1993 (7) TMI 249 - HC - Companies Law

State Financial Corporation barred from seizing assets post company winding up. Official liquidator gains control.

Indian Textiles Versus Gujarat State Financial Corpn.

The court ruled that the State Financial Corporation cannot take possession and dispose of assets without court leave once a company is directed to be ... Custody of company’s property, Winding up - Overriding preferential payments Issues Involved:1. Entitlement of the State Financial Corporation to take possession and dispose of assets without court leave.2. Entitlement of the official liquidator to custody and control of assets.3. Legality of the State Financial Corporation's actions in taking possession and disposing of assets.4. Directions for the State Financial Corporation to hand over possession and sale proceeds to the official liquidator.5. Potential contempt action against the State Financial Corporation.Detailed Analysis:Issue 1: Entitlement of the State Financial Corporation to Take Possession and Dispose of Assets Without Court LeaveThe court concluded that Section 29(1) of the State Financial Corporations Act, 1951, cannot be invoked by the State Financial Corporation once the debtor company is directed to be wound up and the company court is deemed to be in custody of all the assets of the company by virtue of Section 456(2) of the Companies Act, 1956. The State Financial Corporation can only invoke its powers before such an eventuality and not thereafter. The court emphasized that the Corporation is not entitled to dispose of such assets without obtaining the prior leave of the company court once the company is directed to be wound up and the official liquidator is appointed.Issue 2: Entitlement of the Official Liquidator to Custody and Control of AssetsThe court held that once a winding-up order is passed, the official liquidator is deemed to be in custody and control of all the assets of the company, including those mortgaged, hypothecated, and charged in favor of the secured creditor like the State Financial Corporation. The official liquidator must protect the interest of the workmen by enforcing the statutory pari passu charge created by Section 529A of the Companies Act, 1956. The official liquidator is justified in taking charge of all the assets, including those mortgaged and hypothecated, and realizing the securities for the benefit of all creditors and shareholders.Issue 3: Legality of the State Financial Corporation's ActionsThe court found that the Gujarat State Financial Corporation acted illegally in taking possession of the mortgaged, hypothecated, and charged assets on September 7, 1989, and in disposing of plant and machinery in December 1991 without obtaining prior leave of the court. The actions of the Corporation flouted the provisions of Sections 456 and 537 of the Companies Act, 1956.Issue 4: Directions for the State Financial Corporation to Hand Over Possession and Sale ProceedsThe court directed the Gujarat State Financial Corporation to hand over possession of the company's assets, consisting of land and building at Bharuch, to the official liquidator within six weeks. The official liquidator was authorized to sell the assets by public auction or private treaty subject to confirmation by the court. Additionally, the Corporation was directed to hand over the net sale proceeds from the sale of plant and machinery to the official liquidator within six weeks, with the official liquidator reserving the right to claim interest on the amount through separate proceedings.Issue 5: Potential Contempt Action Against the State Financial CorporationThe application for taking action against the Gujarat State Financial Corporation under the Contempt of Courts Act, 1971, was rejected. The court noted that while the Corporation's actions were illegal, they did not appear to be in wilful and deliberate defiance of court orders. However, if the Corporation fails to comply with the court's orders within the stipulated time, the official liquidator may report to the court for potential contempt action against the Corporation and its officers.Conclusion:The court concluded that the State Financial Corporation cannot invoke Section 29(1) of the State Financial Corporations Act, 1951, after the company is directed to be wound up. The official liquidator is entitled to custody and control of all assets. The actions of the State Financial Corporation in taking possession and disposing of assets without court leave were illegal. The Corporation was directed to hand over possession and sale proceeds to the official liquidator, and no contempt action was taken against the Corporation at this stage.