2015 (6) TMI 650 - HC - Companies Law

Secured Creditors Entitled to Contractual Interest Post-Winding Up despite Cap

LVSR Farms (P.) Ltd. Versus Official Liquidator, High Court at Hyderabad

The court held that secured creditors are entitled to the contractual rate of interest for the post-winding up period if surplus funds are available, ... Entitlement of contractual rate of interest by secured creditor for the post winding up period - Surplus amount available before such amount is distributed among the unsecured creditors - Held that:- Under provisions of sections 529, 529A and 530 of the Act , the dues of the secured creditor and the dues of the workmen of the company in liquidation are made to stand on par with each other. As per sub-section (2) of section 529A, the debts payable to these categories shall be paid in full. The phrase 'paid in full' undoubtedly pre-supposes that in case of secured creditors, the debts must include principal and interest payable under the contract and in case of workmen, wages payable to them under the contract of employment, or the statutory provisions in force, as the case may be. Thus, unless the assets of the company in liquidation are insufficient to meet the dues payable to these two categories, they shall be paid in full. In case the amount realised by sale of the charged property is insufficient to satisfy the debts of the secured creditors and the workmen's dues, such balance amounts, not exceeding workmen's portion in the secured debtor's security shall be treated as priority debts under sub-section (1) of section 529A and in such case, these debts shall be paid before considering the claims of other creditors. It is only after making payment of these debts in full, if any further amounts remain, that the creditors included under section 530 shall have preference for payment. If any further amount still remains, the unsecured creditors who include the secured creditors are entitled to, to the extent of the portions of their unsecured debt, payment of dividends subject to proof of their debt by applying the provisions of the Insolvency Act. While the claim for payment of interest at the contractual rate for the post winding up period is supported by the statutory provisions discussed above, even in equity also a secured creditor is entitled to claim interest at the contractual rate where the amounts realised from the sale of assets are sufficient to discharge the debt of the secured creditors and the workmen's dues. It is not merely iniquitous but also wholly illogical that a secured creditor is denied the contractual rate of interest, for, many of the secured creditors are public institutions which lend tax payers' money. Denial of interest at contractual rate to these public institutions, which are instrumental in establishment of companies, seriously affects public interest as they will not be in a position to plough back the substantial monies disbursed by way of loans into their capital, resulting in crippling of their activities. In the long run, these financial institutions may become a great burden to the State as further State funds need to be pumped in to nurture them. From the report of the official liquidator, it is quite evident that the amount claimed by the appellant at the contractual rate of interest is less than the surplus amount available with him even after allowing all the admissible claims of the workmen and other creditors. Therefore, the official liquidator is directed to pay to the appellant interest at the contractual rate, i.e., 9.50 per cent per annum, on the principal amount adjudicated by him from April 22, 1988, i.e., the date on which the company was ordered to be wound up till date within one month from the date of receipt of this order. - Decided in favour of appellant. Issues Involved:1. Entitlement of secured creditors to contractual rate of interest for the post-winding up period if surplus amount is available.2. Applicability of relevant provisions under the Companies Act, 1956, and the Insolvency Act regarding payment of interest.3. Interpretation of rules 156 and 179 of the Companies (Court) Rules, 1959.4. Analysis of judicial precedents relevant to the issue.5. Equity considerations in the payment of interest to secured creditors.Detailed Analysis:1. Entitlement of Secured Creditors to Contractual Rate of Interest for Post-Winding Up Period:The core issue is whether a secured creditor is entitled to the contractual rate of interest for the post-winding up period if surplus funds are available after satisfying all claims. The appellant, as the assignee of security interests from four secured creditors, claimed interest at the contractual rate of 9.50% per annum for the post-winding up period. The official liquidator admitted the principal amount and contractual interest up to the date of winding up but denied the contractual rate for the post-winding up period, citing rule 179 of the Companies (Court) Rules, 1959, which limits the interest to 4% per annum.2. Applicability of Relevant Provisions Under the Companies Act, 1956, and the Insolvency Act:Sections 529, 529A, and 530 of the Companies Act, 1956, were analyzed. Section 529A provides for overriding preferential payments to workmen's dues and secured creditors' debts. Section 529(1) incorporates Insolvency Rules for winding up of companies, making the rights of secured and unsecured creditors subject to insolvency law. Section 48 of the Insolvency Act, which deals with interest, was also considered. The court noted that these provisions collectively form a self-contained scheme for the distribution of assets in winding up proceedings.3. Interpretation of Rules 156 and 179 of the Companies (Court) Rules, 1959:Rule 156 pertains to pre-winding up period interest, while rule 179 relates to post-winding up period interest, capping it at 4% per annum. The court found an apparent conflict between section 48 of the Insolvency Act (which allows up to 6% interest) and rule 179 but clarified that these provisions apply to unsecured debts requiring proof under insolvency law, not to secured creditors who have not relinquished their security.4. Analysis of Judicial Precedents:The court referred to the case of *K. V. Lakshminarayana Sastry v. Vijaya Commercial Bank Ltd.*, which established that a secured creditor stands outside insolvency proceedings to the extent of his security. The court also cited *Crips Laboratories Ltd. (In liquidation)*, where it was held that secured creditors are entitled to the contractual rate of interest if the security is sufficient to cover the debt, including interest. The distinction between this case and *A. P. State Financial Corpn. v. Magna Hard Tempt Ltd. (In liquidation)* was made clear, noting that the latter involved insufficient funds to cover both secured debts and workmen's dues.5. Equity Considerations:The court emphasized that denying contractual interest to secured creditors, especially public institutions, would be inequitable and illogical. Such denial could adversely affect public interest by hindering the ability of financial institutions to recover and reinvest funds, thereby impacting their operational sustainability.Conclusion:The court concluded that the provisions of section 48 of the Insolvency Act and rules 156 and 179 of the Companies (Court) Rules, 1959, do not apply to secured creditors who have not relinquished their security. If the amounts realized from the sale of assets are sufficient to cover the secured debts and workmen's dues, the secured creditors are entitled to the contractual rate of interest for the post-winding up period.Result:The official liquidator was directed to pay the appellant interest at the contractual rate of 9.50% per annum on the principal amount from the date of the winding-up order until the realization of the debt. The company appeal was allowed accordingly.