Gujarat High Court
The General Cooparative Bank ... vs Official Liquidator Of M/S.Suvin ... on 25 February, 2022
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
C/COMA/268/2015 ORDER DATED: 25/02/2022
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/COMPANY APPLICATION NO. 268 of 2015
In
R/COMPANY PETITION NO. 415 of 1997
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THE GENERAL COOPARATIVE BANK LIMITED(IN LIQN.)
Versus
OFFICIAL LIQUIDATOR OF M/S.SUVIN CEMENT PVT,LTD(IN LIQN.) & 3
other(s)
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Appearance:
MR DIPAK R DAVE(1232) for the Applicant(s) No. 1
MR AS ASTHAVADI(3698) for the Respondent(s) No. 2
MR DEVANG D TRIVEDI(2503) for the Respondent(s) No. 4
MR JEET J BHATT(6154) for the Respondent(s) No. 1
NOTICE SERVED for the Respondent(s) No. 3
OFFICIAL LIQUIDATOR for the Respondent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
Date : 25/02/2022
ORAL ORDER
Leave to place on records Annexure-H letter dated 23rd July, 2015.
2. Heard learned advocate Mr.Dipak Dave for the applicant, learned advocate Mr.Jeet Bhatt for the respondent No.1, learned advocate Mr.A.S. Asthavadi for the respondent No.2 and learned advocate Mr.Devang Trivedi for the respondent No.4.
3. The applicant - General Cooperative Bank Limited (in liquidation) has filed this application with the following prayers :
Page 1 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022C/COMA/268/2015 ORDER DATED: 25/02/2022 "(A) Be pleased to direct the Official Liquidator to consider the applicant as secured creditor with regard to movable and immovable assets of M/s. Suvin Cement Private Limited (In Liqn.) and accordingly direct the Official Liquidator to fix the ratio and accordingly disburse the amount considering the applicant as secured creditor;
(B) Grant such other and further reliefs as are deemed fit in the interest of justice."
4. The facts of the case of the applicant are that, the applicant is the cooperative Bank at present under liquidation. The Company in liquidation i.e. M/s. Suvin Cement Private Limited availed the financial assistance of Rs.15,00,000/- from the applicant in the year 1986.
4.1 The Company in liquidation failed to repay the loan amount and the applicant, therefore, filed Lavad Suit No.33 of 1995 before the Board of Nominees. The Board of Nominees passed a decree dated 5th February, 1996 against the Company in liquidation and its Directors for recovery of the amount of Rs.43,81,532.72/- with interest and cost.
4.2 One of the Directors, thereafter, preferred an Appeal No.40 of 1997 before the Gujarat State Cooperative Tribunal (for short "the Tribunal") which was allowed qua that Page 2 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 Director vide order dated 29th September, 1998.
4.3 It is the case of the applicant that after the Decree was passed by the Board of Nominees, as no payment was made by the Company in liquidation, several steps including the attachment of the properties of the Company were taken. The applicant has placed on record the attachment order dated 27th July, 2004 at Annexure-D along with Panchnama at Annexure-E. 4.4 According to the applicant, the amount of more than Rs.4,00,00,000/- is outstanding to be paid to the applicant by virtue of the Decree dated 5th February, 1996.
4.5 This court passed an order of winding up of M/s. Suvin Cement Pvt. Ltd. on 12th January, 1998 in Company Petition No.415 of 1997 and the Official Liquidator attached to this court was appointed as Official Liquidator of the Company in liquidation.
4.6 In compliance of the order passed by this Court, the Official Liquidator has taken the possession of the factory premises situated at Survey No.74/1/P at village: Lokhanka, Dist:
Surendranagar and this Court vide order dated 24th April, 2015 passed in OLR No.54 of 2015 has Page 3 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 confirmed the sale of plants and machineries in favour of M/s. A.A. Associates for an amount of Rs.30,30,000/-.
4.7 It appears that pursuant to the advertisement issued by the Official Liquidator in compliance of the order passed by this Court on 23rd April, 2015 in OLR No.29 of 2015 the applicant submitted an application before the Official Liquidator to register the claim of the applicant as "Secured Creditor". However, the Official Liquidator by reply dated 23rd July, 2015 informed the applicant that the applicant cannot be considered as "Secured Creditor" of the company in liquidation as the applicant did not register the charge on the basis of the Decree in the Office of the Registrar of Companies.
4.8 It was therefore, informed to the applicant that the applicant would fall under the category of one of the unsecured creditors of the company in liquidation.
4.9 The applicant therefore, being aggrieved has filed this application with the aforesaid prayers.
5. Learned advocate Mr.Dipak Dave for the applicant submitted that the Board of Nominees Page 4 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 passed the Decree on 5th February, 1996 (at Page No.28), Annexure-B to the petition, whereas, this court passed the order of winding up on 12th January, 1998 and as such the Decree passed by the Board of Nominees is prior to the date of winding up and therefore, the contractual charge of the applicant Bank has been extinguished by virtue of Decree dated 5th February, 1996. It was submitted that the Board of Nominees has not given any time period for redemption of the Decreetal amount but, has passed an absolute Decree of Rs.43,81,532.72/- with interest from 6th January, 1995 @ 20.5% per annum + cost of Rs.5,000/- till the date of realization.
5.1 It was therefore, submitted that in view of the Decree passed by the Board of Nominees, applicant was not required to register such Decree as charge under Section 125 of the Companies Act, 1956 and therefore, it was submitted that the applicant is required to be considered as "Secured Creditor" of the Company in liquidation on the basis of the Decree passed by the Board of Nominees on 5th February, 1996.
5.2 In support of his submissions, the learned advocate Mr.Dave has relied upon the decision of the Apex Court in case of Indian Bank Page 5 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 Vs. Official Liquidator, Chemmeens Exports Ltd.1 to submit that on construction of the Decree it can be seen that the Decree has extinguished the unregistered charge, therefore, the provisions of Section 125 of the Companies Act, 1956 would not apply.
5.3 It was further submitted that Official Liquidator has by letter dated 23rd July, 2015 rejected to consider the applicant as "Secured Creditor" on the ground that the applicant has not registered the charge on the basis of the Decree in the Office of the Registrar of Companies, Gujarat against the Company in liquidation as per the provisions of the Companies Act, 1956 but, however, Section 125 of the Companies Act, 1956 would not apply after the date of winding up and therefore, there was no question of registering the charge by the applicant on the basis of the Decree in the Office of the Registrar of companies, Gujarat against the company in liquidation as per the provisions of the Companies Act, 1956.
5.4 It was submitted that in the Official Liquidator Report filed in this Company Application, the applicant has tried to justify the stand to consider the applicant as unsecured 1 1998 (5) SCC 401 Page 6 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 creditor as the charge against the Company in liquidation was not registered under Section 125 of the Companies Act, 1956 and therefore, the same was ipso facto void against the liquidator and also other creditors upon the Company being ordered to be would up.
5.5 Learned advocate Mr.Dave submitted that in the Official Liquidator's further Report also, the Official Liquidator has placed reliance upon the decision of this Court dated 4th March, 2015 passed in Company Application No.301 of 2012 in case of IFCI Ltd. Vs. Gujarat Inject Ltd. (In Liqn.) to point out that the said judgment would cover the issue raised by the applicant. However, it was submitted that the major distinguishing feature in the facts of the case before the Court in the case of IFCI Ltd. (Supra) is that, in the said case the Decree was passed after the date of the order of winding up passed by this Court, whereas, in the facts of the present case, the Decree was passed in earlier point of time than the date of the order of winding up passed by this Court. It was pointed out that in the said judgment it was because of the facts of the said case the Court came to the conclusion that the Decree passed in said case did not create the charge as the charge was created contractually because, on the date of winding up there was no Page 7 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 Decree passed by the Court extinguishing the contractual charge. It was therefore, submitted that in such circumstances, the judgment relied upon by the Official Liquidator is not applicable in the fact of the case.
6. On the other hand, learned advocate Mr.Jeet Bhatt appearing for the Official Liquidator submitted that prayers made by the applicant are squarely covered by the decision rendered in case of IFCI Ltd. (Supra) as in the said case, after relying upon the decision of the Supreme Court in case of Indian Bank (Supra) as well as after detailed analysis of applicability of Section 125 of the Companies Act, 1956 vis-a-vis Section 529 and 529A of the Companies Act, 1956 this Court has come to the conclusion that the Decree vested in the judgment debtor a status of creditor and also right to recover the dues fructified thereunder, but when the charge over the properties upon which the dues were accepted, was not registered as contemplated under Section 125 of the Companies Act, 1956 for the purpose of enforcing such dues vis-a-vis the company in liquidation against the Official Liquidator, the judgment creditor has to be governed by the parameters and provisions under the Companies Act, 1956.
Page 8 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022C/COMA/268/2015 ORDER DATED: 25/02/2022 6.1 It was therefore, submitted that when it is an admitted fact that the mortgaged charge was never registered under Section 125 of the Companies Act, 1956 by the applicant, the same would be void against the Official Liquidator as per the provisions of the said Section.
6.2 Learned advocate Mr.Bhatt thereafter, referred to the following decisions referred to in the decision of Indian Bank (Supra) (i) Official Liquidator, High Court of Bombay Vs. Suryakant Natvarlal Surati2; (ii) Praga Tools Ltd. Vs. Official Liquidator of Bengal3 to submit that the Apex Court after considering the facts of the aforesaid two decisions has approved the same and therefore, it would be necessary to refer to both the decisions so as to apply the same in the facts of the case.
6.3 Referring to the decision in case of Suryakant Natvarlal Surati (Supra), it was pointed out that in the said case also the Decree was passed prior to the date of order of winding up passed by the Court and after taking into consideration the facts as well as the law, the Division Bench of the Bombay High Court came to the conclusion that when the Decree fixed a date for redemption of the mortgage or charge so 2 1984 SCC OnLine Bom 347 3 1984 56 CompCas 214 Cal Page 9 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 declared and the mortgagee fails to deliver or satisfy the Decree then in such case up to the date of redemption, the charge is kept alive till the order of the sale of the mortgaged property is effected. It was therefore, submitted that in the present case also, when the Decree is passed prior to the date of order of winding up, the charge is kept alive as the same is not realized till date, and as such, the provisions of Section 125 would be required to be applied and as no charge is registered under Section 125 of the companies Act, 1956, the applicant has to be considered as unsecured creditor considering the contractual charge.
6.4 It was submitted that in case of Praga Tools Ltd. (Supra) the prayer before the Court was to pay the sum of Rs.50,000/- in pro rata satisfaction of the decreetal dues of the applicant because, during the course of winding up, the Court passed an order creating charge in favour of the applicant before the court and in such circumstances, it was held by the Calcutta High Court to grant the prayer of the applicant to pay the sum of Rs.50,000/- in pro tanto satisfaction of the decreetal dues taking into consideration the order passed by the Court in the winding up proceedings.
Page 10 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022C/COMA/268/2015 ORDER DATED: 25/02/2022 6.5 It was therefore, submitted that in the facts of the case, the Board of Nominees has passed the decree in the year 1996 on the basis of the contractual charge created by the applicant against the assets of the company in liquidation and therefore, such charge has to be treated as being alive on the date of winding up and hence, the provisions of Section 125 would apply to the facts of the case also, and in view of the decision of IFCI Ltd. (Supra) the applicant is required to be considered as unsecured creditor of the Company in liquidation.
7. Learned advocates Mr.A.S. Asthavadi and Mr.Devang Trivedi appearing for the secured creditors being respondent Nos.2 and 4 respectively, adopted the submissions made on behalf of the Official Liquidator and submitted that the applicant could not be considered as "Secured Creditor" so as to satisfy the claim from all the assets of the Company in liquidation as per the Decree passed by the Board of Nominees.
8. Considering the submissions made on behalf of the learned advocates for the respective parties, the question of law which arises in this application is as to in the facts of the case when admittedly the Board of Nominees has passed Page 11 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 the Judgment and Decree on 5th February, 1996 prior to the date of order of winding up on 12 th January, 1998, whether the Decree passed by the Board of Nominees extinguish the contractual charge or the same is kept alive on the date of winding up Section 125 of the Companies Act, 1956 would be applicable or not.
9. It would therefore, be germane to refer to the provisions of Section 125 of the Companies Act, 1956, which reads as under :
"125. Certain charges to be void against liquidator or creditors unless registered.
(1) Subject to the provisions of this Part, every charge created on or after the 1st day of April, 1914 , by a company and being a charge to which this section applies shall, so far as any security on the company' s property or undertaking is conferred thereby, be void against the liquidator and any creditor of the company, unless the prescribed particulars of the charge, together with the instrument, if any, by which the charge is created or evidenced, or a copy thereof verified in the prescribed manner, are filed with the Registrar for registration in the manner required by this Act within thirty days after the date of its creation:
Provided that the Registrar may allow the particulars and instrument or copy as aforesaid to be filed within thirty days next following the expiry of the said period of thirty days on payment of such additional fee not exceeding ten times the amount of fee specified in Schedule X as the Registrar may determine, if the company satisfies the Registrar that it had sufficient cause for not Page 12 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 filing the particulars and instrument or copy within that period.
(2) Nothing in subsection (1) shall prejudice any contract or obligation for the repayment of the money secured by the charge.
(3) When a charge becomes void under this section, the money secured thereby shall immediately become payable.
(4) This section applies to the following charges:-
(a) a charge for the purpose of securing any issue of debentures;
(b) a charge on uncalled share capital of the company;
(c) a charge on any immovable property, wherever situate, or any interest therein;
(d) a charge on any book debts of the company;
(e) a charge, not being a pledge, on any movable property of the company;
(f) a floating charge on the undertaking or any property of the company including stock- in- trade;
(g) a charge on calls made but not paid;
(h) a charge on a ship or any share in a ship;
(i) a charge on goodwill, on a patent or a licence under a patent, on a trade mark, or on a copyright or a licence under a copyright."
10. This Court (Coram: Honourable Mr.Justice N.V. Anjaria) in case of IFCI Ltd. (Supra) has considered the case law on this subject in detail. As per the analysis of the provisions and the case law made in the judgment of IFCI Ltd. (Supra) in the first blush it would appear that the claim of the applicant to consider as "Secured Creditor" is not tenable, however, on close scrutiny of the facts in case of IFCI Ltd. (Supra) and in the facts in the present case, the Page 13 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 decision in case of IFCI Ltd. (Supra) would not be applicable to the facts of the present case.
11. It would therefore, be necessary to reproduce the relevant paragraphs relating to facts as well as the discussion on law in the decision of IFCI Ltd., as under :
"Basic Facts
3. The relevant facts emerging from the record may be set out. The company in liquidation-M/s.Gujarat Inject Limited came to be wound up by order dated 20th January, 2000 passed by this Court in Company Petition No.18 of 1989. The Official Liquidator took possession of the properties and assets of the company comprising of land and building, plant and machinery and movables situated at Survey No.23, 25/1, 25/2-B and 30/2 at Village Alindra, Taluka Kalol, District Panchmahal. They were sold at Rs.01,90,00,000/- to M/s.Setco Automative Limited.
3.1 The applicant had sanctioned loan jointly with IDBI and ICICI to the company in liquidation for Rs.179 lakhs on 13th May, 1985; further on 27th September, 1985 as well as on 28th October, 1985 of Rs.82.74 lakhs in foreign currency. A mortgage transaction was effected in that regard and a Deed dated 19th August, 1987 was executed. In the recovery proceedings being O.A. No.293 of 2000 filed before the Debt Recovery Tribunal, Ahmedabad jointly by the applicant-IFCI, IDBI and ICICI, the Tribunal passed judgment and decree on 12th March, 2004. On the basis of the said decree by the Debt Recovery Tribunal it has been the case of the applicant that they acquire status as secured creditor under Section 529-A read with Section 529 of the Companies Act, 1956. Therefore, it is being contended, that though the charge was not registered as required under Section 125 of the Companies Act, non-Page 14 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022
C/COMA/268/2015 ORDER DATED: 25/02/2022 registration would not affect their categorization as secured creditor under Section 529-A read with Section 529 for the purpose of payment of its dues, in view of the decree passed. It is the case that a sum of Rs.11,82,41,735/- was payable to the applicant on the date of winding up, which has mounted to Rs.01,09,76,30,112/- when this Company Application was filed on 31st August, 2012.
3.2 It appears that the applicant herein claiming the capacity of a secured creditor, filed Company Application No.26 of 2010 seeking directions for determination of inter se ratio and final distribution of the funds. In the said Company Application Official Liquidator filed his Reports. In the Report dated 24th August, 2010 the Official Liquidator suggested distribution of Rs.01,75,00,000/-, then available for disbursement. The ratio pattern was indicated. As the present applicant, opponent No.2-IDBI, etc., raised certain objections to the Report of the Chartered Accountant. In view of the anomalies and issues emerged, another Report dated 24th December, 2010 determined the ratio in respect of various claims.
3.4 It thus surfaced as an undisputed position that none of the said three financial institutions had complied with the requirements of Section 125 of the Act. The Chartered Accountant opined that therefore applicant-IFCI and respondent No.2-IDBI and ICICI being the assignee of respondent No.3 herein cannot claim status of secured creditors.
xxx Post-winding up Decree
5. The company was wound up on 20th January, 2000. The applicant has asserted its claim of debt with status as secured creditor on the footing of decree dated 12th March, 2004 and amended as per order dated 02nd July, 2004, passed by the Debt Recovery Tribunal, Ahemdabad in Original Application No.293 of 2000. The case put-forth is that in view of Page 15 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 subsisting decree by the Debt Recovery Tribunal, particularly in respect of immovable property, the status of the applicant as secured creditor stands validated. It is the case that applicant and other creditors-respondent Nos.2 and 3, cannot be denied rights as secured creditor under Section 529-A read with Section 529 of the Act on the ground of want of registration of charge under Section 125 of the Act. It is the case that a sum of Rs.11,82,41,735/- was payable to the applicant on the date of winding up, which has mounted to Rs.01,09,76,30,112/- when this Company Application was filed on 31st August, 2012. 5.1 Details of the decree dated 12th March 2004 passed by the Debt Recovery Tribunal would be material. The said O.A. No.293 of 2000 was filed by the applicant along with two other applicants-IDBI and ICICI-claiming Rs.01,79,00,000/-. From copy of the Page 9 of 44 Downloaded on : Wed Mar 02 10:57:22 IST 2022 O/COMA/301/2012 CAV JUDGMENT judgment and decree of the Tribunal on record, the operative portion thereof is extracted hereinbelow.
O R D E R In the result, the application is allowed declaring that -
(A) The applicant bank is entitled to recover from the Respondents 1 to 3, jointly and severally, a sum of Rs.1,79,00,000=00p with cost and further interest at the rate 12% per annum, from the date of filing of the application till realization.
(B) Respondents are given one month's time to settle the claim of the applicant bank; failing which, the bank may proceed to sell the movables assets and mortgaged and other immovable properties of the said Respondents and adjust the sale proceeds towards the amount due. This period of one month will not bar the Recovery Officer to issue demand notice.
(C) Issue recovery certificate accordingly and parties be informed.Page 16 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022
C/COMA/268/2015 ORDER DATED: 25/02/2022 (D) Bill for the cost of the suit be drawn in accordance with the Form No.2 of the Appendix D to the Civil Procedure 1908 read with relevant rules and regulations applicable under the Act. Dictated to the Stenographer In the Open Court, transcribed by him corrected revised and pronounced by me in the Open Court on 12th March, 2004."
xxx 7.1 Briefly visiting the other provisions, Section 124 says that in Part V, the expression "charge" includes a mortgage. Section 126 provides that where any charge on any property of a company required to be registered under Section 125 has been so registered, any person acquiring such property, part thereof or share or interest therein shall be deemed to have notice of the charge as from the date of the registration. Section 127 is a provision relating to registration charges on properties acquired subject to charge, requiring the company to deliver prescribed particulars of the charge together with the instrument evidencing the creation of charge to the Registrar for the purpose of registration. Section 130 speaks about the register of charges to be maintained by the Registrar, whereas Section 131 says that Registrar shall maintain chronological index giving particulars of the charges registered. Under Section 132 Certificate of Registration is contemplated and it is provided that Registrar shall give a Certificate under his end of the registration of any charge registered, stating the amount thereby secured. The provision further states that the Certificate shall be conclusive evidence about the requirements as to the registration. Under Section 136 every company is required to keep copy of instrument creating charge. As per Section 138 the company shall give intimation to the Registrar of the payment of satisfaction of any charge.
Mandatory Provision, Substantive Rights
8. The group of provisions under Part V, some of which are referred to hereinabove, signify the Page 17 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 importance of registration of charge in respect of enforcement of claim for the money secured by a charge created on the properties. Section 142 speaks of penalties and states that if default is made in filing particulars with the Registrar about any charge created by the company or of the payment or satisfaction of debt covered under a charge registered, etc., the company and every officer or person in default shall be punishable with fine extending to Rs.05,000/- every day.
8.1 Section 125 contains certain procedural aspects, but in essence it is a substantive provision dealing with rights of the creditors to be fared before the company in liquidation. The Section provides that the charge creating any security on the company's property shall be void against the liquidator and any creditor of the company unless the same is registered with the Registrar of Companies. Thus substantive rights are created and dealt with in Section 125. This provision has its own special role, applicability and significance in determining the rights of the creditors to be claimed and enforced against the Company in liquidation through the official liquidator. The provision casts obligation as also confers rights. It is clearly intended to operate in course of winding up in respect of the claims of the creditors against the company in liquidation.
8.2 Provision of Section 125 for registration of charge and the consequences provided for non- registration is a mechanism envisaged by the Legislature for the payment of money to the creditors, enacting a condition in Section that charge on the basis of which the claim of money is to be enforced as secured claim, has to be got registered with the Registrar of Companies.
8.3 (Lala) Ram Narain and others Vs Radha Kishen Moti Lal Chamaria [AIR 1930 Privy Council 66] may be referred to underline the importance and mandatory effect of Section 125. in that case, property of the company was mortgaged to two persons. plaintiff's Page 18 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 mortgage was subsequent one which recited that it created a second charge but the same was registered earlier. As against that, the defendant's mortgage was prior in point of time but the same was registered within the time extended under Section 125 of the Companies Act, 1930. It was held that if the Court extends time for registration and the mortgage is registered within the extended time, it constitutes a valid charge from the beginning. Therefore it was held that merely because registration of the plaintiff's mortgage was first in point of time which created second charge, it cannot be held as intended to convert second charge into first charge only because the registration of the first charge holder was subsequent in point of time within the extended time.
8.4 From the above ruling, two important principles emerged were laid down in relation to Section 109 of the Companies Act, 1930 (corresponding to Section 125 of the Companies Act, 1956). First is that once the charge is registered, may be within the extended time, it would a valid registration ab initio. By necessary implication it follows logically that where the charge is not registered it would be void ab initio. The effect of registration or the consequence of non-registration, both would be ab initio, that is from the inception. The second principle stated was that the Section does not avoid the mortgage absolutely where it is not registered, but it avoids only so far as any security is given thereby on the company's property or undertaking. It is held that the effect, therefore, is that if a mortgage is not registered, it is valid as an admission of debt but as against the creditor or liquidator it cannot be said that a valid charge on the company's property has been created.
Rights existing on the date of Winding up
9. At this stage, it is important to notice the principle that the point of terminus for determining the rights of various claimants and the creditors for their dues and debt claimable from the company Page 19 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 in liquidation, is the date of winding up. The status and the position obtained of the creditors on the date of winding up shall govern the rights. The rights of the creditors-secured or unsecured-would have a status coiest position on the date when the company is wound up, implying thereby that whether the rights are complete or inchoate, whether they are crystalised or unfructified, they would stand unaltered before the Official Liquidator. This principle is emphatically enunciated by the Apex Court in J.K. (Bombay) (P) Ltd. Vs New Kaiser-I-Hind Spg. And Wvg. Co. Ltd. [(1969) 2 SCR 866]. The relevant observations are reproduced.
"31. The effect of a winding-up order is that except for certain preferential payments provided in the Act the property of the company is to be applied in satisfaction of its liabilities pari passu. Pari passu distribution is to be made in satisfaction of the liabilities as they exist at the commencement of the winding-up. (cf. Sections 528 and 529 of the Act; Ghosh on Indian Companies Law, llth Edn., Vol. 2, p. 1073). The effect of a winding-up order on rights already completed as against rights yet to be completed is succinctly stated by Lord Halsbury in Bank of Scotland v. Macleod [1914 AC 311 at 317,318] as follows:
"Rights in security which have been effectually completed before the liquidation must still receive the effect which the law gives to them.
But the company and its liquidators are just as completely disabled by the winding-up from granting new or completing imperfect rights in security as the individual bankrupt is by his bankruptcy. This, indeed, is the necessary effect of the express provisions of the Companies Act that the estate is to be Page 20 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 distributed among the creditors pari passu. Every creditor is to have an equal share, unless any one has already a part of the estate in his hands, by virtue of an effectual legal right."
(emphasis supplied)
32. It is thus well established that once a winding-up order is passed the undertaking and the assets of the company pass under the control of the liquidator whose statutory duty is to realise them and to pay from out of the sale-proceeds its creditors. Such creditors acquire on such order being passed the right to have the assets realised and distributed among them pari passu. No new rights can thereafter be created and no uncompleted rights can be completed, for doing so would be contrary to the creditors' right to have the proceeds of the assets distributed among them pari passu.
(emphasis supplied)
33. On the findings by the appeal court that the company was commercially insolvent and that the scheme could not satisfactorily be worked with or without modifications, the only alternative for that Court was to pass the winding-up order under Section 392(2). The Court could not have completed, as contended by the appellants, their rights which were still incomplete or order the company to execute a debenture trust deed or the second mortgage, and thus set up the appellants and the other Schedule 'B' creditors as secured creditors against the rest of the unsecured creditors. Such an order could not be passed as it would be contrary to and in breach of the right of distribution pari passu of the joint body Page 21 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 of unsecured creditors. The appeal court, therefore, correctly followed the principle that the status of creditors which could be recognised was that which existed at the date of the winding-up order, that the second mortgage or the debenture trust deed not having so for been executed, the appellants and the other Schedule 'B' creditors were still unsecured creditors and therefore could not claim any priority over the rest of the unsecured creditors."
(emphasis supplied) 9.1 Thus for determining the status of the stake holders and for ranking the dues to be enforced against the company in liquidation, it is the position obtainable on the date of winding up is the relevant date. This position of law is quite clear from a decision of the Supreme Court by three Judge Bench in M/s.J.K. (Bombay) Private Limited (supra).
Section 125 Interacts with Sections 529, 529-A
10. Part VII of the Companies Act, 1956 relates to and deals with the winding up. Section 528 to 533 therein pertain to the ranking of claims and proof thereof. Chapter V is relating to provisions applicable to every mode of winding up. Section 529 provides all application of insolvency rules in the winding up of insolvent company, whereas Section 529-AA is about overriding preferential payments. Section 530 pertains to preferential payments. In the winding up proceedings, in particular, the inter se claim of priority of the creditors are regulated by the aforesaid provisions. Section 125 is in no way a foreign provision. Section 125 applies, interacts, informs and has its way and a play in determining the substantive rights in respect of priority claims and ranking of dues of the creditors claiming to be secured creditors, more particularly as the Section provides that unless a charge creating security is registered, such unregistered charge shall be void against the Official Liquidator Page 22 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 and the creditors. The very status of a creditor as secured creditor depends upon the charge by which the debt is secured, which in turn has to be got registered in terms of Section 125 of the Act so as not to be void against the Official Liquidator. As already noted, Section 125 is a provision dealing with substantive rights and is mandatory in its nature. An instrument creating a charge on the property, if not registered, would be void in terms of Section 125.
10.1 Two decisions, which have a buttressing effect in terms of their reasoning and ratio, may be referred to deal with pari pasu charge of the workmen and status of their claim vis-a-vis the secured creditors with reference to a decree of court of law in favour of the secured creditor. In Uco Bank Vs Official Liquidator, High Court of Bombay and another [(1994) 5 SCC 1] the Apex Court considered the effect of proviso to Section 529(1) of the Companies Act, 1956 which was inserted by Companies (Amendment) Act, 1985, and which provided pari pasu charge in favour of the workmen. In respect of the said proviso which came into effect from 24th May, 1985 in its effect, held the Apex Court, credited statutorily, a charge pari pasu in favour of the workmen on every security available to the secured creditor of the employer company for recovery of their debts at the time when the amendment came into force. It held that the expression "the security of every secured creditor shall be deemed to be subject to a pari pasu charge in favour of the workmen" is wide enough to apply to the security of every secured creditor which remained unrealised on the date of amendment. The Supreme Court held that it is only if the security has been realised, pursuant to a decree, prior to the date of amendment that the pari pasu charge is not created, for there is no security upon which it can operate. Thus the Court held that proviso inserted in the provision of Section 529(1) above would apply where even though decree obtained subsequent to the date of the amendment by secured creditor for realisation of the security, but the Page 23 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 security remained unrealised. The claim of the workmen would receive pari pasu charge irrespective of the decree obtained.
10.2 In Textile Labour Association and another Vs Official Liquidator and another [(2004) 9 SCC 741] the Supreme Court examined the effect of Section 529-A and 529 of the Companies Act in relation to inter se priority which may be claimed by the workmen and the secured creditors in respect of dues of the workmen and the debts due to the secured creditors. It was held, "The effect of Sections 529 and 529-A is that the workmen of the company become secured creditors by operation of law to the extent of the workmen's dues provided there exists secured creditor by contract. If there is no secured creditor then the workmen of the company become unsecured preferential creditors under Section 529-A to the extent of the workmen dues. The purpose of Section 529-A is to ensure that the workmen should not be deprived of their legitimate claims in the event of the liquidation of the company and the assets of the company would remain charged for the payment of the workers' dues and such charge will be pari passu with the charge of the secured creditors. There is no other statutory provision overriding the claim of the secured creditors except Section 529-A. This Section overrides preferential claims under Section 530 also. Under Section 529-A the dues of the workers and debts due to the secured creditors are to be treated pari passu and have to be treated as prior to all other dues."
(Para 8) 10.3 Holding as above, the Apex Court relied on its own earlier decision in Uco Bank (supra), laid down following statement of law in paragraph 9, "Therefore, the law is clear on the matter as held in UCO Bank's case that Section 529-A will Page 24 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 override all other claims of other creditors even where a decree has been passed by a Court."
(Para 9) (emphasis supplied) 10.4 Decision in International Coach Builders Limited Vs Karnataka State Financial Corporation [(2003) 10 SCC 482] deserves a reference. What is held therein by the Supreme Court may be usefully considered. In that case the question as to whether Sections 28, 31 and 46-B of the State Financial Corporation Act shall prevail over Section 529 and 529-A of the Companies Act came up for consideration. Under Section 31 of the said Act, a financial corporation can take a recourse and order may be passed by the competent authority. Section 46-B gives an overriding effect to the provisions of the said Act. The Supreme Court, however held as under.
"We do not really see a conflict between Section 29 of the SFC Act and the Companies Act at all, since the rights under Section 29 were not intended to operate in the situation of winding up of a company. Even assuming to the contrary, if a conflict arises, then we respectfully reiterate the view taken by the Division Bench of this Court in A.P. State Financial Corporation case. This Court pointed out therein that Section 29 of the SFC Act cannot override the provisions of Section 529(1) and 529A of the Companies Act, 1956, inasmuch as SFCs cannot exercise the right under Section 29 ignoring a pari passu charge of the workmen."
10.4.1 It was also observed, "It may be true that if there exists a statute like SICA, the provisions thereof may prevail over the Companies Act. But in absence of a clear provision, the Companies Act cannot be held to give way to another Act providing for Page 25 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 recovery only leaving the rights and liabilities of the parties to be dealt with a general law. Reliance has also been placed by Mr. Sree Kumar on Maharashtra State Financial Corporation V/s. Official Liquidator, Sidhu Tyres (P) Ltd. 1988 (64) Comp. Cas 641 is also not apposite. Therein the charge was created not by the company, but by its predecessor which was a partnership firm."
10.5 The aforesaid principles relating to inter se priority to be given to the dues of the workmen and the debts due to the secured creditor would have to operate with reference to the provision of Section 125 of the Act. The requirement of registration of charge under Section 125 and the consequences of non-registration and its effect vis-a-vis the Official Liquidator and creditors has a definite effect in operation of Section 529-A and 529 of the Act.
Import of decision in Indian Bank
11. In order dated 09th July, 2012 passed in previous Company Application No.26 of 2010, this Court relied on the decision in Indian Bank (supra) and based upon that decision, passed the ultimate directions. The Court required that the true ratio of decision in Indian Bank (supra) is required to be followed. The principle of law of precedent is well- settled that, as observed in R.L. Jani Vs DDA and others [(2004) 4 SCC 79], a decision is an authority what it actually decides. It is the ratio and not every observation found therein, nor what may logically follow from the observations made in the decision is relevant. In Delhi Administration Vs Manohar Lal [(2002) 7 SCC 222] the Supreme Court observed that High Court or any other Court, while applying decision of the Supreme Court should first find out the ratio of the decision on a careful reading of the judgment and then its applicability to the case in hand.
11.1 Therefore in order to examine the decision in Page 26 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 Indian Bank (supra) with a close look, switching over to it, which was referred to and, relied on by both the sides. On the effect of Section 125, the Supreme Court stated, "On a plain reading of sub-section (1) it becomes clear that if a company creates a charge of the nature enumerated in sub-section (4), after 1-4-1914 on its properties, and fails to have the charge together with instrument, if any, by which the charge is created, registered with the Registrar of the Companies within thirty days, it shall be void against the liquidator and any creditor of the company. This, however, is subject to the provisions of Part V of the Act. The proviso enables the Registrar to relax the period of limitation of thirty days on payment of specified additional particulars and instrument or a copy thereof within the specified period. Sub-sections (2) and (3) deals with repayment of money secured by the charge. Sub-section (2) provides that the provision of subsection (1) shall not prejudice the contract or obligation for repayment of money secured by the charge and sub-section (3) says that when a charge becomes void under that section, the money secured shall become payable immediately. Though as a consequence of non-registration of charge under Part V of the Act, a creditor may not be able to enforce the charge against the properties of the company as a secured creditor in the event of liquidation of the company as the charge becomes void against the liquidator and the creditor, yet he will be entitled to recover the debt due by the company on a par with other unsecured creditors. It is also evident that Section 125 applies to every charge created by the company on or after 1-4- 1914. But where the charge is by operation of law or is created by an order or decree of the court, Section 125 has no application."
(para 7) Page 27 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 11.2 Learned advocate for the applicant harped on the last line of the above paragraph in which the Apex Court observed "But where the charge is by operation of law or is created by an order or decree of the court, Section 125 has no application", and submitted that in the present case the decree passed by the Debt Recovery Tribunal amounted to creation of charge, and thus that charge would not be required to be registered, Section 125 would not apply and that the dues of the applicant were enforceable on that basis as a secured creditor.
11.3 The facts in the Indian Bank (supra) may be noticed at with relevance. The Indian Bank advanced certain amounts to M/s. Chemmeens Exports Pvt. Ltd. which was secured by an equitable mortgage by deposit of title deeds of the debtor company with the Bank. Thereafter, winding up proceedings were initiated against the debtor-company and on March 1, 1979 an winding up order was passed in Company Petition No. 18 of 1978. The bank prayed for a leave of the Company Court to file a suit for recovery of the debt amount of Rs. 29,50,609.58 due to it. The permission was granted by the Company Court on 7-12-
79. The Indian Bank filed the said suit in the Subordinate Judge's Court, Cochin, against the debtor-company in liquidation which was represented by the Official Liquidator, duly impleading the Directors of the Company. The Official Liquidator filed written statement and contested the suit taking, inter alia, the plea that the charge against the properties of the company not having been registered under Section 125 of the Act, was void. On 28-5-82, in the said suit the Court passed a preliminary decree in favour of the Bank. The Official Liquidator did not file appeal against the said decree.
11.4 The contention inter alia raised before the Apex Court was that the Official Liquidator himself being a party to the decree, the same was binding on him, that the decree was final and the Court could not go behind the decree and thereby to hold that as the charge was not registered with the Registrar and Page 28 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 was void, the decree itself was void. As against that, the rival contention raised was that in view of mandatory provision of Section 125 the Division Bench was rightly held that the preliminary decree was void against the creditors and the Liquidator and that it was of no consequence that the Liquidator did not appeal against it. On the set of the above facts and contentions, the Apex Court considered the questionwhat is the effect of Section 125 of the Act on a preliminary decree in a mortgage suit passed on the basis of an unregistered charge and what is the relief to which the judgment creditor will be entitled in such case.
11.5 The Supreme Court in Indian Bank (supra) on facts before it considered provisions of Sections 125 and 446 of the Act and negatived the contention that the preliminary decree was void and inoperative. It held that the charge was kept alive in the decree upto particular date and thereafter the sale permitted as per the decree would take effect. The final relief was given in the following way.
"Reverting to the facts of this case, on the construction of the decree we have already held that the charge was kept alive till August 28, 1982 and thereafter in default of payment of decree amount the sale order would take effect. In this case, admittedly the decree amount was not paid before August 28, 1982 as such the matter had passed from the domain of contract to the realm of the judgment. The official liquidator filed application on March 21, 1983 seeking to declare the decree as void. By that date what was operative in the decree was not a mere unregistered charge but an order for sale of mortgaged property for realisation of decree amount. The preliminary decree cannot therefore be said to be void and inoperative. For the above reasons we hold that the Division Bench ought not to have held that the preliminary decree passed by the competent Court on May 25, 1980 was void and un-enforceable and Page 29 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 accordingly we set aside the order under appeal dated January 29, 1986 by allowing the appeal with costs."
(paras 19 and 20) 11.6 The Supreme Court in Indian Bank (supra) considered the nature and purport of the decree and held that the decree was not void but operative for enforcement of debt. The status of debt and the status of the creditor-whether secured or unsecured- would travel into the realm of the Company Law to be determined thereunder and in accordance with the provisions of the Companies Act. What was held by the Supreme Court did not exclude or rule out, even by implication, the mandatory provision of Section 125 of the Companies Act requiring the charge to be registered for any security on the company's property conferred thereby.
12. The Supreme Court in Indian Bank (supra), considered decision in Praga Tools Ltd. vs. Official Liquidator of Bengal Engineering Co. (Petition) Ltd. [(1984)56 Company Cases 214(Cal.)]. In the said decision as observed by the Supreme Court in paragraph 9 of the decision, there was a consent decree for repayment of money passed against the Bengal Engineering Company upon a suit filed by Praga Tools Company. The decree provided that in the event of nonpayment of the decreed amount, the Praga Tools would be entitled to execute the decree and in that event the security furnished by the Bengal Engineering Company with the Registrar in an earlier order of the Court to the extent of Rs.53,000/- would continue as security. The decree was not registered. The Bengal Engineering Company subsequently went into liquidation. Learned Single Judge of Calcutta High Court held that as the charge was created by the order of the Court, it would not require registration under Section 125 of the Companies Act and the Praga Tools Company was required to be treated as secured creditor to the extent of Rs.50,000/-. It is this principle which the Apex Court approved. Two aspects are significant and relevant. The charge was created by an order of Page 30 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 the Court earlier. It was the charge created by decree itself. The company's going into liquidation was subsequent in point of time.
12.1 The Supreme Court in the very paragraph 9 observed in the end, which is important to notice, "we also make it clear that an order or decree of a court creating charge on the properties of a company has to be distinguished from a preliminary decree passed in a mortgage suit based on an unregistered charge which is hit by Section 125 of the Act."
(emphasis supplied) Ratio of Indian Bank Case
13. For understanding correctly the ratio of Indian Bank (supra) what is stated, discussed and concluded in paragraph 18 of the judgment is clinching. The Supreme Court referred to decision of learned Single Judge of Bombay High Court in Suryakant Natvarlal Surati Vs Kamani Brothers Private Limited [(1985) 58 Company Cases 121 (Bom)]. The Supreme Court further noted that decision of learned Single Judge in Kamani Brothers (supra) was taken in appeal and the Division Bench laid down the principle on the point. The Supreme Court expressed its approval to the judgment of the Division Bench of the Bombay High Court.
13.1 Paragraph 18 from Indian Bank (supra) is extracted hereinbelow.
"In Suryakant Natvarlal Surati v. Kamani Bros. Pvt. Ltd., (1985) 58 Com Cas 121 : (1984 Tax LR 2002) (Bom), the company created a charge under a mortgage in favour of the trustees of the Employees' Gratuity Fund. The creditors by a preliminary decree of December 3, 1977 were entitled to receive the amount secured on the property of the company; the Court fixed December 8, 1988 as the date for redemption and ordered that in default of payment of the sum Page 31 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 due by that date, the property was to be sold by public auction. On an application made on February 16, 1978, the company was ordered to be wound up by an order dated August 3, 1979.
As default in payment of the decreed amount was committed, the mortgagees applied for leave of the Court under Section 446 to execute the decree against the official liquidator by application dated July 10, 1981. Three contributories sought injunction against taking any further action on the ground that the charge created by the company was not registered under Section 125 of the Companies Act, therefore, the mortgagees should be treated only as unsecured creditor. Their application was dismissed by a learned single Judge. On appeal, speaking for the Division Bench of the Bombay High Court Justice Bharucha (as he then was) laid down, inter alia,the principle that the question of applicability of Section 125 had to be decided on the terms of the decree - Whether the unregistered charge created by the mortgagor was kept alive or extinguished or replaced by an order of sale created by the decree; if upon a construction of the decree, the Court found that the unregistered charge was kept alive, the provisions of Section 125 would apply and if, on the other hand, the decree extinguished the unregistered charge, the section would not apply. We are in respectful agreement with that principle. We hold that a judgment creditor will be entitled to relief from the Company Court accordingly."
13.2 Now, examining the Bombay High Court decisions in their details, learned Single Judge of the Bombay High Court in Kamani Brothers (supra) held as under.
"The only point which requires consideration in the present case is whether s. 125 of the Companies Act will prevent the decree holder from executing a decree for sale obtained in a mortgage suit against a company prior to the Page 32 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 order of winding up, if the decree is in respect of a mortgage unregistered under the Companies Act. Section 125 deals with a charge created by the company. Such a charge must be registered as provided in s. 125. Otherwise, it will not bind the liquidator. Now, a decree is not a charge created by the company. It is, therefore, not covered by s. 125. Secondly, the rights of a decree holder flow from the decree itself. Hence, a decree enforcing a mortgage or a charge is distinct from the mortgage or charge which it enforces. Under sub-s. (4) of s. 125 of the Companies Act, various unregistered charges which became void under that section are enumerated. These include "a charge on any immovable property wherever situate or any interest therein". These words do not cover a mortgage decree. This becomes even more apparent if these words are read with the main provision in s. 125(1) which deals with only a charge created by a company. A decree on a mortgage, especially one obtained prior to winding up of the company, is, therefore, not governed by s. 125."
"As result of the decree in the present case, the rights under the mortgage have become crystallised in the decree for sale which has been passed. It may be that the mortgagor's right of redemption may continue up to a period prescribed in the decree and even thereafter until the sale of the mortgaged property under statutory provisions, but that does not mean that the decree itself is merely a charge. In the present case, rights under the mortgage have become finalised in the decree for sale which was validly passed at a time when there was no winding up petition pending against the company in the court. The mortgage as against the company was valid and a valid decree has been passed pursuant to that mortgage. It is not open to the official liquidator to consider that decree as void as against the official liquidator."Page 33 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022
C/COMA/268/2015 ORDER DATED: 25/02/2022 13.3 The said decision was taken in appeal before the Division Bench. The Division Bench in Official Liquidator, High Court, Bombay Vs Suryakant Natvarlal Surati [(1986) 59 CC 147 (Bom)] reversed the decision in Suryakant Natvarlal Surati Vs Kamani Brothers Private Limited [(1985) 58 Company Cases 121]. The facts of the said case before the Bombay High Court were that The trustees of the employees' gratuity trust fund of a company filed a suit against the company for realisation of amounts due under a mortgage created in their favour by the deposit of title deeds of an immovable property. On December 3, 1977, a preliminary decree was passed in that suit by admission that the trustees (mortgagees) were entitled to the mortgage or charge on the property and further that the sum was due and owing to the trustees (mortgagees) on the security of the mortgage. December 3, 1980, was fixed as the date of redemption and in the event of company committing default in the payment of the sum due by that date, the property was to be sold by public auction. On an application dated February 16, 1978, the company was ordered to be wound up by an order dated August 3, 1979. Default having been committed in payment by the date of redemption, the trustees (mortgagees) applied on July 10, 1981, for leave of the court under section 446 of the Companies Act, 1956, to execute the decree against the official liquidator and an order granting leave was made after notice to the Official Liquidator. Thereafter, an officer of the court gave directions for advertisement in respect of the sale of the property. Three contributories applied for an injunction restraining the taking of any further steps in execution of the decree on the ground that the charge claimed by the trustees (mortgagees) was not registered under section 125 of the Companies Act, 1956, and, therefore, they could be treated only as ordinary creditors. A single judge dismissed the application holding that the rights under the mortgage had become crystalised in the decree and the decree was not affected by section 125.
Page 34 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022C/COMA/268/2015 ORDER DATED: 25/02/2022 13.4 What was held by the Division Bench of Bombay High Court may be attentively looked into, for, the Apex Court in Indian Bank (supra) approved Division Bench decision of the Bombay High Court and expressed agreement with the principles laid down therein. The Bombay High Court held,
(i) that the fact that the Official Liquidator had not raised the plea that the unregistered charge was void against him at the stage of the application for leave under section 446 did not operate as constructive res judicata, because an order under section 446 merely granted liberty to the applicant to take legal proceedings against the company in liquidation wherein the rights or claims were to be adjudicated upon : the rights or claims of the applicant were not adjudicated upon in the proceedings under section 446;
(ii) that every charge created by a company which was not registered under the provisions of the Companies Act was ipso facto void against the liquidator upon the company being ordered to be wound up : no steps were required to be taken by the liquidator to make or have it declared void;
(iii) that for the application of the provisions of section 125, the court had to see whether under the terms of the decree, the unregistered charge created by the mortgage was kept alive or extinguished or replaced by an order of sale created by the decree. If upon a construction of the decree, the court found that the unregistered charge was kept alive, the provisions of section 125 would apply. If, on the other hand, the decree extinguished the unregistered charge, the section would not apply;
(iv) that, in this case, under the decree declaring the equitable mortgage and the charge created thereby and permitting redemption Page 35 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 thereof within the stated period, the unregistered charge created by the company in favour of the trustees (mortgagees) was kept alive. The order of sale of the mortgaged property under the decree was to operate only if by the stated period redemption had not been effected, and only upon such sale would the charge be extinguished. Section 125, therefore, applied to the unregistered charge created by the equitable mortgage and declared by the decree, and the charge was void as against the Official Liquidator. The trustees (mortgagees) could not sell the property notwithstanding the decree obtained prior to the order winding up the company.
(v) That further, the Official Liquidator, notwithstanding the decree, was entitled to place before the executing court his objections based on section 125."
(emphasis supplied) 13.5 The Apex Court in Indian Bank (supra) has approved the aforesaid decision of Division Bench of Bombay High Court.
Indian Bank (supra) explained
14. Now the decision in Indian Bank (supra) was referred to in Kerala State Financial Enterprises Vs Official Liquidator, High Court of Kerala [(2006) 10 SCC 709]. The facts were that the appellant- government company defaulted in respect of repayment of a loan. A recovery proceeding came to be initiated against the appellant-defaulting company under the Kerala Revenue Recovery Act, 1968 and a Notification was issued in that behalf in terms of Section 71 of the said Act. The properties of the defaulting company were put under attachment, in the meanwhile, the company went for voluntary liquidation and a Provisional Liquidator was appointed. In the pending company proceedings, the appellant company filed an Application seeking permission to proceed with sale of the properties.
Page 36 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022C/COMA/268/2015 ORDER DATED: 25/02/2022 The prayer was objected to on the ground inter alia that the charge in respect of the alleged debt was not registered with the Registrar of Companies and, thus, it was an unsecured creditor. Learned Company Judge of the High Court rejected the Application for leave to proceed with the revenue recovery proceedings and the Appeal thereagainst preferred by the company was dismissed by Division Bench. The Apex Court upheld the judgment of the High Court holding that mere attachment itself did not create any charge in the property under the said Kerala Revenue Recovery Act. The Supreme Court stated and ruled that in absence of a clear provision, the Companies Act cannot be held to be giving way to another law providing for recovery only leaving the rights and liabilities of the parties to be dealt with a general law. It was observed in paragraph 8 of the judgment that save and except certain special statutes in relation to recovery of debts from the properties of a company which has been directed to be wound up, the provisions of the Companies Act shall apply.
14.1 The Court considered Section 125 of the Act and further explained law laid down in Indian Bank (supra), by stating, "Section 125 of the Companies Act contains a special provision. It may not have any application in a case where a decree has already been passed, as was the case of Indian Bank V/s. Official Liquidator, Chemmeens Exports (P) Ltd. and Ors. (1998) 5 SCC 401, on the ground that in terms of Sub-section (2) of Section 446, the Company Court is not empowered to declare a decree passed by a competent court to be void. In that case it was held that the provisions of a special statute would apply subject to the provisions of the Companies Act. Therein a decree was already operative and observations were made only in that context."
(para 10) (emphasis supplied) Page 37 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 Creation of Charge and Decree
15. It may be stated that the creation of charge over the properties may be by way of contract. A statute may also create a charge. The charge may be created by decree of the court. The instance of creation of statutory charge is Section 11 of Employees Provident Fund and Miscellaneous Provisions Act, 1952 which provides for priority of payment of contributions over the debts. Sub-section (2) thereof says that without prejudice to the provision of subsection (1), if any amount is due from the employer, such amount due shall be deemed to be the first charge on the assets of the establishment, further providing that the same shall be paid in priority to all other debts. A document of mortgage executed is a charge created resulting out of contract of mortgage, whereunder the properties are mortgaged as security of the amount payable. Creation of charge by decree of the Court is different concept. The decree passed in the instant case did not create the charge. The charge was created contractually. The charge so created was not registered.
16. The decree which was passed and under consideration in the Indian Bank (supra) held the plaintiff entitled to realize a sum of Rs.29,50,605.59 Ps. with interest, further directing the defendant to deposit the said amount on or before a particular date, that is 28th August, 1982, and upon payment thereon, directing the plaintiff to hand over the mortgaged properties to defendant. The decree provided that on failure of deposit of amount the plaintiff's may apply for final decree and for sale of the properties in question. The decree of the Debt Recovery Tribunal in the present case with reference to which claim is laid by the applicant projecting itself as secured creditor was of similar kind as noted above. Having regard to the nature of the decree, it could be said that it kept the charge alive.
17. Therefore under the decree, unregistered charge Page 38 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 created by mortgage was kept alive. When unregistered charge was kept alive, provision of Section 125 would apply. This is as held by the Division Bench of the Bombay High Court in Official Liquidator, High Court of Bombay Vs Suryakant Natvarlal Surati (supra) which was in turn came to be approved by the Supreme Court in terms of the law declared and affirmed by the Supreme Court in Indian Bank (supra). In respect of the decree in question in the present case which could be construed as keeping the charge alive, was an unregistered charge. Section 125 would operate and the unregistered charge would be void against the Official Liquidator and other creditors, implying thereby that the applicant would stand as unsecured creditor.
18. In other words, the decree recognized the dues of the applicant, however, recognizing the dues and the payability of it by decree is not the same as creation of charge by the decree. The decree vested in the judgment debtor a status of creditor and also right to recover the dues fructified thereunder, but when the charge over the properties upon which the dues were accepted, was not registered as contemplated under Section 125 of the Companies Act, for the purpose of enforcing such dues vis-à-vis the company in liquidation against the Official Liquidator, the judgment creditor has to be governed by the parameters and provisions under the Companies Act, 1956.
19. The charge created by mortgage transaction was not got registered under Section 125 as on the date of winding up. Therefore such unregistered charge so created was void against the Official Liquidator as per the said provision. The charge then created was one created in the realm of contract. The decree passed by the Debt Recovery Tribunal did not 'create' charge as such. True it is that it traveled into the four corners of the decree. The decree as passed only recognized the debt in respect of the charge not registered under the Section. However the debt becoming so payable would not rank in priority Page 39 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 for its payment under the Companies Act, and would not be capable of being enforced as a secured debt of a secured creditor against the Official Liquidator. The applicant has to be taken as unsecured creditor.
20. In absence of registration, the element of security in the debt is made to deprive of its legal efficacy, that is to say the creditor would not be able to classify and project himself as a secured creditor before the official liquidator. The security created by virtue of mortgage is not wiped out but its enforcement against the Official Liquidator is voided. In other words, that notwithstanding the creation of charge by virtue of mortgage, since it was not registered on the date of winding up, though right to recover the debt is not extinguished, nor the debt is wiped out as such, but at the same time the creditor claiming on that basis would not be entitled to be ranked or to be categorized as secured creditor. He would stand as unsecured creditor, his debt would survive and subsist accordingly, and with such status."
12. Thus, considering all the three judgments which are cited before this Court namely, Indian Bank (Supra), Suryakant Natvarlal Surati (Supra) and Praga Tools Ltd. (Supra), this Court in the judgment of IFCI Ltd. (Supra) has come to the conclusion on the facts of the said case that the IFCI Ltd. cannot be considered as "Secured Creditor" as the charge was not registered under Section 125 of the Companies Act, 1956 on the date of winding up.
13. In view of the above findings arrived at by this Court in case of IFCI Ltd., it is Page 40 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 necessary to refer to the facts of the case of IFCI Ltd. as narrated in the aforesaid judgment to the effect that the Debt Recovery Tribunal (for short "the DRT") passed the order in O.A. No.293 of 2000 in the year 2004 after the date of order of winding up passed by this Court on 20 th January, 2000. Therefore, on the date of winding up of M/s. Gujarat Inject Limited (Company in liquidation) in the aforesaid case on 20th January, 2000, no order or Decree was passed by the DRT. Admittedly, IFCI Ltd. did not register the charge as required under Section 125 of the Companies Act, 1956 and in such circumstances, this Court held that the debt becoming so payable pursuant to the order passed by the DRT would not rank in priority for its payment under the Companies Act and would not be capable of being enforced as a secured debt of a secured creditor against the Official Liquidator. This finding is arrived at after considering all the three decisions relied upon by the learned advocates for the respective parties. This Court therefore, considering the facts of the case before it, held in paragraph 15 as under :
"15. It may be stated that the creation of charge over the properties may be by way of contract. A statute may also create a charge. The charge may be created by decree of the court. The instance of creation of statutory charge is Section 11 of Employees Provident Fund and Miscellaneous Provisions Act, 1952 which provides for priority of Page 41 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 payment of contributions over the debts. Sub-section (2) thereof says that without prejudice to the provision of subsection (1), if any amount is due from the employer, such amount due shall be deemed to be the first charge on the assets of the establishment, further providing that the same shall be paid in priority to all other debts. A document of mortgage executed is a charge created resulting out of contract of mortgage, whereunder the properties are mortgaged as security of the amount payable. Creation of charge by decree of the Court is different concept. The decree passed in the instant case did not create the charge. The charge was created contractually. The charge so created was not registered."
14. A document of mortgage executed is a charge created resulting out of contract of mortgage, whereunder the properties are mortgaged as security of the amount payable. Creation of charge by decree of the Court is different concept. The decree passed in the instant case did not create the charge.
15. In the facts of the present case, the Decree was passed on 5th February, 1996 by the Board of Nominees as per the decision of the Division Bench of the Bombay High Court in case of Suryakant Natvarlal Surati (Supra) pursuant to the Decree as no date is given by the Board of Nominees for redemption of the charge, the charge was extinguished on the date of the Decree and therefore, the provisions of Section 125 of the Companies Act, 1956 would not be applicable as held by the Apex Court in case of Indian Bank Page 42 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022 C/COMA/268/2015 ORDER DATED: 25/02/2022 (Supra). Therefore, on the date of winding up on 12th January, 1998 Section 125 has no application as the charge was not kept alive by the Decree passed prior to the date of winding up, as it stood extinguished.
16. In view of the above analysis made by this Court in case of IFCI Ltd. (Supra), it is not necessary to again analyze the provisions of Section 125 of the Companies Act, 1956 and all the three judgments as cited by the learned advocates and accepting the analysis in the judgment, conclusion arrived at in case of IFCI Ltd. (Supra) is not applicable in the facts of the present case.
17. For the foregoing reasons, the application is allowed and the Official Liquidator is directed to consider the claim of the applicant as "Secured Creditor" in accordance with law.
(BHARGAV D. KARIA, J) dolly Page 43 of 43 Downloaded on : Sun Apr 24 14:16:59 IST 2022