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C.A.No.5805/05 etc.    

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.5805 OF 2005

Laxmi Fibres Ltd.        …..Appellant

Versus

A.P. Industrial Dev. Corpn. Ltd. & Ors.        …..Respondents

W I T H

C.A.Nos.5803 and 5804 of 2005

J U D G M E N T

SHIVA KIRTI SINGH, J.

Civil Appeal No.5805 of 2005

1. In  this  appeal  preferred  by  the  appellant-company  under

liquidation represented by the Official  Liquidator  the question of

law arising for consideration is whether the Official Liquidator can

claim any power or jurisdiction in itself to adjudicate and quantify

the claim of statutory corporations such as respondent no.1, A.P.

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C.A.No.5805/05 etc.    

Industrial  Development  Corporation  and  respondent  no.2,  A.P.

State  Financial  Corporation  when  the  Company  Judge  has

permitted them to stand outside the liquidation proceeding subject

to  certain  conditions  under  which  the  respondent  Corporations

may pursue the powers available to them under Section 29 of the

State Financial Corporations Act, 1959 (for brevity referred to as

‘the SFC Act’).

2. The relevant facts are not at all under dispute and to answer

the issue of law indicated above it is not necessary to delve deeper

into facts.   It would suffice to notice that the Official Liquidator has

taken over the charge of the company by virtue of Section 445 of

the Companies Act and the property of the company is also seized

by the first respondent (the Corporation) under Section 29 of the

SFC Act.  The sale of the assets of the company was conducted by

first respondent as per conditions imposed by the High Court.  To

comply with one of the conditions the corporation was required to

obtain permission of the High Court for finalizing/confirming the

sale.  The Official Liquidator had already been allowed to inspect

the properties and assets of the company and to take inventory as

and when required.  The valuer’s report was also placed before the

court before the properties covered under the mortgage deeds in

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C.A.No.5805/05 etc.    

favour of Corporation were put to sale.  The respondent-corporation

had also submitted to the order of the Company Judge requiring

the corporation to undertake to deposit workmen’s dues with the

Official  Liquidator  as  and  when  quantified  by  him  as  per  the

provisions  of  Section  529A  of  the  Indian  Companies  Act  with

interest at the bank rate and whatever surplus would remain after

the sale and realization of the dues of the secured creditors and the

workmen,  as  per  law,  the balance sale  proceeds could be made

available to the Official Liquidator for being dealt with as per the

provisions of the Companies Act and the Rules.

3. On  the  application  filed  by  the  respondent-corporation

seeking confirmation of sale of the mortgage assets of the company,

the learned Single Judge vide order dated 19.11.2003 noted the

contention of all the parties and finding that there was no objection

to sale of the properties either by the second charge holder or by

the Official Liquidator, confirmed the sale of land, buildings, plant

and  machinery  in  favour  of  M/s.  Sri  Venkataswara  Industries

represented by Sri  Adarsha Gupta for a sum of  Rs.86 Lacs and

carding machine in favour of M/s. Supreme Associates, Coimbatore

for  a  sum of  Rs.2.45 Lacs.   However,  the  learned Single  Judge

made the order of confirmation subject to the following conditions :

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“Before  the  applicant  and  2nd respondent  seek  to appropriate  the  sale  proceeds  for  themselves,  they should prove their claim before the Official Liquidator. The proceeds realised through the sale of the properties shall  be kept  by the applicant-Corporation in interest earning deposits till the Official Liquidator adjudicates and  quantifies  the  claim  of  the  applicant  and  2nd respondent  Corporations.   The  applicant  and  2nd respondent shall deposit 1/4th  of the sale proceeds with the Official Liquidator to enable him to proceed with the adjudication  of  the  claims  of  the  workmen  and  for distribution among themselves.  They shall make over the  excess  sale  proceeds,  if  any,  to  the  Official Liquidator.

After receiving the entire sale consideration only, the petitioner is directed to hand over possession of the properties to the highest bidders and execute necessary sale papers in their favour.”

4. Aggrieved  only  with  the  condition  extracted  above,  the

respondent no.1 preferred an intra-court appeal bearing OSA No.85

of 2003.  The learned Division Bench disposed of  the appeal  by

order impugned dated 07.01.2004 directing that the confirmation

of sale of the properties in favour of the highest bidder would be

subject  to  only  one  condition  that  the  Official  Liquidator  shall

quantify  the  amounts  liable  to  be  paid  to  the  workmen.   The

Division  Bench  accepted  the  objection  raised  by

respondent-corporation  that  there  could  be  no  question  of

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C.A.No.5805/05 etc.    

establishing  the  claim  of  the  corporation  before  the  Official

Liquidator as the corporation was a secured creditor.

5. The Division Bench in our view came to a correct conclusion

that the Official Liquidator does not have jurisdiction to ascertain

or  adjudicate  the  claim  of  a  secured  creditor  who  has  been

permitted by the Company Judge to stand outside the liquidation

proceeding with liberty to pursue its remedy as per statutory rights

available under the SFC Act, subject only to the conditions imposed

by  the  court.   The  reasons  for  such  a  view  are  apparent  on  a

perusal of the following three judgments of this Court :

1. A.P.  State  Financial  Corporation  v.  Official Liquidator (2000) 7 SCC 291;

2. International  Coach  Builders  Ltd.  v.  Karnataka State Financial Corpn. (2003) 10 SCC 482; and

3. Rajasthan  State  Financial  Corpn.  v.  Official Liquidator (2005) 8 SCC 190

6. In  A.P.  State  Financial  Corporation  this  Court  had  the

occasion to examine the extent of powers available to a Financial

Corporation under Sections 29 and 46 of the SFC Act in the light of

later amendments to the Companies Act incorporating proviso to

Section 529(1)  and Section 529A of  the Companies  Act  through

Amendment Act 35 of 1985.  The object of the amendment was to

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C.A.No.5805/05 etc.    

protect the dues of the workmen.  This Court held that the power

available to a corporation under Section 29 to sell the property of a

debtor company under liquidation is not absolute but is subject to

the proviso to Section 529(1) and  non obstante clause in Section

529A of the Companies Act providing for  pari passu charge of the

workmen.   

7. In  International  Coach Builders  Ltd. this  Court  not  only

followed the view taken in A.P. State Financial Corporation case but

went on to explain in paragraph 31 as to how the view adopted

would not obliterate the difference between a creditor opting to stay

outside winding up and one who opts to prove his debt in winding

up.  Para 31 of the judgment provides thus :

“31. Finally, counsel for SFCs urge that the view we are to  take  would  obliterate  the  difference  between  a creditor opting to stay outside winding-up and one who opts to prove his debts in winding-up.  We are unable to accept it.  As a result of the amendments made by the Act  of  1985  in  the  Companies  Act,  1956,  SFCs  as secured  creditors,  must  seek  leave  of  the  Company Court for the limited purpose of ensuring that the pari passu charge in favour of the workmen is safeguarded by  imposition  of  suitable  conditions  under  the supervision of the Company Court.  If this amounts to impeding  their  hitherto  unimpeded  rights,  so  be  it. Such is the parliamentary intendment, according to us. This impediment is of a limited nature for the specific purpose  of  protecting  the  pari  passu charge  of  the workmen’s dues and subject thereto, SFCs can continue to  exercise  their  statutory  rights  as  secured creditors

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C.A.No.5805/05 etc.    

without  being  reduced  to  the  status  of  unsecured creditors required to prove their debts in insolvency and stand in line with other unsecured creditors.  Neither is the apprehension expressed justified, nor the contention sound.”

8. It  is  clear  from the  aforesaid  judgment  that  no  doubt  the

changes brought about in the Companies Act through amendments

of 1985 impede even the statutory powers available to a secured

creditor like SFCs under Section 29 and the other relevant sections

of the SFC Act but the impediment is indeed of a limited nature; its

specific  purpose  being  to  protect  the  pari  passu charge  of  the

workmen’s dues.  After ensuring that this purpose is achieved or

ensured,  the State Financial  Corporations can continue to enjoy

their  statutory  rights  as  secured  creditors.   They  will  not  be

reduced to the status of unsecured creditors and equally will not be

required to prove their debts nor will be required to stand in line

with other unsecured creditors.

9. A  three  Judges’  Bench  in  the  case  of  Rajasthan  State

Financial Corporation (supra) approved and followed the earlier

views  in  A.P.  State  Financial  Corporation  and  in  International

Coach Builders Ltd.  In paragraph 17 of this judgment it was again

clarified  that  the  “right  of  a  financial  institution  or  of  the

Recovering Tribunal or that of a financial corporation or the Court

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C.A.No.5805/05 etc.    

which has been approached under Section 31 of the SFC Act to sell

the assets may not be taken away, but the same stands restricted

by the requirement of the Official Liquidator being associated with

it,  giving  the  Company  Court  the  right  to  ensure  that  the

distribution  of  the  assets  in  terms  of  Section  529A  of  the

Companies Act takes place”. (emphasis added)

10. In our considered view, the rights of a financial corporation

available  under  the  provisions  of  the  SFC  Act  have  been

compromised  or  impeded  by  the  amendment  of  1985  in  the

Companies  Act,  particularly  the proviso added to  Section 529(1)

and  Section  529A,  only  to  a  limited  extent  and  for  the  limited

purpose of securing the right of the workers for distribution of their

wages as pari passu charge.  But such limited impediment to their

rights under the SFC Act will not alter the status of State financial

corporations as secured creditors and they will not be required to

prove  their  debt  which  they  are  entitled  to  realize  under  the

provisions of the SFC Act subject to right of the workers to receive

their  wages also as secured creditors on  pari  passu basis.   The

control  of  the  Company  Judge  and  the  Official  Liquidator  if

authorized, can extend only to ensure that the aforesaid purpose of

Section  529A  is  effectively  achieved.   Like  any  other  affected

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C.A.No.5805/05 etc.    

person, if the Company represented by the Official Liquidator has

reasons to be aggrieved by claims made by a financial corporation

under the SFC Act, its remedy would be to initiate appropriate civil

proceedings to  challenge such claim or debt of  a State  financial

corporation  before  an  appropriate  forum  and  not  to  assume

jurisdiction  to  sit  in  adjudication  and  decide  entitlement  of  the

financial  corporation  when  it  has  opted  to  stand  outside  the

liquidation proceeding  as a secured creditor.  As noted earlier, the

statutory powers of SFCs have suffered only a limited impediment

only to serve the purpose of protecting workers’ dues.   

11. In view of law noticed above, we find no error in the impugned

order of the Division Bench.  The appeal is, therefore, dismissed

but without any order as to costs.

Civil Appeal Nos.5803 and 5804 of 2005

12. The  orders  under  appeal  dated  07th January  2004  in

O.S.A.No.74 and 86 of 2003 respectively simply follow the reasons

recorded by the  Division Bench in  another  judgment  of  a  same

date, i.e., 07th January 2004 passed in O.S.A.No.85 of 2003.  In the

connected appeal bearing C.A.No.5805 of 2005 we have passed a

reasoned  order  to  uphold  that  order  of  the  Division  Bench.

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C.A.No.5805/05 etc.    

Following the said judgment and for the same very reasons these

appeals are also dismissed but without any order as to costs.  

     …………………………………….J.       [VIKRAMAJIT SEN]

      ……………………………………..J.                  [SHIVA KIRTI SINGH]

New Delhi. August 07, 2015.

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