1984 (12) TMI 249 - HC - Companies Law

Secured Creditors Denied Possession of Goods in Liquidation: Clarification on Legal Procedures

The court dismissed applications under section 446(2)(b) of the Companies Act, 1956, where secured creditors sought possession of hypothecated goods in ... Winding up – Suits stayed on winding-up order, Overriding preferential payments Issues:Applications under section 446(2)(b) of the Companies Act, 1956 for possession of hypothecated goods by secured creditors in liquidation proceedings.Analysis:The judgment addresses two applications under section 446(2)(b) of the Companies Act, 1956, involving secured creditors seeking possession of hypothecated goods in companies under liquidation. The first application involves a bank claiming to be a secured creditor of a company in liquidation, seeking possession of machinery and stock-in-trade hypothecated under four deeds. The second application pertains to an individual seeking custody of machinery hypothecated by another company in liquidation. Both applicants express their intention to stay outside the winding-up proceedings.The main issue is whether the official liquidator is obligated to hand over the hypothecated goods to secured creditors or if such creditors can move the court under section 446(2)(b) of the Act. The court examines the maintainability of the applications, emphasizing that secured creditors must enforce their security through appropriate legal procedures outside the winding-up proceedings. The judgment clarifies that the official liquidator's role is to settle claims of all creditors in accordance with insolvency laws.The court distinguishes between possession and the right to seek possession of hypothecated goods, highlighting that enforcement of security must follow legal procedures. It emphasizes that claims under section 446(2)(b) are not equivalent to civil suits and that the company court's jurisdiction is limited to matters within the winding-up proceedings. The judgment cites legal precedents and provisions of the Provincial Insolvency Act to support its decision.Furthermore, the court rejects the alternative prayer for sale of hypothecated goods in the applications, stating that such actions should be pursued through civil court proceedings. It also notes the English court practice in similar situations but emphasizes the need to align decisions with local legal conditions. Ultimately, the court dismisses the applications, advising the applicants to realize their security through appropriate civil court actions and directs that proceeds from any sale by the official liquidator be kept intact until the applicants obtain a decree from the civil court.In conclusion, the judgment clarifies the limitations of the company court's jurisdiction in matters of secured creditors seeking possession of hypothecated goods in liquidation proceedings, emphasizing the need for adherence to established legal procedures outside the winding-up process.