Andhra HC (Pre-Telangana)
Remu Pipes Limited, Hyd. vs Industrial Finance Corporation Of ... on 31 August, 2001
Equivalent citations: 2001(6)ALD11, 2001(5)ALT265, [2002]108COMPCAS385(AP)
Author: S.B. Sinha
Bench: S.B. Sinha, B. Subhashan Reddy
JUDGMENT S.B. Sinha, C.J.
1. Correctness of a decision of a Division Bench of this Court in OSA No.16 of 1995 disposed of on 19-11-1998 having been doubted the matter has been referred to this Bench.
2. Remo Pipes Limited was directed to be wound up by an order in RCC No.9 of 1999. An official liquidator was appointed on 14-6-1999. The said winding up application was filed at the instance of State Bank of India. A chambers summons was taken by the official liquidator praying for sale of assets of the company in liquidation by public auction. The said application was allowed by an order dated 4-12-2000. Auction was held on 24-1-2001 at the registered office of the company. A report was submitted by the official liquidator as to the result of the said auction on receipt whereof by an order dated 19-2-2001 the learned Company Judge directed the official liquidator to invite sealed tenders from prospective purchasers for the sale of assets of the company in liquidation upon making adequate publicity therefor. Inspite of the aforementioned advertisement and alleged efforts put in by the official liquidator no person came forward to purchase the assets of the company. The 7th respondent made an offer.
3. The official liquidator in the aforementioned situation himself took out a chambers summons praying therein that secured creditors be directed to go in for private negotiations with their existing clients. On the date of hearing the 3rd respondent as also the 1st and 2nd respondents expressed their willingness to negotiate with the prospective purchasers.
4. However, before the learned single Judge an order passed in OSA No.16 of 1995 was produced as a result whereof a doubt was entertained by the learned Judge whether such a procedure can be adopted.
5. Let us now consider the order dated 19-11-1998 passed in OSA No.16 of 1995. In the said case a company was wound up on a petition filed by a Creditor. In the meantime, the Industrial Development Bank of India and other financial institutions filed suits in the High Court at Mumbai which were allowed to be continued by an order of this Court dated 22-3-1991. An application was filed by the Bank before this Court praying for the following reliefs:
to direct the official liquidator to sell the movable and immovable assets of the company in liquidation to the 7th respondent viz., Chaitanya Papers Limited on the terms and conditions contained in the letter of the applicant-bank as modified by its letter dated 8-9-1992; and to direct the official liquidator to transfer the entire properties of the company to the 7th respondent.
whereupon the learned Company Judge allowed the said application observing:
After hearing all the Counsel, I am of the view that the proposal given by the 7th respondent has to be accepted. It is not the case of the official liquidator, or the second respondent that they have identified any party who is prepared to offer better terms than the terms offered by the 7th respondent. The entire machinery has been kept idle for several years and as submitted by the Counsel for the applicant that the same is likely to be disposed of as junk, if the proposal is not accepted. According to him there are no prospective purchasers, and therefore, the applicant as well as respondent Nos. 3 to 6 have accepted the prpposal in their joint meeting after taking into consideration the overall situation, including the value of the machinery, the liabilities and the demand for such old machinery in the market, etc. In view of all the above circumstances, I am of the view that the application has to be allowed.
There-against the official liquidator preferred the aforementioned appeal - OSA No. 16 of 1995.
6. The contention of the official liquidator was that the Court ought not to have granted such permission having regard to the provisions of sub-section (3) of Section 458 of the Act. It was contended that the official liquidator had never been associated with the consultative process.
7. The learned Judges agreed with the contention of the official liquidator to the effect that normally the sale of company's properties is done by advertisement or by open auction which could not be given a goby as the same would be opposed to the provisions of the Companies Act. The learned Judges were of the opinion that the official liquidator ought to have been taken into confidence and the proposal should have been placed before him for his consideration and concurrence so that appropriate steps could be taken by him to move the Court. It was held:
Section 456 makes it clear that the custody and control of the property, effects and actionable claims of the company will be vested in the liquidator soon after winding up order is passed. Section 457 confers various powers on the liquidator which he can exercise with the sanction of the Court. One such power is to sell immovable and movable properties and actionable claims of the company by public auction or private contract with power to transfer the whole thereof to any person or body corporate or to sell in parcels. The exercise or proposed exercise of the powers conferred by Section 457 is subject to the control of the Court. (vide sub-section (3) of Section 457). In the face of these provisions, it could not be open to the creditors to take independent decision without reference to the liquidator to sell the properties of the company under liquidation to a purchaser of their choice and then apply to the Court to issue appropriate directions to the official liquidator to give effect to such deal. This would be virtually relegating the liquidator to a secondary position and amounts to acting in derogation of the powers advisedly conferred on the liquidator, subject to the overall superintendence of the company Court.
It was further observed:
But, such a situation has not arisen here. The entire transaction has been finalised without reference to the official liquidator and a 'fait-accompli' is placed before the Court to put its seal of approval on the proposal. Such an action on the part of the creditors is not contemplated by the Act, though the creditors may be virtually interested in the proper realisation of the value of the assets of the company.
8. The learned Judges held that a direction by the learned single Judge on an application filed by one of the secured creditors, does not satisfy the legal requirement. The learned Judges, however, observed that the offer of the 7th respondent being the best in the situation of the matter and having regard to the fact that the amount realised on the disposal of the assets would not be sufficient even to meet the claims of the secured creditors and as no other parties' interest would suffer the clock shall not be set back and the deal should not be set at naught. It was directed:
We are inclined to give liberty to the applicant-bank and other financing institutions - respondents 1, 3 to 6 to negotiate with the 7th respondent and to arrive at a final settlement and then appraise the official liquidator of the decision. If for any reason, the applicant-bank and other respondents find it difficult to arrive at a consensus broadly in terms of the earlier understanding or the negotiations with the 7th respondent fail, the official liquidator in consultation with respondents 1, 3 to 6 will take proper steps for sale by public auction or by any other beneficial mode of sale subject to the permission of the Court.
9. Mr. Anil Kumar, the learned Counsel appearing for the Official Liquidator, inter alia submitted that having regard to the provisions contained in sub-section (1) of Section 456 the assets of the company vest in the official liquidator. The learned Counsel would contend that as in terms of Section 457 (c) of the Act read with Rules 272 and 273 of the Company Court Rules, the official liquidator alone can sell the property, the decision of the Division Bench must be held to be correct. Strong reliance in this connection has been placed on Indian Textiles v. G. State Financial Corporation, (1994) 81 CC 599, Sirohi Cements Limited In Re (Raj), (1998) 94 CC 769, A.P.S. Financial Corporation v. Electrothermic Private Limited, 1996 (2) ALD 213, Sunitibala Debi v. Dharae Sundari Debi, AIR 1919 PC 24. Our attention in this connection has also been drawn to Section 46 of the Companies Act and Section 28 of the Provincial Insolvency Act.
10. Mr. G. Krishna Murthy, the learned Counsel appearing on behalf of the 2nd caveator, on the other hand, submitted that right of the liquidator is circumscribed by the provisions contained in Sections 456 and 457 of the Companies Act. Strong reliance in this connection has been placed on Maharashtra State Financial Corporation v. Official Liquidator, Bombay H.C., .
11. Before proceeding to consider the r.ival contentions, we may notice the relevant portion of Sections 456 (1) and (2), 457 and 458 of the Companies Act, Rules 272 and 273 of the Companies (Court) Rules, 1959 and Section 28(6) of the Provincial Insolvency Act, 1920 which read thus:
456. Custody of company's property :--
(1) Where a winding up order has been made or where a provisional liquidator has been appointed, the liquidator or the provisional liquidator, as the case may be, shall take into his custody or under his control, all the property, effects and actionable claims to which the company is or appears to be entitled.
(2) All the property and effects of the company shall be deemed to be in the custody of the Court as from the date of the order for the winding up of the company.
457. Powers of Liquidator :--(1) The liquidator in a winding up by the Court shall have power, with the sanction of the Court,--
(c) to sell the immovable and movable property and actionable claims of the company by public auction or private contract, with power to transfer the whole thereof to any person or body corporate, or to sell the same in parcels;
(d) to raise on the security of the assets of the company any money requisite;
(e) to do all such other things as may be necessary for winding up the affairs of the company and distributing its assets.
(3) The exercise by the liquidator in a winding up by the Court of the powers conferred by this section shall be subject to the control of the Court; and any creditor or contributory may apply to the Court with respect to the exercise or proposed exercise of any of the powers conferred by this section.
458. Discretion of liquidator :--The Court may, by order, provide that the liquidator may exercise any of the powers referred to in sub-section (1) of Section 457 without the sanction or intervention of the Court :
Provided always that the exercise by the liquidator of such powers shall be subject to the control of the Court.
Rule 272. Sale to be subject to sanction and to confirmation by Court :--Unless the Court otherwise orders, no property belonging to company which is being wound up by the Court shall be sold by the Official Liquidator without the previous sanction of the Court, and every sale shall be subject to confirmation by the Court.
Rule 273. Procedure at sale :--Every sale shall be held by the Official Liquidator, or, if the Judge shall so direct, by an agent or an auctioneer approved by the Court, and subject to such terms and conditions if any, as may be approved by the Court. All sales shall be made by public auction or by inviting sealed tenders or in such manners as the Judge may direct.
Section 28 of the Provincial Insolvency Act, 1920 :
Effect of an order of adjudication:-
(6) Nothing in this section shall affect the power of any secured creditor to realise or otherwise deal with his security, in the same manner as he would have been entitled to realise or deal with it if this section had not been passed.
12. The aforementioned provisions in no unmistakable terms show that the assets of the company vest in the Court and not in the official liquidator. The official liquidator has also no absolute say in the matter of disposal of the company's property.
13. On a winding up order being made thus, (1) the property of the company does not vest in the official liquidator as in the case of insolvency. The property remains the property of the company and the liquidator is only given custody thereof. The Court although have jurisdiction, would not ordinarily interfere in the matter of obtaining possession by the official liquidator except on special grounds for breaking open locks, etc. Any secured creditor may take possession of the property only with the permission of the Court. Since the object of winding up proceedings is to put secured creditors on par and pay them pari passu, attachment effected by the revenue authority on the immovable properties of the company in respect of statutory dues would be ineffective and the liquidator could take the properties into his custody free from all attachments and realise the value thereof according to the winding up procedures. The liquidator is the custodian of the property and is merely a statutory trustee. The assets of the properties of a company directed to be wound up come into the custody of the Court.
14. The Privy Council in Ripon Press and Sugar Mills Company v. Gopal Chetty, AIR 1932 PC 1 = (1932) 2 Com Cases 70, held that the company's assets are to be treated as being in the custody of the Court.
15. The power of the liquidator in terms of Section 457 including the power to sell the immovable property can be exercised only with the sanction of the Court. The Court even in a case where it grants sanction, may exercise its jurisdiction by issuing such suitable directions as it may think fit and proper.
16. Therefore, the right of the Court to issue a direction which is beneficial to the company or its creditors whether secured or otherwise cannot be taken away. The property of a company which has been wound up is deemed to be vested in a Court. The Court thus has all the powers to issue necessary directions which would subserve the interests of the creditors.
17. Even in relation to sale of properties of the liquidated company the Court has the power to modify the terms and conditions.
18. in Industrial Finance Corporation v. Official Liquidator, High Court, Calcutta, , it has held:
1. There is no standard or uniform pattern to be followed in such cases. The Court should adopt such procedure as would avoid a situation where the Court is put to the task of negotiating the terms of the sale with the parties. It would invite criticism and would also be against the dignity of the Court. Better it would have been to announce the sale on the basis of competitive tenders including payment plan and then to accept the most appropriate price and payment plan.
2. In this case the advertisement was of a blank nature and the details had to be filled subsequently and, therefore, the Court had power to change the mode and period of payment.
3. The purchaser had no right to walk out of the sale only because of the rescheduling of the instalments of payment and that he had not acted fairly in failing to pay the first instalment.
4. The purchaser's interest had to be kept in mind because he had made certain investments and had re-employed the whole labour but because all the assets were transferred to him on the basis of deferred payments, it was desirable that he should be required to pay more expeditiously.
19. Yet again in United Bank of India v. Bharat Electrical Industries Limited, AIR 1994 Cal 283 = (1993) 76 CC 317, although the original reserve price was Rs.2.5 crores, having regard to the fact that the sale was advertised five times and the highest bid remained below that amount all the times, an order confirming the sale at Rs.1 crore by the Court was held to be no suffering from any illegality or irregularity.
20. The Division Bench in OSA No.16 of 1995 was dealing with a peculiar situation and merely observed, having regard to the facts and circumstances of the case that the official liquidator should have been taken into confidence. It did not hold that the assets of the company vest in the official liquidator or the Court cannot pass an appropriate direction.
21. There cannot be any doubt whatsoever that the ownership of the company liquidated remains with the company but only by reason of a legal fiction, the properties remain in the custody of the Court in relation thereto the official liquidator merely takes the same into his custody or under his control.
22. All requisite and effective directions can thus be issued by the Court.
23. We may now consider the decisions cited at the Bar.
24. In Maharashtra Stale Financial Corporation v. Official Liquidator, Bombay H.C. (supra) Sujatha Manohar, J., (as the learned Judge then was) held:
.....Therefore, the official liquidator cannot demand possession of the property from a mortgagee lawfully in possession of it. Also, the rights conferred on a financial corporation as a mortgagee under Section 29 of the State Financial Corporations Act are not obliterated when the company is in winding up. It may have to exercise its right to take possession with the permission of the Court. Also, the statutory right which is given to a financial corporation under Section 29 to sell the property has to be exercised consistently with the rights of a pari passu charge holder in whose favour a statutory charge is created by the proviso to Section 529 of the Companies Act when the company is in liquidation. Therefore, such a power can be exercised only with the concurrence of the Official Liquidator and the Official Liquidator is required to take the permission of the Court before giving such concurrence since he is an officer of the Court and is required to act under the directions of the Court while exercising his powers on behalf of the workers. However, we entirely agree with the learned Judge when he says in the above judgment that for the implementation of the priorities under Section 529-A of the Companies Act the official liquidator must take necessary steps to file the claim of the workman before the Court as set out in the judgment and that'this is not dependent on the statement of affairs being filed by the Directors of the company. This, however, is not a question which requires determination in the present case and, hence we do not propose to go into this question. We respectfully differ from this judgment in so far as it lays down that if there are workmen's dues, only the official liquidator can sell the properties which are secured to a state financial corporation if the company is wound up.
25. In Sirohi Cements Limited, In Re, (1998) 94 CC 769, a learned single Judge of the Rajasthan High Court merely followed the decision of the Apex Court in Central Bank of India v. Elmot Engineering Company, , wherein it was observed that the object of Section 446 is to safeguard the assets of the company in winding up against wasteful or expensive litigation as far as matters which could be expeditiously and cheaply decided by the company Court are concerned, but did not lay down any legal principles. It merely followed certain directions issued by the Apex Court.
26. In Indian Textiles v. G. State Financial Corporation (supra) a learned single Judge of the Bombay High Court held that the State Financial Corporation has to take possession of or put the property is sale only upon taking consent of the Court.
27. In A. P. State Financial Corporation v. Official Liquidator, , upon referring to the decisions of Maharashtra State Financial Corporation (supra) it was observed: "Having regard to the fact that the financial corporation has taken recourse to Section 29 of the Act, it was not necessary to approach the Court to take permission to stay outside the winding up proceedings". It was merely held that the official liquidator could represent the workmen and enforce pari passu charge in favour of the workmen.
28. In A.P.S. Financial Corporation v. Electrothermic Private Limited, (supra), a Division Bench of this Court followed A.P. State Financial Corporation v. Official Liquidator (supra) and the decision in International Coach Builders v. K.S.F.C., (Kar.), (1994) 81 CC 19 and held:
.....Once it comes to the notice, as rightly held in the case of A.P. State Financial Corporation v. Official Liquidator that the workmen's claims are unpaid, the liquidator has a duty to realise from the assets which are under a debt charge of the financial corporation, their claims. The same, on principle, being pari passu with the dues of the financial corporation, has to be applied to the claims of any other secured creditor provided, of course, when the assets of the company are insufficient to meet all pan passu claims.
APSFC cannot claim appropriation of the assets under its charge unless it is found that the remaining assets of the Company are sufficient to meet all other debts. We have the support for the above view of the judgment of the Madras High Court in K. Sardambai v. Jagannathan [(9) (1972) 42 CC 359], in which it is pointed out that Section 529 applies to all kinds of winding up and, it must be noted, only to an insolvent company, though every company in liquidation may presumably be treated as coming under the Section unless its assets are shown to be sufficient to meet the liabilities in full including interest and the expenses of the winding up. In other words, it means a company which is being wound up on account of its inability to pay debts.
The view that we have taken leads us to the conclusion that the financial corporation shall stand in the queue of the secured creditors pan passu with the claim of the State Bank of Hyderabad. As the case appears to us fully covered by Section 529(1)(c) of the Companies Act, 1956, the liquidator has a duty to bring this fact to the notice of the Court and to ensure that the two secured creditors apportion, if their debts in full are not likely to be discharged by the assets of the company, in such a manner that they get their claims discharged in proportion to their claims strictly pari passu.
29. Having regard to the fact situation obtaining in this case we are of the opinion that as the official liquidator himself has made an application, the Division Bench decision of this Court cannot be said to have any application in the instant case and it will be open to the learned Company Judge to proceed to consider the case on merits and pass an appropriate order thereupon. However, the decision of the Division Bench to the extent it is inconsistent with the findings of this Court must be held to have not correctly laid down the law.
30. The matter is accordingly remitted to the learned company Judge.