2010 (7) TMI 826 - HC - Companies Law

Secured Creditor's Priority Upheld in Sale Proceeds Dispute

Canara Bank Versus Northland Sugar Complex Ltd. (In Liquidation)

The applicant, a secured creditor, was affirmed as such by the DRT and DRAT, entitling them to recover a specified amount with interest from PSIDC's sale ... Whether the applicant is an unsecured creditor and thus, it is required to lodge its claim before the official liquidator for adjudication ? Whether the DRT under the RDB Act, will have the jurisdiction in respect of the proceedings initiated by the applicant, though secured assets were put to sale by PSIDC prior to the order of the winding up ? Whether the proceedings before the DRT are in respect of the money realised by the secured creditors ? Whether the claim of the applicant being a secured creditor, is subject to the rights of the other secured creditors including the claim of the workmen under section 529A of the Companies Act, 1956 ? Held that:- After sale the money realised by the sale of the secured assets would continue to be security against which a secured creditor can proceed and realise its dues. The sale proceeds is the cash worth of the security of the assets. Therefore, the act of sale of the secured assets will not render a secured creditor as an unsecured creditor. It has been held that it shall be necessary for the Tribunal to decide the question of priority by keeping in mind the principles underlying section 73 of the Code of Civil Procedure. It has been further held that under section 73 of the Code of Civil Procedure, sharing of the sale proceeds is permissible only if the person seeking such share has obtained a decree or an order of adjudication from the Tribunal and also complied with other conditions laid down under section 73 of the Code of Civil Procedure. The contention of Shri Kansal is wholly misconceived. The discussion in the aforesaid paras is in respect of the facts of the case. Allahabad Bank, as an unsecured creditor, has sold property of the company on the strength of a money decree obtained from the DRT. The question of appropriation raised was in respect of the said sale consideration. Therefore, the contention that the Tribunal has jurisdiction only in respect of the money realised, is untenable. The applicant is a secured creditor, who has opted to stand outside the winding up. The secured assets have been put to sale by the PSIDC including the assets secured in favour of the applicant. Therefore, the applicant is entitled to recover the amount of ₹ 1,41,83,391.33 with pendente lite and future interest at 9 per cent per annum till actual recovery, as found by the DRT and modified by the DRAT, from the sale proceeds lying in deposit with PSIDC. However, such entitlement is subject to the right of the claim of the workmen under section 529A of the Companies Act, 1956, as and when adjudicated upon by the official liquidator. The present application is allowed and the applicant-bank is found entitled to recover the amount of ₹ 1,41,83,391.33 with pendente lite and future interest at 9 per cent per annum till recovery, in terms of the order passed by the DRT. Issues Involved:1. Whether the applicant is an unsecured creditor and required to lodge its claim before the official liquidator for adjudication.2. Whether the DRT under the RDB Act will have jurisdiction in respect of the proceedings initiated by the applicant, though secured assets were put to sale by PSIDC prior to the order of the winding up.3. Whether the proceedings before the DRT are in respect of the money realized by the secured creditors.4. Whether the claim of the applicant being a secured creditor is subject to the rights of the other secured creditors, including the claim of the workmen under section 529A of the Companies Act, 1956.Issue-wise Detailed Analysis:Question No. 1:The applicant is a secured creditor. The DRT held that the applicant-bank is a secured creditor as its charge has been duly registered with the Registrar of Companies. This finding was affirmed by the DRAT, which noted that the applicant-bank's officials were present and signed the proceedings when PSIDC took over the fixed assets, including plant and machinery, of the borrower company. The DRAT held that the applicant is entitled to recover an amount of Rs. 1,41,83,391.33 with pendente lite and future interest at 9% per annum till actual recovery from PSIDC. The argument that the applicant is an unsecured creditor due to the sale of assets by PSIDC before the winding up is misconceived. The winding up order relates back to the date of filing of the winding-up petition, and the sale proceeds from the secured assets remain security against which a secured creditor can proceed.Question No. 2:In Allahabad Bank v. Canara Bank, it was held that sections 17 and 18 of the RDB Act confer exclusive jurisdiction to the Tribunal for adjudication of liability and execution of recovery certificates, and no leave of the company court is necessary. The Supreme Court also held that the Tribunal has jurisdiction to decide questions of priorities among creditors in accordance with section 19(19) of the RDB Act read with section 529A of the Companies Act. Therefore, the Tribunal alone has jurisdiction to entertain the question of priorities.Question No. 3:The contention that the Tribunal has jurisdiction only in respect of money realized from the sale of assets is untenable. The discussion in Allahabad Bank's case was specific to its facts, where the unsecured creditor had sold the property of the company based on a money decree. The Tribunal's jurisdiction extends beyond merely the money realized.Question No. 4:The Supreme Court in Allahabad Bank's case distinguished between secured creditors who go before the company court and those who stand outside the winding up to realize their security. The applicant falls into the latter category and is entitled to recover the amount adjudicated by the DRT and modified by the DRAT from the sale proceeds lying with PSIDC. However, this entitlement is subject to the rights of the workmen under section 529A of the Companies Act, 1956.Conclusion:The applicant is a secured creditor and entitled to recover Rs. 1,41,83,391.33 with pendente lite and future interest at 9% per annum till actual recovery from the sale proceeds with PSIDC. This recovery is subject to the rights of the workmen as adjudicated by the official liquidator. The applicant must furnish an undertaking to reimburse the official liquidator for the workmen's claims found due and payable.