LAXMI FIBRES LTD. Vs A.P. INDUSTRIAL DEV. CORPN. LTD. .
Bench: VIKRAMAJIT SEN,SHIVA KIRTI SINGH
Case number: C.A. No.-005805-005805 / 2005
Diary number: 3890 / 2004
Advocates: G. RAMAKRISHNA PRASAD Vs
Y. PRABHAKARA RAO
Page 1
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.
1
Page 2
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
2
Page 3
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 :
3
Page 4
C.A.No.5805/05 etc.
“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
4
Page 5
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
5
Page 6
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
6
Page 7
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
7
Page 8
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
8
Page 9
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.
9
Page 10
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.
10
Page 11