2003 (3) TMI 529 - SC - Companies Law

State Financial Corporations cannot unilaterally realize security post winding-up order. Official Liquidator involvement required.

International Coach Builders Ltd. Versus Karnataka State Financial Corpn.

The court held that State Financial Corporations (SFCs) cannot unilaterally realize their security under Section 29 of the SFC Act post a winding-up ... Whether the rights of the State Financial Corporation under section 29 of SFC Act to sell and realise the security could be exercised without reference to the Company Court when a winding up order is made against the company? Held that:- Appeal allowed. The right unilaterally exercisable under section 29 of the SFC Act is available against a debtor, if a company, only so long as there is no order of winding up. The SFCs cannot unilaterally act to realise the mortgaged properties without the consent of the official liquidator representing workmen for the pari passu charge in their favour under the proviso to section 529 of the Companies Act, 1956. If the official liquidator does not consent, the SFCs have to move the Company Court for appropriate directions to the official liquidator who is the pari passu charge holder on behalf of the workmen. In any event, the official liquidator cannot act without seeking directions from the Company Court and under its supervision. Issues Involved:1. Whether the rights of the State Financial Corporation (SFC) under Section 29 of the SFC Act to sell and realize the security could be exercised without reference to the Company Court when a winding-up order is made against the company.Issue-wise Detailed Analysis:1. Rights of SFC under Section 29 of the SFC Act:The main issue addressed in these appeals is whether the State Financial Corporations (SFCs) can exercise their rights under Section 29 of the SFC Act to sell and realize the security without involving the Company Court when a winding-up order is made against a company. The SFCs contended that they are secured creditors and can realize their security without court intervention, relying on the judgment in M.K. Ranganathan v. Government of Madras, which allowed secured creditors to stand outside the winding-up and realize their security.2. Impact of Amendments to the Companies Act:The judgment highlights that the amendments made to the Companies Act in 1985, specifically the addition of Section 529A and the proviso to Section 529, brought significant changes. These amendments created a pari passu charge in favor of the workmen's dues on the security of every secured creditor. The Official Liquidator represents the workmen and enforces this charge, making the realization of security by SFCs subject to the rights of the workmen.3. Conflict Between SFC Act and Companies Act:The court observed that there is no inherent conflict between the SFC Act and the Companies Act. The SFC Act provides an expedited remedy for SFCs to realize their security without court intervention under normal circumstances. However, when the debtor is a company in winding-up, the rights of the SFCs are affected by the provisions of the Companies Act, particularly Sections 529 and 529A, which prioritize the dues of workmen.4. Role of Official Liquidator:The Official Liquidator, representing the workmen, holds a pari passu charge on the assets of the company in liquidation. The court emphasized that the SFCs cannot act independently to realize their security without the consent of the Official Liquidator or the supervision of the Company Court. The realization of security must be done in tandem with the rights of the workmen, ensuring their dues are protected.5. Judicial Precedents and High Court Judgments:The judgment references various High Court decisions, including the Bombay High Court's view in Maharashtra State Financial Corpn. v. Ballarpur Industries Ltd., which supports the need for Company Court intervention when realizing security in a winding-up scenario. The court also disagreed with the Gujarat High Court's reasoning that SFCs can realize security without involving the Company Court, emphasizing the statutory changes brought by the 1985 amendments to the Companies Act.6. Conclusion and Directions:The court concluded that the SFCs' right to unilaterally exercise their powers under Section 29 of the SFC Act is available only until a winding-up order is made. Post winding-up, the SFCs must obtain consent from the Official Liquidator or seek directions from the Company Court. The judgment directs the SFCs to approach the Company Court for appropriate directions in the realization of their securities, ensuring the protection of workmen's dues as per the Companies Act.Judgment Outcomes:- Civil Appeal No. 4702/1994: Allowed, directing KSFC to seek directions from the Company Court.- Civil Appeal No. 12928/1996: Dismissed.- Civil Appeal Nos. 6491/1995 and 2007/1997: Dismissed with liberty to move the Company Court.- Civil Appeal No. 6303/1995: Allowed, setting aside the Gujarat High Court's judgment and upholding the Company Judge's decision, with liberty to GSFC to seek directions from the Company Court.