Y.Jayashankar vs J.Pattabiraman on 6 September, 2022

[Cites 48, Cited by 0]

Madras High Court

Y.Jayashankar vs J.Pattabiraman on 6 September, 2022

Challenging the order passed in A.No.319 of 2017 in I.P.No.8 of 2017 dated 08.10.2018, annulling the order of the Adjudication of the Appellants as Insolvents, the Appellants have preferred the above Intra-Court Appeal.

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2.The Appellants, who were partners of an unregistered Partnership Firm, were adjudged as Insolvents in their petition in I.P.No.8 of 2017 dated 31.07.2017. Their claim in the said petition was that they had collected deposits from friends and relatives to fund their business activities, namely Construction and Development of Apartments. They had defaulted in repayment of these deposits and hence they filed the petition to adjudge them as Insolvents. According to the Appellants, the total liability of the Partnership Firm was to the tune of Rs.38,69,06,603/- (Rupees Thirty Eight Crores Sixty Nine Lakhs Six Thousand Six Hundred and Three Only), out of which, Rs.25,04,40,993/- (Rupees Twenty Five Crores Four Lakhs Forty Thousand Nine Hundred and Ninety Three Only) was towards the repayment of deposits to the various Depositors and their assets were to the tune of Rs.5,10,70,761/- (Rupees Five Crores Ten Lakhs Seventy Thousand Seven Hundred and Sixty One only). The liability of the Appellants also exceeded their assets.

3.Meanwhile, it appears that some of the Depositors had lodged an FIR against the Appellants for the offences under Sections 406, 420, 120B IPC and Section 5 of the Tamil Nadu Protection of Interests of Depositors 3/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 (TNPID) Act, 1997 on 26.01.2018, registered in Crime No.1 of 2018 on the file of Inspector of Police, Economic Offences Wing, Guindy, Chennai- 600 032. After that, the first Respondent and other Depositors filed applications before this Court to annul the order adjudging the Appellants as Insolvents under Section 21 of the Presidency Towns Insolvency Act, III of 1909 (Insolvency Act). The first Respondent, in his petition seeking annulment, stated that the Appellants cheated him to the tune of Rs.81,43,404/- (Rupees Eighty One Lakhs Forty Three Thousand Four Hundred and Four only) by the Appellants; that the Appellants had transferred immovable properties to defeat and defraud the Depositors; that the Appellants had suppressed many facts in their Insolvency Petition; that the first Respondent and others were Depositors within the meaning of Tamil Nadu Protection of Interests of Depositors (in Financial Establishment) Act, 1997 (TNPID) and only the Special Courts constituted under the said Act will have Jurisdiction. This Court had no jurisdiction to entertain the Insolvency Petition.

4.The Appellants filed a Counter inter alia stating that they had no intention to cheat the Depositors and that they had suffered a genuine loss in their business and could not repay the deposits; and that they had not 4/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 committed any fraud. Section 6 (2) of the TNPID Act cannot be invoked to state that the Appellants were not entitled to intiate proceedings under the Presidency Towns Insolvency Act, 1909 (Insolvency Act). The Partnership Firm was not a Financial Establishment, as they were not carrying on the business of receiving deposits and their primary business was construction business, and hence, they cannot be prosecuted under the TNPID Act.

5.The learned Single Judge, by a common order passed in Application No.319 of 2017 and Application Nos.17 and 18 of 2018 filed by the Depositors praying for annulment of the order of adjudication as Insolvents found that the Partnership Firm is a Financial Establishment, within the meaning of Section 2(3) of the TNPID Act. Because of Section 6(2) of the TNPID Act, the TNPID Court will have jurisdiction in respect of any matter to which the provisions of the TNPID Act apply and therefore, the learned Single Judge found that order of adjudication of the Appellants as Insolvents, should be annulled and directed to transfer the matters to the Special Court for adjudication in accordance with the provisions of the TNPID Act.

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6.Heard Mr.Yasodvardhan, learned Senior Counsel for the first Appellant, Mr.R.Singaravelan, learned Senior Counsel for the second Appellant, Mr.K.Krishnaswamy, learned Counsel for the first Respondent and Mr.K.V.Ananthakrushnan, learned counsel for the Second Respondent (Official Assignee).

7.Mr.Yasodvardhan, learned Senior Counsel for the first Appellant submitted that the Courts cannot invoke Section 6(2) of the TNPID Act for annulling an order of adjudication validly passed. The order of adjudication on the date when it was passed did not suffer from any infirmity and hence ought not to have been annulled. The learned Senior Counsel would further submit that the Insolvency Court has powers under Section 7 of the Insolvency Act to decide all questions that may arise in Insolvency including questions of priorities, for doing complete justice. Therefore, the first Respondent would not be affected if the Appellants were adjudged as Insolvents. The learned Senior Counsel further submitted that the Special Court constituted under the TNPID Act has no jurisdiction to adjudicate a person as Insolvent and only the Insolvency Court would be competent to adjudicate a person as an Insolvent. The Special Court under the TNPID Act will exclude the jurisdiction of other Courts only to the 6/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 matters to which the provisions of TNPID Act apply. The TNPID Act does not provide for the adjudication of persons as Insolvents. In any event, Section 6 (2) of TNPID Act cannot be the sole basis for annulling an order adjudging the Appellants as Insolvents.

8.Mr.R.Singaravelan, learned Senior Counsel for the second Appellant, would submit that the Appellants were partners of an unregistered Partnership Firm carrying on the Apartment construction business since 1993. Since the Appellants suffered financially, they generated revenue by inviting deposits from friends and relatives. One Mr.R.Sridhar forced the Appellants to sell their personal properties of the partners namely Mr.Y.Balaji and Mr.Y.Jaishankar to him, as he had volunteered to help them with fresh funding if they sold their properties to him, for the loan already advanced by him. The said Mr.R.Sridhar did not support the Appellants financially after the sale, and hence they were unable to repay the Depositors and forced to file the petition for adjudicating them as Insolvents. The learned Senior Counsel further submitted:-

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(a) that Section 6 (2) of TNPID Act cannot be relied upon to annul an order of adjudication as Insolvent.

(b) that the TNPID Act intends to protect the Depositors and not other Creditors; that there is no provision under the TNPID Act to adjudicate any person as Insolvent that the Insolvency Act is more comprehensive and practical for distribution of assets of the Insolvent, including to set aside malafide transfers made by the Insolvent within two years before the Insolvency. The TNPID Act does not provide for the attachment of the properties, if the properties have not been acquired from the money collected as deposits. However, under the Insolvency Act, there are no such restrictions, and it covers eventualities that protect the Depositors. The TNPID Act does not provide for a simple procedure for realisation of money of the Depositors, and it does not cover the interest of the other Creditors.

(c) that it would be in the interest of the Appellants and the Depositors if the properties are vested with the Official Assignee and are dealt under the Provisions of the Insolvency Act than under the TNPID Act. The learned Senior Counsel relied upon the Judgment of the learned 8/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 Single Judge of the Bombay High Court in Aryarup Tourism Club Resorts Pvt. Ltd & others reported in [(2017) 203 Comp Cas 220 (Bom)]. The Bombay High Court held that where a Company prosecuted under the Maharasthra Protection of Interest of Depositors Act was under

liquidation, the properties would vest with the official liquidator.

(d) that the TNPID Act would not apply to the Appellants, since they would not fall within the definition of Financial Establishment as defined under Section 2 (3) of the TNPID Act.

(e) that TNPID Act cannot be interpreted to defeat a person's right to be adjudged as an Insolvent. The bar under Section 6(2) is only in respect of matters to which the provision of TNPID Act applies. The adjudication of a person as Insolvent is a fundamental right, and the Court cannot annul the order of adjudication merely because a person is accused of an offence under the TNPID Act. Section 6(2) of the TNPID Act must be construed in such a way, and a purposive interpretation must be given so that it does not take away a person's right to be adjudged as an Insolvent. 9/ 41

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(f) that Bankruptcy and Insolvency is found in list three of Schedule VII of Constitution of India as Entry No.9. In view of Article 246 of the Constitution of India, since the Central Government has enacted a law in the form of Presidency Towns Insolvency Act, the State Government cannot enact any law given the doctrine of “occupied field”; and hence, prayed for setting aside the order of annulment passed by the learned Single Judge. The learned Senior Counsel relied upon the following judgments in support of his contentions:-

(a) K.K.Baskaran vs the State reported in (2011) 3 SCC 793.

(b) Vishwapriya India Limited and others vs. The Government of Tamil Nadu reported in (2015) 4 CTC 705.

(c) Thirupa Chits Private Ltd Vs. Deputy Superintendent of Police Economic Offences Wing reported in 2019 SCC online NCLT 3392.

(d) Indian Overseas Bank vs RCM Infrastructure Ltd and another reported in 2022 SCC Online SC 634.

(e) Aryarup Tourism Club Resorts Private Limited and others reported in [(2017) 203 Comp Cas 220 (Bom)] 10/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019

(f) Nahar Industrial Enterprises Ltd vs Hong Kong and Shanghai Banking Corporation reported in (2009) 8 SCC 646.

9.Mr.K.Krishnaswamy, learned counsel appearing for the first Respondent submitted:

(a) that the Appellant Firm was carrying on the business of receiving deposits, even if they were also carrying on the business of construction.

Hence, the Partnership Firm would fall within the definition of Financial Establishment under Section 2 (3) of the TNPID Act.

(b) that the Insolvency Act is the general Act protecting the interest of unsecured creditors and the TNPID Act is the special Act, therefore the special Act prevails over the general Act. The TNPID Act is equally effective and it takes care of all situations provided under the Insolvency Act.

(c) that the Judgement of the Bombay High Court in the case of Aryarup Tourism Club Resorts Private Limited and others reported in [(2017) 203 Comp Cas 220 (Bom)] relied upon by the learned Senior Counsel for the Appellants to the effect that the Maharashtra Depositors Act does not bind the Official liquidator may not be applicable, since the Maharashtra Depositors Act is silent on the winding up of the Company 11/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 whereas, under the TNPID Act there is a specific provision which ousts the jurisdiction of the Insolvency Court.

(d) that the adjudication of a person as Insolvent is only a statutory right, is not absolute and hence subject to restrictions. The TNPID Act will prevail over the Insolvency Act in so far as the Depositors who are protected under the TNPID Act.

(e) that if any surplus is left after the distribution of the proceeds to the Depositors it is always open for the Appellants to approach the Insolvency Court for adjudicating them as Insolvents.

(f) that the learned Single Judge has passed a common order in three applications filed by three different Depositors and the Appeal has been filed only in respect of the order passed in Application No.319 of 2017. The order passed in other applications annulling the order of adjudication of the Appellants as Insolvents is unchallenged. Therefore, the learned counsel would submit that the present Appeal is barred by Res Judicata. Mr.S.Vasudevan, learned counsel for the first Respondent, relied upon the following judgements in support of his submissions:-

1.State of Maharashtra Vs. 63 Moons Technologies Limited reported in 2022 SCC Online SC 506 12/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019

2.Helios and Matheson Information Technology Ltd. vs. The State represented by the Deputy Superintendent of Police, reported in 2015 SCC Online Mad 7398.

3.K.K.Baskaran vs. State Represented by its Secretary, Tamil Nadu and others reported in (2011) 3 SCC 793.

4.Innoventive Industries Limited Vs. ICICI Bank and another reported in (2018) 1 SCC 407.

10.Mr.K.V.Ananthakrushnan, learned counsel for the Official Assignee made his submissions and also filed the report of the Official Assignee. Broadly his submissions are:

(a) that the Appellants' action of receiving deposits from the general public and defaulting squarely falls within the TNPID Act.

(b) the official Assignee has not received any secured claim in the estate and the claims have been filed only based on the deposits and receipts issued to the Depositors.

(c) the Appellants and one Mr.R.Sridhar are hand in glove. The sale of properties of the Appellants in favour of the said Mr.R.Sridhar are sham and nominal transactions inasmuch as the Appellants have not come out 13/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 with the truth in their Insolvency Petition as to how and in what manner the Appellants had disbursed sale proceeds of the property. That apart, the said Mr.R.Sridhar after purchase of the property, had given the same as collateral for the loans taken by the Appellants with the very same financial institutions on the same day. Thus, the Appellants have indulged in sham transactions to defeat the creditors. In fact, the Appellants themselves have admitted that the sale made to said Mr.R.Sridhar was by way of threat and coercion and is not supported by adequate consideration.

(d) the creditors other than the Depositors are primarily relatives and friends.

(e) That the appellants after the order of adjudication filed an application before this Court praying for stay of the Investigation under TNPID Act. The learned Master intially granted protection. Thereafter, the learned Single Judge of this Court vacated the order and observed that it was open for the Investigating Officer to arrest the Insolvents during the course of the investigation of the FIR lodged by the Depositors.

11.We have given our anxious consideration to the submissions made on either side and the pleadings on record.

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12.The Admitted facts are that the first Respondent and others have filed an FIR against the Appellants under various provisions of the Indian Penal Code and under Section 5 of the TNPID Act registered, in Crime No.1 of 2018 on the file of Inspector of Police, Economic Offences Wing, Guindy, Chennai – 600 032. The deposit receipts filed by the first respondent would indicate that the Depositors were promised interest at the rate of a 20% p.a showing the date of deposit, the deposit amount and the maturity value. These indicators suggest that the Appellants received deposits, as defined under TNPID Act from the first Respondent and the other Depositors. In any case, the question as to whether the Appellants would fall within the definition of Financial Establishment cannot be gone into in these proceedings. It is for the Investigating Officer to investigate and file a final report in accordance with law. Admittedly, the Appellants have not challenged the proceedings under the TNPID Act. The only question involved in this Appeal is whether the order of the learned Single Judge annulling the order of adjudication of the Appellants as Insolvent is sustainable in law and facts.

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13.The learned Senior Counsels for the Appellants submitted that a person’s right to be adjudged as Insolvent is a constitutional right, and the TNPID Act cannot take away that right. The learned Senior Counsels further submitted that the Presidency Towns Insolvency Act's provisions are more comprehensive and deal with all situations that have not been contemplated under the TNPID Act. The Insolvency Act takes care of all Creditors including the Depositors. The sum and substance of the learned Senior Counsel's submission is that the order of adjudication as Insolvents should not have been annulled because the Appellants have been accused of the offence under Section 5 of the TNPID Act. The two Acts operate in different fields. The TNPID Act does not provide for the adjudication of a person as Insolvent. Therefore, the learned Senior Counsels would submit that notwithstanding whether the TNPID Act or the Insolvency Act would apply for distribution of the assets, one cannot take away a person's right to be adjudicated as an Insolvent because he is facing an FIR under TNPID Act.

14.The learned counsel for the Respondent, on the other hand, would submit that the TNPID Act is a special enactment that it is comprehensive and beneficial for the Depositors. If the properties of the Insolvents are 16/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 vested with the Official Assignee, the depositors would be treated as unsecured creditors. In the order of the priority of debts, they would be relegated after secured creditors, Government dues, statutory dues, etc., Whereas under the TNPID Act the property would be distributed amongst only the group of Creditors namely the Depositors. That is why Section 6(2) of TNPID Act expressly excludes the jurisdiction of the Courts under Insolvency Acts in respect of any matter to which the provisions of TNPID Act apply. The learned counsel for the Respondent further submitted that once the complaint under Section TNPID Act is filed against a person, his right to be adjudged as Insolvent is taken away due to Section 6 (2) and Section 14 of the TNPID Act.

15.To appreciate the rival contentions, we will have to examine the scope and ambit of the two relevant provisions of the TNPID Act, namely Section 6(2) and Section 14. For easy understanding, the two provisions of Sections 6 and 14 of TNPID Act are extracted hereunder:

“6. Special Court. - (1) For the purpose of this Act, the Government may, with the concurrence of the Chief Justice of the High Court, by notification, constitute [one or more Special Courts for such area or areas or such cases as may be specified in the notification] in the cadre of a District and 17/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 Sessions Judge.

(2) No Court including the Court constituted under the Presidency Towns Insolvency Act, 1909 (Central Act III of 1909) and the Provincial Insolvency Act, 1920, (Central Act V of 1920) other than the Special Court shall have jurisdiction in respect of any matter to which the provision of this Act apply.

(3) Any pending case in any other court to which the provisions of this Act apply shall stand transferred to the Special Court.

(4) [When trying any case, the Special Court may also try any offence, other than an offence specified in Section 5, with which the accused may, under the Code of Criminal Procedure, 1973 (Central Act 2 of 1974) be charged, at the same trial.] ...

“14. Act to override other laws. - Save as otherwise provided in this Act, the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any custom or usage or any instrument having effect by virtue of any such law.” We could see that Section 6 of the TNPID Act deals with the Constitution and the jurisdiction of the Special Court. Section 6(3) 18/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 provides for the transfer of any pending case to which the provisions of this Act apply to the Special Court. For instance, if a trial is pending for an offence under Section 420 IPC against a Financial Establishment for cheating the Depositors, the case would be transferred to the Special Court. Section 6(2) excludes the jurisdiction of all Courts including the Courts constituted under the Insolvency Act, in respect of matters to which provisions of the Act apply. Hence, it is necessary to find out the matters that can be dealt with by the Special Court constituted under TNPID Act.

16.Section 7 of TNPID Act deals with the powers of the Special Court regarding attachment, sale, realisation and distribution of the properties of the Financial Establishment or any other person. The Special Court has the power to make the attachment of properties made by the Government under Section 3 of TNPID Act absolute. Before making the order of attachment absolute, the Special Court has the power to issue notice to all persons likely to have any interest or title in the Property of the Financial Establishment, call for objections, and pass orders based on the objections, if any. Under Section 7(5) of the TNPID Act, the Special Court has power to deal with the objections and follow the procedure of 19/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 the Court hearing a suit under Civil Procedure Code. The Special Court can make the Ad-Interim order of attachment absolute or vary it by releasing the whole or a portion of the property from attachment. Under Section 7 (7) of the TNPID Act, where the attachment is made absolute, the Special Court has the power to direct the competent Authority to sell the properties attached by public auction. The Special Court shall, on application by the competent Authority, thereafter issue direction for equitable distribution of the sale proceeds among the Depositors. Section 8 of the TNPID Act, confers power on the Special Court to order attachment of properties which have been transferred by the Financial Establishment otherwise than in good faith and without consideration. Under Section 10 of TNPID Act, the Special Court has power to safeguard the business of any person affected by such attachment or to provide for maintenance of the accused and his family members from and out of the property attached under the Act. Besides the above powers, the Special Court has the power to take cognizance of the offences committed by the accused under the Act without the accused being committed to it for trial. The Special Court under Section 6 (4) has the power to try any other offence other than Section 5 of TNPID Act which the accused may under Code of Criminal 20/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 Procedure be charged at the same trial. Thus, we find that the Special Court's jurisdiction is regarding making the order of attachment by the Government absolute after a judicial exercise and also for taking cognizance of the offences committed by the accused under TNPID Act and other allied offences. These are the matters for which the Special Court under TNPID Act will have primacy and will exclude the Jurisdiction of other Courts, including the Court constituted under the Insolvency Acts. The TNPID Court does not have any power to adjudicate a person as an Insolvent. The power to adjudicate a person as Insolvent is only with the Court under the Insolvency Act. Therefore, we cannot hold that whenever a person is accused of an offence under TNPID Act, he cannot be adjudged as an Insolvent.

17.The next question that would arise for consideration is how the assets of the person adjudged as Insolvent and facing proceedings under the TNPID Act, be dealt with. To appreciate this question, we must understand the purpose of enacting the TNPID Act. The TNPID Act was passed to protect gullible depositors who are duped with the promise of high returns. The Act therefore confers power on the Government to attach 21/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 properties of the Financial Establishment, provides a mechanism for making the attachment absolute and, after that selling the properties and equitably distribute the proceeds. In fact, under the TNPID Act, the process of attachment, making it absolute under Section 7 of TNPID Act by the Special Court and the process of selling and distributing the sale proceeds of the property are independent of the result of the Criminal proceedings that the Depositors may initiate against the offending Financial Establishment. This mechanism is not ordinarily provided for other offences. One may note that under the Criminal Amendment Ordinance, 1944, the disposal of the attached property is only after the termination of the Criminal Proceedings. The TNPID Act provides exceptional procedure to give speedy remedy to the victims. Therefore as held by the Apex Court in KK Baskaran vs. State represented by its Secretary, reported in (2011) 3 SCC 783, the State is the custodian of welfare of the citizens as parens patriae. It has taken the role of safeguarding the interest of the gullible investors.

18. The victims under the TNPID Act, form a distinct class whose interest is safeguarded by the Government. We cannot equate their claims with the claims of other unsecured creditors. Their claim has to take 22/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 precedence. Therefore, the consequential question would be in which position they would be placed in the order of priority for distribution of assets.

19.Both the Counsels concede that there are no direct judgements on this issue as to how the assets of an Insolvent has to be distributed, if he is facing prosecution under TNPID Act. The learned Senior Counsel for the Appellants relied upon the following passages in the Judgement of the learned Single Judge of the Bombay High Court in Aryarup Tourism Club Resorts Pvt. Ltd & Others (cited supra).

111. In my view the powers of competent authority appointed under the MPID Act and the MPID Court does not supersede or prevail upon the powers of the Official Liquidator or of the Company Court under the provisions of the Companies Act. MPID Act is totally silent on the aspect relating to the winding up and thus if the financial establishment as defined under the provisions of the MPID Act is in winding up, then the provisions of the Companies Act, 1956 would apply to such financial establishment. The MPID Act cannot take away the powers under the Companies Act. In my view the provisions of the MPID Act and the Companies Act will have to be olr126-13g construed harmoniously by holding that on winding up of such 23/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 companies which are financial establishment as defined under the provisions of the MPID Act, assets of such wound up companies would vest in the Official Liquidator and all the creditors including the depositors/investors can lodge their claims before the Official Liquidator. The MPID Act does not contemplate a situation of winding up of the financial establishment and for adjudication of the claims of other creditors and distribution of dividend to those creditors. The creditors other than depositors who only fall within the purview of the MPID Act cannot apply for any amount of their claims before the MPID Court or the competent authority as the case may be.

120. In my view since there is no conflict between the Companies Act, 1956 and the MPID Act and both operates in different field, the Judgment of Supreme Court in case of Central Bank of India Vs. State of Kerala and others(supra) relied upon by the learned A.G.P. would not assist his case.

121. Insofar as the criminal complaints filed and FIRs having registered against the companies M/s.City Limouzines (India) Ltd. and M/s.City Realcom Ltd. and its directors referred to and relied upon by the learned A.G.P. appearing in Company Petition (L) No.234 of 2010 and Company Petition No.182 of 2012 and in Official Liquidator's Report No.126 of 2013 are concerned, those complaints are pending before criminal courts. In my view there is no olr126-13g merit in the submission of the learned A.G.P. that in view of 24/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 section 71 of the Prevention of Money Laundering Act, 2002, the provisions of the said Act shall have effect and would prevail over the provisions of the Companies Act, 1956.

128. In my view for the purpose of considering the claims of the secured and unsecured creditors, the preferential creditors and also the claims of the investors/depositors etc., the properties which are admittedly standing in the name of the companies in liquidation attached by the competent authority under the provisions of the MPID Act are required to be handed over to the Official Liquidator for the purpose of sale and physical control thereof. The competent authority is thus required to be issued an order and direction to handover the physical possession, custody and control of all such properties standing in the name of the aforesaid companies in liquidation which are attached by the competent authority under the provisions of the MPID Act to the Official Liquidator expeditiously.

We are of the view that the observations made by the learned Single Judge of the Bombay High Court may not be applicable to the facts of the instant case. As rightly contended by the learned counsel for the first Respondent, the Maharasthra Protection of Interest of Depositors Act is silent on the aspect relating to the winding up. In fact, the Bombay High Court has specifically stated in Paragraph No.111 of its Judgement that the 25/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 Maharasthra Protection of Interest of Depositors is silent on the aspect relating to winding up of a Company. The relevant portions are extracted hereunder:-

“...

In my view the powers of competent authority appointed under the MPID Act and the MPID Court does not supersede or prevail upon the powers of the Official Liquidator or of the Company Court under the Provisions of the Companies Act. MPID Act is totally silent on the aspect relating to the winding up and thus if the financial establishment as defined under the Provisions of the MPID Act is in winding up, then the provisions of the Companies Act, 1956 would apply to such financial establishment.” However, under the TNPID Act Section 6(2) expressly excludes the jurisdiction of the Insolvency Courts. Therefore, the Judgement of the Bombay High Court is inapplicable to the facts of the instant case.

20.The learned Senior Counsel for the Appellants also relied upon the following passage in the judgement of the Apex Court in Indian Overseas Bank vs RCM Infrastructure Ltd and another reported in 2022 SCC Online SC 634.

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24. It is thus clear that after the CIRP is initiated, there is moratorium for any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property including any action under the SARFAESI Act. It is clear that once the CIRP is commenced, there is complete prohibition for any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property. The words “including any action under the SARFAESI Act” are significant. The legislative intent is clear that after the CIRP is initiated, all actions including any action under the SARFAESI Act to foreclose, recover or enforce any security interest are prohibited.

25. It will also be relevant to refer to Section 238 of the IBC:

“ Section 238. Provisions of this Code to override other laws.

—The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”

26. It could thus be seen that the provisions of the IBC shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

27. It has been consistently held by this Court that the 27/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 IBC is a complete Code in itself and in view of the provisions of Section 238 of the IBC, the provisions of the IBC would prevail notwithstanding anything inconsistent therewith contained in any other law for the time being in force. A reference in this respect could be placed on the judgments of this Court in the cases of Innoventive Industries Limited v. ICICI Bank, Principal Commissioner of Income Tax v. Monnet Ispat and Energy Limited and Ghanashyam Mishra and Sons Private Limited through the Authorised Signatory v. Edelweiss Asset Reconstruction Company Limited through the Director.” In the above Judgement, we find that the Apex Court dealt with the provisions of IBC not the Insolvency Act. The IBC being a later enactment contains a specific Provision in Section 238, which provides that the Provisions of IBC shall have effect notwithstanding anything inconsistent in any other law for the time being in force. Because of this provision, the Apex Court held that IBC will prevail over the actions taken under the SARFEASI Act. In the case on hand, the TNPID Act is a later Enactment in which Section 14 states that the Act shall have effect notwithstanding anything inconsistent contained in any other law for the time being force.

21.Section 3 of the TNPID Act provides for the attachment of properties or money which have been procured from and out of the 28/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 deposits collected by the Financial Establishment or if such money or property is not available for attachment or not sufficient for repayment of deposits such other property of the Financial Establishment, the Promoter, Partner, Director, Manager or Member of the said Financial Establishment or a person who has borrowed from Financial Establishment etc., as the Government may think fit and transfer the control over the said money or property to the competent Authority. In our view the Government has power to attach the properties even if the properties vest with the Official Assignee. As elaborated earlier, the Act provides for a mechanism for the Special Court to adjudicate claims and objections of any person interested in the property. For that purpose the Special Court will have the power of the Court trying a suit while adjudicating those claims and objections. Therefore, all persons interested in or have claim over the property including the Official Assignee can object to the attachment, before the Special Court. The Special Court, on considering the objections, can decide whether to make the order of interim attachment absolute or vary or release the property from attachment. The constitutional validity of these provisions have been upheld by this Court in M/s.Thirumuruga Finance and others vs State of Tamil Nadu and another reported in 29/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 2000-3-L.W.298. The Apex Court also considered the Constitutional validity of the Act, with its amendments, in K.K.Baskaran vs. State reported in (2011) 3 SCC 793.

22.The TNPID Act has certain special provisions wherein, the Government steps in to protect gullible depositors, to identify and attach properties of the Financial Establishment. Therefore, the Depositors cannot be treated on par with other unsecured Creditors. The Depositors have to be treated as secured Creditors as regards the properties attached by the Government. As secured Creditors, it is trite that the Government and the competent Authority who act on behalf of the Depositors have the power to realise or deal with the security without reference to the Official Assignee. Section 17 of the Insolvency Act makes the said position clear. The proviso to Section 17 of the Insolvency Act makes it clear that Section 17 shall not affect the power of any secured Creditors to realise or otherwise deal with the security. However, we also make it clear if there is a prior lawful secured debt in respect of the very same property attached by the Government it is open for the secured Creditor to object under Section 7 of the TNPID Act. He can prove his bonafides and establish that his debt 30/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 is prior in point of time and lawful. The Special Court under Section 7 of the TNPID Act as we have noted earlier is competent to decide such issues.

23.It is settled law that the Secured Creditor's right will take precedence even over the crown debts. The Apex Court in Dena Bank vs Bhikhabhai Prabhudas Parekh and Co 2005 reported in (2000) 5 SCC 694 held as follows.

7.What is the common law doctrine of priority or precedence of crown debts? Halsbury, dealing with general rights of the crown in relation to property, states that where the Crown's right and that of a subject meet at one and the same time, that of the Crown is in general preferred, the rule being "detur digniori" (Laws of England, Fourth Edition Vol. 8 para 1076 at page 666). Herbert Brown states; -

"Quanta jus domini Regis et submit concurrent jus Regis preferred debt - Where the title of the king and the title of a subject concur, the king's title must be preferred. In this case detur digniori is the rule... where the titles of the king and of a subject concur, the king takes the whole... where the king's title and that of a subject concur, or are in conflict, the king's title is to be preferred" (Legal Maxims 10th edition, pp.3 5-3 6).

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https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 This common law doctrine of priority of State's debts has been recognised by the High Courts of India as applicable in British India before 1950 and hence the doctrine has been treated as "law in force" within the meaning of Article 372(1) of Constitution. An illuminating discussion of the subject made by Chagla C.J. is to be found in Bank of India v. John Bowman AIR1955Bom305 . We may also refer to Full Bench decision of Madras High Court in Manickam Chettiar v. Income Tax Officer, Madura : [1937]5ITR534(Mad) as also to two Judicial Commissioner's Court decisions in People's Bank of Northern India Ltd. v. Secretary of State for India AIR 1935 Sind 232 and Vassanbai Topandas v. Radhabai Tirathdas and Ors. Without multiplying the authorities we would straightaway come to the Constitution Bench decision in M/s. Builders Supply Corporation v. Union of India [1965]56ITR91(SC) .

...

10. However, the Crown's preferential right to recovery of debts over other creditors is confined to ordinary or unsecured creditors. The Common Law of England or the principles of equity and good conscience (as applicable to India) do not accord the Crown a preferential right for recovery of its debts over a mortgagee or pledgee of goods or a secured creditor. It is only in cases 32/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 where the Crown's right and that of the subject meet at one and the same time that the Crown is in general preferred. Where the right of the subject is complete and perfect before that of the King commences, the rule does not apply, for there is no point of time at which the two rights are at conflict, nor can there be a question which of the two ought to prevail in a case where one, that of the subject has prevailed already. In Giles v. Grover it has been held that the Crown has no precedence over a pledgee of goods. In Bank of Bihar v. State of Bihar and Ors. the principle has been recognised by this Court holding that the rights of the pawnee who has parted with money in favour of the pawnor on the security of the goods cannot be extinguished even by lawful seized of goods by making money available to other creditors of the pawnor without the claim of the pawnee being first fully satisfied. Rashbehary Ghose states in Law of Mortgage (T.L.L., Seventh Edition, p. 3 86) - 'It seems a Government debt in India is not entitled to precedence over a prior secured debt.' The Apex Court, however on the facts of that case, held that in view of a specific statutory provision in the Karnataka Law Revenue Act which gave statutory recognition to the doctrine of the State's priority for recovery of debts but also extends its applicability to private debts forming the subject matter of mortgage, judgment decree, execution or attachment 33/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 and the like, the State shall have preferential right to recover the dues over the right of the secured creditors.

24.There may be situations, where the person may first, be adjudicated an Insolvent and after that face proceedings under TNPID Act, or he may be prosecuted under TNPID Act first and thereafter adjudicated as an Insolvent, or his property may be attached by the Government under TNPID Act after his properties are vested with Official Assignee and before he sells it under Section 69 of the Insolvency Act or his property may be attached before his adjudication as an Insolvent. These are only illustrative situations. In all cases, the Government, the competent Authority, the Special Court under TNPID Act, the Official Assignee and the Insolvency Court will have to bear in mind that the Special class of Depositors, have to be treated as secured Creditors, in respect of properties attached by the Government, and made absolute by the Special Court.

25.We now propose to examine the facts of the instant case to ascertain whether the order of adjudication is liable to be annulled on the facts placed before us. Admittedly the total number of Creditors is 144, out of which 124 are Depositors. Further, the report of the Official Assignee discloses the following facts:

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(a) that the Official Assignee had received 74 unsecured claims and all these claims were from the Depositors.

(b) that the Appellants, in the personal schedule of affairs had disclosed their own family members and sister concerns as debtors.

(c) that the property bearing Door No.15, 4th cross Street, Shastri Nagar, Adyar which belonged to the first Appellant was transferred to one Mr.R.Sridhar for a consideration of Rs.2,27,85,000/- (Rupees Two Crores Twenty Seven Lakhs Eighty Five Thousand Only) by Sale Deed registered as a document number 446 of 2017 dated 28.02.2017. Likewise, the property bearing Door No.8, Rangachari Road which belonged to the third Appellant was transferred to said Mr.R.Sridhar for a total sale consideration of Rs.4,12,01,000/- (Rupees Four Crores Twelve Lakhs One Thousand only) by Sale Deed registered as Document No.360 of 2017 dated 09.02.2017. The said Mr.R.Sridhar deposited the title Deeds of the two properties as collateral security for the mortgage loan taken by the M/s.L.C.S City Makers Private, limited which belongs to the Appellants.

(d) that the Appellant's subsequent stand that the sale made in favour of said Mr.R.Sridhar was under threat, coercion and undue influence has not been disclosed in their petition filed for their adjudication as 35/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 Insolvents. This conduct of the Appellants ought to be taken into consideration, while deciding the question of annulment of their adjudication.

26.We find that the Appellants have now taken a stand that the properties of the first Appellant and the third Appellant were sold for a sum of Rs.6,39,86,000/- (Rupees Six Crores Thirty Nine Lakhs Eighty Six Thousand only) totally, though the market value was Rs.14,00,00,000/- (Rupees Fourteen Crores only) to settle the loan of Rs.6,08,00,000/- (Rupees Six Crores Eight Lakhs Only) advanced by the said Mr.R.Sridhar. This stand can be seen from the written arguments filed by the learned counsel for the Appellants. The Appellants have also filed an affidavit dated 16.08.2022 in the above Original Side Appeal confirming the above stand taken in the written submissions. The Appellants had taken a stand during the proceedings before the learned Single Judge that the sales made by them were done under threat, coercion, and undue influence. Thus the Appellants have now admitted that the sales made in favour of said Mr.R.Sridhar are sham and nominal. The Appellants, however, have not stated so in their Insolvency Petition. The Appellants have not refuted the statements made in the report of the the Official Assignee in their Affidavit 36/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 dated 16.08.2022. The Appellants, on adjudication as Insolvents sought for an order of protection from the learned Master of this Court from arrest in the Criminal proceedings. This Court by order dated 15.02.2018 in A.No.319 of 2017, had vacated the protection granted by the learned Magistrate and held that it is open for the Investigating Officer to arrest the Appellants in the case registered against them under TNPID Act. These facts are found in the report of the Official Assignee. The Appellants cannot be allowed to take advantage of their adjudication as Insolvents to escape from the Criminal prosecution under TNPID Act. The Appellants have not come to the Court with clean hands. They have suppressed several material facts as seen from the report of the Official Assignee, to obtain an order of adjudication as Insolvents.

27.Section 21 of the Insolvency Act Inter alia provides for annulment of adjudication if in the opinion of the Court, the debtor ought not to have to been adjudged as Insolvent . The facts narrated above would show that out of 144 Creditors, 124 are Depositors whose case would fall within the ambit of TNPID Act. The Official Assignee has not received any claim other than from the depositors. The debtors are relatives and friends 37/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 of the Appellants. We find that the sales made by the Appellants of the two prime properties in favour of Mr.R.Sridhar are sham and nominal. Thus we are of the view that the Appellants are hand in glove with the said Mr.R.Sridhar and executed two documents to defeat the interest of the depositors. All these facts are enough to conclude that the Appellants ought not to have been adjudged as Insolvent. That apart, for the reasons best known to the Appellants they have not challenged the order annulling their adjudication as Insolvents made in other A.Nos.17 and 18 of 2018.

28.Further, the Court dealing with the Petition to annul the adjudication can take note of the subsequent events. The subsequent events are the Appellants' Admission that the sales were sham and nominal, the report of the Official Assignee disclosing certain vital facts and the fact that there is no claim from any other Creditor except the Depositors. Our view is fortified by the view taken by this Court by the view taken by this Court in RM Subramaniam versus N.Sundaram reported in 1962 SCC online Mad 181 : AIR 1963 Mad 217. In that case, the Full Bench of this Court had an occasion to consider the question whether the Insolvency Court could take note of subsequent events after the filing of the petition while deciding whether an order of adjudication as Insolvent can be 38/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 passed. The Full Bench, held that after the filing of the petition the Court can take into account subsequent events before passing an order of adjudication as otherwise the adjudication would rest on an unreal state of affairs. The Full Bench held that if any order of adjudication is made leaving out the change of circumstances affecting the Act of Insolvency, it would be annulled under Section 21 of the Act. The relevant observations of the Full Bench are extracted hereunder:

“Any adjudication that may be made, leaving out of account the change of circumstances affecting the act of Insolvency, would be futile, as it would be annulled under S. 21 of the Act. It is possible to view the question from another angle. There must be proof of an act of Insolvency having been committed within three months of the presentation of the petition. Otherwise, the creditor's petition would fail. The debtor resisting the application is not prevented from letting in evidence of facts and circumstances to show that there was no not of Insolvency. Such facts and circumstances are not inadmissible in evidence on the ground of their stemming from events subsequent to the petition. Strictly speaking, evidence relating to the act of Insolvency in the shape of subsequent events, if let in, does not offend the general rule of the right of parties being confined and restricted 39/ 41 https://www.mhc.tn.gov.in/judis O.S.A.No.71 of 2019 to the date of institution of the proceedings.” Extending this analogy to the facts of the instant case, we hold that the Insolvency Court can take into account the facts brought to its notice after the order adjudging the person as Insolvent, for annulling the order of adjudication.

29.For the foregoing reasons, we confirm the order passed by the learned Single Judge.

30.Accordingly, the Original Side Appeal is dismissed. No costs. Consequently, the connected miscellaneous petition is closed.

                                                                                    [M.D.J]       [S.M.J]
                                                                                          06.09.2022

                    Index:Yes/No

                     Internet:Yes/No

                     dk




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                                                  O.S.A.No.71 of 2019




                                           M.DURAISWAMY,J.

                                                               and

                                           SUNDER MOHAN,J.

                                                                 dk




                                  Pre-delivery Judgement made in

                                            O.S.A.No.71 of 2019
                                      and C.M.P.No.6615 of 2019




                                                      06.09.2022



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