TaxTMI 
TaxTMI 
2026 (6) TMI 1428
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.... with Mr Tirth Nayak. R/CROSS OBJECTION NO. 4 of 2024 For the Cross Objectors No. 1,2: Mr Sn Soparkar, Senior Advocate with Mr Masoom K Shah with Ms Priyanshi Trivedi, Mr Abhijit P Joshi (1 330) For the Opponent(S) No. 1 For the Opponent(S) No. 2: Mr R S Sanjanwal with Mr Tirth Nayak. CAV JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1. Heard learned Senior Advocate Mr. R.S. Sanjanwala assisted by learned advocate Mr. Tirth Nayak appearing for the appellant, learned advocate Mr. Abhijit P. Joshi appearing for the respondent no. 1 and learned Senior Advocate Mr. S.N. Soparkar assisted by learned advocate Mr. Masoom K. Shah and learned advocate Ms. Priyanshi Trivedi appearing for the respondent nos. 2 and 3 in O.J. Appeal No. 6 of 2023. 2. Heard learned Senior Advocate Mr. S.N. Soparkar assisted by learned advocate Mr. Masoom K. Shah and learned advocate Ms. Priyanshi Trivedi appearing for the appellant, learned advocate Mr. Abhijit P. Joshi appearing for the respondent no. 1 and learned Senior Advocate Mr. R.S. Sanjanwala assisted by learned advocate Mr. Tirth Nayak for respondent no. 3 in O.J. Appeal No.9 of 2024. 3. Heard learned Senior Advocate ....
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.... the Official Liquidator was directed to pay a sum of Rs. 9,82,16,530/- together with interest thereon at the rate of 6% per annum from 12.03.2001 till realisation. 12. There are Deeds of Assignment dated 02.12.2006 between BOI and respondent no. 2-Essen Finance and Investments Ltd. and dated 24.02.2007 between SBI and Essen Finance Ltd. The O.A. No. 47 and No. 124 filed before Debt recovery tribunal were settled on 12.01.2007 between BOI, SBI vs Essen Computers Ltd.(in Liquidation) The GIIC has issued a communicated dated 25.02.2010 showing Essen Peripherals Limited has settled the loan. Similar communications have been issued by the GSFC showing Essen Peripherals and Essen Fabrication & Engg. have settled the loan. It is pertinent to note that all the communications are addressed to the borrower company and do not indicate the name of respondent no. 3-Apurva Parekh. Both - Essen Peripherals and Essen Fabrication amalgamated with Essen Computers (in Liquidation) in 1992. Account in both GIIC and GSFC has been settled in 2010/2011 after the date of liquidation i.e. 17.04.1997. The Bank of India has entered with the Deed of Assignments dated 02.12.2006, 9.12.2006 and 14.2.2007 wi....
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.... 19. Chartered Accountant by letter dated 10.09.2019 explained their comments about the discrepancies. The Official Liquidator thereafter sent a report of the Chartered Accountant to the secured creditors and the Sale Committee members of the company in liquidation. On receipt of reply from Mr. Apurva J. Parekh and Essen Finance & Investments Limited accepting the report of the Chartered Accountant, Official Liquidator preferred OLR No. 136 of 2019 to take on record the report of the Chartered Accountant and to disburse the amount as per the said report amongst secured and unsecured creditors of the company in liquidation. 20. It appears that Kotak Mahindra Bank Ltd. filed its affidavit in reply in OLR No. 136 of 2019 to dismiss the OLR on the ground that the Chartered Accountant's report had not considered several issues. 21. Essen Finance & Investments Limited and Mr. Apurva J. Parekh, respondent nos. 2 and 3 have also filed their affidavit in reply in OLR No. 136/2019 contending inter-alia that the O.A. filed before the Debts Recovery Tribunal was already settled between the parties in view of full and final settlement of the suit claim and therefore, Kotak Mahindra Bank L....
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.... the Essen Computers Limited (company in liquidation) to pay the total amount of Rs 9,82,16,530.00 with simple interest at the rate of 6% from 12.03.2001 until realization to Kotak Bank. Instead, the secured claim is only considered as Rs.72 lacs by Chartered Accountant. There are Deeds of Assignment dated 02.12.2006 between BOI and Essen Finance and Investments Ltd. and dated 24.02.2007 between SBI and Essen Finance Ltd. The O.A. No. 47 and No. 124 were settled on 12.01.2007 between BOI, SBI vs Essen Computers Ltd. The GIIC has issued a communicated dated 25.02.2010 showing Essen Peripherals Limited has settled the loan. Similar communications have been issued by the GSFC showing Essen Peripherals and Essen Fabrication & Engg. have settled the loan. It is pertinent to note that all the communications referred hereinabove are addressed to the borrower and do not indicate the name of respondent no. 1-Apurva Parekh. Both - Essen Peripherals and Essen Fabrication amalgamated with Essen Computers in 1992. Account in both GIIC and GSFC has been settled in 2010/2011 after the date of liquidation i.e. 17.04.1997. 21. The Bank of India has entered with the Deed of Assignments date....
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....8,51,481 100.00 22. The Chartered Accountant has treated the amount paid to GIIC of Rs.70,4500 and to GSFC Rs. 11,00,000 and Rs.2,18,842 considering the respondent no. 1- Apporva Parekh as secured creditor as per his by treating the debt as a secured debt on the basis of the letters of settlement issued by GIIC and GSFC intimating settlement of loans given to Essen Peripherals and Essen Fabrication & Engg. Co. Pvt. Limited. The said companies were subsequently amalgamated with Essen Computers. As per the report of Chartered Accountant no documents are produced by the respondent no. 1-Mr. Parekh, except the settlement letters dated 25.02.2010 and 05.11.2011, 08.11.2011. The settlement letters do not indicate that the loan has been paid by respondent no. 1 or the Companies Essen Peripherals and Essen Fabrication & Engg. Co. Pvt. Limited. The Chartered Accountant had demanded various documents as per their communication dated 20.01.2022 (Page 270) from respondent no. 1 with regard to the payment made by him to ICICI, GSFC and GIIC as a guarantor. The Chartered Accountant has observed thus: "Remarks/ Observations "There is no evidence available on record a....
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....the Insolvency Act that it is an inclusive and not an exhaustive definition, whereas it will be clear from the definition of "secured creditor" in Section 2(1)(e) of the Insolvency Act that it is an exhaustive definition and that a secured creditor means a person holding a mortgage, charge or lien on the property of the debtor or any part thereof as a security for a debt due to him from the debtor. The result is that the expression "secured creditor" in Section 529(1)(c) would mean a person who holds a mortgage, charge or lien on the property of the company or any part thereof as a security for a debt due to him from the company. Where, therefore, a creditor, such as the bank or the financial institution in this case, does not hold a mortgage, charge or lien on the property of the company or any part thereof as a security for a debt due to it from the company, it is not a secured creditor for the purposes of Sections 529 and 529A of the Companies Act. 26. Thus, in absence of any definition of "secured creditor" under the Companies Act, 1956, the Apex Court has placed reliance on the definition of "secured creditor" as defined under section 2(1)(e) of the Insolvency Act. It....
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....of provision of section 140 and 141 of the Contract Act has observed thus: "11 Kaluram by executing the surety bond had undertaken to discharge the liability arising out of any act, omission, negligence or default of the forest contractor. The surety Kaluram contends that because the State lost or parted with the security he stood discharged. By sec. 140 of the Indian Contract Act, 1872, where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor; and by sec. 141 it is provided : "A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security." The State had as already observed, a first charge over the goods. The State was....
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.... Rs.65,00,000.00 OL : 12,52,796 ECL: 1,15,18,630:00 30. The respondent no. 3 has primarily raised objection towards the claim of Bank of India and State Bank of India. The claim is based on the Deeds of Assignment dated 02.12.2006 (BOI), 09.12.2006 (BOI) and 14.02.2007 (SBI) after the order of liquidation has been passed. The aforesaid Deeds of Assignment are entered with the sister concern of the company in liquidation i.e. respondent no. 2. As per the Deeds of Assignment all debts of the company in liquidation has been satisfied by the respondent no. 2. It is pertinent to note that the BOI and SBI had filed O.A No. 47 of 1997 and No. 124 of 1997 for recovery of dues before the Debt Recovery Tribunal against ECL, (Company in liquidation), which were disposed of in view of full and final settlement in the year 2007. The Chartered Accountant, on the basis of the Deeds of Assignment deeds has considered an amount of Rs.54,87,82,695.00 as unsecured. The respondent-Kotak Bank cannot question the Deeds of Assignment at this stage of disbursal of the amounts, hence the contention in this regard is rejected. The respondent no. 3 has placed reliance on the judgme....
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....d Dollars, hence the objections raised by the respondent nos. 1 and 2 in this regard do not merit acceptance. However, with regard to the claim of rate of conversion by the respondent no. 3, this Court cannot delve into the said aspect and it is for the Chartered Accountant to examine the same, since it is for the respondent no. 3 to satisfy the Chartered Accountant with documentary proof of such rate of conversion. The Chartered Accountant has also considered the amount of Rs. 4,96,75,215 (Rs. 5,11,75, 215 (-) Rs. 15,00,000.00) as unsecured. It is also admitted by them that the Bank has received an amount of Rs. 15,00,000/- paid by the guarantor. In the affidavit of proof dated 03.05.2019 in Company Petition No.97 of 1995, the respondent no. 3 has clarified the aforesaid order and the amount. The respondent no. 3-Kotak Mahendra Bank has alleged that the Chartered Accountant has ignored the order dated 31.08.2007 passed by the DRT in O.A No. 122 of 2001, wherein and whereby the respondent no. 1 Mr. Parekh was directed to pay an amount of Rs. 9,18,16530.00 to it, after considering respondent no. 3 as a secured creditor. The said submission runs contrary to the report of Chartered Ac....
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....tments Limited preferred O.J. Appeal No.9 of 2024. 29. Essen Finance & Investments Limited as well as Mr. Apurva J. Parekh have also preferred Cross Objection raising the issue of considering the claim of Kotak Mahindra Bank Ltd. to the extent of value of security held by it namely Rs. 7,00,000/- for hypothecation of three machines. 30. Learned Company Judge has considered the objections raised by the Kotak Mahindra Bank Ltd. against the report of the Chartered Accountant which provides for ratio of 53.08:46.92 to be apportioned to Mr. Apurva J. Parekh and Kotak Mahindra Bank and 82.42% to Essence Finance and Investment Ltd. and only 8.99% to Kotak Mahindra Bank Ltd. It was contended by Kotak Mahindra Bank before the learned Company Judge that so far as claim of Mr. Apurva J. Parekh is concerned, the amount mentioned in his affidavit were without any proof and does not show that the said amount was paid for settlement of dues of the company in liquidation. 31. It was also contended by Kotak Mahindra Bank Ltd. that so far as claim of Essence Finance and Investments Ltd. is concerned, it could not have been considered as secured claim since the said company is the sister con....
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....Investment Ltd. and Mr. Apurva Parekh have conspired and connived to defraud the secured creditors of the company in liquidation and has approached this Court seeking a stamp of validity to such fraudulent transaction. It was therefore, submitted that learned Company Judge ought to have considered the modus operandi of Essence Finance and Investment Ltd. and Mr. Apurva Parekh and therefore, there is no subrogation in favour of Essence Finance and Investment Ltd. in absence of any documentary evidence on record to suggest that Essence Finance and Investment Ltd. and Mr. Apporva Parekh had paid dues of the company in liquidation. 36. It was submitted that Essen Finance & Investments Limited and Mr. Apporva Parekh has not placed on record any document to show that amount of other secured creditors namely, GIIC and GSFC have been paid by it but letters placed on record are addressed to companies Essen Peripherals and Essen Fabrication and Engineering Co. Pvt. Ltd. who were the borrowers which later merged with the company in liquidation. 37. It was therefore, submitted that so far as Essence Finance and Investment Ltd. is concerned, there is no agreement to confirm that the right....
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....editors would have priority in payment over subrogee claim in exercise of right under section 140 of the Indian Contract Act. 42. It was submitted that the decision of Bombay High Court in case of Sterling Trade vs. Trimbak Ispat Private Limited reported in 2018 S.C.C. Online 12339 would be applicable in facts of the case wherein it is held that a guarantor making payment to settle the accounts of the borrower will be entitled to only the amount paid and will be treated as unsecured creditor. 43. It was further submitted that learned Company Judge has erred in law in holding that Kotak Mahindra Bank Ltd. could not have questioned the Deeds of Assignment executed by Bank of India, State Bank of India and Bank of India Mutual Fund in favour of Mr. Apurva Parekh at the stage of deciding distribution of sale proceeds. It was submitted that it is only stage at which Kotak Mahindra Bank Ltd. could have raised objections with regard to such Deed of Assignment as the same has been relied upon by Mr. Apurva Parekh and it is a proper stage to object the same. 44. In support of his submission, reliance was placed on the decision in case of Suzuki Parasrampura Suitings Private Limited....
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....has become due on default of the principal debtor to perform the guaranteed given, the surety upon payment or performance of all the dues is liable for and is invested with all the rights which the creditor had against the principal debtor and the surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not. It was therefore submitted that the learned Company Judge has rightly approved the ratio of disbursement determined by the Chartered Accountant in its report in favour of Essence Finance and Investment Ltd. and Mr. Apurva Parekh as they could not have been deprived of remedy to recover the amount paid as part of obligation under the agreement as guarantor under the provisions of the Indian Contract Act from the Corporate Debtor as Mr. Apurva Parekh in his own capacity as guarantor has sought repayment as a subrogee in exercise of his right conferred under Section 140 of the Indian Contract Act. 48. Learned Senior Advocate Mr. Soparkar submitted that learned Company Judge has committed an error in holding tha....
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.... claim of the bank is liable to be considered. 51. It was further submitted that as per the report of the Chartered Accountant treating Kotak Mahindra Bank Ltd. as secured creditor to the extent of Rs.72,00,000/- is erroneous as the claim of Kotak Mahindra Bank Ltd. is concerned, same is required to be restricted to Rs. 7,00,000/- only and the remaining amount is to be treated to be paid along with other unsecured creditors. 52. It was also submitted that as per section 529A of the Companies Act, 1956 only the secured creditor is required to be given the preference for disbursement of the amount realised on sale of assets of the company in liquidation and it is immaterial to determine the amount payable to the secured creditors beyond the value of assets which was hypothecated with the secured creditor and therefore, the learned Company Judge has committed an error in holding that value of the secured asset is immaterial to determine the amount payable to the secured creditor under section 529A of the Companies Act. 53. In support of his submission, reliance was placed on the decision in case of UCO Bank v. Official Liquidator, High Court, Bombay and another reported in (1....
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....ision bench of the High court is supported by this reason. 8. Consequently, the appeal is dismissed with costs quantified at Rs. 5,000.00 (Rupees five thousand) only." 54. Reliance was also placed on the decision of Hon'ble Apex Court in case of Jitendra Nath Singh v. Official Liquidator and others reported in (2013) 1 Supreme Court Cases 462, wherein it is held as under: "3. U.M.I. Special Steel Limited (for short 'the company') is a company registered under the Companies Act. The company became sick and went before the BIFR but the BIFR in its opinion dated 08.03.2002 recommended for winding up of the company. On 05.08.2003, the learned Company Judge of the High Court of Jharkhand passed orders for winding up of the company and appointed the official liquidator as liquidator to conduct the liquidation proceedings in relation to the company and to take over the assets, books and documents of the company. The liquidator then took over the assets of the company and sold some of the assets of the company and paid Rs. 93,64,93,586/-to the secured creditors and Rs. 8,19,22,371.12 to the workmen representing 50% of their verified claims towards wages. 4. Wh....
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.... and unsecured creditors as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent. This would mean that the respective rights of secured and unsecured creditors of an insolvent company, which is being wound up, will be the same as the respective rights of secured and unsecured creditors with respect to the estates of persons adjudged insolvent as are in force under the law of insolvency. In the State of Jharkhand, the Provincial Insolvency Act, 1920 (for short 'the Insolvency Act') is in force and accordingly the respective rights of secured and unsecured creditors with respect to the assets of the insolvent company being wound up will be the same as in the Insolvency Act. The Companies Act does not define a "creditor" and a "secured creditor" and hence, we have to refer to the Insolvency Act for the definitions of these two words. Section 2(1)(a) and Section 2(1)(e) of the Insolvency Act define the words 'creditor' and 'unsecured creditor' and are extracted hereinbelow: "2(1)(a) "creditor" includes a decree-holder, "debt" includes a judgment-debt, and "debtor" includes a judgment-debtor." "2(1)(e) "s....
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....solvent company which is being wound up has only a right over the particular property or asset of the company offered to the secured creditor as a security and the unsecured creditors have rights over all other properties or assets of the insolvent company. We may now examine whether the proviso to sub-section (1) of Section 529 of the Companies Act makes any difference to these rights of secured creditors and unsecured creditors of an insolvent company. xxx 16.1 A secured creditor has only a charge over a particular property or asset of the company. The secured creditor has the option to either realize his security or relinquish his security. If the secured creditor relinquishes his security, like any other unsecured creditor, he is entitled to prove the debt due to him and receive dividends out of the assets of the company in the winding up proceedings. If the secured creditor opts to realize his security, he is entitled to realize his security in a proceeding other than the winding up proceeding but has to pay to the liquidator the costs of preservation of the security till he realizes the security. 16.2 Over the security of every secured creditor, a s....
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.... analyse the contentions raised in that regard. According to the borrower(s) assignment of Financial Instruments in possession of ICICI Bank Ltd. to Kotak Mahindra Bank Ltd. transfers not merely the right to recover the debt but also transfers the obligations under the Financial Instruments "as if they were executed by the clients of ICICI Bank in favour of the assignee", i.e., Kotak Mahindra Bank Ltd. According to the borrower(s), an assignment of a debt can never carry with it the assignment of the obligations of the assignor unless there is a novation of the contract by all parties. Therefore, according to the borrower(s), the impugned Deed of Assignment is legally unsustainable without novation of original contract between ICICI Bank Ltd. (assignor) and the borrower(s) (assignee). We find no merit in the above arguments. 46. As stated above, an outstanding in the account of a borrower(s) (customer) is a debt due and payable by the borrower(s) to the Bank. Secondly, the Bank is the owner of such debt. Such debt is an asset in the hands of the Bank as a secured creditor or mortgagee or hypothecatee. The Bank can always transfer its asset. Such transfer in no manner affec....
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.... assigned. That, there is, in law, a clear distinction between assignment of rights under a contract by a party who has performed his obligation thereunder and an assignment of a claim for compensation which one party has against the other for breach of contract." 57. Referring to the aforesaid judgment of the Hon'ble Apex Court, it was submitted that the learned Company Judge has rightly held that debts are the assets of the assignor bank and in facts of the case, Essence Finance and Investment Ltd. and Mr. Apurva Parekh have discharged the debt of the secured creditors. It was therefore, submitted that section 130 of the Transfer of Property Act, would not be applicable in facts of the case because an assignment of a debt can never carry with it the assignment of the obligations of the assignor unless there is a novation of the contract by all parties. It was submitted that on perusal of the Deed of Assignment, ICICI bank is only required to be paid the value of security it held against the three machines of Rs. 7,00,000/- only. 58. Learned Senior Advocate Mr. Soparkar also referred to and relied upon the decision of Hon'ble Apex Court in case of ICICI Bank Limited vs. Sidc....
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....sact business as specified in Section 23 of The Industrial Finance Corporation Act, 1948, is repository of pubic fund. That assignment of debts of more than Rs.160 crores to be recovered from the company in liquidation for a paltry sum of Rs. 58 lakhs towards consideration of dues amounts unconscionable business transaction and a ground for application of mind prima facie against public interest even at the stage of considering an application for substitution in place of assignor, which has far reaching consequences. The company Court dealing with assets of the company in liquidation based on reports filed by Official Liquidator, who is an eye and ear of the Company Court cannot simply ignore or brush aside legitimate claim of other secured creditors in such a scenario. 13.8 In the case of Sesa Industries Ltd. v. Krishna H. Bajaj & Ors. [AIR 2011 SC 1070], the Apex Court in para 39 held as under: "39. An Official Liquidator acts as a watchdog of the Company Court, reposed with the duty of satisfying the Court that the affairs of the company, being dissolved, have not been carried out in a manner prejudicial to the interests of its members and the interest of the p....
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....frastructure Finance Limited and another reported in (2025) 1 Supreme Court Cases 456, wherein the Hon'ble Apex Court has held as under: "40. The words used in Section 140 are "upon payment or performance of all that he is liable for". When the principal debtor commits a default and when the liability under the deed of guarantee of the surety is not limited to a particular amount, its liability is in respect of the entire amount repayable by the principal debtor to the creditor. The words all that he is liable used under Section 140 cannot be ignored. The principal borrower must continuously indemnify the surety. Section 140 of the Contract Act may be founded on the said obligation. The 1st respondent-financial creditor relied upon a decision of this Court in the case of Economic Transport Corporation, Delhi [(2010) 4 SCC 114], which holds that the doctrine of subrogation is a creature of equity. Therefore, the Section will have to be interpreted having regard to the equitable principles. If the surety pays the entirety of the amount payable under guarantee to the creditor, Section 140 provides a remedy to the surety to recover the entire amount paid by him in the discharg....
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.... and considering the facts of the case, following questions arises from the impugned order passed by learned Company Judge for consideration: 1) Whether Essence Finance and Investment Ltd. and Mr. Apurva Parekh are entitled to the claim of the erstwhile secured creditors i.e. Bank of India, State Bank of India, GIIC and GSFC whose debts have been discharged by them or to the extent of amount paid by Essence Finance and Investment Ltd. and Mr. Apurva Parekh to the secured creditors? 2) Whether the Kotak Mahindra Bank Ltd. is entitled to the value of the security only or the entire debt assigned to it by ICICI bank and decree passed by Debts Recovery Tribunal amounting to Rs. 9,82,16,530/- together with simple interest at the rate of 6% per annum from 12.03.2001 till realisation. 65. It would therefore be necessary to take note of relevant provisions at this stage: The Transfer of Property Act, 1882 130. Transfer of actionable claim. - (1) The transfer of an actionable claim whether with or without consideration shall be effected only by the execution of an instrument in writing signed by the transferor or his duly authorised agent, sha....
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....ss there is anything repugnant in the subject or context,- (a) "creditor" includes a decree-holder, "debt" includes a judgment-debt, and "debtor" includes a judgment-debtor; (e) "secured creditor" means a person holding a mortgage, charge or lien on the property of the debtor or any part thereof as a security for a debt due to him from the debtor;.." 66. Considering the above provisions, it is clear that in absence of definition of "secured creditor" under the Companies Act,1956, the Hon'ble Apex Court has referred to definition of "secured creditor" given as per provisions of the Insolvency Act in case of Jitendra Nath Singh(supra) and accordingly, the same would be applicable while considering the provisions of section 529(1)(c) of the Companies Act. Therefore, to ascertain as to who is secured creditor under the provisions of the Companies Act for disbursement of the amount realised on sale of assets of the company in liquidation as per the provisions of section 529 and 529A of the Companies Act, the "secured creditor" would mean a person who holds a mortgage, charge or lien on the property of the company or any part thereof as a security for a debt due to h....
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.... the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security." The State had as already observed, a first charge over the goods. The State was also entitled to prevent the goods from being removed without payment of the instalments due. The expression "security" in sec. 141 is not used in any technical sense; it includes all rights which the creditor had against the property at the date of the contract. The surety is entitled on payment of the debt or performance of all that he is liable for, to the benefits of the rights of the creditors against the principal debtor which arise out of the transaction which gives rise to the right or liability: he is therefore on payment of the amount due by the principal debtor entitled to be put in the same position in which the creditor stood in relation to the principal debtor. If the creditor has lost or has parted with security without the c....