1993 (7) TMI 252 - DSC - Companies Law

Court Orders Equitable Asset Distribution Under Special Securities Act Section 11(2)

Bank of Baroda Versus Fairgrowth Financeial Services Ltd.

The court ruled that all claims, including those of financial institutions with secured interests, must adhere to the distribution order outlined in ... Discharge of liabilities, Act to have overriding effect Issues Involved:1. Rights of financial institutions in attached properties.2. Interpretation of 'property belonging to a notified party.'3. Distribution of attached properties under Section 11(2) of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.4. Impact of prior contractual rights and special interests on attachment.5. Constitutional validity of Section 11 under Articles 14 and 19 of the Constitution of India.6. Bankers' rights of lien, set off, and adjustment of accounts.Detailed Analysis:1. Rights of Financial Institutions in Attached Properties:The court was faced with numerous petitions from financial institutions claiming rights in properties attached under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992. These claims were based on various grounds such as banker's lien, set off, pledges, and hypothecation. The institutions contended that their rights, either under specific documents or by law, entitled them to appropriate the attached properties.2. Interpretation of 'Property Belonging to a Notified Party':The Custodian argued that once a property is attached under Section 3 of the Act, it should be distributed as per Section 11(2), regardless of any special rights claimed by third parties. The term 'property belonging to' was not defined in the Act, and the Custodian suggested it should be interpreted broadly to include any property over which the notified party had a right of disposal. The court agreed, noting that the attachment under the Act is broader than under the Criminal Procedure Code or Civil Procedure Code, aiming for an equitable distribution of assets similar to bankruptcy laws.3. Distribution of Attached Properties under Section 11(2):Section 11(2) mandates the distribution of attached properties in a specific order: first to government dues, then to financial institutions, and finally to other liabilities as specified by the Special Court. The court held that all creditors, including those with special interests or secured claims, must stand in line for distribution as per this order. The court emphasized that the Act was designed to ensure a rational and equitable distribution of assets, preventing protracted litigations and ensuring a speedy return of public monies.4. Impact of Prior Contractual Rights and Special Interests on Attachment:The court examined whether prior contractual rights or special interests in properties could prevail over the statutory attachment. The Custodian argued that while these rights are not abrogated, they must be enforced within the framework of Section 11(2). The court agreed, stating that the attachment under the Act does not nullify these rights but requires their enforcement to be in line with the statutory distribution order.5. Constitutional Validity of Section 11 under Articles 14 and 19:Petitioners argued that interpreting Section 11 to include secured creditors in the distribution order would violate Articles 14 and 19 of the Constitution by depriving them of their security benefits. The court rejected this argument, holding that the distribution order is rational, equitable, and designed to meet the Act's objectives. The court noted that the Act aims to recover public monies and return them to financial institutions and banks, from where they were siphoned off, in an orderly manner.6. Bankers' Rights of Lien, Set Off, and Adjustment of Accounts:The court considered the rights of bankers, including lien, set off, and adjustment of accounts. The Custodian argued that these rights must be subject to the statutory distribution order under Section 11(2). The court agreed, stating that while these rights are preserved, they must be exercised in accordance with the Act's provisions. The court emphasized that the interpretation must ensure an orderly distribution of assets, preventing any party from circumventing the statutory order of payments.Conclusion:The court concluded that all claims, including those of secured creditors and parties with special interests, must be addressed within the framework of Section 11(2) of the Act. The statutory attachment and distribution order aim to ensure an equitable and rational distribution of assets, prioritizing public monies and financial institutions. The court upheld the constitutional validity of Section 11, emphasizing that the Act's provisions are designed to meet its objectives without abrogating private rights.