JURISDICTION OF OFFICIAL LIQUIDATOR TO ADJUDICATE THE CLAIM OF SECURED CREDITOR

In ‘Laxmi Fibres Limited V. A.P. Industrial Development Corporation Limited and others’ 2015 (8) TMI 434 - SUPREME COURT the official liquidator has taken over the charge of the company by virtue of Section 445 of the Companies Act, 1956.  The respondent seized the property of the company under Section 29 of the State Financial Corporation Act, 1959.   The respondent sold the company as per conditions imposed by the High Court.   One of the conditions to be complied with by the respondent is that the respondent is required to obtain permission of the High Court for finalizing the sale.  The Official liquidator inspected the properties and assets of the company.  The valuer’s report was also placed before the High Court.  The report is in respect of the properties that are covered under the mortgage deeds in favor of the respondent Corporation.  The respondent also submitted before the High Court to undertake to deposit workmen’s dues with the official liquidator as and when quantified by him as per the provisions of Section 529A of the Companies Act, 1956 with interest.  The surplus that would remain after the sale and realization of the dues of the secured creditors and the workmen could be made available to the official liquidator for dealing with as per the Act and the Rules.

The High Court, noting the contention of all the parties and found that there was no objection for the sale of the properties either by the second charge holder or by the Official liquidator, confirmed the sale of land, buildings, plant and machinery in favor of Shri Venkateswara Industries for a sum of ₹ 86 lakhs and carding machine in favor of Supreme Associates, Coimbatore for a sum of ₹ 2.45 lakhs.  The confirmation of above sales is subject to the following conditions:

• Before appropriating the sale proceedings, they should prove their claim before the Official Liquidator;
• The proceeds realized through the sale of the properties shall be kept in  interest earning deposit till the official liquidator adjudicates and quantifies the claim;
• One fourth of the sale proceeds shall be deposited with the Official liquidator to enable him to proceed with the adjudication on the claims of the workmen and for distribution among themselves;
• Excess sale proceeds, if any, shall be made over to the official liquidator;
• After receiving the entire sale consideration only, the properties are to be handed over the highest bidders and exercise necessary sale papers in their favor.

The respondent corporation filed an appeal before the Division Bench and contended that there could be no question of establishing the claim of the corporation before the Official Liquidator as the corporation was a secured credit.

The Division Bench accepted the above said contentions and held that the Official liquidator does not have jurisdiction to entertain or adjudicate the claim of a secured creditor who has been permitted by the Company Judge to stand outside the liquidation proceedings with liberty to pursue its remedy as per statutory rights available under the State Financial Corporation Act subject to the conditions imposed by the Court.

Against this order appeal was filed before the Supreme Court.  The Supreme Court upheld the findings of the Division Bench.  The Supreme Court, while coming to the above said conclusion relied on three judgments of Supreme Court as detailed below:

In ‘A.P. State Financial Corporation V. Official liquidator’ – 2000 (8) TMI 986 - SUPREME COURT OF INDIA the Supreme Court examined the extent of powers available to a Financial  Corporation under Section 29 and 46 of the Act in the light of later amendments to the Act incorporating the proviso to Section 529(1) and Section 529 A of the Act through the Amendment Act 35 of 1985.  The object of the amendment is to protect the dues of the workmen.  The Supreme Court held that the power available to a corporation under Section 29 to sell the property of a debtor company under liquidation is not absolute but is subject to the proviso to Section 529(1) and non obstante clause in Section 529 A of the Act providing for pari passu charge of the workmen.

In ‘International Coach Builders Limited V. Karnataka State Financial Corporation’ – 2003 (3) TMI 529 - SUPREME COURT OF INDIA the Supreme Court not only followed the view taken in A.P. State Financial Corporation case (supra) but also explain as to how the view adopted would not obliterate the difference between a creditor opting to stay outside winding up and one who opts to prove his debt in winding up.  The Supreme Court held that as a result of the amendments made by the Act of 1985 in the Companies Act, 1956, SFCs as secured creditors must seek leave of the company court for the limited purpose of ensuring that the pari passu charge in favor of the workmen is safeguarded by imposition of suitable conditions under the supervision of the company court.   If this amounts to impeding their unimpeded rights so be it.  This impediment is of a limited nature for the specific purposes of protecting the pari passu charge of the workmen’s dues and subject thereto, SFCs can continue to exercise their statutory rights as secured creditors without being reduced to status of unsecured creditors required to prove their debts in insolvency and stand in line with other unsecured creditors.

In ‘Rajasthan State Financial Corporation V. Official Liquidator’ – 2005 (10) TMI 280 - SUPREME COURT OF INDIA the Supreme Court clarified that the right of a financial institution or of the Recovering Tribunal or that of a financial corporation or the court which has been approached under Section 31 of SFC Act to sell the assets may not be taken away, but the same stands restricted by the requirement of the official liquidator being associated with it, giving company court the right to ensure that the distribution of the assets  in terms of Section 529A of the Act takes place.

The proviso to Section 529(1) of the Companies Act, 1956 provides that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favor of the workmen to the extent of the workmen’s portion therein, and, where a secured creditor, instead of relinquishing his security and proving his debt opts to realize his security-

• the liquidator shall be entitled to represent the workmen and enforce such charge;
• any amount realized by the liquidator by way of enforcement of such charge shall be applied ratably for the discharge of workmen’s dues; and
• so much of the debt due to such secured creditor as could not be realized by him by virtue of the foregoing provisions of this proviso or the amount of the workmen’s portion in his security, whichever is less, shall rank pari passu with the workmen’s dues for the purposes of Section 529A.

Section 529A of the Companies Act, 1956 provides that notwithstanding anything contained in any other provisions of this Act or any other laws for the time being in force, in the winding up of a company-

• Workmen’s dues; and
• Debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to Section 529(1)pari passu with such dues

shall be paid in priority to all other debts.   The debts payable shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.

The Supreme Court was of the considered view that the rights of a financial corporation have been impeded by the amendment in Companies Act, only to a limited extend and for the limited purpose of securing the right of the workers for distribution of their wages as pari passu charge.  But such limited impediment to their rights will not alter the status of the Corporations as secured creditors and they will not be required to prove their debt which they are entitled to realize under the provisions of SFC Act subject to the right of workers to receive their waves also as secured creditors on pari passu basis.

If the Official liquidator has reasons to be aggrieved by claims made by a financial corporation under SFC act, its remedy would be to initiate appropriate civil proceedings before an appropriate forum and not to assume jurisdiction to sit in adjudication and decide entitlement of the financial corporation when it has opted to stand outside the liquidation proceeding as a secured creditor.  The Supreme Court dismissed the appeal.