2024 (6) TMI 633 - HC - Companies Law

Secured creditors' mortgage rights prevail over unsecured creditors in company liquidation under section 48 Transfer of Property Act

In the matter of arbitration of M/s. Maharashtra Explosives Ltd. (In Liquidation)

The Bombay HC ruled on priority of claims in company liquidation, affirming that secured creditors' rights under mortgage prevail over unsecured creditors ... Recovaery of dues - Priority of claims among secured and unsecured creditors - priority charge on liquidation of company’s assets - HELD THAT:- The Supreme Court has in the case of ICICI Bank [2006 (4) TMI 264 - SUPREME COURT] in clear terms, held that the right to property is a Constitutional right and, therefore, right to recover the money lent by enforcing a mortgage would also be a right to enforce an interest in the property. The Court further held that in terms of section 48 of the Transfer of Property Act, claim of the first charge holder shall prevail over the claim of the second charge holder. The Court then, by referring to section 529 of the Companies Act, has opined that merely because such a section does not specifically provide for rights or priorities over the mortgaged assets, would not mean that the provision of section 48 of the Transfer of Property Act, 1882 shall stand obliterated. The report filed by the recovery officer is in tune with the order passed by this Court. The objection is accordingly rejected. Seeking release of amount for the purpose of distribution to the certificate holders in terms of recovery certificate after retaining the amount payable to the workers - HELD THAT:- It will be appropriate to direct the Official Liquidator to release Rs. 9.5 Crores in favour of the recovery officer in terms of the prayer made by him. The amount be released within fifteen working days - Application disposed off. Issues Involved:1. Entitlement and priority of secured and unsecured creditors.2. Inter se priority among secured creditors.3. Validity of the Recovery Officer's report.4. Distribution of liquidated assets.5. Rights of workers in liquidation proceedings.6. Claims by Central Excise and Customs Department.Detailed Analysis:1. Entitlement and Priority of Secured and Unsecured Creditors:The Court directed the Recovery Officer to assess the entitlement of secured and unsecured creditors in accordance with Section 529A of the Companies Act, 1956, and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993. The Recovery Officer concluded that secured creditors have a priority claim over unsecured creditors. The Court upheld this finding, emphasizing that the entitlement of creditors must be determined with due regard to statutory priorities.2. Inter Se Priority Among Secured Creditors:The Recovery Officer prioritized the first charge holding secured creditors (ICICI Bank, Kotak Mahindra Bank, and IFCI Bank) over the second charge holding secured creditors (Bank of Maharashtra and Bank of India), based on Section 529A of the Companies Act, 1956. The Supreme Court's judgment in ICICI Bank Ltd. vs. Sidco Leathers Ltd. was cited, which held that the first charge holder's claim prevails over the second charge holder's claim. The Court affirmed this prioritization, rejecting the Bank of Maharashtra's contention that all secured creditors should have equal rights in the liquidated cash.3. Validity of the Recovery Officer's Report:The Recovery Officer's report, which allocated the available Rs. 20 Crores to the first charge holding secured creditors on a pro-rata basis, was challenged by the Bank of Maharashtra. The Court found no merit in the objection, stating that the Recovery Officer acted within the scope of the Court's order and correctly applied the legal principles regarding creditor priorities.4. Distribution of Liquidated Assets:The Recovery Officer's request to release Rs. 9.5 Crores to the certificate holders, as per the recovery certificate granted by the Debt Recovery Tribunal, was approved. The Official Liquidator was directed to release the amount within fifteen working days. The Court also noted that the remaining amount of Rs. 10.876 Crores owed to the first charge holding secured creditors was yet to be paid.5. Rights of Workers in Liquidation Proceedings:The Court addressed the workers' claims, noting that their dues had already been paid by the Official Liquidator. The workers' exclusive right to the sale proceeds was not upheld, and their claims were considered alongside those of secured creditors. The Court reiterated that secured creditors' rights in liquidated cash are equal to their rights in the original secured assets.6. Claims by Central Excise and Customs Department:The Central Excise and Customs Department sought permission to file its claim as an unsecured creditor. The Recovery Officer had repudiated their claim under Section 31B of the Recovery of Debts and Bankruptcy Act, 1993, and the Department had not challenged this decision. Consequently, the Court dismissed the application, finding no merit in it.Conclusion:The Court upheld the Recovery Officer's prioritization of secured creditors over unsecured creditors and first charge holding secured creditors over second charge holding secured creditors. The objections raised by the Bank of Maharashtra were rejected, and the distribution of liquidated assets was directed in accordance with the Recovery Officer's report. The workers' claims were acknowledged as paid, and the Central Excise and Customs Department's application was dismissed.