the sale is void and the auction purchaser was directed to restore the properties to the Official Liquidator.
The said order was the subject-matter of the appeal before the Division Bench. The Division Bench, after considering the contentions elaborately, held the word "after the commencement of winding up" in Section 537(1)(a) of the Companies Act, 1956, must be read as meaning after the presentation of the petition for winding up of the company and not after the winding up order. Section 537 read with Section 441(2) of the Act fixes the date of the commencement of the winding up as the date of the presentation of the petition for winding up and not the winding up order. The object of Section 537 is to preserve the assets of a company for fair and equitable distribution to all the creditors and to generally negative all possibilities of a preference between creditors inter se from the date of commencement of the winding up proceedings. The words "is being wound up" in Section 537(1) may be suggestive of a process, but the starting point of that process has been clearly laid down by Section 441 of the Companies Act, and the language of Section 537 has to be understood by reference to Section 441. The doctrine of "relating back" has been imported and the date of commencement of winding up has been given a fixed meaning.
Hence the sale by auction of the properties or assets of the company, held after the presentation of a petition for winding up, without leave of the court must be held to be null and void.
23. In Karnataka State Industrial Investments Development Corporation Ltd. v. Shivmoni Steel Tubes Ltd. [1998] 94 Comp. Cas. 1 (Kar.), wherein two company petitions, viz, 157 of 1992 and 49 of 1994, were registered based on the proceedings issued by the BIFR and AAIFR. All the secured creditors were shown as respondents in those company petitions. An order of winding up was passed on 8-9-1995. The Canara Bank and the Syndicate Bank, which are shown as secured creditors and respondents in the original company petitions, filed applications, seeking permission to sell the hypothecated plant and machinery, while the workers' union filed an application, pleading the cause of the 300 workmen who were claiming to get about Rs. 80 lakhs. In the meantime, the appellant-Corporation acting under Section 29 of the SFC Act, took over possession of the assets of the company under liquidation on 29-7-1994, and put for sale giving an advertisement on 1-11-1994. In pursuance of the advertisement, the seventh respondent stood as the highest bidder, where negotiations are even held before the court and the sale price was finalised at Rs. 486 lakhs. At that stage the appellant-Corporation filed an application before the company court to recognise and record its right as secured creditor to stand outside the winding up proceedings in enforcement of its security for realisation of the amount due to it and also sought approval of the sale in favour of the seventh respondent. At that stage, a third party filed an application, offering higher price of Rs. 5.02 crores. At that stage, the official liquidator also filed an application under Sections 456 and 457 of the Act for a declaration that the sale conducted by the applicant-Corporation in favour of the seventh respondent was void under Section 537 of the Act since the same had been finalised after winding up order and without leave of the court, and to direct the appellant-Corporation to re- auction the property in association with the Official Liquidator.
24. The Company Judge, who heard all those applications, allowed the application of the Official Liquidator, while setting aside the sale already held, and allowed the applicant-Corporation to stand outside the winding up and to sell the plant and machinery and immovable properties of the company in association with the official liquidator from the time of settling the terms of advertisement and in negotiating to secure the higher price and subject to the condition that the sale has to be confirmed by the court and the sale proceeds are to be deposited in the court. The sale already effected in favour of the seventh respondent was not approved.
25. Aggrieved by that, the appeal was filed by the appellant-Corporation, claiming that the State Financial Corporations Act had overriding effect in terms of Section 46B of the SFC Act, and therefore the order passed by the company court was sought to be set aside.
The Division Bench upheld the order of the Company Judge, having noticed that there is no conflict between the provisions of the State Financial Corporations Act and the Companies Act and further in view of the provisions of Sections 529 and 529A of the Act, the official liquidator, representing the workmen, will have a pari passu charge over the assets of the company and the Corporation cannot dispose of the assets without permission of the court, where the winding up proceedings have already commenced and without association of the official liquidator, who represents the paripassu charge holder; the appeal was accordingly dismissed.
In Rajasthan Financial Corporation v. Official Liquidator [2005] 128 Comp. Cas. 387 (SC), wherein the decision was rendered by a Larger Bench of the Apex Court on a reference in view of the apparent conflict between two of its earlier decisions, viz., Allahabad Bank v. Canara Bank [2000] 101 Comp. Cas. 64 (SC) and International Coach Builders Ltd. v. Karnataka State Financial Corporation [2003] 114 Comp. Cas. 6142(SC). In that case, the appellants are the Rajasthan State Financial Corporation and Rajasthan State Industrial Development and Investment Corporation Ltd., which are the financial institutions, entitled to exercise powers conferred under the SFC Act. They are the secured creditors of M/s. Vikas Woollen Mills Ltd., which is a company under liquidation. By order dated 14-6-1994, the Company Judge of the High Court of Bombay ordered the company in liquidation to be wound up. The Official Liquidator was directed to take charge of the assets of the company in liquidation. On 18-4-1995, the Official Liquidator applied for directions to the company court for getting the property valued by a valuer as well as for a direction to the secured creditors to advance Rs. 25,000 each to meet the expenses for selling the assets of the company in liquidation. The secured creditors who had already obtained the valuation of the assets of the company in liquidation, filed applications opposing the report of the Official Liquidator, seeking permission to stand outside the winding up as well as to realise the securities and apportion the net sale proceeds between them along with the Bank of Baroda, which is another secured creditor. They undertook to pay over the dues of the workmen on the same being adjudicated by the Official Liquidator to the extent of the availability of the funds out of the net sale proceeds of the properties of the company in accordance with Section 529A of the Companies Act.
The company court rejected the application of the appellants-Corporations. The company court took the view that the rights available to the Corporation under the State Financial Corporations Act had to be exercised in association with the official liquidator, who was a charge holder and ranked pari passu with the secured creditors in terms of Section 529 of the Act, even if they stood outside the winding up. The court permitted Rajasthan State Financial Corporation to effect the sale in consultation with the official liquidator. It was also directed that the reserve price would be fixed by the company court on the report of the official liquidator and the sale proceeds were to be retained by the official liquidator until further orders.
26. Aggrieved by that, the appellant-Corporation filed appeal before the Division Bench unsuccessfully, hence the appeal before the Apex Court. It was observed that the rights claimed by the State Financial Corporation under the SFC Act have to be considered in the light of Section 529A read with Section 529 of the Companies Act. The court held as under:
When the debtor is a company in winding up, the rights of financial corporations are affected by the provisions in Sections 529 and 529A of the Companies Act... As far as we can see, there is no conflict on the question of the applicability of Section 529A read with Section 529 of the Companies Act to cases where the debtor is a company and is in liquidation. The conflict, if any, is in the view that the Debts Recovery Tribunal could sell the properties of the company in terms of the Recovery of Debts Act. This view was taken in Allahabad Bank v. Canara Bank [2000] 101 Comp. Cas. 64; in view of the Recovery of Debts Act being a subsequent legislation and being a special law, which would prevail over the general law, the Companies Act. This argument is not available as far as the SFC Act is concerned, since Section 529A was introduced by Act 35 of 1985 and the overriding provision therein would prevail over the SFC Act of 1951 as amended in 1956 and notwithstanding Section 46B of the SFC Act. As regards distribution of assets, there is no conflict. It seems to us that whether the assets are realized by a secured creditor even if it be by proceeding under the SFC Act or under the Recovery of Debts Act, the distribution of the assets could only be in terms of Section 529A of the Act and by recognizing the right of the liquidator to calculate the workmen's dues and collect it for distribution among them pari passu with the secured creditors. The official liquidator representing a ranked secured creditor working under the control of the company court cannot, therefore, be kept out of the process.
Thus, on the authorities what emerges is that once a winding up proceeding 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 assets 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 had 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 529A of the Companies Act takes place...(p. 398) Therefore, it was contended by learned Counsel that in view of the above law laid down by the Apex Court, the sale has to be set aside as it is null and void or alternatively the sale proceeds have to be directed to be deposited with the official liquidator for distribution under the supervision of the company court.
As against the above decisions, learned Counsel for the APSFC relied upon a decision of the Apex Court in International Coach Builders Ltd.'s case {supra). In that case, the Apex Court noticed the conflicting views that have been taken by different High Courts with reference to the rights of the Corporation under the provisions of the State Financial Corporations Act vis-a-vis the provisions of the Companies Act. The court also considered the contention on behalf of the Corporation that the provisions of the State Financial Corporations Act prevails over the provisions of the Companies Act, being a special Act. But the said contention was rejected holding that though the State Financial Corporations Act is a special Act and the Companies Act is a general Act, but in view of the amendments made in Sections 529 and 529A of the Act override and control the rights under Section 29 of the SFC Act. The said view was expressed by the Apex Court in A.P. State Financial Corporation v. Official Liquidator [2000] 102 Comp. Cas. 1 : 27 SCL 133, was affirmed and further held that there was no conflict between the provisions of the State Financial Corporations Act and the Companies Act. It was also observed that the Legislature has amended the Companies Act in 1985 with a special purpose, viz., to protect dues of the workmen. If the conditions are not imposed to protect the right of the workmen, there is every possibility that the secured creditor may frustrate the above pari passu right of their workmen. In fact, in the judgment of the Apex Court held that the amendments that are made to Sections 529 and 529A, being a subsequent enactment, the non obstante clause in Section 529A prevails over Section 29 of the Act of 1951. Finally, the court laid the following principles in paragraph 33 as under:
(1) The right unilaterally exercisable under Section 29 of the SFC Act is available against a debtor, if a company, only so long as there is no order of winding up;
(2) The SFC's cannot unilaterally act to realise the mortgaged properties without the consent of the official liquidator representing workmen for the pari passu charge in their favour under the proviso to Section 529 of the Companies Act, 1956;
(3) If the official liquidator does not consent, the SFCs have to move the company court for appropriate directions to the official liquidator who is the pari passu charge holder on behalf of the workmen. In any event, the official liquidator cannot act without seeking directions from the company court and under its supervision.(p. 630) Therefore, it was contended by learned Counsel that the right unilaterally exercised by the APIDC under Section 29 of the SFC Act is unaffected since no winding up order was passed by the date of the exercise of its powers by the APIDC.
27. Learned Counsel also relied upon a decision of this Court in T. Rajive's case (supra), where the Company Judge of this Court upheld the sale effected by the finance corporation, exercising its powers under Section 29 of the SFC Act, where sale was effected much before the winding up order was passed. In that case, the Corporation effected the sale on June 23,1997, and sale deed was executed on 30-8-1997, while the order of the BIFR was received by the registry of this Court on 29-8-1998, which was registered as RCC No. 19 of 1998 on 19-10-1998, therefore, it was held that the sale was effected much before the receipt of the proceedings from the BIFR by this Court, hence, the provisions of Section 446 of the Act has no application. In fact, in that case, an application was filed under Section 446 of the Act, seeking to set aside the sale on the ground that the sale was effected without obtaining permission from the court. The court held that the provisions of Section 446 of the Act is applicable either when a winding up order is passed by the court or where the official liquidator is appointed as a provisional liquidator of the company, which is sought to be wound up. In the present case either of the things had happened by the date of sale, therefore, negatived the contention of the applicant. Therefore, it is contended by learned Counsel that the facts in the present case are identical to that of the above case, therefore, the application filed by the official liquidator is liable to be dismissed.
28. Learned Counsel appearing for the auction purchaser (fourth respondent) relied upon the following decisions:
In Rm. Nl Ramaswami Chettiar v. Official Receiver which is a case, dealing in Provincial Insolvency Act, wherein the Apex Court held that a transfer effected by the insolvent after the presentation of the insolvency petition, would be valid until the said transferee stands annulled by an express order of the court and the transaction would become invalid only from the date of annulling the transfer.
To the same effect, is another judgment of the Apex Court in Sankar Ram & Co. v. Kasi Naicker , whereat the Apex Court had an occasion to consider the proviso of Section 55 of the Provincial Insolvency Act, 1920, and the protection available to the bona fide transferee. It was held that where the transfer has been made by the insolvent after presentation of the insolvency petition, the transfer cannot be held as void ab initio, but its validity or otherwise depends upon a consideration of the question whether the conditions specified in Section 55 are or are not satisfied. It was further held that once the requirements of Section 55 of the Provincial Insolvency Act were satisfied, the transferee is entitled to the protection of the said section as a bona fide transferee.
In Damera Ramakrishna v. CTO [2005] 142 STC 515, wherein the Division Bench of this Court considered the provisions of Section 16C of the Andhra Pradesh General Sales Tax Act, 1957. As per the said provision, the sales tax due to the Government shall be the first charge on the property of the dealer notwithstanding anything to the contrary contained in any law. Further, Section 17A of the said Act lays down that any conveyance of property in favour of any other person with the intention to defraud the revenue, would be void. But the proviso saves transfers made for adequate consideration and without notice of the pendency of the proceedings under the Act or of tax or other sum payable by the dealer. Therefore, it was held that the initial burden to show that the property was sold to defraud the Department and avoid payment of sales tax is on the Department, and there after the onus will shift to the purchasers to show that they were bona fide purchasers and that they were not parties to the fraud being played by the dealer.
Learned Counsel also contended that since the application is filed long after the sale was effected, the same is also barred by limitation.
From the above decisions, it is clear that when once proceedings are initiated for winding up of a company, any attachment or sale of the assets of the said company effected without the leave of the court, shall be null and void, in terms of Section 537 read with Section 441 of the Act. Therefore, the bar imposed under the provisions of the Act would operate from the inception of the winding up proceedings before the company court. Further, though it was contended for the APSFC and APIDC that by virtue of Section 46B of the SFC Act, the provisions of Section 29 of the SFC Act has got an overriding effect over the provisions of any other Act, but the said contention is without any merit in view of the decision of the Apex Court, wherein it was held that the powers conferred under Section 29 of the SFC Act are restricted by virtue of the provisions of Section 529 read with Section 529A of the Companies Act, which provisions were amended by the Amendment Act, 1985, in order to protect the interests of the workmen of the company under liquidation. In fact, even the Apex Court had gone to the extent of holding that even with reference to the proceedings under the Recovery of Debts Act, for recovery of debts due to the financial institutions, are also bound by the provisions of Section 529A of the Act and the official liquidator is required to be associated with the sale as well as to the distribution of the sale proceeds among the secured creditors, as the official liquidator was representing the workmen who were having a pari passu charge over the assets of the company under liquidation, consequently the approval of the company court is also required. Therefore, under no circumstance, after the liquidation proceedings have commenced, any authority has got any right to proceed against the assets of the company without the leave of the court and the association with the official liquidator, attached to the High Court.
The judgments relied upon by the auction purchaser, no doubt shows that under the provisions of the Provincial Insolvency Act, the rights of the purchaser of the property of the insolvent, during the pendency of the insolvency proceedings, are protected, provided the purchaser is a bona fide purchaser for consideration, without notice of the pendency of the proceedings. But the said proposition of law may not help either to the auction purchaser or the other respondents. As admittedly no such provision was incorporated either under Section 537 or under Section 441 of the Act, protecting the interests of the parties as was laid down in the above decision.
If we consider the facts of the present case in the light of the above decisions, admittedly, the company case was pending before this Court, the moment the proceedings of the BIFR are communicated to the registry of this Court for consideration to pass an order for winding up, which was received on 12-2-1997. Therefore, the moment the proceedings of the BIFR are received by the registry, it should be presumed that the proceedings are pending before this Court. Therefore, the provisions of Section 537 of the Act are applicable. Since the APIDC had seized the assets of the company on 15-2-1997, and effected the sale on 9-2-1998, and received the sale consideration on 19-8-1998, and delivered the possession of the property on 20-8-1998, and all these acts have taken place only during pendency of proceedings for winding up.
In addition, against the order of the BIFR dated 20-1-1997, an appeal was filed before the AAIFR on 15-2-1997, and the same was pending till 15-7-1997, on which date the appeal was dismissed. By virtue of the provisions of Section 22(1) of the SICA, there is a clear prohibition from proceeding against the assets of the company, except with the consent of the Board or the appellate authority, as the case may be. Admittedly, the APIDC, which took the assets of the company, had approached the BIFR when it has come to the conclusion to pass an order, referring the matter to the High Court for being wound up. At that stage, the APIDC requested for an order to seize the assets of the company for realisation of its debt due. A specific order was passed by the BIFR, as already referred to, negativing the request and further the APIDC was directed to approach this Court for seeking permission. The APIDC, without seeking permission of either the appellate authority or this Court, seized the assets of the company deliberately, violating the express order of the BIFR, as well as the provisions of the SICA and the Act. The act of APIDC can be considered only as an attempt to overreach the specific order of the BIFR as well as the provisions of both the Acts where there was a specific prohibition against the creditors to proceed against the assets of the company. At this stage it would be appropriate to refer to the relevant declaration made by this Court in Sporolac Laboratories (P.) Ltd.'s case {supra) prohibiting the sale during the pendency of the winding up proceedings:
it is declared that the State Financial Corporation or any other body which has a right similar to the right conferred on the State Financial Corporation under Section 29 of the SFC Act shall not bring to sale the assets of any debtor industrial concern without the leave of this Court once the winding up proceedings are initiated under the Companies Act, 1956, with respect to such an industrial concern.(p. 570) In spite of such specific declaration, which was made with reference to the State Financial Corporation, which was also in fact, associated with APIDC not only in effecting the sale, but also in getting the distribution of the assets of the company, have proceeded in utter disregard of the law declared by this Court, prohibiting the institutions exercising its powers under Section 29 of the SFC Act from proceeding against the assets of the company under liquidation. The said act is again a deliberate attempt on the part of the APSFC also to overreach the assets of the company, thereby trying to deprive the rights of the workmen, even though they have got a part passu charge over the assets of the company under liquidation. In view of the above innumerable restrictions against the APIDC from proceeding against the assets of the company, the sale effected by the APIDC has to be declared as null and void and the sale is accordingly, liable to be set aside.
Coming to the claim of the purchaser, it is claimed by the purchaser that it is bona fide purchaser for valuable consideration, without notice of the pendency of the proceedings. No doubt, the auction purchaser participated in the auction, in response to the notice published by the APIDC, and gave its offer for a sum of Rs. 109 lakhs, which was considered as highest and the same was accepted and delivery of the assets of the company was effected as early as on 20-8-1998. The application itself by the official liquidator was filed only in the year 2005. There was no proper explanation why the official liquidator did not move this Court immediately after the sale or at least within a reasonable time. It is not as if the official liquidator had no notice of the sale that was effected by the APIDC. Since a writ petition was filed against the sale, where the official liquidator was also impleaded as a party respondent, the said writ petition was filed in the year 1999 itself.
29. Apart from that, it is claimed by the auction purchaser that after the purchase, the auction purchaser had invested huge amounts by raising further loans, not only on the buildings but also on the plant and machinery, therefore, it was claimed that the sale effected in its favour may not be interfered with at this stage, i.e., nearly after 8 years of the sale.
30. This was opposed by counsel for the workers union, contending that a notice was served on the auction purchaser as to the pendency of the proceedings, but no material is brought on record, showing that any notice was served on the auction purchaser at the time of auction, bringing to its notice about the pendency of the winding up proceedings or even the pendency of the appeal before the AAIFR. In the absence of any such notice, there is no other evidence to infer that the auction purchaser had the notice of the pendency of the winding up proceedings before this Court. Had the official liquidator approached this Court immediately after the sale, even though the auction purchaser had no notice of the pendency of the proceedings, the sale ought to have set aside, in view of the declaration that the said sale is void. But now at this length of time, further in view of the claim made by the auction purchaser that it had made huge investments by raising loans from the Corporations or from the financial institutions, it may not be appropriate to set aside the sale and dispossess the auction purchaser.
31. Under the above circumstances, this Court declines to interfere with the sale that was effected in favour of the auction purchaser, though it was held that the sale is null and void. But, however, in view of the above circumstances, the APIDC is directed to deposit the entire sale proceeds together with interest at 9 per cent per annum with the official liquidator, within a period of four weeks from the date of the order. Once the amount is deposited with the official liquidator, as directed by this Court, then the company court can be moved by appropriate application by any of the claimants for apportionment, in accordance with law.
32. In view of the deliberate attempt made by the APIDC, exemplary costs of Rs. 10,000 (rupees ten thousand only) are imposed on it, and the APIDC is at liberty to recover the said costs from the officers, responsible for this illegal act of conducting sale, contrary to the express order of the BIFR. The company applications are, accordingly, disposed of.