LAXMI FIBRES LTD. Vs. A.P. INDUSTRIAL DEV. CORPN. LTD. & ORS.

Tags Competition Laws

Supreme Court of India (Division Bench (DB)- Two Judge)

Appeal (Civil), 5803-5804 of 2005, Judgment Date: Aug 07, 2015

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.5805 OF 2005

Laxmi Fibres Ltd. …..Appellant

Versus

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

W I T H

C.A.Nos.5803 and 5804 of 2005

J U D G M E N T

SHIVA KIRTI SINGH, J.

Civil Appeal No.5805 of 2005

In this appeal preferred by the appellant-company under liquidation
represented by the Official Liquidator the question of law arising for
consideration is whether the Official Liquidator can claim any power or
jurisdiction in itself to adjudicate and quantify the claim of statutory
corporations such as respondent no.1, A.P. Industrial Development
Corporation and respondent no.2, A.P. State Financial Corporation when the
Company Judge has permitted them to stand outside the liquidation
proceeding subject to certain conditions under which the respondent
Corporations may pursue the powers available to them under Section 29 of
the State Financial Corporations Act, 1959 (for brevity referred to as ‘the
SFC Act’).
The relevant facts are not at all under dispute and to answer the issue of
law indicated above it is not necessary to delve deeper into facts. It
would suffice to notice that the Official Liquidator has taken over the
charge of the company by virtue of Section 445 of the Companies Act and the
property of the company is also seized by the first respondent (the
Corporation) under Section 29 of the SFC Act. The sale of the assets of
the company was conducted by first respondent as per conditions imposed by
the High Court. To comply with one of the conditions the corporation was
required to obtain permission of the High Court for finalizing/confirming
the sale. The Official Liquidator had already been allowed to inspect the
properties and assets of the company and to take inventory as and when
required. The valuer’s report was also placed before the court before the
properties covered under the mortgage deeds in favour of Corporation were
put to sale. The respondent-corporation had also submitted to the order of
the Company Judge requiring the corporation to undertake to deposit
workmen’s dues with the Official Liquidator as and when quantified by him
as per the provisions of Section 529A of the Indian Companies Act with
interest at the bank rate and whatever surplus would remain after the sale
and realization of the dues of the secured creditors and the workmen, as
per law, the balance sale proceeds could be made available to the Official
Liquidator for being dealt with as per the provisions of the Companies Act
and the Rules.
On the application filed by the respondent-corporation seeking confirmation
of sale of the mortgage assets of the company, the learned Single Judge
vide order dated 19.11.2003 noted the contention of all the parties and
finding that there was no objection to sale of the properties either by the
second charge holder or by the Official Liquidator, confirmed the sale of
land, buildings, plant and machinery in favour of M/s. Sri Venkataswara
Industries represented by Sri Adarsha Gupta for a sum of Rs.86 Lacs and
carding machine in favour of M/s. Supreme Associates, Coimbatore for a sum
of Rs.2.45 Lacs. However, the learned Single Judge made the order of
confirmation subject to the following conditions :

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

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

Aggrieved only with the condition extracted above, the respondent no.1
preferred an intra-court appeal bearing OSA No.85 of 2003. The learned
Division Bench disposed of the appeal by order impugned dated 07.01.2004
directing that the confirmation of sale of the properties in favour of the
highest bidder would be subject to only one condition that the Official
Liquidator shall quantify the amounts liable to be paid to the workmen.
The Division Bench accepted the objection raised by respondent-corporation
that there could be no question of establishing the claim of the
corporation before the Official Liquidator as the corporation was a secured
creditor.
The Division Bench in our view came to a correct conclusion that the
Official Liquidator does not have jurisdiction to ascertain or adjudicate
the claim of a secured creditor who has been permitted by the Company Judge
to stand outside the liquidation proceeding with liberty to pursue its
remedy as per statutory rights available under the SFC Act, subject only to
the conditions imposed by the court. The reasons for such a view are
apparent on a perusal of the following three judgments of this Court :

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

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

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

In A.P. State Financial Corporation this Court had the occasion to examine
the extent of powers available to a Financial Corporation under Sections 29
and 46 of the SFC Act in the light of later amendments to the Companies Act
incorporating proviso to Section 529(1) and Section 529A of the Companies
Act through Amendment Act 35 of 1985. The object of the amendment was to
protect the dues of the workmen. This Court held that the power available
to a corporation under Section 29 to sell the property of a debtor company
under liquidation is not absolute but is subject to the proviso to Section
529(1) and non obstante clause in Section 529A of the Companies Act
providing for pari passu charge of the workmen.
In International Coach Builders Ltd. this Court not only followed the view
taken in A.P. State Financial Corporation case but went on to explain in
paragraph 31 as to how the view adopted would not obliterate the difference
between a creditor opting to stay outside winding up and one who opts to
prove his debt in winding up. Para 31 of the judgment provides thus :

“31. Finally, counsel for SFCs urge that the view we are to take would
obliterate the difference between a creditor opting to stay outside winding-
up and one who opts to prove his debts in winding-up. We are unable to
accept it. As a result of the amendments made by the Act of 1985 in the
Companies Act, 1956, SFCs as secured creditors, must seek leave of the
Company Court for the limited purpose of ensuring that the pari passu
charge in favour of the workmen is safeguarded by imposition of suitable
conditions under the supervision of the Company Court. If this amounts to
impeding their hitherto unimpeded rights, so be it. Such is the
parliamentary intendment, according to us. This impediment is of a limited
nature for the specific purpose of protecting the pari passu charge of the
workmen’s dues and subject thereto, SFCs can continue to exercise their
statutory rights as secured creditors without being reduced to the status
of unsecured creditors required to prove their debts in insolvency and
stand in line with other unsecured creditors. Neither is the apprehension
expressed justified, nor the contention sound.”

It is clear from the aforesaid judgment that no doubt the changes brought
about in the Companies Act through amendments of 1985 impede even the
statutory powers available to a secured creditor like SFCs under Section 29
and the other relevant sections of the SFC Act but the impediment is indeed
of a limited nature; its specific purpose being to protect the pari passu
charge of the workmen’s dues. After ensuring that this purpose is achieved
or ensured, the State Financial Corporations can continue to enjoy their
statutory rights as secured creditors. They will not be reduced to the
status of unsecured creditors and equally will not be required to prove
their debts nor will be required to stand in line with other unsecured
creditors.
A three Judges’ Bench in the case of Rajasthan State Financial Corporation
(supra) approved and followed the earlier views in A.P. State Financial
Corporation and in International Coach Builders Ltd. In paragraph 17 of
this judgment it was again clarified that the “right of a financial
institution or of the Recovering Tribunal or that of a financial
corporation or the Court which has been approached under Section 31 of the
SFC Act to sell the assets may not be taken away, but the same stands
restricted by the requirement of the Official Liquidator being associated
with it, giving the Company Court the right to ensure that the distribution
of the assets in terms of Section 529A of the Companies Act takes place”.
(emphasis added)
In our considered view, the rights of a financial corporation available
under the provisions of the SFC Act have been compromised or impeded by the
amendment of 1985 in the Companies Act, particularly the proviso added to
Section 529(1) and Section 529A, only to a limited extent and for the
limited purpose of securing the right of the workers for distribution of
their wages as pari passu charge. But such limited impediment to their
rights under the SFC Act will not alter the status of State financial
corporations as secured creditors and they will not be required to prove
their debt which they are entitled to realize under the provisions of the
SFC Act subject to right of the workers to receive their wages also as
secured creditors on pari passu basis. The control of the Company Judge
and the Official Liquidator if authorized, can extend only to ensure that
the aforesaid purpose of Section 529A is effectively achieved. Like any
other affected person, if the Company represented by the Official
Liquidator has reasons to be aggrieved by claims made by a financial
corporation under the SFC Act, its remedy would be to initiate appropriate
civil proceedings to challenge such claim or debt of a State financial
corporation before an appropriate forum and not to assume jurisdiction to
sit in adjudication and decide entitlement of the financial corporation
when it has opted to stand outside the liquidation proceeding as a secured
creditor. As noted earlier, the statutory powers of SFCs have suffered
only a limited impediment only to serve the purpose of protecting workers’
dues.
In view of law noticed above, we find no error in the impugned order of the
Division Bench. The appeal is, therefore, dismissed but without any order
as to costs.
Civil Appeal Nos.5803 and 5804 of 2005

12. The orders under appeal dated 07th January 2004 in O.S.A.No.74 and 86
of 2003 respectively simply follow the reasons recorded by the Division
Bench in another judgment of a same date, i.e., 07th January 2004 passed in
O.S.A.No.85 of 2003. In the connected appeal bearing C.A.No.5805 of 2005
we have passed a reasoned order to uphold that order of the Division Bench.
Following the said judgment and for the same very reasons these appeals
are also dismissed but without any order as to costs.

…………………………………….J.
[VIKRAMAJIT SEN]

……………………………………..J.
[SHIVA KIRTI SINGH]
New Delhi.
August 07, 2015.

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