2003 (3) TMI 529 - SC - Companies Law

State Financial Corporation's post-winding-up sale of secured assets u/s29 vs workmen's pari passu charge; unilateral sale barred.

After a winding-up order, the dominant issue was whether a State Financial Corporation (SFC) could unilaterally exercise its statutory power under s.29 of ... Pari passu charge in favour of the workmen - statutory right under section 29 of the SFC Act to take possession and realise security - representative right of the Official Liquidator to enforce the workmen's pari passu charge - supervision and directions of the Company Court in the realisation of securities - amendments to the Companies Act (proviso to section 529 and section 529A) overriding inconsistent rightsStatutory right under section 29 of the SFC Act to take possession and realise security - pari passu charge in favour of the workmen - representative right of the Official Liquidator to enforce the workmen's pari passu charge - supervision and directions of the Company Court in the realisation of securities - amendments to the Companies Act (proviso to section 529 and section 529A) overriding inconsistent rights - Extent to which a State Financial Corporation may exercise its rights under section 29 of the SFC Act when the debtor company is under winding up - HELD THAT: - The Court held that the unilateral right of an SFC under section 29 to take possession and realise mortgaged assets is available against a debtor company only so long as no winding up order has been made. The 1985 amendments to the Companies Act (the proviso to section 529 and section 529A) create a pari passu charge in favour of the workmen to the extent of their dues and entitle the Official Liquidator to represent and enforce that charge. Consequently, where a company is in liquidation an SFC that purports to realise its security must reckon with the Official Liquidator's statutory position as representative of the workmen; the existence of the pari passu charge converts the relationship into one akin to co mortgagees and thereby brings the exercise of the SFC's rights under the supervision of the Company Court. If the Official Liquidator withholds consent, the SFC must apply to the Company Court for directions; the Official Liquidator cannot act independently without the Court's leave or directions. The Court rejected the contention that the SFC Act's special machinery or its non obstante clause permits the SFC to override the statutory rights conferred on workmen by the Companies Act amendments, holding that the later Parliamentary enactments prevail and must be given effect so as to protect the pari passu charge of workmen. [Paras 32]The right under section 29 is exercisable against a company only before winding up; once winding up is ordered the SFC cannot unilaterally realise mortgaged assets without either the consent of the Official Liquidator (representing workmen's pari passu charge) or directions of the Company Court.Final Conclusion: The appeals were disposed by holding that SFCs cannot, after a winding up order, realise mortgaged assets unilaterally; they must obtain concurrence of the Official Liquidator or seek directions from the Company Court. Several appeals were allowed or dismissed accordingly, with liberty to the SFCs to move the Company Court for appropriate directions. 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.