Allahabad Bank Vs. Canara Bank & ANR
[2000] INSC 180 (4 April 2000)
M.J.Rao, N.S.Hegde
M.JAGANNADHA RAO,J.
Leave granted.
The case raises issues relating to the impact
of the provisions of the Recovery of Debts due to Banks and Financial
Institutions Act, 1993 (hereinafter called the RDB Act ) on the provisions of
the Companies Act, 1956. The immediate dispute before us is between two
nationalised Banks, the Allahabad Bank (appellant) on the one hand which has
obtained a simple money decree against the debtor-company (M/s M.S.Shoes (East)
Co. Ltd. from the Debt Recovery Tribunal at Delhi under the RDB Act and the
Canara Bank on the other, whose claim as a secured creditor is still pending before
the same Tribunal at Delhi against the same company. The Allahabad Bank has
appealed before us against an order passed by the learned Company Judge under
sections 442 and 537 of the Companies Act, (in a winding up petition by Ranbaxy
Ltd.) staying the sale proceedings taken out by the Allahabad Bank before the
Recovery Officer under the RDB Act. Applications for winding up the defendant
company are pending in the Delhi High Court. As yet no winding up order has
been passed nor a provisional liquidator appointed as contemplated by section
446(1).
Point has been raised by the respondent -
Canara Bank that the appellant Allahabad Bank is obliged to seek leave of the
Company Court under the Companies Act, 1956 and the Company Court can stay
these proceedings as aforesaid under Sections 442 and 537 for the ultimate
purpose of deciding the priorities, in the event of a winding up order or other
order appointing a provisional liquidator being passed under section 446(1) of
the Companies Act, 1956. After the appellant obtained decree from the Debt
Recovery Tribunal, some properties of the company have been sold by the Recovery
Officer. Appellant contends that the Tribunal under the RDB Act can itself deal
with the question of appropriation of sale proceeds in respect of sales of the
company properties held at the instance of the appellant and the priorities and
that the appellant alone is entitled to all the sums so realised. The matter
was argued and judgment was reserved. Thereafter, our attention was invited by
the learned counsel for the respondent - Canara Bank to the Amending
Ordinance(Ordinance 1 of 2000) which came into force with effect from
17.1.2000. The effect of the Ordinance and in particular section 19(19) then
fell for consideration. Question of distribution of the sale proceeds by
Company Court/Tribunal and method of working out priorities among creditors was
argued. The facts of the case are as follows: The appellant Bank filed
O.A.No.109 of 1995 before the Debt Recovery Tribunal, Delhi under section 19 of
the RDB Act, 1993 for recovery of Rs.21,49,29,520 and a simple money decree was
passed on 13.1.1998 with interest at 18% and interest tax levy at 0.75% p.a.
Recovery Case (R.C.No.9 of 98) was filed by the Allahabad Bank for recovery
before the Recovery Officer. The debtor Company filed appeal No.270 of 1998
before the appellate Tribunal and there was no stay inasmuch as there was
default in deposit of the money directed to be deposited. O.A. No.784 of 1996
was filed by the Canara Bank also under the RDB Act in the Debt Recovery
Tribunal, Delhi for a decree for Rs.14,40,05,982.98 plus interest and it was
said that a sum of about Rs.25 crores was due from the same company. The said
O.A. of Canara Bank is pending in the Delhi Tribunal under the RDB Act. The
Canara Bank filed interlocutory application before the Recovery Officer for
impleadment in the said recovery case of the appellant, viz., R.C.9/98 seeking
pro-rata distribution of sale proceeds from auctions of the debtor company's
properties. The appellant Bank resisted the same contending that inasmuch as no
orders have been passed in favour of the Canara Bank in its claim filed before
the Delhi Tribunal against the same company, there was no question of
impleading the Canara Bank. As regards proportionate disbursement of sale
proceeds, it was observed that that question was premature and that the said
issue could be considered after sale proceeds were received by the Tribunal.
These applications were dismissed on 28.9.98.
The property of the debtor company situated
at Village Kherki Daula, admeasuring Ac 32.64 was sold on 8.1.99 for
Rs.2,30,11,200. The sale was confirmed on 16.2.99 by the Recovery Officer.
Property of the Company at village Dundahera admeasuring Ac 4.23 was also sold
on 15.1.99 for Rs.3,17,34,375, but the Recovery Officer declined to confirm
that sale and directed fresh auction and the appellant Bank filed W.P. under
Articles 226, 227. Canara Bank then filed applications in the Debt Recovery
Tribunal under section 22 of the RDB Act in January,1999 seeking stay of
recovery proceedings in RC No.9/98. They were heard on 25.2.99, adjourned to
3.3.99 then to 5.3.99. On 5.3.99, the counsel for Canara Bank informed the
Recovery Officer that it had filed Company application No.296 of 1999 in
Company Petition No.141/95 (being a winding up petition filed by Ranbaxy Ltd.
against M.S.Shoes Co.) under sections 442,
537 of the Companies Act for stay of the appellant's Recovery Case, RC No.9/98.
The said CA 296/99 was filed by Canara Bank in CP 141/95 under section 442 and
section 537 of the Companies Act seeking stay of RC 9/98 and for staying sales
of assets of company by the appellant Bank. Later on Canara Bank filed CA
323/99 again under section 442 and section 537 for similar reliefs as in CA
296/99. On 9.3.99, the learned Company Judge passed the impugned order in CA
323/99 under section 442 read with section 537 of the Companies Act staying the
further sale of assets of the Company in RC 9/98 in OA 109/95 and also
restraining disbursement of monies already realised in other sales. It is
against the above order dated 9.3.99 that this appeal has been preferred.
(While narrating the facts, we have not
referred to a number of other proceedings taken out by the debtor- company
before various Courts to stall the sales. In fact allegations have been made
that the action of the Canara Bank in trying to stall sales - which are being
held at the instance of the Allahabad Bank - was intended to benefit the
debtor-company.These allegations were, of course, denied by the Canara Bank. We
shall refer to some subsequent events which took place during the pendency of
this appeal. On 14.5.99 this Court passed an order in favour of the Allahabad
Bank directing that the sale of the debtor company's property in shed No.15 to
go on but that the sale proceeds be not distributed. Unfortunately, the sale
was not held for quite some time due to an omnibus stay order dated 29.6.99
passed by the Tribunal at Delhi. That order was stayed by the Appellate
Tribunal, Bombay on 29.6.99.
The sale did not take place even by 7.1.2000.
This Court then issued further orders on 7.1.2000 for sale of the company's
property in Shed No.15. Thereafter, sale of Industrial Shed No.15/Category-II
under SFS at Rohtak Road, Industrial Complex, New Delhi-110005 was held on
28.1.2000.
(The raw material and machinery in the shed
which were said to have been mortgaged to Canara Bank were removed and
segregated. An order was passed that an inventory be prepared and to remove the
pledged property). It appears the sale proceeds of about Rs. 20 lakhs are in
deposit in this Court. Now, the position is that some sale proceeds are in
deposit in the Tribunal and some in this Court, all such sales having been held
at the instance of the appellant Bank alone. Questions have been raised by the
respondent as to whether the Tribunal can entertain proceedings for recovery,
execution proceedings, and also for distribution of monies realised by sales of
properties of a company against which winding up proceedings are pending,
whether leave is necessary and as to which Court is to distribute the sale
proceeds and according to what priorities among various creditors? In this
appeal, Sri Soli Sorabjee, the learned Attorney General for India appearing for
the appellant, Allahabad Bank has submitted that the RDB Act of 1993 is a
special statute intended for expeditious adjudication and recovery of debts due
to banks and financial institutions and it contains two crucial provisions. One
of them is section 18 which ousts the jurisdiction of all Courts or other
authorities (except the Supreme Court and the High Court exercising powers
under Articles 226, 227) in relation to matters covered by section 17 and that
section 17 covers the entire procedure from the filing of an application under
section 19, to the `adjudication' and `recovery'. These matters are taken out
from the purview of the Companies Act, including sections 442, 537 and section
446 of the said Act. The proceedings under the RDB Act cannot be stayed by the
Company Court nor can they be transferred to the Company Court. No leave of the
Company Court is necessary either for the filing of the OA for adjudication of
the debt nor for executing the decree passed by the Tribunal. Section 34(1)
gives overriding effect to the provisions of the Act save as provided in
section 34(2). Section 34(2) as amended by Ordinance 1/2000 proceedings saves
only six statutes from the purview of section 34(1). The Companies Act, 1956 is
not one of them.
Hence, the RDB Act, 1993 overrides sections
442, 537 and also section 446 of the Companies Act. It is contended that even
otherwise section 446 cannot be invoked in this case because there is no
winding up order nor an order appointing a provisional liquidator so far. So
far as principles underlying section 73 CPC are concerned, even if applicable,-
on facts, they are not attracted before the Tribunal since no decrees have been
obtained from any Civil Court or Debt Recovery Tribunal by the Canara Bank
(respondent) nor any steps as visualised by section 73 have been taken by the
Canara Bank. It is urged that Courts must interpret the RDB Act of 1993 so as
to subserve the purpose of realisation of thousands of crores of Bank funds
which are due. The legislature intended to avoid the long drawn proceedings in
the Civil Court as well as under section 442 and 446 and 537 of the Companies
Act and this is now clear from section 19(19) as re-enacted by Ordinance 1/2000
which permits even the working out of priorities by the Tribunal.
Several rulings of this Court and of High
Courts under various other statutes have been cited before us and we shall
refer to them at the appropriate stage. It is submitted that the appellant Bank
having got a decree and having got the properties sold is solely entitled to
the entirety of these proceeds and there is no question of the appellant
sharing the sale proceeds with others nor is it necessary to wait till the
Canara Bank gets a decree in its O.A. pending before the Delhi Tribunal.
Important submissions have been made by the learned Attorney General as to the
effect of section 19(19) introduced by Ordinance 1/2000, it is contended by the
learned Attorney General that only section 529A of the Companies Act is
attracted and that too for a limited purpose if a question of "workman's portion"
is involved. No such question has arisen so far.
Hence no other provision of the Companies Act,
much less section 529(1) or (2) are attracted. In the Company Court, any
secured creditor who has not stood out of winding up but wants to come before
the Company Court has to give up his security and prove his debt before the
liquidator to seek dividends as per the insolvency rules mentioned in section
529(1), read with sections 45 to 50 of the Provincial Insolvency Act and stand
in the queue along with all unsecured creditors under section 529(2). Even that
procedure is applicable only in respect of any monies realised by the Company
Court and not by the Tribunal. The limited extent to which secured creditors
can claim priority under the RDB Act is as limited by section 19(19) of the RDB
Act and this is covered by section 529A alone read with sub-clause (c) to the
proviso to section 529(1). The effect of these provisions is that if any monies
are realised by Canara Bank by standing outside winding up and if any part of
such realisations of the Canara Bank are taken away by the liquidator for
payment to workmen, only to the extent of such "workmen's portion",
can the Canara Bank have priority over other creditors. Otherwise, Canara Bank
cannot invoke Section 529(1), (2) and that too before the Tribunal. On the
other hand, learned counsel for the Canara Bank Sri Y.P.Narula has submitted
that when a winding up petition is pending in the Company Court, it is
necessary that the leave of the Company Court is obtained for obtaining a
decree before the Tribunal or for execution before the Recovery Officer.
Sections 442, 446, 537 applied even to proceedings under the RDB Act. Leave is
necessary under section 537 even if no winding up order is passed. It is
therefore necessary to stay the sale proceedings before the Recovery Officer or
the distribution of sale proceeds. The Company Court alone can sell the
properties of the Company in the winding up proceedings. The recovery
proceedings must be stayed and then the proceedings must be transferred to the
Company Court and thereafter, once the proceeds of sale come before the Company
Court, the said Court alone will have to distribute the monies according to
priorities as mentioned in sections 446(2)(d), 529, 529A and 530 etc. The
Canara Bank is also a nationalised bank and merely because the Allahabad Bank
has been able to get a decree from the Debt Recovery Tribunal earlier than the
Canara Bank, under the RDB Act, the Allahabad Bank can not be allowed to
appropriate the entire sale proceeds recovered by it. Even if the Canara Bank
has only a `claim' and not a decree - in view of section 2(g), its security has
preference. Unlike section 73 CPC, section 446 does not require a decree and it
is sufficient to prove a debt before the liquidator.
Alternatively, it is submitted that even
before the Tribunal section 73 CPC and also section 529(1) and (2) of the Companies
Act read with sections 529A, 530 etc. are attracted for purposes of
distribution of the sale proceeds and working out priorities, assuming that
jurisdiction of the Company Court is excluded in so far as recovery of debts
due to Banks and financial institutions are concerned. From the aforesaid
contentions, the following points arise for consideration: (1) Whether in
respect of proceedings under the RDB Act at the stage of adjudication for the
money due to the Banks or financial institutions and at the stage of execution
for recovery of monies under the RDB Act, the Tribunal and the Recovery
Officers are conferred exclusive jurisdiction in their respective spheres? (2)
Whether for initiation of various proceedings by the Banks and financial
institutions under the RDB Act, leave of the Company Court is necessary under
Sections 537 before a winding up order is passed against the Company or before
provisional liquidator is appointed under section 446(1) and whether the
Company Court can pass orders of stay of proceedings before the Tribunal, in
exercise of powers under section 442? (3) Whether after a winding up order is
passed under Section 446 (1) of the Company Act or a provisional liquidator is
appointed, whether the Company Court can stay proceedings under the RDB Act,
transfer them to itself and also decide questions of liability, execution, and
priority under section 446 (2) and (3) read with sections 529, 529A and 530
etc. of the Companies Act or whether these questions are all within the
exclusive jurisdiction of the Tribunal? (4) Whether, in case it is decided that
the distribution of monies is to be done only by the Tribunal, the provisions
of section 73 CPC and sub- clause (1) and (2) of section 529, section 530 of
the Companies Court also apply - apart from section 529A - to the proceedings
before the Tribunal under the RDB Act? (5) Whether in view of provisions in
section 19(2) and 19(19) as introduced by Ordinance 1/2000, the Tribunal can
permit the appellant Bank alone to appropriate the entire sale proceeds
realised by the appellant except to the limited extent restricted by section
529A? Can the secured creditors like the Canara Bank claim under section 19(19)
any part of the realisations made by the Recovery Officer and is there any
difference between cases where the secured creditor opts to stand outside the
winding up and where he goes before the Company Court? (6) What is the relief
to be granted on the facts of the case since the Recovery Officer has now sold
some properties of the company and the monies are lying partly in the Tribunal
or partly in this Court? Points 1: This point concerns the question as to the
exclusive jurisdiction of the Tribunal and the Recovery Officer in their
respective spheres. The RDB Act is, as disclosed by its preamble, an Act to
provide for the establishment of Tribunals for expeditious adjudication and
recovery of debts due to banks and financial institutions.
The said Act is the result of two Reports,
one of 1981 of a Committee headed by Sri T. Tiwari and the other by a Committee
headed by Sri M. Narasimham in 1991. As on 30.9.90, more than 15 lakh cases
filed by public sector Banks and about 304 cases filed by financial institutions
were pending in various civil courts, and recovery of debts to Banks in a sum
of Rs.5622 crores and to financial institutions in a sum of Rs. 391 crores, was
held up. That was the immediate cause for the passing of the Act. Under
sub-clause (4) of Section 1 of the RDB Act, it is stated that the Act will not
apply if the debt due is less than Rs.
10 lakhs or such other amount as may be
notified. Section 2(d) defines 'Banks' as including (i) Bank Companies, (ii)
corresponding new banks, (iii) State Bank of India, (iv) subsidiary Banks and
(v) Regional Rural Banks. 'Banking Company' is defined in Section 2(e) and
'Corresponding New Bank is defined in Section 2(f) and it refers to Section
5(da) of the Banking Regulation Act, 1949. Clause (da) of Section 5 of the
Banking Regulation Act, 1949, defines 'corresponding new banks' as Banks
constituted under the Banking Companies ( Acquisition and Transfer of
Undertakings) Act, 1970 and Section 3 of the Banking Companies ( Acquisition
and Transfer of Undertakings) Act, 1980. About 20 nationalised banks have come
under the purview of RDB Act. Section 2(h) defines 'financial institutions' and
refers to public financial institutions falling within Section 4A of the Companies
Act, 1956 - namely (i) the Industrial Credit and Investment Corporation of
India Ltd; (ii) the Industrial Finance Corporation of India; (iii) the
Industrial Development Bank of India;
(iv) the Life Insurance Corporation of India
and (v) the Unit Trust of India. Other financial institutions since notified
are large in number. Section 2(g) as amended by Ordinance 1/2000 defines 'debt'
as meaning any liability which is "claimed" as due from any person to
a Bank or financial institutions. It includes the liability and interest in
cash or otherwise, whether secured or unsecured or whether payable under a
decree or order of any civil Court or otherwise and subsisting, and legally
recoverable on, the date of the application filed to the Tribunal.
Exclusive Jurisdiction of the Tribunal under
Sections 17 18 and 25 of the RDB Act: (i) adjudication, (ii) execution The
initial question is as to the jurisdiction of the Tribunal under Sections 17
and 18 of the RDB Act in the matter passing the order of adjudication and to
what extent it is exclusive. The next question will be whether the jurisdiction
of the Recovery Officer is also exclusive for purposes of execution of the
adjudication order passed by the Tribunal. (i)adjudication by Tribunal: Does
the Tribunal have exclusive jurisdiction? We shall refer to Sections 17 and 18
in Chapter III of the RDB Act which deal with adjudication of the debt.
"Section 17: Jurisdiction, powers and authority of Tribunals - (1) A
Tribunal shall exercise, on and from the appointed day, the jurisdiction,
powers and authority to entertain and decide applications from the banks and
financial institutions for recovery of debts due to such banks and financial
institutions. (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. Section 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 Article 226 and 227 of the Constitution) in relation to the
matters specified in Section 17." It is clear from Section 17 of the Act
that the Tribunal is to decide the applications of the Banks and Financial
Institutions for recovery of debts due to them. We have already referred to the
definition of 'debt' in Section 2(g) as amended by Ordinance 1/2000. It
includes "claims" by Banks and financial institutions and includes
the liability incurred and also liability under a decree or otherwise. In this
context Section 31 of the Act is also relevant. That section deals with
transfer of pending suits or proceedings to the Tribunal. In our view, the word
'proceedings' in Section 31 includes an 'execution proceedings' pending before
a Civil Court before the commencement of the Act.
The suits and proceedings so pending on the
date of the Act stand transferred to the Tribunal and have to be disposed of
"in the same manner" as applications under Section 19. In our
opinion, the jurisdiction of the Tribunal in regard to adjudication is
exclusive. The RDB Act requires the Tribunal alone to decide applications for
recovery of debts due to Banks or financial institutions. Once the Tribunal
passes an order that the debt is due, the Tribunal has to issue a certificate
under Section 19(22)(formerly under section 19(7)) to the Recovery Officer for
recovery of the debt specified in the certificate. The question arises as to
the meaning of the word 'recovery' in Section 17 of the Act. It appears to us
that basically the Tribunal is to adjudicate the liability of the defendant and
then it has to issue a certificate under Section 19(22). Under Section 18, the
jurisdiction of any other court or authority which would otherwise have had
jurisdiction but for the provisions of the Act, is ousted and the power to
adjudicate upon the liability is exclusively vested in the Tribunal. (This
exclusion does not however apply to the jurisdiction of the Supreme Court or of
a High Court exercising power under Articles 226 or 227 of the Constitution).
This is the effect of Sections 17 and 18 of the Act. We hold that the
provisions of Sections 17 and 18 of the RDB Act are exclusive so far as the
question of adjudication of the liability of the defendant to the appellant
Bank is concerned. (ii) execution of Certificate by Recovery Officer: Is his
jurisdiction exclusive Even in regard to `execution', the jurisdiction of the
Recovery Officer is exclusive. Now a procedure has been laid down in the Act
for recovery of the debt as per the certificate issued by the Tribunal and this
procedure is contained in Chapter V of the Act and is covered by Sections 25 to
30. It is not the intendment of the Act that while the basic liability of the
defendant is to be decided by the Tribunal under Section 17, the
Banks/Financial institutions should go to the Civil Court or the Company court
or some other authority outside the Act for the actual realisation of the
amount. The certificate granted under Section 19(22) has, in our opinion, to be
executed only by the Recovery Officer. No dual jurisdictions at different
stages are contemplated.
Further, section 34 of the Act gives
overriding effect to the provisions of the RDB Act. That section reads as
follows: "Section 34 (1): Act to have over-riding effect- (1) Save as
otherwise provided in sub- section (2), the provisions of this Act shall 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. (2) The provisions of this Act or the rules made there under
shall be in addition to, and not in derogation of, the Industrial Finance
Corporation Act, 1948 ( 15 of 1948), the State Financial Corporations Act, 1951
( 63 of 1951), the Unit Trust of India Act, 1963 ( 52 of 1963), the Industrial
Reconstruction Bank of India Act, 1984 ( 62 of 1984) and the Sick Industrial
Companies ( Special Provisions ) Act, 1985 ( 1 of 1986)." 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. There is one
more reason as to why it must be held that the jurisdiction of the Recovery
Officer is exclusive. The Tiwari Committee which recommended the constitution
of a Special Tribunal in 1981 for recovery of debts due to Banks and financial
institutions stated in its Report that the exclusive jurisdiction of the
Tribunal must relate not only in regard to the adjudication of the liability
but also in regard to the execution proceedings. It stated in Annexure XI of
its Report that all "execution proceedings" must be taken up only by
the Special Tribunal under the Act. In our opinion, in view of the special
procedure for recovery prescribed in Chapter V of the Act, and section 34,
execution of the certificate is also within the exclusive jurisdiction of the
Recovery Officer. 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. Points 2 and 3: Does the Act override the
provisions of Sections 442 and 537 and Section 446 of the Company Act? These
points deal with the question whether the Company Court can stay proceedings
before the Tribunal or the Recovery Officer under section 442 and whether the
said court can stall proceedings under section 537 unless leave is obtained.
Question also arises in regard to `priorities' under section 446(2)(d), read
with sections 529, 529A, 530 of the Companies Act and whether the Company Court
alone can distribute and decide priorities among creditors or whether the
Tribunal can do this in view of section 19(19) of the RDB Act, as introduced by
Ordinance 1 of 2000. It is necessary first to refer to Sections 442, 537 and
then to 446(1)(2) and 446(3). of the Companies Act.
Sections 442 and 537 deal with situations
before the passing of a winding up order. Under section 442, at any time after
the filing of a winding up petition and before the passing of a winding up
order, the Company, or any creditor or contributors may apply for stay of suits
or proceedings before the High court/supreme Court and for this purpose file an
application in those Courts. If, they are pending in other courts, applications
may be filed in the Company court to stay those proceedings and the said Courts
where applications are filed can stay the suits or proceedings.
Under section 537, where any Company is being
wound-up by or subject to the supervision of the Court, any attachment,
distress or execution put in force, without leave of the Company Court, against
the estate or effects of the Company, after the commencement of the winding up,
or any sale held - without the leave of the Court, if any of the properties or
effects of the Company, after such commencement, shall be void. Nothing in this
section applies to any proceedings for the recovery of any tax or import or any
dues payable to the government. After a winding up order is passed, provisions
of section 446 become applicable. Under sub-clause (1) of section 446, when a
winding up order is passed or the official liquidator is appointed as a
provisional liquidator, no suit or other legal proceeding shall be commenced,
or if pending at the date of winding up order, shall be proceeded with against
the company, except by leave of the Court and subject to such terms as the
Court may impose. Under sub-clause (2), the Company court shall,
notwithstanding anything contained in any other law for the time being inforce,
have jurisdiction to entertain, or dispose of (a) any suit or proceeding by or
against the Company (b) any claim made by or against the Company (including
claims by or against any of its branches in India); (c) any application made
under section 391 by or in respect of the Company; (d) any question of
priorities or any other question whatsoever, whether of law or fact, which may
relate to or arise in course of the winding up of the Company. This provision
applies whether such suit or proceeding has been institutes, or is instituted,
or such claims or question has arisen or arises or such application has been
made or is made before or after the order for the winding up of the Company, or
before or after the commencement of the Companies (Amendment) Act, 1960.
Sub-clause (3) of section 446 is important.
It states that any suit or proceeding by or against the Company which is
pending in any Court other than that in which the winding up of the Company if
proceeding, may, notwithstanding anything contained in any other law for the
time being in force, be transferred to and disposed of by that Court. Question
of leave and control by the Company Court: Learned Attorney General has, in
this connection, relied upon Damji Valji Shah & Another vs. Life Insurance
Corporation of India & Others [1965 (3) SCR 665 = AIR 1966 SC 135] to
contend that for initiating and continuing proceedings under the RDB Act, no leave
of the Company court is necessary under section 446. In that case, a Tribunal
was constituted under the Life Insurance Corporation Act, 1956. Question was
whether under section 446 of the Companies Act, 1956, the said proceedings
could be stayed and later be transferred to the Company court and adjudicated
in that Court. It was held that the said proceedings could not be transferred.
Section 15 of the Life Insurance Corporation Act, 1956 - which we may say,
roughly corresponds to section 17 of the RDB Act - enabled the Life Insurance
Corporation of India to file a case before a special Tribunal and recover
various amounts from the erstwhile life insurance companies in certain
respects. Section 41 of the LIC Act conferred exclusive jurisdiction on the
said Tribunal just like section 18 of the RDB Act, 1993. There the Company was
ordered to be wound up by an order of the Company court passed under section
446(1) on 9.1.1959. The claim was filed by the LIC against the Company before
the Tribunal and its Directors in 1962. The respondents before the Tribunal contended
that the claim could not have been filed in the Tribunal without the leave of
the company court under section 446(1). This Court rejected the said contention
and held that though the purpose of section 446 was to enable the company court
to transfer proceedings to itself and to dispose of the suit or proceedings so
transferred, unless the Company Court had jurisdiction to decide the questions
which were raised before the LIC tribunal, there was no purpose of requiring
leave of the Company Court or permitting transfer. It was held by this Court:
"In view of section 41 of the LIC Act, the Company Court has no
jurisdiction to entertain and adjudicate upon any matter which the Tribunal is
empowered to decide or determine under that Act. It is not disputed that the
Tribunal has jurisdiction under the Act to entertain and decide matters raised
in the petition filed by the corporation under section 15 of the LIC Act. It
must follow that the consequential provisions of sub-section (1) of section 446
of the Companies Act will not operate on the proceedings which be pending
before the Tribunal or which may be sought to be commenced before or."
Just as the Company Court was held incompetent to stay or transfer and decide
the claims made before the LIC Tribunal because the Company Court could not
decide the claims before the LIC Tribunal, the said Court cannot, in our view,
decide the claims of Banks and financial institutions. On the same parity of
reasoning as in Damji Valji Shah's case, there is no need for the appellant to
seek leave of the Company Court to proceed with its claim before the Debt
Recovery Tribunal or in respect of the execution proceedings before the
Recovery Officer. Nor can they be transferred to the Company Court. It may also
be noticed that in the LIC Act of 1956, there was no provision like section 34
of the RDB Act giving overriding effect to the provisions of the LIC Act. Still
this Court upheld the exclusive jurisdiction of the LIC Tribunal observing as
follows: "the provisions of the special Act i.e. the LIC Act will override
the provisions of the general Act, the Companies Act which is an Act relating
to Companies in general." We are of the view that the appellant's case
under the RDB Act - with an additional section like section 34 - is on a
stronger footing for holding that leave of the Company Court is not necessary
under section 537 or under section 446 for the same reasons. If the
jurisdiction of the Tribunal is exclusive, the Company Court cannot also use
its powers under section 442 against the Tribunal/Recovery Officer.
Thus, sections 442, 446 and 537 cannot be
applied against the Tribunal. Purposive interpretation adjudication, execution
and working out priorities : As there is some difference between various High
Courts as to the applicability of the principle of purposive interpretation to
the RDB Act, we shall deal with the said question. It is true that it has been
held in several judgments of this Court that there is a special purpose behind
the provisions in sections 442, 446 and 537 of the Companies Act, 1956. It has
been, in fact, so stated by the Federal Court in ( AIR (33) 1946 SC 16) under
the Old Companies Act, 1913.
O. Sukukmaran Pillai and Ors. (1984(4) SCC
657) observed that -not satisfied with sections 442 and 537 and also with
Section 446(1) (which was similar to Section 171 of the Old Companies Act,
1913),- Parliament enacted the Companies ( Amendment) Act, 1960 and brought in
the present sub-sections (2) and (3) into section 446. This Court pointed out
that instead of allowing claims to be proceeded with against these companies in
various Civil courts, Parliament declared that wherever winding up proceedings
were pending or when an order of winding up was passed, it was necessary to
save the company "from this prolix and expensive litigation and to
accelerate the disposal of winding up proceedings", and "a cheap and
summary remedy" was devised by conferring jurisdiction on the Company
Court to entertain suits and proceedings in respect of claims for and against
the company. That being the object behind enacting Section 446(2), it was held
that the Companies Act "must receive such construction at the hands of the
court as would advance the object and at any rate not thwart it". In other
words, the principle of purposive interpretation was, as contended by respondent's
counsel, applied while construing these provisions of the Companies Act. This
principle was applied by some High Courts to hold that provisions of the
Companies Act can be invoked against the Tribunal. While it is true that the
principle of purposive interpretation has been applied by the Supreme Court in
favour of jurisdiction and powers of the Company Court in Sudarshan Chits (P)
Ltd. case, and other cases the said principle, in our view, cannot be invoked
in the present case against the Debt Recovery Tribunal in view of the superior
purpose of the RDB Act and the special provisions contained therein. In our
opinion, the very same principle mentioned above equally applies to the
Tribunal/Recovery Officer under the RDB Act, 1993 because the purpose of the said
Act is something more important than the purpose of sections 442, 446 and 537
of the Companies Act. It was intended that there should be a speedy and summary
remedy for recovery of thousands of crores which were due to the Banks and to
financial institutions, so that the delays occurring in winding up proceedings
could be avoided. Tiwari Committee Report:
adjudication, execution & priorities: In
the Tiwari Committee Report of 1981, it was stated in Chapter VIII, para 8.2
that in respect of suits by Banks and financial institutions there have been
abnormal delays at the stage of trial as well as the stage of execution in
various courts and hence it stated: "the principle that the State should
have a special procedure to enforce its own demands should equally be extended
to the recovery of dues of banks and financial institutions as well". In
fact, it was recommended that a Tribunal under Articles 323A and 323B should be
constituted. The Tribunal should not be bogged down by the Civil Procedure Code
but should have a simple procedure guided only by principles of natural
justice. It was stated by the tribunals: "should follow simple and summary
procedure in accordance with the principles of natural justice". The
Tiwari Committee also prepared a draft of the proposed legislation, in Annexure
XI to its Report. It recommended disposal of cases in three months.
It stated in Annexure XI to the Report that
all "execution proceedings" were to be initiated only before the
Adjudication Officer so that such execution proceedings could be completed
speedily. The above Report of 1981 was followed ten years later by the M.
Narasimham Committee Report which in Chapter V stated that the 'special
legislation' recommended by the Tiwari Committee in 1981 should be immediately
enacted. The latter Committee too observed: "We regard setting up the
Special Tribunals as critical to the successful implementation of the financial
sector reforms", to ensure speedy remedy of adjudication and execution
against defaulters. Even in regard to `priorities' among creditors, the said
Committee stated in Annexure I as follows: "The Adjudication Officer will
have such power to distribute the sale proceeds to the Banks and Financial
Institutions being secured creditors, in accordance with inter-se agreement/arrangement
between them and to the other persons entitled thereto in accordance with the
priorities in the law." The above recommendations as to working out
`priorities' have now been brought into the Act with greater clarity under
section 19(19) of Ordinance 1/2000. Priorities, so far as the amounts realised
under the RDB Act are concerned, are to be worked out only by the Tribunal
under the RDB Act. Section 19(19) of the RDB Act reads as follows: "Where
a certificate of recovery is issued against a company registered under the Companies
Act, 1956, the Tribunal may order the sale proceeds of such company to be distributed
among its secured creditors in accordance with the provisions of section 529A
of the Companies Act, 1956 and to pay the surplus, if any, to the
Company." Section 19(19) is clearly inconsistent with section 446 and
other provisions of the Companies Act. Only section 529A is attracted to
proceedings before the Tribunal. Thus, on questions of adjudication, execution
and working out priorities, the special provisions made in the RDB Act have to
be applied. Special law vs. general law:
At the same time, some High Courts have
rightly held that the Companies Act is a general Act and does not prevail under
the RDB Act. They have relied upon Union of India vs. India Fisheries ( 1965(3)
SCR 679) There can be a situation in law where the same statute is treated as a
special statute vis-a-vis one legislation and again as a general statute
vis-a-vis yet another legislation. Such situations do arise as held in Life
Insurance Corporation of India vs.D.J.Bahadur [AIR 1980 SC 2181]. It was there
observed:
"for certain cases, an Act may be
general and for certain other purposes, it may be special and the Court cannot
blur a distinction when dealing with finer points of law". For example, a
Rent Control Act may be a special statute as compared to the Code of Civil
Procedure. But vis-a-vis an Act permitting eviction from public premises or
some special class of buildings, the Rent Control Act may be a general
Insurance Corporation of India and Ors. ( 1965(3) SCR 665=AIR 1965 SC 135
already referred to), this Court has observed that vis-a-vis the LIC Act, 1956,
the Companies Act, 1956 can be treated as a general statute. This is clear from
para 19 of that judgment. It was observed:
"Further, the provisions of the Special
Act, i.e. LIC Act, will override the provisions of the general Act, viz; the Companies
Act which is an Act relating to companies in general". Thus, some High
Courts rightly treated the Companies Act as a general statute, and the RDB Act
as a special statute overriding the general statute. Special law versus special
law: Alternatively, the Companies Act, 1956 and the RDB Act can both be treated
as special laws, and the principle that when there are two special laws, the
latter will normally prevail over the former if there is a provision in the
latter special Act giving it overriding effect, can also be applied. Such a
provision is there in the RDB Act, namely, section 34. A similar situation
arose Investment Corporation of India (1993(2) SCC 144) where there was inconsistency
between two special laws, the Finance Corporation Act, 1951 and the Sick
Industries Companies (Special Provisions) Act, 1985. The latter contained
Section 32 which gave overriding effect to its provisions and was held to
prevail over the former. It was pointed out by Ahmadi, J. that both special
statutes contained non-obstante clauses but that the "1985 Act being a
subsequent enactment, the non-obstante clause therein would ordinarily prevail
over the non-obstante clause in Section 46-B of the 1951 Act unless it is found
that the 1985 Act is a general statute and the 1951 statute is a special
one". Therefore, in view of section 34 of the RDB Act, the said Act
overrides the Companies Act, to the extent there is anything inconsistent
between the Acts. other rulings of Supreme Court and High Courts cited by
counsel:
It was then argued for the respondents that
the proceedings before the Tribunal/Recovery Officer under the RDB Act, 1993 are
`legal proceedings' and could be stayed under section 537 read with section 442
and reliance was placed on the decision of the Federal Court in Governor
General in Council our view, this judgment cannot help the respondents. In the
above case the Income Tax Officer tried to demand income tax from the Company
through a certificate got issued by the Collector and the demand was sent to
the official liquidator. The official liquidator filed an application under
Section 171 of the Old Act (corresponding to Section 446(1) of the 1956 Act)
and obtained stay and required a direction from the Company Court that the
Income Tax Officer should seek leave under Section 232(1)(a) ( corresponding to
section 537 of the 1956 Act). It was held that the limited priority extended to
Crown debts was not sufficient to enable the Income Tax Officer to avoid the
provisions of the Companies Act and that the Crown was bound by the provisions
of the Companies Act. The cases in Re Webb and Co. 1922(2) followed. It was
also held that the proceedings taken by the Income Tax Officer though they were
not akin to proceedings in a court, they were still 'legal proceedings' as they
were initiated under a statute. In our opinion, this decision cannot help the
respondents inasmuch as, as pointed out above, the jurisdiction of the
Tribunal/Recovery Officer under the RDB Act is exclusive and Section 34 gives overriding
effect to the provisions of the RDB Act. No provision similar to section 34 was
available in the above case before the Federal Court. The decision of this
Court 604) cannot also help the respondent. That was a case in which a secured
creditor standing outside the winding up sold the property of the company,
pending a winding up petition, by private sale. It was pointed out by this
Court (see para 15) that such a sale by a secured creditor, who opted to stand
outside the winding up proceedings, would be permissible without leave of the
Company Court. It might be different if the secured creditor tried to sell the
property through a Court by filing a suit or other proceeding. It was argued
there that the 1936 Amendment to the Companies Act in section 232(1)
(corresponding to Section 537 of the new Act) introduced the words "or any
sale held without leave of the court of any of the properties", and those
words were introduced for the purpose of staying even private sales by the
secured creditor unless leave was obtained for such sales. This contention was
rejected and it was held that, even after the 1936 Amendment, the private sale
by the secured creditor standing outside the winding up proceedings was valid
without leave of the Company Court.
Learned counsel for respondent relied upon
para 24 of the judgment which stated that Section 171 (corresponding to section
446(1)) was supplementary to Section 232 and 229 ( corresponding to Section 529
of the new Act). But the said observations, in our view, cannot help the
respondents, in view of the reasons given above. When the matter was listed for
fresh arguments, learned counsel for the respondent relied upon Ram Narain vs.
The Simla Banking & Industrial Co. Ltd. [AIR 1956 SC 614]] to contend that
in that case the Court ( the High Court of Punjab) which was winding up the
Banking company was held entitled to transfer the execution case pending before
a Tribunal to the High Court and to dispose of the same. That case is, in our
view, distinguishable. The facts there were that the Tribunal was one
constituted under the Displaced Persons (Debt Adjustment) Act, 1951, while the
High Court of Punjab was exercising special powers under sections 45A, 45B
& 45C of the Banking Companies Act, 1949 (as amended in 1953) for winding
up a Banking Company. Earlier, under the 1913 Act, the District Court was
dealing with winding up proceedings but so far as Banking Companies were
concerned, the Banking Companies Act, 1949 was amended in 1953 giving powers to
the High Court to wind up Banking companies. It was held that the latter Act of
1953 prevailed over the former Act of 1951 in view of section 45A, and that the
legislative intention was to prescribe a speedy procedure for the winding up of
the Banking companies outside the provisions of the Companies Act, 1913.
Section 45B conferred exclusive jurisdiction on the High Court (there the Punjab
High Court) in this behalf. The more important distinguishing feature between
that case and the present one is that section 2 of the Banking Companies Act,
1949 specifically provided that its provisions would be in addition to those in
the Companies Act and it was held that sections 171 and 232 of the Companies
Act, 1913 were available to the High Court as a winding up Court to stay the
execution proceedings taken pursuant to the decree of the Tribunal under the
1951 Act and to transfer them to the High Court. But the position under the RDB
Act is different. Sections 442, 446 and 537 are not saved by the RDB Act. Even
section 34(2) of the RDB Act does not save the provisions of the Companies Act.
Learned counsel for the respondent then
relied upon certain observations in a recent case in Industrial Credit and 165)
made in relation to RDB Act, 1993 and to sections 529 and 529A of the Companies
Act. That judgment related to a batch of appeals against the judgment of the
Andhra Pradesh High Court dated 23.8.89 and certain SLPs. (C) 10101/91 and
11055/91 (from Kerala)(the Kerala SLPs were registered as Leathers Ltd. (AIR
1997 Ker.273). It has to be noticed that when the A.P. High Court decided the
matter and when the special leave petitions from Kerala were filed in 1991, the
RDB Act, 1993 had not yet been enacted. But much later by the time the Civil
appeals came up for disposal on 22.2.96, the RDB Act of 1993 had been passed.
The above ruling of this Court did not concern itself with the RDB Act directly
on facts. The only issues which arose in that case, as stated in para 5 of the
judgment, were viz. (1) when should leave of the winding up court be granted to
a secured creditor to proceed with the suit after an order of winding up has
been made (2) when should a winding up court transfer to itself any suit or
proceedings by or against the Company during the period of the winding up? It
was in that connection that in para 9, a reference was made to an argument by
one of the counsel that in the case of suits which were pending before the date
of liquidation, the court could grant leave imposing "reasonable
conditions" even against secured creditors so that genuine claims of other
secured creditors were not affected. As appears from para 10 of the judgment,
the learned counsel appearing for one of the parties in that case, appears to
have incidentally referred to the provisions of the RDB Act, 1993 which had by
then come to be enacted, for contending that while staying suits, the Company
Court could impose reasonable conditions, keeping the rationale of the
provisions of the RDB Act in mind. In para 12, this Court accepted the
submission of counsel and in para 13, it was observed that while granting leave
to such secured creditors i.e in suits, the company court "would also bear
in mind the rationale behind the RDB Act". In that connection sections 529
and 529A were also referred to. The said observations do not, in our opinion,
have any bearing on the questions before us relating to the exclusive
jurisdiction of the Tribunal/Recovery Officer under the RDB Act. Further, as we
shall explain under Points 4 and 5, section 19(19) of the Ordinance 1 of 2000,
refers only to section 529A and not to sections 529 (1) or (2) and this is one
other clear indication that the other provisions of the Companies Act are
completely excluded.
The decision of the Delhi High Court in M/s
Major Syntex 836] no doubt supports the contention of the respondents that the
Company Court's jurisdiction prevails over that of the Tribunal/Recovery Officer
under the RDB Act, 1993. The learned Company Judge in that case does, in fact,
accept that a statute which is a general one vis-a-vis another statute can also
be a special one, vis-a-vis yet another statute. But the Court, in our view,
was not correct in its conclusion that, in this context, the Companies Act,
1956 was not a general statute. Further in the said judgment it was stated that
the "non-obstante clause in section 34 of the RDB Act cannot apply because
the Acts did not overlap".
According to the High Court, there was no
provision like Section 446 in the RDB Act laying down the procedure as to what
should be done in case of the passing of a winding up order by the Company
Court nor a provision for recovery of amounts due from a company against which
a winding up petition was pending or was ordered or for distribution from a
common pool. But, now section 19(19) introduced by the Ordinance 1/2000
clarifies and removes any such doubts in as much as it refers to execution and
distribution of sale proceeds by the Tribunal/Recovery Officer. The observation
that the RDB Act does not operate in the same field and hence, leave of the
Company Court is necessary under Section 446(1), cannot therefore be accepted.
We hold that the Delhi High Court's decision is not correctly decided. We are
also unable to agree with the decision of the Calcutta liquidation)[1996 (2)
Com L.J. 449]. In that case a suit which was filed in the High Court by the Bank
against the company stood transferred to the Tribunal under the RDB Act by
virtue of section 31. Later on, the Company went into liquidation. The High
Court held that in view of section 446 of the Companies Act, 1956, the suit had
to be transferred back to the Company Court. This was done on the basis that
the Companies Act applied even to proceedings before the Tribunal. This is not
correct. In our view, the Leathers Ltd. ( AIR 1997 Ker.273) relied upon for the
appellant, is correctly decided. It was pointed out in that case that the
records leading to the decision in Srinivas Agencies and batch ( 1996(4) SCC
165) show that suits filed by Banks and financial institutions were pending in
civil Courts and a winding up petition was filed later on in the High Court.
The Kerala High Court held that the suits would stand transferred to the Debt
Recovery Tribunal under section 31 of the RDB Act automatically and that
section 446 of the Companies Act, 1956 could not be invoked in view of section
34 of the RDB Act. The RDB Act was a special law overriding another special
law, the Companies Act. Leave of the Company Court under Section 446(1) was not
necessary nor could the suit be transferred to the Company Court under Section
446(2). Similarly, we are of the view that the Patna High Court's decision in
Bihar Sales Pvt. Ltd. In re [( Vol.96) Comp. Cases. 40] is also correctly
decided.
There the decision of this Court in Srinivas
Agencies was not accepted as laying down anything specific about the RDB Act
and as to its interpretation. The decision of the Kerala High Court in Vanjinad
Leathers Ltd. was followed.
The decision of the Rajasthan High Court in
Rajasthan Comp.LJ 309) relied upon for the respondent cannot be of any help.
That was a case which concerned itself with the State Finance Corporation Act,
1951. Section 537 of the Companies Act was applied and it was held that the Companies
Act did not yield to the provisions of the State Finance Corporation Act, 1951.
There was no provision in the State Finance Corporation Act, 1951 like section
34 which gave overriding effect to its provisions. 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 in 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 529A 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. Point 4 and 5:
We have already held that the adjudication,
execution and distribution of the sale-proceeds and working out priorities as
between Banking and financial institutions and other creditors of the defendant
company - so far as the monies realised under the RDB Act are concerned - has
to be done only by the Tribunal and not by the Company Court. The next question
is as to the manner of distribution of these monies between the Banks or
financial institutions on the one hand and the other creditors, secured or
unsecured of the company under winding up. This question depends upon the
effect of section 19(19) of the RDB Act as introduced by Ordinance 1/2000.
Before we go to section 19(19), we would like to dispose of another minor point
raised by the respondent on the basis of section 19(2). That sub-section
permits other banks or financial institutions to be impleaded in the main
application filed under section 19(1) by a Bank or a financial institution.
Question is whether Canara Bank can be impleaded in the main application under
section 19 at this stage. We may point out that section 19(2) permits such
impleadment "at any stage of the proceedings before a final order is
passed". The final order here is the order of adjudication under section
19(1) as to whether the debt is due or not. In the present case, the
adjudication order in respect of the debt has already been made long back and
therefore section 19(2) does not permit any impleadment in the main application
under section 19(1) at this stage.
Hence, this relief for impleadment cannot be
granted. We shall now go into the effect of section 19(19) of the Ordinance
1/2000. (a)Case where defendant company is not ordered to be wound up: Where
the defendant company is a company against which no winding up order is passed,
the Company, in our view, is like any other defendant and if in such a
situation a question of priority arises before the Tribunal, in respect of any
monies realised under the RDB Act, as between the Bank or financial
institutions on the one hand and the other creditors on the other, it will, in
our opinion, be necessary for the Tribunal to decide such questions of priority
bearing in mind principles underlying section 73 of the Code of Civil
Procedure. Section 22 of the RDB Act, in our view, gives sufficiently wide
powers to the Tribunal and the Appellate Tribunal to decide such questions of
priorities, subject only to the principles of natural justice. This Court has
explained that the powers under section 22 are wider than those of Civil Courts
and the only restriction on its powers is that principles of natural justice
have to be followed. See Industrial Credit and Investment Corporation of India
Ltd. vs. Grapco Industries Ltd. & Others [1999 (4) SCC 710] and Allahabad
Bank, Calcutta vs. Radha Krishna Maity & Others [1999 (6) SCC 755]. But
under section 73 CPC, sharing in the sale proceeds ( here, sale proceeds
realised under the RDB Act) is permissible only if a person seeking such share
has obtained a decree or an order of adjudication from the Tribunal and has
also complied with other conditions laid down under section 73. In the present
case, the Canara Bank is not in a position to invoke the principles underlying
section 73 CPC because it has not yet obtained any decree or adjudication of
its debt from the Tribunal. Nor has it complied with other provisions
underlying section 73 CPC.
Hence no relief can be granted on the basis
of the said principles. (b) Position of secured creditors standing outside
winding up and also not so standing out: The discussion here is confined to
sharing the realisations made by the Recovery Officer under the RDB Act where
winding up proceedings are pending in the Company Court against the defendant
company. This is the crucial aspect of the case upon which detailed arguments
have been advanced by both sides. Learned counsel for the respondent contended
that other secured creditors of the defendant company could seek or share in
the realisations made by the Recovery Officer.
Counsel relied upon the following words in
section 19(19) "to be distributed among its secured creditors" and
contended that though the said words are followed by the words "in
accordance with the provisions of section 529A of the Companies Act, 1956",
it is implicit that out of the sale proceeds secured creditors are paid first.
Counsel submitted that, in any event, even if section 529A is attracted, the
provisions of section 529(1) and (2) are also attracted by implication. The
sale proceeds realised by the appellant Bank will be subject to
"claims" of the Canara Bank as a secured creditor, even if it has not
obtained a decree or adjudication from the Tribunal. The mere existence of the
security is sufficient. And as a secured creditor the Canara Bank will have
priority over the appellant Bank which has no security in its favour. On the
other hand, learned Attorney General has contended that in respect of the
monies realised under the RDB Act, the only restriction on the distribution of
dividends is the one specified in section 529A, so far as secured creditors are
concerned. The secured creditor has no other general right of preference.
Sections 529(1) and (2) are also not attracted. Workmen's dues are entitled to
highest priority even as against other secured creditors. Any other secured
creditor like the respondent Bank has only a limited claim of priority to the
extent stated in section 529A and that too in case the said secured creditor
has opted to stand outside the winding up proceedings and realised his dues on
the security as per the terms of contract or by private sale as might have been
permissible in law. It is argued that in that event, the secured creditor has
only the benefit given by sub-clause (b) of section 529A(1), namely, to the
extent permitted by clause (c) of the proviso to section 529(1).
Reading the definition of 'workmen's portion'
in section 529(3)(c) read with the illustration given in that clause, a secured
creditor who stands outside the winding up, in case he loses any part of that
security towards 'workmen's dues' at the instance of the liquidator under
clause (a), (b) of the proviso to section 529(1), then to that extent only he
has priority over all other creditors under section 529A(1)(b). His priority is
confined again to amounts not realised by him or the 'workmens portion' above
referred to, whichever is less. In reply to this submission, learned counsel
for the respondent has submitted that the words in the first part of the clause
(c) to proviso to section 529(1) "so much of the debt due to such secured
creditor as could not be realised by him" meant the entire unrealised
amounts of the secured creditor and not merely the "workmen's
portion". To understand the submission, it is necessary to refer to
section 529A as well as section 529, to the extent relevant for this
discussion. They read as follows: "Section 529-A: Overriding preferential
payments - (1) Notwithstanding anything contained in any other provision of
this Act or any other law for the time being force, in the winding up of a company
- (a) workmen's dues;
and (b) debts due to secured creditors to the
extent such debts rank under clause (c) of the proviso to sub-section (1) of
section 529 pari passu with such dues shall be paid in priority to all other
debts. (2) The debts payable under clause (a) and clause (b) of sub-section (1)
shall be paid in full, unless the assets are insufficient to meet them, in
which case they shall abate in equal proportions." "S.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: provided that the security of every secured creditor shall
be deemed to be subject to a pari passu charge in favour of the workmen to the
extent of the workmen's portion therein, and, where a secured creditor, instead
of relinquishing his security and proving his debt, opts to realise his
security,-- (a) the liquidator shall be entitled to represent the workmen and
enforce such charge; (b) any amount realised by the liquidator by way of
enforcement of such charge shall be applied rateably for the discharge of
workmen's dues; and (c) so much of the debt due to such secured creditor as
could not be realised by him by virtue of the foregoing provisions of this
proviso or the amount of the workmen's portion in his security, whichever is
less, shall rank pari passu with the workmen's dues for the purposes of section
529A. (2) 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 this section.
(3)(a)...................................
(b)...................................... (c)
"workmen's portion", in relation to the security of any secured
creditor of a company, means the amount which bears to the value of the
security the same proportion as the amount of the workmen's dues bears to the
aggregate of- (i) the amount of workmen's dues; and (ii) the amounts of the
debts due to the secured creditors. Illustration-- The value of the security of
a secured creditor of a company is Rs.1,00,000.
The total amount of the workmen's dues is
Rs.1,00,000. The amount of the debts due from the company to its secured
creditors is Rs.3,00,000. The aggregate of the amount of workmen's dues and of
the amounts of debts due to secured creditors is Rs.4,00,000. the workmen's
portion of the security is, therefore, one-fourth of the value of the security,
that is Rs.25,000." The respondent's contention that section 19(19) gives
priority to all "secured creditors" to share in the sale proceeds
before the Tribunal/Recovery Officer cannot, in our opinion, be accepted. The
said words are qualified by the words "in accordance with the provision of
section 529A". Hence, it is necessary to identify the above limited class
of secured creditors who have priority over all others in accordance with
section 529A. 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.
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, the Canara Bank has not
made it clear whether it wants to come under this category. The second class of
secured creditors referred to above are those who come under section 529A(1)(b)
read with proviso (c) to section 529(1). These are those who opt to stand
outside the winding up to realise their security. Inasmuch as section 19(19)
permits distribution to secured creditors only in accordance with section 529A,
the said category is the one consisting of creditors who stand outside the
winding up. These secured creditors in certain circumstances can come before
the Company Court (here the Tribunal)and claim priority over all other
creditors for release of amounts out of the other monies lying in the Company
Court (here, the Tribunal).
This limited priority is declared in section
529A(1) but it is restricted only to the extent specified in clause (b) of
section 529A(1). The said provision refers to sub-clause (c) of the proviso to
section 529(1) and it is necessary to understand the scope of the said
provision. Under sub-clause (c) of the proviso to section 529(1), the priority
of the secured creditor who stands outside the winding up is confined to the
"workmen's portion" as defined in section 529(3)(c). 'Workmen's portion'
means the amount which bears to the value of the security, the same proportion
which the amount of the workmen's dues bears to the aggregate of (a) workmens
dues and (b) the amounts of the debts due to all the creditors. This is
explained in the illustration under the said provision. If the workmen's dues
in all are (say) Rs.1 lakh and the debt due to all secured creditors is Rs.3
lakhs, the total amount due to all of them comes to Rs.4 lakhs. Therefore, the
workmen's share come to 25%(Rs.1 lakh out of Rs. 4 lakhs). Now if the value of
the security of a secured creditor ( like Canara Bank) is Rs.1 lakh, the
'workmen's portion' will be Rs.25,000 which is the pro-rata amount to be shared
by the said secured creditor. By virtue of section 529A(1)(b) his priority over
all others out of other monies available in the Tribunal is restricted to
Rs.25,000 only. Reliance is placed by the learned counsel for the respondent on
the words "so much of the debt due to such secured creditor as could not
be realised by him by virtue of the foregoing provisions of this proviso"
occurring in the first part of the said proviso(c) to section 529(1). Learned
Attorney General on the other hand submitted that the first part of clause (c)
of the proviso to section 529(1) is to be read along with the words "or
the amount of the workmen's portion in his security, whichever is less".
In other words, the priority of the secured creditor is only to the extent that
any part of the said security is lost in favour of the workmen consequent to
demands made by the liquidator under clause (a), (b) or the said proviso to
section 529(1). No such situation has arisen so far. It is contended that where
a secured creditor keeps himself outside as stated in the proviso to section
529(1) and seeks to recover his dues outside the Company Court, if he loses
part of his security towards workmen's dues, he gets reimbursed to that extent
as a secured creditor, with an overriding priority under section 529A (1)(b).
He gets priority over all other creditors before the Tribunal, to be
compensated for this loss out of the monies that may have been realised at the
instance of other creditors before the Tribunal. It is pointed out that Canara
Bank has neither realised any amount outside winding up nor has it lost any
part of its security towards workmen's dues. In our view, this contention of
the learned Attorney General is well founded and is entitled to be accepted. In
our opinion, the words "so much of the debt due to such secured creditor
as could not be realised by him by virtue of the foregoing provisions of the
proviso" obviously mean the amount taken away from the private realisation
of the secured creditor by the liquidator by way of enforcing the charge for
workmen's dues under clause (c) of the proviso to section 529(1)
"rateably" against each secured creditor. To that extent, the secured
creditor - who has stood outside the winding up and who has lost a part of the
monies otherwise covered by security - can come before the Tribunal to
reimburse himself from out of other monies available in the Tribunal, claiming
priority over all creditors, by virtue of section 529A(1)(b). This can be
exemplified by three more examples. (i) Let us assume that the total amount due
to a secured creditor is Rs.90,000 and he has a security valued at Rs.1 lakh.
This security is sufficient to cover his entire dues. Let us assume that the
total amount due to all secured creditors is Rs.3 lakhs and workmen's dues are
Rs.1 lakh, as in the illustration given under section 529A(3). This creditor
can be made to part pro- rata upto with Rs.25,000 out of his security of one
lakh towards the workmen's dues. This is the "workmen's portion".
That still leaves with him Rs.75,000 of his security but that is not sufficient
to meet his total dues of Rs.90,000. Still Rs.15,000 of his dues have to be
cleared. By virtue of section 529A (1)(b), he can claim this sum of Rs.15000
from monies realised by other creditors in the Tribunal on the basis of section
529A (1)(b) claiming overriding priority as against all other creditors. This
is because the above amount is less than the `workmen's dues of Rs.25,000 taken
away from the realisation out of his security, as prescribed in clause (c) of
the proviso to section 529(1). That is what is meant by the words "whichever
is less". (ii) Take a case where the total dues of a secured creditor are
only Rs.65,000 and his security is Rs. 1 lakh in value. The other facts being
the same as in the illustration to section 529(3), the secured creditor loses
his security rateably in a sum of Rs.25,000. The balance of the available
security is Rs.75,000 and that is sufficient to meet his entire debt of
Rs.65,000. He has no occasion to claim any extra amount as a secured creditor
under section 529A(1)(b). This situation presents no difficulty. (iii) Take yet
another case where the secured creditor has a security valued at Rs.1 lakh, but
his total dues are Rs.1.10 lakhs. In other words, Rs. 10,000 are not secured.
Other facts are as in illustration to section 529(3). He is made to part with
Rs.25,000 towards workmen's dues rateably. He has Rs.75,000 available from his
security but he has to meet Rs.1,10,000 and that leaves a balance of Rs.35,000
(Rs.1,10,000 - Rs.75,000) to be recovered. He can claim overriding priority
only upto Rs.25,000 as a secured creditor, under clause (c) to proviso to
section 529(1).
The priority is restricted to Rs.35,000 only
because as between Rs.25,000 and Rs.35,000, the amount of Rs.25,000 answers the
description whichever is less.. It will be noticed that, after claiming Rs.
25,000 as a secured creditor out of the realisation of other creditors before
the Tribunal, he has still dues upto Rs.10,000 which remain unsecured. That was
also the unsecured amount to start with initially. The above examples show that
the secured creditor who stands outside the winding up and whose claims are
restricted to section 529A read with the clause (c) of proviso to section
529(1), does not in the ultimate analysis stand to lose any part of his
security merely because the "workmen's portion" is taken away from
his security.
Whatever he loses towards "workmen's
portion' out of his security, can be claimed by him as a secured amount with
priority over such creditors out of other realisations made by other creditors
whose monies are lying in the Tribunal.
At the same time, his position would not
improve from what it was originally and his priority would not extend to his
entire unrealised sums which might be in excess of his security. But the point
here is that the occasion for such a claim by a secured creditor ( here the
Canara Bank ) against realisations by other creditors (like the Allahabad Bank)
under section 529A read with proviso (c) to section 529(1) can arise before the
Tribunal only if the Canara Bank has stood outside winding up and realised
amounts and if it shows that out of the amounts privately realised by it, some
portion has been rateably taken away by the liquidator under sub-clauses (a)
and (b) of the proviso to section 529(1).
It is only then that it can claim that it is
to be re-imbursed at the same level as a secured creditor with priority over
the realisations of other creditors lying in the Tribunal. None of these
conditions is satisfied by Canara Bank. Thus, Canara Bank does not belong to
the class of secured creditors covered by section 529A(1)(b).
Therefore, the result is that the Canara Bank
cannot rely on the words in section 19(19) vis, "to be distributed among
its secured creditors" for claiming any amount lying in the Tribunal
towards its security nor can it claim priority as against the Allahabad Bank.
If none of the conditions required for applying section 19(19) and section 529A
is, therefore, satisfied, then the claim of Canara Bank before the Tribunal can
only be on the basis of principles underlying section 73 CPC. There being no
decree in its favour from any court or from any Tribunal, and the other
conditions of section 73 not having been satisfied, no dividend can be claimed
out of monies realised at the instance of the Allahabad Bank, even if the Allahabad
Bank is an unsecured creditor. We hold accordingly on points 4 and 5. Point 6:
By the sale of shed NO.15, a sum of Rs.20 lakhs has been realised and is lying
in this Court. Other sale proceeds in respect of previous sales are lying with
the Recovery Officer. In view of our findings on points 1 to 5, no part of the
said amounts is payable to the Canara Bank. The next question is whether the
amounts realised under the RDB Act at the instance of the appellant can be
straightway released in its favour. Now, even if section 19(19) read with
section 529A of the Companies Act does not help the respondent-Canara Bank, the
said provisions can still have an impact on the appellant- Allahabad Bank which
has no doubt a decree in its favour passed by the Tribunal.
Its dues are unsecured. The 'workmen's dues'
have priority over all other creditors, secured and unsecured because of
section 529A(1)(a). There is no material before us to hold that workmen's dues
of the defendant company have all been paid. In view of the general principles
laid down in National Textile Workers' Union etc. vs. P.R.Ramakrishnan &
Others [AIR 1983 SC 75] there is an obligation resting on this Court to see
that no secured or unsecured creditors including Banks or financial
institutions, are paid before the workmen's dues are paid. we are, therefore,
unable to release any amounts in favour of the appellant Bank straightway. We,
therefore, direct the Registry of the Supreme Court to make over the monies
deposited in this Court pursuant to sale of shed No.15, to the Debt Recovery
Tribunal, Delhi and it will be for the said Tribunal to find out if there are
any workmen's dues by issuing notice to the workmen or other persons/bodies
which can furnish information in this behalf. The above monies to be sent from
this Court as well as the monies realised by earlier sales,- in case they are
not subject to any pending litigation - have to be first released towards the
workmen's dues. The balance remaining will then be released in favour of the
appellant Bank in accordance with law and subject to the various principles
stated in this judgment. In case any machinery or goods pledged to the Canara
Bank are lying in the two other sheds already sold, it will be open to the
Canara Bank to move the Tribunal/Recovery Officer for their removal and for an
inventory. The impugned order of the High Court is set aside, the appeal is
allowed and disposed of as stated above. There will be no order as to costs.
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