2019 (1) TMI 1443 - SC - Companies Law

Secured creditors' rights affirmed: Winding up petition post-DRT decree valid, clarifying jurisdictional boundaries

The Supreme Court upheld the right of a secured creditor to file a winding up petition even after obtaining a DRT decree and recovery certificate. It ... Right of a secured creditor to file a winding up petition after such secured creditor has obtained a decree from the Debts Recovery Tribunal [“DRT”] and a recovery certificate based thereon - Held that:- One of three instances in which a company shall be deemed to be unable to pay its debts. If the fact situation fits sub-clause (b) of Section 434(1), then a company may be said to be deemed to be unable to pay its debts. However, this does not mean that each one of the sub-clauses of Section 434(1) are mutually exclusive in the sense that once Section 434(1)(b) applies, Section 434(1)(a) ceases to be applicable. Also, on the facts of this case, we may state that the company petition was filed only on 03.07.2015, pursuant to a notice under Section 433 of the Companies Act, 1956 dated 15.04.2015. This petition was filed under Section 433(e) read with Section 434(1)(a) of the Companies Act, 1956. At the stage at which the petition was filed, it could not possibly have been filed under Section 434(1)(b) of the Companies Act, 1956, as execution or other process in the form of a recovery certificate had not been issued by the Recovery Officer till 12.08.2015, i.e., till after the company petition was filed. For this reason also, it is clear that this contention of the learned counsel appearing for the appellant must be rejected. We may only end by saying that cases like the present one have to be decided by balancing the interest of creditors to whom money is owing, with a debtor company which will now go in the red since a winding up petition is admitted against it. It is not open for persons like the appellant to resist a winding up petition which is otherwise maintainable without there being any bona fide defence to the same. We may also hasten to add that the respondent cannot be said to be blowing hot and cold in pursuing a remedy under the Recovery of Debts Act and a winding up proceeding under the Companies Act, 1956 simultaneously. When secured creditors like the respondent are driven from pillar to post to recover what is legitimately due to them, in attempting to avail of more than one remedy at the same time, they do not “blow hot and cold”, but they blow hot and hotter. Issues Involved:1. Right of a secured creditor to file a winding up petition after obtaining a decree from the Debts Recovery Tribunal (DRT) and a recovery certificate.2. Jurisdiction of DRT versus Company Court under the Recovery of Debts Act and Companies Act, 1956.3. Requirement for a secured creditor to relinquish its security before filing a winding up petition.4. Applicability of Section 434(1)(a) versus Section 434(1)(b) of the Companies Act, 1956.5. Balancing interests of creditors and debtor companies in winding up proceedings.Issue-wise Detailed Analysis:1. Right of a Secured Creditor to File a Winding Up Petition:The case revolves around whether a secured creditor can file a winding up petition after obtaining a decree from the DRT and a recovery certificate. The respondent, Kotak Mahindra Bank Limited, advanced loans to companies, which defaulted, leading the bank to approach the DRT. The DRT delivered judgments in favor of the bank, and recovery certificates were issued. Despite attempts to auction properties, the bank issued statutory notices under Sections 433 and 434 of the Companies Act, 1956, and filed a winding up petition when payments were not forthcoming. The Bombay High Court admitted the petition, declaring the companies commercially insolvent. The appellants argued that once the DRT issues a recovery certificate, a winding up petition is barred, but the Division Bench dismissed these appeals.2. Jurisdiction of DRT versus Company Court:The appellants contended that the Recovery of Debts Act, being a special statute, vests exclusive jurisdiction in the DRT, thereby barring the Company Court from entertaining a winding up petition. They cited Allahabad Bank v. Canara Bank, which held that the DRT has exclusive jurisdiction for adjudicating and executing recovery of debts, overriding the Companies Act, 1956. However, the Court clarified that this exclusivity pertains to recovery of debts and does not extend to winding up proceedings, which are not means of enforcing payment of a debt but rather equitable execution.3. Requirement for a Secured Creditor to Relinquish Security:The appellants argued that a secured creditor must relinquish its security before filing a winding up petition, based on insolvency rules. However, the Court noted that Section 439 of the Companies Act, 1956, allows a secured creditor to present a winding up petition without relinquishing security, contrasting with Section 9(2) of the Provincial Insolvency Act, 1920. The Court upheld the view that the requirement to relinquish security applies at the stage of proving debts post-winding up order, not at the petition filing stage.4. Applicability of Section 434(1)(a) versus Section 434(1)(b):The appellants contended that the winding up petition should be under Section 434(1)(b) since the security was not realized. However, the Court clarified that Section 434(1)(b) applies when execution or other process is returned unsatisfied, which was not the case at the petition filing stage. The petition was filed under Section 434(1)(a) based on the company's inability to pay debts, and the subsequent issuance of a recovery certificate did not alter this basis.5. Balancing Interests of Creditors and Debtor Companies:The Court emphasized the need to balance the interests of creditors and debtor companies. It rejected the notion that pursuing remedies under both the Recovery of Debts Act and the Companies Act constitutes blowing hot and cold. Instead, it recognized the creditor's right to seek multiple remedies to recover debts. The Court dismissed the appeals, highlighting that the respondent's actions were legitimate attempts to recover dues, and the winding up petition was maintainable.Conclusion:The Supreme Court upheld the right of a secured creditor to file a winding up petition even after obtaining a DRT decree and recovery certificate. It clarified the jurisdictional boundaries between the DRT and Company Court, and affirmed that relinquishing security is not a prerequisite for filing a winding up petition. The Court balanced creditor and debtor interests, allowing parallel proceedings under the Recovery of Debts Act and Companies Act. The appeals were dismissed, reinforcing the creditor's right to pursue multiple remedies.