http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 8  

PETITIONER: INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LTD.

       Vs.

RESPONDENT: M/S. SRINIVAS AGENCIES & ORS.

DATE OF JUDGMENT:       22/02/1996

BENCH: HANSARIA B.L. (J) BENCH: HANSARIA B.L. (J) AHMADI A.M. (CJ)

CITATION:  1996 SCC  (4) 165        JT 1996 (5)   405  1996 SCALE  (2)774

ACT:

HEADNOTE:

JUDGMENT: [With T.C. (C) Nos. 44-46/91 & 1/92, C.A.Nos. 3820-22, 4253                        & 4256 of 1996  (arising out of SLP(C) Nos. 13235/91, 14446/91, 15026/91,                   10101/91, and 11055/95)]                       J U D G M E N T HANSARIA, J.      The extent  of right  cf secured  creditors to  realize their debts  from the  assets of  a company  which is  under winding-up or  has been  wound up, by approaching fora other than the company court, is required to be spelt out in these appeals. We  have also been called upon to decide as to then a pending  suit or proceeding relating to realization of the debts by  such a creditor should be transferred to itself by a company court seized with the winding-up proceeding. 2. The  foundational premise of the aforesaid points is that position by  now that  a secured creditor stands outside the winding-up proceeding  and under  the law  he can proceed to realize his  security without  the leave  of the  winding-up court, if  by the  time he  initiated the action the company has not beer wound up. This view has been holding field ever since a  three-Judge bench  decision of  this Court  in M.K. Ranganathan vs.  Government of  Madras, 1955 (2) SCR 374. As this legal  position has  not been  assailed by  any of  the parties, we  need not  advert to  the reasons which led this Court in  Ranganathan’s case  to hold as above. Despite this being the  legal position, there were some provisions in the Indian Companies  Act, 1913,  which enactment  preceded  the present Companies Act, 1956 (hereinafter the ’Act’) in which also a  parallel  provisions  find  place,  which  put  some restrictions on the aforesaid power. 3    It would  be profitable to note these provisions of the Act at  the threshold itself. These are sections 446, 529(1) and(2), 529A and 537, reading as below :      "446 (1)  When a  winding up  order      has  been   made  or  the  Official

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 8  

    Liquidator has  been  appointed  as      provisional liquidator,  no suit or      other  legal  proceeding  shall  be      commenced. or  if  pending  at  the      date of the 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.      (2)  The Court  which is winding up      the company  shall, notwithstanding      anything contained in any other law      for the  time being  in force, 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;      whether such suit or proceeding has      been instituted,  or is instituted,      or  such   claim  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.      (3)  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    is    proceeding    may,      notwithstanding anything  contained      in any other law for the time being      in force,  be  transferred  to  and      disposed of by that Court.      (4) Nothing  in sub-section  (1) or      sub section  (3) shall apply to any      proceeding pending in appeal before      the Supreme Court or a High Court.      529. (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;

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 8  

              and           (c)  the respective  rights of                secured and unsecured 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 realize      his security,-           (a)  the liquidator  shall  be                entitled to represent the                workmen and  enforce such                charge;           (b) any amount realized by the                liquidator  by   way   of                enforcement    of    such                charge shall  by  applied                ratably for the discharge                of workmen’s dues; and           (c)  so much  of the  debt due                to such  secured creditor                as could  not be realized                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:      Provided that it a secured creditor      instead   of    relinquishing   his      security and  proving for  his debt      proceeds to  realize his  security,      he shall  be  liable  to  pay  (his      portion of the expenses incurred by      the   liquidator    (including    a      provisional liquidator, if any) for      the preservation  of  the  security      before  its   realization  by   the      secured creditor).      Explanation :  For the  purposes of      this  proviso,   the   portion   of      expenses incurred by the liquidator      for the  preservation of a security      which the secured creditor shall be      liable to pay shall be the whole of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 8  

    the expensed  less an  amount which      bears to  such  expenses  the  same      portion as the workmen’s portion in      relation to  the security  bears to      the value of the security.      (3)  * * *     * * *     * * *      529A.  (1)          Notwithstanding      anything  contained  in  any  other      provision of  this Act or any other      law for the time being in 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 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.      537. (1)  Where  any   company   is      being wound up by or supervision of      the Court-           (a)  any attachment,  distress                or   execution   put   in                force, without  leave  of                the  Court,  against  the                estate or  effects of the                company,    after     the                commencement    of    the                winding up; or           (b)  any  sale   held  without                leave of  the  Court,  of                any of  the properties or                effects  of  the  company                after such commencement;      shall be void.      (2)  Nothing   in    this   section      applies to  any proceedings for the      recovery of  any tax  or impost  or      any    dues    payable    to    the      Government." 4.   A combined reading of the aforesaid provisions leads to the following results : (i)  A winding-up  court has  jurisdiction, inter  alia,  to entertain or dispose of any suit or proceeding by or against the company,  even if  such  suit  or  proceeding  had  been instituted before  an order  for winding-up  had been  made. This  apart,   the  winding-up  court  has  jurisdiction  to transfer such  a suit or proceeding to itself and dispose of the same.  These follow  from sub-sections  (2) and  (3)  of section 446. (ii) When a  winding-up order  has been made or the official liquidator has  been appointed as provisional liquidator, no suit or  other legal proceeding, even if pending at the date of the  winding-up order,  can proceed  against the company, except by Leave of the Company Court vide sub-section (1) of section 446.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 8  

(iii)     Any sale  held without the Leave of the winding-up court pursuant  to order  of  a  civil  court  on  it  being approached by  a secured  creditor to  realise its debt will not  ipso   facto  be  void,  in  view  of  the  holding  in Ranganathan’s case  that section  537, dealing with voidness of sale, operates when the sale is pursuant to attachment of company court.  This, however, would be the position where a company has  not been  wound up,  but is  in the  process of being wound up. 5.   None  of   the  parties   has  assailed  the  aforesaid propositions of  law as well. The real bone of contention is as to  when (i)  leave of  the winding-up  court  should  be granted to a secured creditor to proceed with the suit after an order of winding-up has been made; and (ii) when should a winding-up court  transfer to  itself any suit or proceeding by or  against  the  company  during  the  pendency  of  the winding-up proceeding. 6.   The  aforesaid   questions  arise   because  a  secured creditor who  has initiated  a suit or proceeding in a civil court is interested in realization of his debt only, whereas the company  court looks  after  the  interest  of  all  the creditors; so too. the workmen’s dues, which rank pari passu with debts  due to  secured creditors.  This is brought home not only  by section 529A, which was inserted by the Company (Amendment) Act,  1985, but  also by  the proviso to section (1) of  section 529  inserted by the same Amendment Act. The winding-up court  does these  acts through a liquidator, who has been  given wide  powers by  section 457  of the Act. As against this, a receiver appointed by a civil court on being approached by  secured creditor  would basically  look after the interest  of that  creditor, whose  interest may in many cases he  in  conflict  with  that  of  liquidator,  as  was acknowledged in In re Karamelli & Barnett, Limited. 1917 (1) CH 203 We feel no difficulty in stating that in case of such conflict,  the   interest  of   liquidator  has  to  receive precedence over  that of the receiver inasmuch as the former looks after  the interest  of a  large segment  of creditors alongwith that  of  workmen, whereas the latter confined his concern to  the interest  of the  secured creditor  on whose approach the  receiver had  bean appointed. This view cannot also be,   and has indeed not been, contested by the learned counsel appearing for the appellants. 7.   The real  controversy is  as to when a winding-up court should  get  transferred  to  itself  a  pending  proceeding initiated by  secured creditor:  and when a winding-up court should grant  leave to  the secured  creditor to  pursue his remedy in  the civil  court, despite winding-up order having been passed.  Shri Salve brought to our notice. on the first aspect of  the controversy,  a decision  of two-Judge  bench decision of  this Court  in Central  Bank of  India vs. M/s. Elmot Engineering  Company, 1994  (4) SCC  159. It  was held therein that  the aim  of section  446 is  to safeguard  the assets  of   the  company   against  wasteful  or  expensive litigation as  for as  matters which  could be expeditiously and cheaply  decided by  the  company  court.  It  was  also observed that  while granting  leave under  this section the court always takes into consideration whether the company is likely to be exposed to unnecessary litigation and cost. 8.   In this  context. lt  would be  apposite and  useful to note what  was started  by a  three-Judge bench  in Sudarsan Chits (I)  Ltd. vs.  O.Sukumaran Pillai,  1984 (4) SCC which has traced  the historical  evolution as well as the present setting of  Section 446(2).  A need for such a provision was felt because  section 171  of the  predecessor Act  had only provided for  stay of  suits and  proceeding pending  at the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 8  

commencement of winding-up proceeding, alongwith the embargo against  the   commencement  of  any  suit  or  other  legal proceeding, against  the company  except by the leave of the court. That  provision, with  little modification,  was  re- enacted in sub-section (1) of section 446. There was thus no specific provision  conferring  jurisdiction  to  the  court winding-up the  company analogous  to the  one conferred  by sub-Section  (2),   which  was  introduced  to  enlarge  the jurisdiction of the winding-up court so as to facilitate the disposal of  winding-up  proceeding.  This  sub-section,  as originally enacted, did not meet with the requirement fully, with the  result that  the Committee appointed for examining comprehensive amendment  to the  Companies  Act  recommended that "a  suit by  or against  a company in winding-up should notwithstanding any  provision in  law for the time being be instituted in  the court in which the winding-up proceedings are pending".  The Committee made this recommendation having noticed that on winding-up order being made and the official liquidator being  appointed, he has to take into his custody company property  as required  by section 456. Then, secting 457 confers  power on  the liquidator to sell the properties of the company and to realise the assets, The Committee felt that at the stage when winding-up order is made, the company may as  well have  subsisting claims  and to  realise  these claims the liquidator will have to file suits. To avoid this eventuality  and   to  keep  all  incidental  proceeding  in winding-up before  the court,  its jurisdiction was required to be  enlarged to  entertain petition,  amongst others, for recovering the claims of the company. To give effect to this recommendation, sub-section  (2)  was  suitably  amended  to bring it  to its  present form  by the Companies (Amendment) Act. 1960.  The amendment  obviated the need filing of suits by the  liquidator  (which  are  prolix  and  expensive)  to realise and  recover the claims and subsisting debts owed to the company;  and instead,  provided  a  cheap  and  summary remedy  by  conferring  the  required  jurisdiction  on  the company court. 9.   Shri Salve’s  entire submission had been that a working principle may  be got  evolved which would, on the one hand. protect  the   substantive  right  of  a  secured  creditor, specially in  view of  large sums of money being advanced of late  of   such  creditors  and,  on  the  other  hand,  not jeopardize  the   interest  of   other  secured   creditors, according to  the learned counsel, these twin objects can be achieved if  the company  court were to grant leave wherever required as  a rule,  subject to reasonable conditions. This would preserve the integrity of the substantive right of the secured creditor.  The terms  to  be  imposed  which  should facilitate,  rather   than  obstruct,   the  realization  of security. Further,  wherever a  receiver has  been appointed prior to  the commencement of the winding-up proceedings, he should be permitted to continue in general run of case as to the suits  to be  filed after  the winding-up proceeding has commenced, the  learned counsel urged that such a permission should normally  granted by  the winding-up  court. On  this being done,  when the  question of  appointment of  receiver would arise,  the civil court would on so if a case for same were to  be made out after hearing the liquidator, who would be a  defendant in  the suit.  As regards  transfer  of  the pending suit  by the  company court, the submission was that convenience may  not be the guiding factor; the preservation of integrity of the substantive right of the creditor should be the main consideration. (10)      To  buttress   his  submissions,  Shri  Salve  has referred us  to the  Recovery of  Debts  Due  to  Banks  and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 8  

Financial Institutions Act, 1993, which was recently enacted because of  the considerable difficulty being experienced by financial institutions  in recovering  loans and enforcement securities charged  with them.  Earlier, recovery  procedure used to  black a  significant  portion  of  their  funds  in unproductive assets,  the value  of which  deteriorates with the passage  of time.  An urgent  need  was,  therefore  for successful implementation  of the  financial  through  which dues to  these institutions  could be realized without dely. To  achieve  this  purpose,  the  aforesaid  Act  visualizes establishment of  the  Debts  Recovery  Tribunal(s)  by  the Central Government,  with its  own procedure which is speedy in nature. Section 18 of this Act has barred jurisdiction of other courts, except the writ power of the higher courts, in relation to  the matters  specified in section 17 - the same being recovery of debts due to such institutions. 11. Shri  Subba Rao  who appeared for official liquidator in many cases, however, urged that it is the liquidator who can look after  the interests  of all the secured creditors. and so, his  actions should  be allowed  to prevail over that of the receiver.  He submitted  that section  529  of  the  Act contains many  provisions to  duly protect  the interest  of secured creditors.  Shri Grover,  appearing for  some of the respondents, brought  to our  notice that part of subsection (1) of  section 446  which mentions about the grant of leave on "such  terms as  the Court  may impose", which provision. according to  learned counsel,  means that the terms have to be reasonable.  The underlying  idea of  this contention  is that there  cannot he any uniform working principle, and the question whether  leave should  be granted,  if so,  on what terms and  whether transfer  should at  all be ordered would depend on the facts and circumstances of each case. 12. We  have duly applied our mind to the rival contentions. It is  no doubt  correct that  the interest  of the  secured creditor,  who   has  taken   recourse  to   an  independent proceeding to  realise his  debt has to be protected; but it is apparent this cannot be done at the cost of other secured creditors.  To   preserve  the   integrity  of  one  secured creditor, another  secured creditor  cannot be discredited - his integrity  has to  be of equal concern. It may, however, be that  in a  particular case  the secured creditor who has approached the  civil court  happens to  be one who has lent huge amount,  or be one who is the main secured creditor. In such a  situation. on  approach being made by such creditor, we have  no doubt that company court would duly take note of this fact  and should  like to  grant leave required by sub- section (1)  of section 446; and by the same token refuse to transfer the  proceeding to  his court.  This is  not to say that in  all cases where the proceeds have been initiated by the main  secured creditor,  the company  court would  grant leave. such  would depend on the circumstances of each case. But, if  the position  be that  the secured creditor who had approached the  civil court  is  one  amongst  many  similar creditors, lt  may be  that the  company court feels that to take care of the interest of other secured creditors. either the relief  of leave  does not deserve to be granted or that the proceeding  is required  to be  transferred  to  it  for disposal. It  may be  pointed out that sections 529 and 529A of the  Act do  contain provisions in so far as the priority of secured  creditor’s claim  is concerned.  Of course,  the company court would not transfer the proceeding to it merely because of  its convenience  ignoring the difficulties which may have  to be faced by the secured creditor, who may be at a place  far away  from the  seat of  the company court. The need to  protect the company from unnecessary litigation and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 8  

cost have,  however, to  be borne  in mind  by  the  company court. 13.  We are.  therefore, of the view that the approach to be adopted in this regard by the company court does not deserve to be put in a straight jacket formula. The discretion to be exercised in  this regard  has to  depend on  the facts  and circumstances of  each case.  While exercising this power we have no doubt that the company court would also bear in mind the rationale  behind the enactment of Recovery of Debts Due to the  Banks and Financial Institutions Act, 1993, to which reference has  made above.  We  make  the  same  observation regarding the  terms which  a company  court should  like to impose while  granting leave. It need not be stated that the terms to  be imposed have to be reasonable, which  would, of course, vary  from case  to case  According to  us, such  an approach, would  maintain  the  integrity  of  that  secured creditor who had approached the civil court or desires to do so. and  would take  care of  the interest  of other secured creditors as  well which  the company court is duty bound to do. The  company court  shall also  apprise itself about the fact whether  dues of workmen are outstanding; if so, extent of the same It would be seen whether after the assets of the company are  allowed to  be used  to satisfy the debt of the secured creditor,  it  would  be  possible  to  satisfy  the workmen’s dues pari passu. 14.  The appeals  and transfer  cases stand disposed of with these  observations,  leaving  the  company  court  to  pass appropriate orders  in the concerned matters in the light of what has been stated by us. No order as to cost.