1995 (9) TMI 301 - HC - Companies Law

Financial institution must seek court approval to utilize SFC Act section 29, safeguarding liquidation process.

Bihar Woollen Fabrics Ltd. (In Liquidation), In re

The court ruled that a financial institution, like BIS-CICO, must obtain court permission under section 446 of the Companies Act to utilize section 29 of ... Winding up – Avoidance of certain attachments, executions, etc. Issues:1. Whether a financial institution can take recourse to the provisions of section 29 of the SFC Act without obtaining leave of the company court under section 446 of the Companies Act.2. Whether leave should be granted to secured creditors as a matter of course under section 446 of the Companies Act.Analysis:The judgment dealt with applications filed by Canara Bank, Bihar State Credit Investment Corporation Limited (BIS-CICO), and the ex-managing director of a company seeking leave to prosecute suits or file suits for recovery of money against the company. The key issue was whether a financial institution like BIS-CICO could utilize section 29 of the SFC Act without obtaining leave of the company court under section 446 of the Companies Act. It was established that secured creditors, including BIS-CICO, needed court permission to initiate legal proceedings despite standing outside the liquidation process. The court emphasized that the company court's jurisdiction over secured creditors and company assets was not negated even if the creditors chose to realize their security outside the winding-up proceedings.Furthermore, the judgment discussed the necessity of obtaining leave for secured creditors to proceed with legal actions under section 446 of the Companies Act. While a previous judgment suggested granting leave as a matter of course, the court disagreed, citing sections 529 and 529A of the Act. Granting leave automatically would undermine the statutory provisions and lead to unnecessary legal proceedings, contrary to the company's best interests. Instead, the court favored a more cautious approach, considering the transfer of proceedings as outlined in section 446(3) to streamline the process and prevent undue financial burden on the company.In conclusion, the court rejected BIS-CICO's plea to sell the company's assets under section 29 of the SFC Act without court permission. Additionally, the judgment refused to grant leave to BIS-CICO for legal actions independently but directed the transfer of pending suits by Canara Bank and the ex-managing director to be handled within the ongoing proceedings. The decision highlighted the importance of upholding the Companies Act's provisions and ensuring a structured approach to dealing with secured creditors within the liquidation framework.