1973 (11) TMI 99 - HC - Companies Law

Appeal success for secured creditor in scheme of arrangement dispute.

Rikhabchand Mohanlal Surana Versus The Sholapur Spinning And Weaving

The Letters Patent Appeal was allowed, setting aside the judgment and decree of the single Judge. The appellant was deemed a secured creditor due to the ... - Issues Involved:1. Whether the appellant was a creditor at the date of the scheme of arrangement.2. Whether the judgment-creditor became a secured creditor by reason of the attachment and subsequent deposit of moneys into Court by the garnishee.3. Whether the scheme of arrangement was binding on the appellant.4. The impact of the winding-up order on the scheme of arrangement and the rights of the judgment-creditor.5. The applicability of Section 51 of the Provincial Insolvency Act, 1920, by virtue of Section 529 of the Companies Act, 1956.Detailed Analysis:1. Creditor Status at the Date of the Scheme of Arrangement:The appellant supplied goods to the respondent-company, and due to non-payment, a decree was passed on July 8, 1960. However, before the suit, a scheme of arrangement was sanctioned on August 18, 1958, for unsecured creditors. The appellant contended that he was not a creditor at the date of the scheme because the debt was denied by the respondent-company. The court noted that the term 'creditor' is not defined in the Companies Act but inferred from Section 390(c) that unsecured creditors who filed suits or obtained decrees are of the same class as other unsecured creditors.2. Secured Creditor Status:The main issue was whether the judgment-creditor became a secured creditor by the attachment and subsequent deposit of moneys into Court by the garnishee. The court examined various authorities and concluded that in India, attachment does not create a charge or lien but prevents alienation. However, when the money is brought into Court, the judgment-creditor is entitled to insist on payment. The court held that the appellant was a secured creditor since the moneys were deposited in Court before the winding-up order.3. Binding Nature of the Scheme of Arrangement:The respondent-company argued that the scheme of arrangement was binding on all creditors, including the appellant, and that the judgment-creditor could only receive 25% in cash and the rest in debentures. The court found that the scheme of arrangement was binding on the appellant only if he was an unsecured creditor at the date of the scheme. However, since the appellant was deemed a secured creditor, the scheme was not binding on him.4. Impact of the Winding-Up Order:The winding-up order was passed on April 22, 1964, but deemed to commence from August 30, 1963. The court noted that the winding-up order effectively canceled the scheme of arrangement. The Supreme Court's judgment in J.K. (Bom) P. Ltd. v. New Kaiser-I-Hind Sp. & Wvg. Co. clarified that once a winding-up order is made, the scheme of arrangement cannot govern the rights and obligations of the parties. Thus, the judgment-creditor's rights were not governed by the scheme after the winding-up order.5. Applicability of Section 51 of the Provincial Insolvency Act:The court considered whether Section 51 of the Provincial Insolvency Act, 1920, applied by virtue of Section 529 of the Companies Act, 1956. Section 51 provides that assets realized before the presentation of an insolvency petition cannot vest in the Receiver. The court concluded that Section 51 did not apply directly but could be considered by analogy. The court held that the judgment-creditor was entitled to the moneys deposited in Court as assets realized before the winding-up order.Conclusion:The Letters Patent Appeal was allowed, and the judgment and decree of the learned single Judge were set aside. The court directed that the judgment-creditor be paid the decretal amount with interest from the moneys deposited in Court by the garnishee. The respondent-company was ordered to pay the costs of the judgment-creditor, and the judgment-creditor was entitled to withdraw the money from the Court on or after January 10, 1974.