REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.___1291__________ of 2019 (ARISING OUT OF SLP (CIVIL) NO.6221 OF 2018)

SWARAJ INFRASTRUCTURE PVT. LTD.  …APPELLANT

VERSUS

KOTAK MAHINDRA BANK LTD. …RESPONDENT

WITH

CIVIL APPEAL NO._____1292________ of 2019 (ARISING OUT OF SLP (CIVIL) NO.6458 OF 2018)

CIVIL APPEAL NO._____1294________ of 2019 (ARISING OUT OF SLP (CIVIL) NO.6571 OF 2018)

CIVIL APPEAL NO._____1293________ of 2019 (ARISING OUT OF SLP (CIVIL) NO.6597 OF 2018)

J U D G M E N T

R.F. Nariman, J.

1. Leave granted.

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2. The present case involves the right of a secured creditor to file

a  winding  up  petition  after  such  secured  creditor  has  obtained  a

decree  from  the  Debts  Recovery  Tribunal  [“DRT”]  and  a  recovery

certificate based thereon.  

3. Several  appeals  were  taken  up  together  for  hearing  by  the

Division Bench of the Bombay High Court. The brief facts necessary to

decide the present appeals are as follows:

The  respondent,  Kotak  Mahindra  Bank  Limited,  advanced

various loans to the companies in question. The outstanding amount

against these companies as on date, together with interest, is stated to

be in the region of  INR 48 crores.  The respondent approached the

Debts  Recovery  Tribunal,  Mumbai  by  filing  three  separate  original

applications to recover the debt owed to them. The Debts Recovery

Tribunal delivered three separate judgments on 16.01.2015 allowing

the  applications  filed  by  the  respondent  bank.  Apparently,  the  said

orders  are  final  as  no  appeals  have  been  preferred  to  the  Debts

Recovery Appellate Tribunal [“DRAT”], Mumbai. Recovery certificates

dated  12.08.2015  for  the  said  amounts  were  then  issued  by  the

Recovery Officer under Section 19(19) of the Recovery of Debts Due

to Banks and Financial  Institutions Act,  1993 [“Recovery  of  Debts

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Act”].  We have been informed that  various attempts were made to

auction the properties that  were security  for  the loans granted,  but

each of these attempts has yielded no results.  

In the meanwhile, the respondent issued statutory notices dated

15.04.2015 under Sections 433 and 434 of the Companies Act, 1956.

As no payments were forthcoming, a company petition was filed before

the Bombay High Court on 03.07.2015. By an order dated 26.07.2017,

the said petition was admitted as the companies in question were said

to  be  commercially  insolvent.  In  the  appeals  that  were  filed  to  the

Division Bench of the Bombay High Court, the main point argued was

that once a secured creditor has obtained an order from the DRT, and

a  recovery  certificate  has  been  issued  thereupon,  such  secured

creditor cannot file a winding up petition as the Recovery of Debts Act

is a special Act which vests exclusive jurisdiction in the DRT. Also, a

secured creditor  can file a winding up petition only on giving up its

security,  which  has  not  been  done  in  the  present  case.  These

contentions  did  not  find  favour  with  the  Division  Bench  who  then

dismissed the appeals in question.

4. Shri K. Parameshwar, learned advocate, appearing on behalf of

the appellants, has urged a number of points before us. He first argued

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that this Court has held that the Recovery of Debts Act is a special

statute qua the general statute of the Companies Act, 1956, and that

this Court has further held that exclusive jurisdiction is vested in the

DRT under the Recovery of Debts Act to the exclusion of the Company

Court.  As  this  is  so,  once  the  DRT  has  been  approached,  the

necessary corollary is that a winding up petition to realize the same

debt would be expressly barred on a conjoint reading of Sections 17

and 18 of the Recovery of Debts Act. He further argued that in any

case, the secured creditor is put to an election where it  must either

relinquish its security and stand in line in the winding up proceeding or

realize its security outside the winding up proceeding. On the facts of

the present case, it has filed a successful action to realize its security

outside the winding up proceeding, as a result of which, the winding up

proceeding filed by it, without giving up the mortgaged security, would

not be maintainable. It was further argued that, in any event, Section

434(1)(b)  of  the  Companies  Act,  1956 would  be  attracted,  and  not

Section  434(1)(a),  and  that  since  the  security  has  not  yet  been

realized, the winding up petition dressed up under Section 434(1)(a),

but really under Section 434(1)(b), would not be maintainable.  Also,

reliance on certain High Court judgments by the impugned judgment is

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completely  misplaced  for  the  reason  that  the  provisions  of  the

Companies Act,  1956 would  show that  the secured creditor  has to

relinquish  its  security  when  it  files  a  winding  up  petition,  and  not

thereafter, as has been held in these judgments.

5. In  answer  to  these  contentions,  Shri  Shyam  Divan,  learned

Senior Advocate appearing on behalf of the respondent, has argued,

relying upon Section 439 of the Companies Act, 1956 in particular, that

a  secured  creditor  can  maintain  a  winding  up  petition  in  the  fact

situation  as  obtains  in  the  present  case.  According  to  him,  the

judgment relied upon by the appellant,  namely,  Allahabad Bank v.

Canara Bank, (2000) 4 SCC 406, is distinguishable in that the context

of  that  judgment  was  whether  leave  had  to  be  obtained  from  the

Company Court when a winding up proceeding is either pending, or a

winding  up  order  is  made,  in  order  to  pursue  a  debt  recovery

proceeding under the Recovery of Debts Act. He also argued before

us that the election that is to take place with the secured creditor giving

up its security is at the stage of proof of claims, which is only after a

winding  up  order  has  been  passed,  and  which  stage  has  not  yet

arrived on the facts of the present case. Also, according to him, the

petition has been filed only on the ground of inability to pay debts, and

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once the statutory presumption is raised under Section 434(1)(a) of the

Companies Act,  1956, it  is  clear that winding up must follow in the

absence of payment of outstanding amounts of debts owed. According

to the learned Senior Advocate, his client has gone from pillar to post

in an attempt to recover the loans made to the appellants and has not

yet  succeeded in  any endeavour  to  do so.  Also,  nothing has been

repaid  so  far  and  the  debt  owed  by  these  companies,  which  is

mounting, amounts to a staggering figure of INR 48 crores. According

to  the  learned  counsel,  therefore,  the  High  Court  was  right  in

dismissing the appeal filed by the appellants.

6. After hearing learned counsel for both sides, it is important to

first set out the relevant provisions of the Companies Act, 1956 and the

Recovery of Debts Act, 1993.  

Section 434(1) of the Companies Act, 1956 reads as follows:

“434.  Company  when  deemed  unable  to  pay  its debts.—(1) A company shall be deemed to be unable to pay its debts—

(a) if  a creditor, by assignment or otherwise, to whom  the  company  is  indebted  in  a  sum exceeding  one  lakh  rupees  then  due,  has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due

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and  the  company  has  for  three  weeks thereafter  neglected  to  pay  the  sum,  or  to secure or compound for it to the reasonable satisfaction of the creditor;

(b) if  execution  or  other  process  issued  on  a decree or order of  any Court  or  Tribunal in favour  of  a  creditor  of  the  company  is returned unsatisfied in whole or in part; or

(c) if  it  is  proved  to  the  satisfaction  of  the Tribunal that the company is unable to pay its debts,  and,  in  determining  whether  a company  is  unable  to  pay  its  debts,  the Tribunal  shall  take  into  account  the contingent  and  prospective  liabilities  of  the company.

xxx xxx xxx”

Section 439(1)(b) and Section 439(2) of the Companies Act, 1956 read

as follows:

“439. Provisions as to applications for winding up.— (1) An application to the Tribunal for the winding up of a company shall  be by petition presented, subject to the provisions of this section—

xxx xxx xxx (b) by  any  creditor  or  creditors,  including  any

contingent  or  prospective  creditor  or creditors; or

xxx xxx xxx

(2)  A secured  creditor,  the  holder  of  any  debentures (including debenture stock), whether or not any trustee or trustees have been appointed in respect of such and other like debentures, and the trustee for the holders of debentures, shall be deemed to be creditors within the meaning of clause (b) of sub-section (1).

xxx xxx xxx”

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Section 441, which deals with commencement of winding up, reads as

follows:

“441. Commencement of winding up by Tribunal.—(1) Where,  before  the  presentation  of  a  petition  for  the winding up of a company by the Tribunal,  a resolution has been passed by the company for voluntary winding up, the winding up of the company shall be deemed to have  commenced  at  the  time  of  the  passing  of  the resolution, and unless the Tribunal, on proof of fraud or mistake,  thinks  fit  to  direct  otherwise,  all  proceedings taken in  the voluntary  winding up shall  be deemed to have been validly taken.

(2) In any other case, the winding up of a company by the Tribunal shall be deemed to commence at the time of the presentation of the petition for the winding up.”

Section 529(1) of the Companies Act reads as follows:

“529. Application of insolvency rules in winding up of insolvent  companies.—(1)  In  the  winding  up  of  an insolvent company, the same rules shall prevail and be observed with regard to—

(a) debts provable; (b) the  valuation  of  annuities  and  future  and

contingent liabilities; and (c) the  respective  rights  of  secured  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:

xxx xxx xxx”

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The reference made in Section 529 of the Companies Act, 1956 is to

Section  47  of  the  Provincial  Insolvency  Act,  1920  which  reads  as

follows:

“47. Secured creditors.—(1) Where a secured creditor realises his security, he may prove for the balance due to him, after deducting the net amount realised. (2) Where a secured creditor relinquishes his security for the general benefit of the creditors, he may prove for his whole debt. (3) Where a secured creditor does not either realise or relinquish his security, he shall, before being entitled to have his debt entered in the schedule, state in his proof the particulars of his security, and the value at which he assesses it, and shall be entitled to receive a dividend only in respect of the balance due to him after deducting the value so assessed. (4) Where a security is so valued, the Court may at any time  before  realisation  redeem  it  on  payment  to  the creditor of the assessed value. (5)  Where  a  creditor,  after  having  valued  his  security, subsequently realises it, the net amount realised shall be substituted  for  the  amount  of  any valuation  previously made by the creditor, and shall be treated in all respects as an amended valuation made by the creditor. (6) Where a secured creditor does not comply with the provisions of this section, he shall be excluded from all share in any dividend.”

7. The relevant  provisions of  the Recovery of  Debts Act,  1993,

read as follows:

“17. Jurisdiction, powers and authority of Tribunals. —(1)  A  Tribunal  shall  exercise,  on  and  from  the appointed day, the jurisdiction, powers and authority to

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entertain  and  decide  applications  from the  banks  and financial  institutions for  recovery  of  debts  due to  such banks and financial institutions.

(1-A) Without prejudice to sub-section (1),— (a) the Tribunal shall exercise, on and from the

date  to  be  appointed  by  the  Central Government,  the  jurisdiction,  powers  and authority to entertain and decide applications under Part III  of Insolvency and Bankruptcy Code, 2016;

(b) the Tribunal  shall  have circuit  sittings in  all district headquarters.

(2) An Appellate Tribunal shall exercise, on and from the appointed day, the jurisdiction, powers and authority to entertain appeals against any order made, or deemed to have been made, by a Tribunal under this Act.

(2-A) Without prejudice to sub-section (2), the Appellate Tribunal  shall  exercise,  on  and  from  the  date  to  be appointed  by the  Central  Government,  the jurisdiction, powers  and  authority  to  entertain  appeals  against  the order made by the Adjudicating Authority under Part III of the Insolvency and Bankruptcy Code, 2016.”

“18.  Bar of  jurisdiction.—On and from the appointed day, no court or other authority shall have, or be entitled to exercise, any jurisdiction, powers or authority (except the  Supreme  Court,  and  a  High  Court  exercising jurisdiction  under  Articles  226  and  227  of  the Constitution)  in  relation  to  the  matters  specified  in Section 17:

Provided  that  any  proceedings  in  relation  to  the recovery  of  debts  due  to  any  multi-State  co-operative bank pending before the date of commencement of the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012 under the Multi-State Co- operative  Societies  Act,  2002  ((39  of  2002)  shall  be

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continued  and  nothing  contained  in  this  section  shall, after such commencement, apply to such proceedings.”

“19. Application to the Tribunal.— xxx xxx xxx (19) Where a certificate of recovery is issued against a company as defined under the Companies Act, 2013 (18 of  2013)  and  such  company  is  under  liquidation,  the Tribunal may by an order direct that the sale proceeds of secured assets of  such company be distributed in  the same  manner  as  provided  in  Section  326  of  the Companies Act, 2013 or under any other law for the time being in force. xxx xxx xxx”

“34.  Act  to  have  overriding  effect.—(1)  Save  as provided under sub-section (2), the provisions of this Act shall  have  effect  notwithstanding  anything  inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act. xxx xxx xxx”

8. In  Allahabad Bank v. Canara Bank (supra), this Court dealt

with  whether  the  secured  creditor,  namely,  Allahabad  Bank  in  that

case, was obliged to seek the leave of the Company Court under the

Companies  Act,  1956,  and  whether  the  Company  Court  can  stay

recovery proceedings which had been initiated under the Recovery of

Debts Act in the event of a winding up order being passed under the

Companies Act,  1956.  In  this  context,  this  Court  held,  adverting to

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Sections 17 and 18 of the Recovery of Debts Act, that the jurisdiction

of the Tribunal in regard to adjudication of applications for recovery of

debts  under  Section  17  is  exclusive.  No  dual  jurisdiction  is

contemplated, particularly having regard to Section 34 of the said Act,

which  has  overriding  effect  over  other  statutes  including  the

Companies Act, 1956 – see paragraphs 21 to 23. The said judgment

further goes on to state:

“23.  …… The provisions of  Section 34(1) clearly state that the RDB Act overrides other laws to the extent of “inconsistency”.  In  our  opinion,  the  prescription  of  an exclusive Tribunal both for adjudication and execution is a procedure clearly inconsistent with realisation of these debts in any other manner.”

xxx xxx xxx

“25. Thus, the adjudication of liability and the recovery of the  amount  by  execution  of  the  certificate are respectively  within  the  exclusive  jurisdiction  of  the Tribunal and the Recovery Officer and no other court or authority much less the civil court or the Company Court can go into the said questions relating to the liability and the recovery except as provided in  the Act.  Point  1 is decided accordingly.”

(emphasis in original)

9. In answering whether the Recovery of Debts Act overrides the

provisions of Sections 442 and 537 and 446 of the Companies Act,

1956,  this  Court  held  that  the  Recovery  of  Debts  Act  is  a  special

statute which would necessarily override the aforesaid provisions of

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the  more  general  statute,  namely,  the  Companies  Act,  1956.  Even

otherwise, if both are treated as special laws, since the Recovery of

Debts Act is later in point of time, together with a non-obstante clause

contained in Section 34, the said Act will prevail to the extent set out in

the Recovery of Debts Act. This Court then concluded:

“50. For the aforesaid reasons, we hold that at the stage of adjudication under  Section  17  and execution of  the certificate  under  Section  25  etc.  the  provisions  of  the RDB  Act,  1993  confer  exclusive  jurisdiction  on  the Tribunal  and  the  Recovery  Officer  in  respect  of  debts payable to banks and financial institutions and there can be no interference by the Company Court under Section 442 read with Section 537 or under Section 446 of the Companies Act, 1956. In respect of the monies realised under the RDB Act, the question of priorities among the banks and financial institutions and other creditors can be decided only by the Tribunal under the RDB Act and in accordance with Section 19(19) read with Section 529- A of  the Companies Act  and in no other  manner.  The provisions of the RDB Act, 1993 are to the above extent inconsistent  with the provisions of  the Companies Act, 1956 and the latter Act has to yield to the provisions of the former. This position holds good during the pendency of the winding-up petition against the debtor Company and also after a winding-up order is passed. No leave of the  Company  Court  is  necessary  for  initiating  or continuing  the  proceedings  under  the  RDB Act,  1993. Points 2 and 3 are decided accordingly in favour of the appellant and against the respondents.”

10. It is important to note that the aforesaid statement of the law

was made in the context of non-requirement of leave of the Company

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Court to initiate, continue with, and execute orders passed under the

Recovery  of  Debts  Act.  What  is  important  to  note  is  that  the

Companies Act, 1956 is overridden to the extent of the inconsistency

between the Companies Act, 1956 and the Recovery of Debts Act only

qua recovery of debts due to banks and financial institutions.  

11. It  is  settled law that  a winding up proceeding initiated under

Section 433(e) and 434 of the Companies Act, 1956 is not a means of

seeking to enforce payment of a debt. This Court, in  Amalgamated

Commercial  Traders  (P.)  Ltd.  v.  A.C.K.  Krishnaswami  and Ors.,

(1965)  35  Comp  Cas  456  (SC)  [“Amalgamated  Commercial

Traders”], has held:

“13. It is well-settled that “a winding up petition is not a legitimate means of seeking to enforce payment of the debt  which  is  bona  fide  disputed  by  the  company.  A petition presented ostensibly for a winding up order but really to exercise pressure will be dismissed, and under circumstances  may  be  stigmatized  as  a  scandalous abuse of the process of the court.”

This statement of the law has subsequently been followed in several

judgments, one of which is  M/s IBA Health (India) Pvt. Ltd. v. M/s

Info-Drive Systems Sdn.  Bhd.,  (2010)  10 SCC 553 (at  paragraph

21).  

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12. However, it was pointed out that a subsequent judgment of this

Court, of the selfsame strength of three learned Judges, in Harinagar

Sugar Mills Co. Ltd. v. M.W. Pradhan, (1966) 3 SCR 948 [“Harinagar

Sugar Mills”], has held as follows:

“5. ……  Can  it  be  said  that  the  petition  filed  by  the Receiver for winding up of the Company is not a mode of realisation of  the debt due to the joint  family  from the Company?  In  Palmer's  Company  Precedents,  Part  II, 1960 Edn., at p. 25, the following passage appears:

“A  winding  up  petition  is  a  perfectly  proper remedy for enforcing payment of a just debt. It is the mode of execution which the Court gives to a creditor against a company unable to pay its debts.”

This  view  is  supported  by  the  decisions  in  Bowes v. Hope Life Insurance and Guarantee Co. [(1865) II HLC 388], Re General Company for Promotion of Land Credit [(1870)  LR 5  Ch  D  380]  and  Re National  Permanent Building Society [(1869) LR 5 Ch D 309]. It is true that “a winding up order is not a normal alternative in the case of  a  company  to  the  ordinary  procedure  for  the realisation of the debts due to it”; but nonetheless it is a form of equitable execution……”

13. It is true that this Court has stated that a winding up petition is a

form of equitable execution of a debt, but this is qualified by stating

that  a  winding up  order  is  not  a  normal  alternative  to  the  ordinary

procedure for realization of debts due to a creditor. We are of the view

that  both  the  judgments  contained  in  Amalgamated  Commercial

Traders (supra)  as  well  as  in  Harinagar  Sugar  Mills (supra),

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recognize the fact that a winding up proceeding is not a proceeding

that can be referred to as a proceeding for realization of debts and

would, therefore, not be covered by the language of Section 17 read

with Section 18 of the Recovery of  Debts Act.  When it  comes to a

winding up proceeding under the Companies Act, 1956, since such a

proceeding  is  not  “for  recovery  of  debts”  due  to  banks,  the  bar

contained in Section 18 read with Section 34 of the Recovery of Debts

Act would not apply to winding up proceedings under the Companies

Act, 1956.  

14. In point of fact, a Division Bench of the Bombay High Court in

Viral  Filaments Ltd. v. Indusind Bank Ltd.,  (2001) 3 Mah LJ 552

reached this very conclusion after closely examining the judgment in

Allahabad Bank v. Canara Bank (supra) of this Court. We approve of

the  reasoning  contained  in  the  aforesaid  Bombay  High  Court

judgment.

15. However,  Shri  K.  Parameshwar,  appearing  on  behalf  of  the

appellants, also relied upon Rajasthan State Financial Corporation

v. Official Liquidator,  (2005) 8 SCC 190, and paragraph 18 of the

aforesaid judgment, in particular. Paragraph 18 reads as follows:

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“18. In the light of the discussion as above, we think it proper to sum up the legal position thus:

(i)  A  Debts  Recovery  Tribunal  acting  under  the Recovery  of  Debts  Due  to  Banks  and  Financial Institutions Act, 1993 would be entitled to order the sale and  to  sell  the  properties  of  the  debtor,  even  if  a company-in-liquidation, through its Recovery Officer but only  after  notice  to  the  Official  Liquidator  or  the Liquidator  appointed  by  the  Company Court  and  after hearing him.

(ii) A District Court entertaining an application under Section 31 of the SFC Act will have the power to order sale of the assets of a borrower company-in-liquidation, but  only  after  notice  to  the  Official  Liquidator  or  the Liquidator  appointed  by  the  Company Court  and  after hearing him.

(iii) If a financial corporation acting under Section 29 of the SFC Act seeks to sell  or otherwise transfer  the assets of a debtor company-in-liquidation, the said power could  be  exercised  by  it  only  after  obtaining  the appropriate  permission  from  the  Company  Court  and acting in terms of the directions issued by that court as regards associating the Official Liquidator with the sale, the  fixing  of  the  upset  price  or  the  reserve  price, confirmation of  the sale,  holding of  the sale  proceeds and the distribution thereof among the creditors in terms of Section 529-A and Section 529 of the Companies Act.

(iv) In a case where proceedings under the Recovery of  Debts  Due  to  Banks  and  Financial  Institutions  Act, 1993 or the SFC Act are not set in motion, the creditor concerned  is  to  approach  the  Company  Court  for appropriate  directions  regarding  the  realisation  of  its securities consistent with the relevant provisions of the Companies Act regarding distribution of the assets of the company-in-liquidation.”

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As a matter of fact, sub-paragraphs (i) and (iv) of paragraph 18 would

show that proceedings before the DRT, and winding up proceedings

under the Companies Act, 1956, can carry on in parallel streams. That

is why paragraph 18(i) states that a Debts Recovery Tribunal, acting

under the Recovery of Debts Act, would be entitled to order sale, and

sell the properties of the debtor, even of a company in liquidation, but

only after giving notice to the Official Liquidator, or to the Liquidator

appointed by the Company Court, and after hearing him.

16. To  similar  effect  is  the  judgment  of  this  Court  in  Official

Liquidator v. Allahabad Bank, (2013) 4 SCC 381, where this Court

held as follows:

“24. From the  aforesaid  authorities,  it  clearly  emerges that  the  sale  has  to  be  conducted  by  DRT  with  the association of the Official Liquidator. We may hasten to clarify that as the present controversy only relates to the sale, we are not going to say anything with regard to the distribution. However, it is noticeable that under Section 19(19) of the RDB Act, the legislature has clearly stated that  distribution  has  to  be  done  in  accordance  with Section 529-A of the 1956 Act. The purpose of stating so is that it is a complete code in itself and the Tribunal has the exclusive jurisdiction for the purpose of sale of the properties for realisation of the dues of the banks and financial institutions.”

xxx xxx xxx

“31. The aforesaid analysis makes it  luculent that DRT has  exclusive  jurisdiction  to  sell  the  properties  in  a

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proceeding  instituted  by  the  banks  or  financial institutions,  but  at  the  time  of  auction  and  sale,  it  is required  to  associate  the  Official  Liquidator.  The  said principle  has  also  been  reiterated  in  Pravin  Gada v. Central Bank of India [(2013) 2 SCC 101 : (2013) 1 SCC (Civ) 988].

32. Once the Official Liquidator is associated, needless to say, he has a role to see that there is no irregularity in conducting the auction and appropriate price is obtained by  holding  an  auction  in  a  fair,  transparent  and  non- arbitrary manner in consonance with the Rules framed under the RDB Act.”

17. The second important point raised by learned counsel for the

appellant is that a conjoint reading of the Companies Act, 1956 and the

Provincial Insolvency Act, 1920, would make it clear that the secured

creditor must, at the time of filing the petition for winding up, state that

it has given up his security, or else, such winding up petition would not

be maintainable. In Hegde & Golay Limited v. State Bank of India,

ILR 1987 KAR 2673, a learned single Judge of the Karnataka High

Court,  Venkatachaliah,  J.  (as he then was),  dealt  with this point  as

follows:

“12. Re: Point (a): The  contention  is  that  the  Bank  which  is  a  secured creditor  cannot  maintain  a  winding-up  petition  without making an election either to give-up the security or value it as required by Section 9(2) of the Provincial Insolvency Act, 1920. It is urged that by Section 529(1) of the Act, the Rules of Insolvency in Section 9(2) are attracted.

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Section 9(2) of the Provincial Insolvency Act reads: “If the petitioning creditor, is a secured creditor, he shall  in  his  Petition either  state  that  he is willing to relinquish his security for the benefit of the creditors in the event of  the debtor  being adjudged insolvent or given an estimate of the value of the security. In the latter case, he may be  admitted  as  a  petitioning-creditor  to  the extent  of  the balance of  the debt  due to  him after  deducting the value so estimated in  the same way as if he were an unsecured creditor”.

(emphasis in original)

13. The contention is that a secured-creditor may stand outside  insolvency;  but  if  he  brings-up  a  creditor’s winding-up petition he must, in his petition, state that he is either willing to relinquish the security for the benefit of the body of creditors or give an estimate of the value of the  security.  Learned  Company-Judge  has  taken  the view, if we may say so with respect, quite rightly, that this rule of Insolvency Law is not attracted to the presentation of a winding-up petition.

14. Sri Shetty says that both in bankruptcy and winding- up the law is the same and the petitioning-creditor, if he is a secured creditor, must conform to the rule in Section 9(2). He relied upon  M.K. Ranganathan v.  Government of  Madras [AIR 1955 SC 604]  and  Hansraj v.  Official Liquidators,  Dehradun  Mussorie  Electric  Trading Company  Limited [AIR  1929  Allahabad  353].  The observation in  Ranganathan’s case [AIR 1955 SC 604] relied upon is this:

“Section  229  recognises  the  position  of  the secured  creditor  generally  as  outside  the winding up but enables him in the event of his desiring to take the benefit  of  the winding up proceedings  to  prove  his  debt,  to  value  the same and share in the distribution pro rata of the assets of the company just in the same way as  he  would  be  able  to  do  in  the  case  of

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insolvency  under  the  Presidency  Towns Insolvency Act or the Provincial Insolvency Act”.

In  Hansraj’s  case  [AIR  1929  Allahabad  353]  it  was observed:

“…….. I am, therefore, of opinion that the rules contained  in  any  Section  of  the  Provincial Insolvency Act, the rules, if any, made under the Act  and  any  appropriate  established  rules  of practice in insolvency proceedings are imported into  the  Companies  Act,  unless  there  is something in the Companies Act itself already providing  for  the  matter  in  question,  or  in conflict  with  the  rule  which  it  is  proposed  to import”.

These observations, in our opinion, do not advance the contention of Sri Shetty any further. Section 529(1) of the ‘Act’  attracts  the  rules  of  insolvency  to  winding-up  in relation  to  “the  respective  rights  of  secured  and unsecured  creditors”  and  confines  these  Rules  so attracted to matters that arise between these two classes of creditors. Sections 528 and 529 of the ‘Act’ are in the chapter “Proof and Ranking of Claims” and deal with the question of proof of debts and the rights of secured and unsecured  creditors.  Section  529(2)  itself,  in  so  far  it expressly envisages, and provides for,  the contingency that if a secured-creditor proceeds to realise his security he should pay the expenses incurred by the Liquidator, by implication, rules out the construction contended for by  Sri  Shetty.  The  words  “in  winding-up  of  insolvent company”  in  Section  529(1)  of  the  ‘Act’  has  obvious reference to a post winding-up stage.

The  point  to  note  is  that  this  rule  of  insolvency  is attracted to winding-up in the matter of proof of debts. That is after the stage of the winding-up order. A secured creditor is, under Section 439(2) of the ‘Act’ as much a creditor entitled to present a winding up petition as any other. The law in regard to the right of a Secured Creditor to  present  a  petition  for  adjudication  under  the

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Insolvency law is  different  from the right  of  a secured creditor to present a winding-up petition……”

Shri  Parameshwar took exception to this  statement of  the law, and

referred to Section 441 of the Companies Act, 1956, in particular, sub-

section (2) thereof, to state that this judgment has missed the fact that

the winding up of a company shall be deemed to commence at the

time of presentation of the petition for winding up, and that, if this is so,

the stage at which a secured creditor has to give up his security is at

the stage of the filing of the winding up petition itself. We are afraid that

we cannot  agree.   First  and foremost,  it  is  important  to  notice that

under Section 439 of the Companies Act, 1956, a secured creditor’s

petition for winding up is maintainable without any requirement of it

having to give up or relinquish its security. This is in contrast to Section

9(2) of the Provincial Insolvency Act, 1920, which reads as follows:

“9. Conditions on which creditor may petition.—

xxx xxx xxx

(2)  If  the  petitioning  creditor  is  a  secured  creditor,  he shall  in  his  petition  either  state  that  he  is  willing  to relinquish his security for the benefit of the creditors in the event of the debtor being adjudged insolvent, or give an estimate of the value of the security. In the latter case, he may be admitted as a petitioning creditor to the extent of the balance of the debt due to him after deducting the

22

value so estimated in the same way as if  he were an unsecured creditor.”

What is conspicuous by its absence is a provision akin to Section 9(2)

of the Provincial Insolvency Act, 1920 in Section 439 of the Companies

Act, 1956. In point of fact, Section 47 of the Provincial Insolvency Act,

1920 occurs only at the stage where an adjudication order has already

been passed,  which is  the stage referred to by Section 529 of  the

Companies Act, 1956. In fact, Section 529(1)(c) of the Companies Act,

1956 specifically refers to the right of a secured creditor under the law

of  insolvency  “with  respect  to  the  estates  of  persons  adjudged

insolvent”.  The  express  language  of  Section  529(1)(c)  of  the

Companies  Act,  1956  makes  it  clear  that  it  is  Section  47  of  the

Provincial Insolvency Act, 1920 alone that is attracted, and not Section

9(2), as was contended by learned counsel for the appellants before

us. We may also add that reliance on Section 441(2) of the Companies

Act, 1956 is misplaced for yet another reason. Section 441(2) has to

be read with Section 441(1), and so read, makes it clear that it became

necessary to enact sub-section (2),  because a petition for voluntary

winding up of a company presented before the Tribunal would be said

to commence at an anterior point of time, namely, at the time of the

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passing of the resolution whereby the company resolves to voluntarily

wind itself up. In contrast, therefore, Section 441(2) says “in any other

case”, i.e., in cases other than those falling under sub-section (1) of

Section 441 of the Companies Act, 1956, the winding up of a company

by  the  Tribunal  shall  be  deemed  to  commence  at  the  time  of

presentation of the petition for winding up. The context of the provision,

therefore,  makes it  clear  that  it  cannot  be read so as to  introduce

Section 9(2) of the Provincial Insolvency Act, 1920 by the back door,

as it were, when no such provision is contained in Section 439 of the

Companies Act, 1956 itself. The absence, therefore, of any provision

akin to Section 9(2) of the Provincial Insolvency Act, 1920 in Section

439 of the Companies Act, 1956; the language of Section 529(1)(c) of

the Companies Act, 1956, which expressly refers only to Section 47

and not to Section 9(2) of the Provincial Insolvency Act, 1920; and the

context in which Section 441(2) of the Companies Act, 1956 appears,

namely, to contrast winding up petitions that have been filed under the

Act with voluntary winding up petitions, all lead to the conclusion that

there is  no need to  revisit  the correct  statement  of  the law by the

learned  single  Judge  of  the  Karnataka  High  Court.  Indeed,  this

statement of the law has been followed subsequently by a Division

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Bench of  the Bombay High court  in  Asian Power Controls Ltd. v.

Bubbles Goyal, (2013) 3 Mah LJ 811 as follows:

“10. Section  529(1)  of  the  Companies  Act,  1956, provides that in the winding up of an insolvent company, the same rules shall prevail and be observed with regard to (a) debts provable; (b) the valuation of annuities and future  and  contingent  liabilities;  and (c)  the  respective rights of secured 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. Under sub-section (2) of section 529, all persons who in any such case would be entitled to prove, for and receive dividends out of the assets of the company, may come in under the winding up, and make such claims against the company as they respectively  are entitled  to  make by virtue  of  the  section.  Section  529-A  provides  an overriding preferential priority to the dues of the workmen and to the debts due to secured creditors to the extent to which such debts rank pari passu under clause (c) of the proviso to sub-section (1) of section 529 with such dues. The  rules  of  insolvency  which  are  attracted  to proceedings of winding up are inter alia those pertaining to  the  proof  of  debts.  This  is  after  the  stage  of  the winding up order. This principle has been enunciated in a judgment  of  Mr.  Justice  M.N.  Venkatachaliah  (as  the learned Chief Justice then was) speaking for a Division Bench of the Karnataka High Court in Hegde and Golay Limited v. State Bank of India, ILR 1987 KAR 2673. The judgment of the Company Judge of this Court in Canfin Homes Ltd. (supra) has also followed the principle that the  scheme  of  the  provisions  relating  to  winding  up, particularly those in sections 528 and 529 would indicate that the stage of proving a claim of a debt arises after an order of  winding up is passed. In  Canffin Homes Ltd., this Court held as follows:—

“15. The secured creditor who seeks to prove the  whole  of  his  debt  in  the  course  of  the

25

proceedings of winding up must before he can prove his debt  relinquish  his  security  for  the benefit of the general body of the creditors. If he surrenders  his  security  for  the  benefit  of  the general  body  of  creditors,  he  may  prove  the whole of  his debt.  If  the secured creditor  has realised  his  security,  he  may  prove  for  the balance  due  to  him  after  deducting  the  net amount that has been realised. The stage for relinquishing  security  arises  when  a  secured creditor seeks to prove the whole of his debt in the course of winding up. If, he elects to prove in the course of  winding up the whole of  the debt  due  and  owing  to  him,  he  has  to necessarily surrender his security for the benefit of the general body creditors.”

(emphasis in original)

Having  regard  to  the  position  in  law  as  consistently followed in the judgments of the Madras, Calcutta and Karnataka High Courts and as reiterated in the judgment of  the Company Court  in  Canfin Homes Ltd.,  it  is  not possible to accept the submission which was urged on behalf  of  the  appellant.  The  law does  not  impose  an unreasonable condition of requiring a secured creditor to forsake his security before he asserts a right to urge that a company which is unable to pay its debts should be wound up. The respondent has stated before the learned Company Judge, when the petition for winding up came up for hearing that it was not possible for the respondent to recover her dues by the sale of the land in respect of which  a  security  has  been  created  in  favour  of  the respondent.  The claim of  the respondent  is  still  to  be proved in the course of the winding up proceedings. A secured creditor who has a mortgage, charge or lien on the property of the company as security for her debt may either: (a) enforce the security and prove in the winding up for the balance of the debt after deducting the amount realised; or (b) surrender the security to the Liquidator and prove for  the whole of  the debt  as an unsecured

26

creditor; or (c) estimate the value of the property subject to her  security,  and prove for  the balance of  the debt after  deducting the estimated value;  or  (d)  rely on the security and not  prove in  the winding up proceedings. [Pennington's Company Law (Fourth edition, page 762)]. A secured  creditor  has  the  option  of  relinquishing  his security  and/or  proving  the  entirety  of  his  debt  in  the course of winding up. If the secured creditor does so in the course of winding up proceedings, the security will enure  for  the benefit  of  the  body of  creditors.  On the other hand, it is open to a secured creditor to prove in the course of  winding up proceedings to the extent  of debt  which  has  not  been  realised  outside  the proceedings for winding up by either accounting for the amount that has been so realised or by estimating the value of the property subject to security so as to enable him to prove in respect of the balance of the debt. On either view of the matter, that stage is still to arrive.”

18. In fact,  even in  Jitendra Nath Singh v.  Official  Liquidator,

(2013)  1  SCC 462,  this  Court,  after  referring  to  Section  47  of  the

Provincial Insolvency Act, 1920 and Section 529 of the Companies Act,

1956, held as follows:

“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 realise 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 realise his security, he is entitled to realise 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 realises the security.”

(emphasis supplied)

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xxx xxx xxx

“17. In support of our aforesaid conclusions, we may now cite some authorities. In Allahabad Bank v. Canara Bank [(2000) 4 SCC 406],  a two-Judge Bench of  this Court speaking  through  M.  Jagannadha  Rao,  J.  discussed these rights of the secured creditors in paras 62, 63, 64 and 65 of the judgment as reported in SCC, which are extracted hereinbelow: (SCC pp. 435-36)

“62. Secured  creditors  fall  under  two categories. Those who desire to go before the Company  Court  and  those  who  like  to  stand outside the winding up.

63. The  first  category  of  secured  creditors mentioned above are those who go before the Company  Court  for  dividend  by  relinquishing their security in accordance with the insolvency rules mentioned in Section 529. The insolvency rules are those contained in Sections 45 to 50 of the Provincial Insolvency Act. Section 47(2) of that Act states that a secured creditor who wishes  to  come  before  the  Official  Liquidator has to prove his debt and he can prove his debt only  if  he  relinquishes  his  security  for  the benefit of the general body of creditors. In that event, he will rank with the unsecured creditors and  has  to  take  his  dividend  as  provided  in Section 529(2). Till today, Canara Bank has not made it clear whether it wants to come under this category. xxx xxx xxx”

19. We now come to the argument based on Section 434(1)(b) of

the  Companies  Act,  1956.  It  is  obvious  that  Section  434(1)(b)  is

attracted only if execution or other process is issued in respect of an

28

order of a Tribunal in favour of a creditor of the company is returned

unsatisfied in whole or in part. This is only one of three instances in

which a company shall be deemed to be unable to pay its debts. If the

fact  situation fits sub-clause (b)  of  Section 434(1),  then a company

may be said to be deemed to be unable to pay its debts. However, this

does not mean that each one of the sub-clauses of Section 434(1) are

mutually exclusive in the sense that once Section 434(1)(b) applies,

Section 434(1)(a) ceases to be applicable. Also, on the facts of this

case,  we  may  state  that  the  company  petition  was  filed  only  on

03.07.2015, pursuant to a notice under Section 433 of the Companies

Act,  1956  dated  15.04.2015.  This  petition  was  filed  under  Section

433(e) read with Section 434(1)(a) of the Companies Act, 1956. At the

stage at which the petition was filed, it could not possibly have been

filed  under  Section  434(1)(b)  of  the  Companies  Act,  1956,  as

execution or other process in the form of a recovery certificate had not

been issued by the Recovery Officer till 12.08.2015, i.e., till after the

company petition was filed. For this reason also, it  is clear that this

contention of the learned counsel appearing for the appellant must be

rejected.

29

20. We may only end by saying that  cases like the present one

have to  be decided by balancing the interest  of  creditors  to  whom

money is owing, with a debtor company which will now go in the red

since a winding up petition is admitted against it.  It  is  not open for

persons  like  the  appellant  to  resist  a  winding  up  petition  which  is

otherwise maintainable without there being any  bona fide defence to

the same. We may also hasten to add that the respondent cannot be

said  to  be  blowing  hot  and  cold  in  pursuing  a  remedy  under  the

Recovery  of  Debts  Act  and  a  winding  up  proceeding  under  the

Companies Act, 1956 simultaneously. Here, it is important to refer to

the judgment of Lord Atkin in Lissenden v. C.A.V. Bosch, Ltd., [1940]

1 All E.R. 425, at 436-437, which says:

“The  doctrine  of  election  could  have  no  place  in  the present case. The applicant is not faced with alternative rights. It is the same right that he claims, but in larger degree. In  Mills v.  Duckworth, [1938] 1 All E.R. 318, a plaintiff who had been awarded damages for negligence had taken the judgment sum out of a larger sum paid into Court  and had then appealed against  the  quantum of damages,  and  was  met  by  a  similar  objection  to  his appeal. Greer, L.J., in overruling the objection, pointedly said, at p. 321:  

“He [the plaintiff] said: “I am not going to blow hot and cold. I am going to blow hotter.”  

Here the applicant is not faced with a choice between alternative rights. He has exercised an undisputed right

30

to  compensation,  and claims to  have a  right  to  more. One has not lost one’s right to a second helping because one has taken the first.”

When secured creditors like the respondent are driven from pillar to

post to recover what is legitimately due to them, in attempting to avail

of more than one remedy at the same time, they do not “blow hot and

cold”,  but  they  blow  hot  and  hotter.  The  appeals  are  accordingly

dismissed with no order as to costs.  

……………………J. (R.F. Nariman)

……………………J. New Delhi     (Navin Sinha) January 29, 2019

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