TaxTMI 
TaxTMI 
2006 (4) TMI 264
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....leather boards:- (a)IDBI Rupee Term Loans of Rs. 193.2 lakhs and Foreign Currency loan of Italian Lira 1380900.000. (b)IFCI Rupee Term Loans of Rs. 196.74 lakhs. Central Investment subsidy of Rs. 25 lakhs and Foreign Currency loan of DM 2127.565. (c)ICICI Rupee Term Loans of Rs. 96.61 lakhs and Foreign Currency loan of Italian Lira 1380900.000. 4. The Punjab National Bank (PNB) also advanced a loan to the said Respondent for providing working capital funds. The 1st Respondent, in order to secure the amounts lent to it, created a first charge in favour of the appellant along with other financial institutions, i.e., Respondent No. 3 (IFCI) and Respondent No. 4 (IDBI) herein by way of equitable mortgage by deposit of title deeds of its immovable property. A second charge was created in favour of PNB by way of constructive delivery of title deeds remaining in deposit with Respondent No. 3 herein, clearly indicating that the charge in favour of the latter was subject and subservient to charges in favour of IFCL, IDBI and ICICI. 5. On an application for winding up of the 1st Respondent made before the High Court of Judicature at Allahabad, an order was passed on 16-12-1993 directing....
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.... second charge holder in respect of the aforesaid properties. ****** 12. That the said charge of the Plaintiff Bank regarding the grant of cash credit hypothecation limit and creation of second charge in respect of immovable properties of the Defendant No. 1 company in favour of the Plaintiff Bank, was duly registered with the Registrar of Companies (U.P.) at Kanpur, on the basis of submission of the Defendant No. 1 company with the Registrar of Companies (U.P.) Kanpur." 8. It is, however, not in dispute that in the meantime the assets of the Company were sold and the Official Liquidator, against the said assets, received a sum of Rs. 65,72,311. As on 31-10-2001, the Official Liquidator had a sum of Rs. 71,00,351 available with him for distribution to the creditors of the Company. An advertisement was issued by the said Official Liquidator being Notice in Form No. 63 prescribed under Rule 148(1) of the Companies (Court) Rules, 1959, inter alia, stating: "Any creditor so fails to submit his affidavit of proof within the time limited as aforesaid will be excluded from the benefit of any distribution of dividend before the debt is proved or as the case may be from objecting to suc....
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....days of our intention in this regard and (c) we obtain prior written approval of IFCI/IDBI/ICICI and other first charge holders in this regard. (iii)We, in our capacity as a second charge holder, take steps to enforce the security for realization of our dues consequent on default or breach committed by the Company after giving notice to and obtaining prior approval of the first charge holders as at (ii ) above, the first charge holders, shall also be at liberty (but without obligation) to call upon the Company to repay forthwith their respective loans and advances as if they have become due under their respective loan documents and shall also be at liberty to exercise and/or all the right and remedies available to them as first mortgages or under any law for the time being in force." 11. In the Memorandum of Entry, acting also on behalf of the Respondent No. 1, the Bank stated: "2. The said Shri M. Zafrulla stated that the documents of title, evidences, deeds and writings more particularly described in the First Schedule hereunder written (hereinafter called "the said deeds") in respect of the Company's all immovable properties situated at Village Klauriya Mustaquil, Tehsil Bink....
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....ns to the company (in liquidation) by connotation, the rate of interest and liquidated damages were claimed. Punjab National Bank had second charge over the fixed assets of the company for working capital of Rs. 134 lakhs by deposit of title deeds created by the company in favour of Punjab National Bank on 21st November 1989 at IFCI office. The second charge in favour of Punjab National Bank was subject to first charge of IFCI, IDBI and ICICI. It is admitted to the applicant that Punjab National Bank might have first charge on the current assets of the company but that claim of Punjab National Bank as second charge holder of Rs. 1,32,22,539 has to be excluded and that the Punjab National Bank may get its share out of the sale proceeds of current assets. Since the applicants - IFCI and IDBI have joined the winding up proceedings and have submitted proof of their debts before the Official Liquidator, as held above, they shall be taken to have given up their securities and thus they cannot claim any priority over the assets of Punjab National Bank on the fixed assets." 14. An intra-court appeal known as Special Appeal there against was filed by the appellant before the Division Bench....
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....terpreted the judgment of this Court in Allahabad Bank's case (supra), as therein this Court was primarily concerned with interpretation of section 446 of the Companies Act vis-a-vis the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 ('RDB Act', for short), i.e., as to whether for instituting or continuing proceedings under RDB Act interference of the Company Court was required under section 446 thereof, as would appear from the subsequent decision of this Court in Rajasthan State Financial Corpn. v. Official Liquidator [2005] 8 SCC 190. It even failed to consider the observations made in paragraph 37 of judgment in Allahabad Bank's case (supra). (ii)The High Court failed to appreciate the true and correct scope and purport of section 47 of the Provincial Insolvency Act, 1920 which comes into play by reason of the provisions of Chapter V of the Companies Act, 1956. (iii)The High Court committed a serious error in relying upon sub-section (2) of section 47 of the Provincial Insolvency Act and ignoring the other provisions thereof. (iv)The first charge holders and second charge holders could not have been equated having regard to the fact sit....
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....ights. 19. The questions therefore which arise for our consideration are: (a)Whether significance is lost in respect of inter se right of priority between two sets of secured creditors in view of section 529A of the Companies Act? (b)Whether section 48 of the Transfer of Property Act stands over-ridden by section 529A of the Companies Act. (c)Whether the Appellant can be said to have relinquished his right to claim as a secured creditor as it had not opted in terms of section 47 of the Provincial Insolvency Act. 20. Some legal propositions, which are not in controversy, may also be noticed at this stage. 21. There are two categories of secured creditors, namely, (i) those who are desirous of going before the Company Court and; (ii) those who stand outside the winding up proceeding. 22. Corporate insolvency procedures serve a variety of functions which include collective execution by unsecured creditors, facilitation of cor-porate rescue and the enforcement of security which would include certain public goals as for example, corporate morality. In an insolvency proceeding, the fundamental questions, which go to the root of the procedure, are: (i)which parties are involved; ....
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.... law in the following terms: Even in regard to "priorities" among creditors, the said Committee stated in Annexure I as follows: "The Adjudication Officer will have such power to distribute the sale proceeds to the banks and financial institutions being secured creditors, in accordance with inter se agreement/arrangement between them and to the other persons entitled thereto in accordance with the priorities in the law." 29. The above recommendations as to working out "priorities" have now been brought into the Act with greater clarity under section 19(19) as substituted by Ordinance 1 of 2000, inter alia, whereof Priorities, so far as the amounts realized under the RDB Act are concerned, are to be worked out only by the Tribunal under the RDB Act. Section 19(19) of the RDB Act reads as follows: "19. (19) Where a certificate of recovery is issued against a company registered under the Companies Act, 1936, the Tribunal may order the sale proceeds of such company to be distributed among its secured creditors in accordance with the provisions of section 529A of the Companies Act, 1956 and to pay the surplus, if any, to the company." [Emphasis supplied] Section 19(19) is clearly i....
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....with section 529A of the Companies Act and in no other manner. The Court took into account the fact that the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 was a legislation subsequent in point of time to the introduction of section 529A of the Companies Act by Act 35 of 1985 and it had overriding effect. But it noticed that by virtue of section 19(19) of the Recovery of Debts Act, the priorities among various creditors had to be decided by the Recovery Tribunal only in terms of section 529A of the Companies Act and section 19(19) did not give priority to all secured creditors. Hence, it was necessary to identify the limited class of secured creditors who have priority, over all others in accordance with section 529A of the Companies Act. The Court also held that the occasion for a claim by a secured creditor against the realisation by other creditors of the debtor under section 529A read with proviso (c) to section 529(1) of the Companies Act could arise before the Debts Recovery Tribunal only if the creditor concerned had stood outside the winding up and realised amounts and if it is shown that out of the amounts privately realised by it some portion had bee....
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.... of the Companies Act does not ex facie contain a provision (on the aspect of priority) amongst the secured creditors and, hence, it would not be proper to read therein to things, which the Parliament did not comprehend. The subject ofmortgage, apart from having been dealt with under the commonlaw, is governed by the provisions of the Transfer of Property Act. It is also governed by the terms of the contract. 38. The Punjab National Bank granted loan to the 1st Respondent herein knowing fully well that, over the assets of the mortgagor, the Appellant held the first charge. It in no uncertain terms stated that the charges created by reason of the loan agreement entered into by and between itself and the 1st Respondent was subservient to the charges of the appellant as also the Respondent Nos. 3 and 4. The admission of the PNB in this behalf is absolutely clear and explicit. Even in the suit filed by it for recovery of the mortgage money as against the 1st Respondent, it not only in no uncertain terms stated that the Appellant and Respondent Nos. 3 and 4 herein were the first charge holders in respect of movable and immovable properties of the 1st Respondent, but its prayers in rega....
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.... creditors gets obliterated by merely responding to a public notice wherein it is specifi- cally stated that on his failure to do so, he will be excluded from the benefits of the Dividends that may be distributed by the Official Liquidator, the same would lead to deprivation of the secured creditor of his right over the security and would bring him at par with an unsecured creditor. The logical sequitor of such an inference would be that even unsecured creditors would be placed at par with the secured creditors. This could not have been the intendment of the legislation. 44.The provisions of the Companies Act may be a special statute but if the special statute does not contain any specific provision dealing with the contractual and other statutory rights between different kinds of the secured creditors, the specific provisions contained in the general statute shall prevail. 45.In Maru Ram v. Union of India [1981] 1 SCC 107, this Court distinguished between a specific provision and a special law holding that a specific provision dealing with a particular situation would override even a special law, which is inconsistent therewith. 46.Section 9 of the Companies Act only states tha....
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....egard to such liens the general rule is reversed and they are entitled to priority in inverse order to their dates. Salvage liens are confined in English law to maritime liens. A salvage lien was claimed in an old Calcutta case in respect of an advance made for the purpose of carrying on an indigo factory, and again in another case in respect of an advance made to enable the mortgagor to pay the rent of the premises mortgaged, but in both cases the claim was repelled. The lien of a co-sharer for owelty money on partition is entitled to precedence over prior mortgages of property allotted to the co-sharer who is liable to pay owelty." 48.Section 47 of the Provincial Insolvency Act is attracted by virtue of section 529(1) of the Companies Act. Sub-section (2) of section 47 would become applicable where a secured creditor voluntarily relinquishes his security for the general benefit of the creditors. 49.The expression "relinquish" has a different connotation. In P. Ramanatha Aiyar's Advanced Law Lexicon at page 4047, it is stated: "Relinquish: To give over possession or control of; to leave off." 50.It envisages a conscious act, i.e., an act where a person was aware of his right ....
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.... Liquidator [1985] 58 Comp. Cas. 609 , wherein the law was stated in the following terms: "It will be thus plain that what section 47 provides is only for the benefit of the mortgagee and not to his detriment. He can follow any one of the three procedures suggested in the section. In this case, I do not think it can be validly argued that the mortgagee has relinquished his security. Exhibit B-1 makes it clear that he had no objection if the property is sold free of mortgage but a lien is kept insofar as the value he had assessed is concerned and is preferentially paid out of the sale proceeds. There are no words in Exhibit B-1 which warrant any conclusion that the mortgagee had relinquished his security. . . In fact sub-section (3) of section 47 lends support to this method of payment to the mortgagee. If the official receiver proceeds to sell the security, the court first has to pay the amount at which the security was valued to the secured creditor out of the sale proceeds. Whatever may be the position in regard to the balance, insofar as the value of his assessment is concerned, he can be preferentially paid out of the sale proceeds. If the sale was valid, I fail to see how t....