Secured creditor liability in winding up is limited to preservation costs, not ad hoc preliminary or advertisement expenses.

In a winding-up order passed on a BIFR reference, a secured creditor who was not the petitioner and did not support the reference cannot be compelled at the threshold to deposit ad hoc amounts for preliminary expenses or advertisement of the winding-up order. The obligation to advertise the winding-up order rests on the petitioner, and the proviso to section 529(2) does not create a general duty to fund initial winding-up costs. However, the secured creditor may still be required to reimburse or advance expenses directly connected with preservation and maintenance of the security, where such expenditure is properly shown and supported by details.

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Issues: (i) Whether a secured creditor, against whom no winding-up petition was made and who did not support the reference, can be directed at the threshold of winding up to deposit ad hoc amounts towards preliminary expenses and advertisement of the winding-up order; (ii) Whether the secured creditor can be required to bear expenses incurred by the official liquidator only for preservation and maintenance of the security.

Issue (i): Whether a secured creditor, against whom no winding-up petition was made and who did not support the reference, can be directed at the threshold of winding up to deposit ad hoc amounts towards preliminary expenses and advertisement of the winding-up order.

Analysis: The obligation to advertise the winding-up order under rule 113 rests on the petitioner. In a winding-up order passed on a reference by the BIFR under section 20 of the Sick Industrial Companies (Special Provisions) Act, 1985, the secured creditor cannot be treated as the petitioner merely because it is a principal creditor. The proviso to section 529(2) does not create a positive duty to advance preliminary expenses, and rule 292 also does not authorise an ad hoc deposit at the inception of winding up. The expenses contemplated by sections 529 and 529A relate to preservation of security and do not extend to advertisement costs or initial expenses for putting the winding-up order into effect.

Conclusion: The direction requiring the secured creditor to deposit preliminary expenses and to advertise the winding-up order is not sustainable and is set aside.

Issue (ii): Whether the secured creditor can be required to bear expenses incurred by the official liquidator only for preservation and maintenance of the security.

Analysis: The proviso to section 529(2) contemplates reimbursement of expenses incurred for preserving the security when the secured creditor seeks to realise the security on its own or when the official liquidator incurs expenditure directly referable to safeguarding that security. Such liability arises at the appropriate stage and not as an advance liability for general preliminary expenses. The official liquidator may require payment or reimbursement for such specific expenditure, provided adequate details are furnished, and disputes on quantum or justification can be placed before the court.

Conclusion: The secured creditor remains liable to reimburse or, where justified, advance expenses strictly connected with preservation and maintenance of the security.

Final Conclusion: The appeals succeed to the extent that the ad hoc directions for preliminary expenses and advertisement are unsustainable, while the obligation to meet expenses genuinely incurred for preservation of the secured assets is preserved.

Ratio Decidendi: In a winding-up order passed on a BIFR reference, a secured creditor who is not the petitioner cannot be compelled at the threshold to advance preliminary or advertisement expenses, but may be required to bear expenses directly referable to preservation and maintenance of the security.

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