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CASE NO.: Appeal (civil)  2332 of 2006

PETITIONER: ICICI BANK LTD.

RESPONDENT: SIDCO LEATHERS LTD. & ORS.

DATE OF JUDGMENT: 28/04/2006

BENCH: S.B. Sinha & P.K. Balasubramanyan

JUDGMENT: J U D G M E N T (Arising out of S.L.P. (C) No.23360/2004)

S.B. SINHA, J :

       Leave granted.

Interpretation of Sections 529 and 529-A of the Companies Act, 1956  is involved in this appeal, which arises out of a judgment and order dated  4.8.2004 passed by the High Court of Judicature at Allahabad in Special  Appeal No.698 of 2002 affirming the judgment and order dated 24.5.2002  passed by a learned Singh Judge of the said Court.   

       The appellant herein is a Banking Company.  It, along with Industrial  Finance Corporation of India (IFCI) and Industrial Development Bank of  India (IDBI), advanced the following amounts by way of loan to Respondent  No.1 with a view to give financial assistance to it in setting up a plant for  manufacture of leather boards:

a)      IDBI    Rupee Term Loans of Rs.193.2 lacs and  Foreign Currency loan of Italian Lira 1380900,000.

b)      IFCI    Rupee Term Loans of Rs.196.74 lacs,  Central Investment subsidy of Rs.25 lacs and Foreign  Currency loan of DM 2127,565.

c)      ICICI Rupee Term Loans of Rs.96.61 lacs and  Foreign Currency loan of Italian Lira 1380900,000.

       The Punjab National Bank (PNB) also advanced a loan to the said  Respondent for providing working capital funds.  The 1st Respondent, in  order to secure the amounts lent to it, created a first charge in favour of the  appellant along with other financial institutions, i.e., Respondent Nos.3  (IFCI) and Respondent No.4 (IDBI) herein by way of equitable mortgage by  deposit of title deeds of its immovable property.  A second charge was  created in favour of PNB by way of constructive delivery of title deeds  remaining in deposit with Respondent No.3 herein, clearly indicating that  the charge in favour of the latter was subject and subservient to charges in  favour of IFCI, IDBI and ICICI.

On an application for winding up of the 1st Respondent made before  the High Court of Judicature at Allahabad, an order was passed on  16.12.1993 directing its winding up whereupon an Official Liquidator was  appointed.  The borrowing facilities of the said Respondent had been  terminated.  A suit for recovery of the credited sum was filed by the

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appellant along with the Respondent Nos.3 and 4 herein against the 1st  Respondent in the High court of Judicature at Bombay, which was numbered  as Suit No.2789/1995.  The said suit was thereafter transferred to the Debt  Recovery Tribunal, Bombay.  Recovery proceedings are admittedly pending  adjudication.   

The Official Liquidator was one of the defendants.  Liberty was  granted by the Debt Recovery Tribunal to the appellant herein and the other  respondents to obtain permission of the Company Court, i.e., High Court of  Judicature at Allahabad to continue the prosecution of the said suit.   Thereupon, an application under Section 446 of the Companies Act, 1956  was filed by the plaintiffs in the said suit stating that they were Secured  Creditors and had decided to remain outside the winding up proceedings  being desirous of realizing the Security in the suit.  The permission to  continue the proceedings in the said Suit No.2789/95 was granted by the  High Court of Judicature at Allahabad on 30.8.1995.  In the said suit,  however, the Respondent No.2 herein, PNB, was not impleaded as a party.   

PNB filed a Civil Suit in the Court of Civil Judge, Fatehpur (U.P.) on  15.10.1998, which was numbered as Suit No.2/98, for recovery of money  payable to it by the 1st Respondent.  In its plaint it was, inter alia, averred:

"That the defendant No.1 company had secured  various other financial facilities from the Defendant  Nos.4, 5 and 6 in whose favour the Defendant No.1  company had created Equitable mortgage as Collateral  Security by deposit of original title deeds in respect of  land, building and plant and machineries situated at  Village Kauriya, Tehsil Binkdi, District Fatehpur (U.P.),  but, then the Defendant No.1 company agreed to secure  the second charge on the said mortgaged property in  favour of the plaintiff Bank, after the defendant Nos.4, 5  and 6 gave their consent to the effect that the title deeds  in respect of the aforesaid properties shall remain with  the Defendant No.4, for and on behalf of the Joint First  charge holders, viz. Defendant No.4, 5 and 6 and the said  title deeds shall also be retained by the Defendant No.4,  as agents, for and on behalf of the plaintiff Bank as a  Second charge holder in respect of the aforesaid  properties.

xxx                     xxx                     xxx 12.     That the said Charge of the Plaintiff Bank  regarding the grant of cash credit hypothecation limit and  creation of Second Charge in respect of immoveable  properties of the Defendant No.1 company in favour of  the Plaintiff Bank, was duly registered with the Registrar  of Companies (U.P.) at Kanpur, on the basis of  submission of the Defendant No.1 company with the  Registrar of Companies (U.P.) Kanpur."

It is, however, not in dispute that in the meantime the assets of the  Company were sold and the Official Liquidator, against the said assets,  received a sum of Rs.65,72,311/-.  As on 31.10.2001, the Official Liquidator  had a sum of Rs.71,00,351/- available with him for distribution to the  creditors of the Company.  An advertisement was issued by the said Official  Liquidator being Notice in Form No.63 prescribed under Rule 148(1) of the  Companies (Court) Rules, 1959, inter alia, stating:

"Any creditor so fails to submit his affidavit of  proof within the time limited as aforesaid will be  excluded from the benefit of any distribution of dividend  before the debt is proved or as the case may be from  objecting to such distribution.

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Any creditor who has sent in his proof, if so  required by notice in writing from the Official Liquidator  shall either in person or by his advocate, attend the  investigation of such debt or claim at such time and place  as shall be specified in such notice and shall produce  such further evidence of his debt or claim as may be  required."

In response to the said notice, the appellant herein lodged a claim  stating as under:

S.No.   Name of Secured Creditor        Amount Claimed  To be disbursed                                                                         1.6 paise

1.      xx                                      xx                      xx

2.      ICICI                                26,18,44,044.00      41.89,506.00                                     Although, before us the factual aspect of the matter that Respondent  No.2 was the second charge holder, whereas the appellant and IFCI and  IDBI were the first charge holders is not in dispute, we may, however, notice  that Respondent No.2, in its letter dated 20.11.1989, addressed to the  appellant and Respondent Nos. 3 and 4 categorically stated:

"We, Punjab National Bank, hereby confirm that  notwithstanding anything to the contrary contained in or  by virtue of the various securities created/to be created by  M/s. Sidco Leathers Ltd. (hereinafter referred to as the  Company) in favour of Punjab National Bank on the  immovable and movable properties (save and except  book debts) of the Company, the charges created to be  credited by the Company in favour of Punjab National  Bank for its working capital facilities being Cash Credit  limit of Rs.80 lac and bills discounting of Rs.54 (Fifty  four lac only) shall be subject and subservient to the  charges created/to be created by the Company in favour  of:

(1)(a)  rupee term loan of Rs.277.00 lac in  Participation with IDBI and ICICI to the  extent mentioned below:

IFCI  \026  Rs.112.00 lac IDBI  \026 Rs.110.00 lac ICICI \026 Rs. 55.00 lac         xx              xx              xx We further agree and confirm as follows:

i)      We shall not be entitled to call upon  IFCI/IDBI/ICICI and other pari passu charge holders, if  any, (hereinafter referred to as ’the first charge holders’)  to exercise or enforce any of the rights under their  securities or otherwise.

ii)     We shall not resort to any legal proceedings for the  sale of the mortgaged properties or for the exercise of our  any other right (a) against the Company unless \026 (a) we  exhaust our remedies as a first charge holders on the  current assets of the Company, (b) we give to the first  charge holders a notice of minimum period of 60 days of  our intention in this regard and (c) we obtain prior  written approval of IFCI/IDBI/ICICI and other first  charge holders in this regard.

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iii)    We, in our capacity as a second charge holder, take  steps to enforce the security for realization of our dues  consequent on default or breach committed by the  Company after giving notice to and obtaining prior  approval of the first charge holders as at (ii) above, the  first charge holders, shall also be at liberty (but without  obligation) to call upon the Company to repay forthwith  their respective loans and advances as if they have  become due under their respective loan documents and  shall also be at liberty to exercise and/or all the right and  remedies available to them as first mortgages or under  any law for the time being in force."

       In the Memorandum of Entry, acting also on behalf of the Respondent  No.1, the Bank stated:

"2.     The said Shri M. Zafrulla stated that the  documents of title, evidences, deeds and writings more  particularly described in the First Schedule hereunder  written (hereinafter called "the said deeds") in respect of  the Company’s all immovable properties situated at  Village Klauriya Mustaquil, Tehsil Binki, District  Fatehpur in the State of Uttar Pradesh were deposited on  the 11th day of August, 1988 and further deposited by  way of constructive delivery on the 8th day of November,  1989 by the Company with IFCI and IFCI acting for  itself and as agent of  

Industrial Development Bank of India

The Industrial Credit & Investment  Corporation of India Ltd.

in order to create security, by way of joint mortgage by  deposit of title deeds, on the Company’s all immovable  properties together with the buildings and other  structures, fixed plant and machinery, fixtures and  fittings, constructed or erected or installed thereon or to  be constructed, erected or installed thereon, for securing  the due repayment, discharge and redemption by the  Company."    

It is not in dispute that the suit filed by Respondent No.2 has been  decreed; whereas the proceedings before the Debt Recovery Tribunal (DRT)  initiated by the appellant and others is still pending.  It is furthermore not in  dispute that the appellant along with Respondent Nos. 3 and 4 filed a  Company Application before the learned Company Judge of the High Court  of Judicature at Allahabad, inter alia, praying for that their claim for a sum  of Rs.4,56,06,736 as on 16.12.1993 should be considered on pro-rata basis  and further prayed that the claim of PNB be excluded from the movable and  immovable assets of the Company.   

By an order dated 9.1.2002, the first prayer of the appellant was  allowed.  However, as regards the second prayer, order was reserved.  By an  order dated 24.5.2002, relying on or on the basis of the decision of this Court  in Allahabad Bank vs. Canara Bank & Anr. [AIR 2000 SC 1535] it was  held:

"The test in law, as emerges from the aforesaid  discussion is that where the secured creditors even if it  has first charge over mortgaged assets, in preference to  other secured creditors, having second charge over the  same assets, opts to prove his debts before Official

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Liquidator and claim dividend by joining winding up  proceedings, relinquishes his claim over the assets and  ranks equal to other secured creditors, including those  who have second charge over the assets and shall be  entitled to pro rata share out of the sale proceeds subject  to the claim of workmen to be determined as provided  under Section 529-A of the Companies Act, 1956.

I may add here that IFCI, IDBI and ICICI had  given foreign currency loan and term loans to the  company (in liquidation) by connotation, the rate of  interest and liquidated damages were claimed.  Punjab  National Bank had second charge over the fixed assets of  the company for working capital of Rs.134 lacs by  deposit of title deeds created by the company in favour of  Punjab National Bank on 21st November 1989 at IFCI  office.  The second charge in favour of Punjab National  Bank was subject to first charge of IFCI, IDBI and ICICI.   It is admitted to the applicant that Punjab National Bank  might have first charge on the current assets of the  company but that claim of Punjab National Bank as  second charge holder of Rs.1,32,22,539/- has to be  excluded and that the Punjab National Bank may get its  share out of the sale proceeds of current assets.  Since the  applicants \026 IFCI and IDBI have joined the winding up  proceedings and have submitted proof of their debts  before the Official Liquidator, as held above, they shall  be taken to have given up their securities and thus they  can not claim any priority over the assets of Punjab  National Bank on the fixed assets."

An intra-court appeal known as Special Appeal thereagainst was filed  by the appellant before the Division Bench of the High Court.  Having  regard to the provisions contained in Section 47 of the Provincial Insolvency  Act, 1920, it was held that the appellant having opted to remain outside the  liquidation proceedings by expressing its desire to continue with its suit, in  respect of the second claim of beneficial right, Section 48 of the Transfer of  Property Act will have no application in the instant case.  It was further  opined that in view of the terminology used in Section 529-A of the  Companies Act, the right of Secured Creditors being a contingent right, the  appellant shall rank with unsecured creditors and has to take his dividend as  provided under Section 529(2) of the Act.   

The High Court relying upon Allahabad Bank (supra) further held:

"The second class of secured creditors are those  who come under section 529(1)(b) read with proviso (c).   These are those who opt to stand outside the winding up  to realize their security.  Section 19(19) of the RDB Act,  1993 permits distribution to secured creditors only in  accordance with Section 529-A of the Companies Act,  1956 which includes the creditors who stand outside the  winding up.  These secured creditors in certain  circumstances can come before the Company Court and  claim priority over all other creditors to realize the  amounts out of other moneys lying in the Company  Court.  This limited priority is declared in Section 529-A  (1).  It is however restricted only to the extent specified  in clause (b) of Section 529-A(1).  The Canara Bank had  laid claims against realizations by other creditors.  The  Supreme Court found that it has not exercised its option  to remain outside the winding up proceedings and thus it  was held that the question of such claim can be raised  only if the Canara Bank had stood outside the winding up

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and had realized the amount and if it shows that out of  the amounts privately realized by it, some portion has  been rateably taken away by the liquidator under sub- clause (a) and (b) of the proviso to Section 529(1).  It is  only then that it can claim that it should be reimbursed at  the same level as a secured creditor with priority over the  realizations of other creditors lying the Tribunal."   

On the aforementioned findings, the said special appeal was  dismissed.   

Mr. Rajiv Shakdher, learned Senior Counsel appearing on behalf of  the appellant would submit that:

(i)     The High Court misread and misinterpreted the judgment of  this Court in Allahabad Bank (supra), as therein this Court was primarily  concerned with interpretation of Section 446 of the Companies Act vis-‘-vis  the provisions of the Recovery of Debts Due to Banks and Financial  Institutions Act, 1993 (’RDB Act’, for short), i.e., as to whether for  instituting or continuing proceedings under RDB Act interference of the  Company Court was required under Section 446 thereof, as would appear  from the subsequent decision of this Court in Rajasthan State Financial  Corporation  vs. Official Liquidator reported in (2005) 8 SCC 190.  It  even failed to consider the observations made in paragraph 37 of judgment  in Allahabad Bank (supra).

(ii)    The High Court failed to appreciate the true and correct scope  and purport of Section 47 of the Provincial Insolvency Act, 1920 which  comes into play by reason of the provisions of Chapter V of the Companies  Act, 1956.   

(iii)   The High Court committed a serious error in relying upon Sub- section (2) of Section 47 of the Provincial Insolvency Act and ignoring the  other provisions thereof.   

(iv)    The first charge holders and second charge holders could not  have been equated having regard to the fact situation obtaining herein:

(v)     PNB, also having filed a claim before the Official Liquidator, it  should not have been given any preferential treatment;

(vi)    Right of the Secured Creditor, in terms of Section 48 of the  Transfer of Property Act which is a specific provision dealing with the  priority against mortgage and there being no such specific provision in the  Companies Act dealing with a similar matter, does not get obliterated only  because the appellant responded to the  public notice;   

(vii)   Section 48 of the transfer of Property Act would override the  provisions of Section 529 of the Companies Act.                  

       Mr. M.T. George, learned counsel appearing on behalf of Punjab  National Bank, on the other hand, would submit:

(a)     Having regard to the fact that Section 529-A of the Companies  Act provides for a non-obstante clause and no distinction having been made  therein as regard the priority over the claim amongst the secured creditors  inter se, the Appellant cannot have a priority over the claim of the Second  Respondent.   

(b)     Proviso appended to sub-section (1) of Section 529 of the  Companies Act and Section 529-A having been enacted by the Parliament  subsequent to the enactment of the Transfer of Property Act, Section 48  thereof must be held to be subservient thereto.  

(c)     The claim of the Appellant shall rank pari passu only with all

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other secured creditors and, thus, it cannot claim a preferential right over  other secured creditors.   

(d)     Section 47 of the Provincial Insolvency Act shall apply to the  instant case in terms whereof the Appellant had three options:          (i)     He can realize his security and if there is something left due to  him, then come and prove its claim for the balance; or

(ii)    He has to give up his security and to come into liquidation  ranking with other creditors and take share in the distribution of the  dividends; or

(iii)   To value his security and to come into liquidation and prove for  any dues that according to him remain outstanding in respect of his debt on  the valuation of his security.

       Having regard to the fact that the Appellant had not exercised his  option in regard to the same, its claim was extinguished.   

       The learned counsel appearing on behalf of the Official Liquidator  submitted that having regard to the provisions of sub-section (2) of Section  47 of the Provincial Insolvency Act, the Appellant would be deemed to have  relinquished its rights.

       The questions therefor which arise for our consideration are:

(a)     Whether significance is lost in respect of inter se  right of priority between two sets of secured  creditors in view of Section 529-A of the  Companies Act?

(b)     Whether Section 48 of the Transfer of Property  Act stands over-ridden by Section 529-A of the  Companies Act.

(c)     Whether the Appellant can be said to have  relinquished his right to claim as a secured creditor  as it had not opted in terms of Section 47 of the  Provincial Insolvency Act.

       Some legal propositions, which are not in controversy, may also be  noticed at this stage.   

There are two categories of secured creditors, namely, (i) those who  are desirous of going before the Company Court and; (ii) those who stand  outside the winding up proceeding.

       Corporate insolvency procedures serve a variety of functions which  include collective execution by unsecured creditors, facilitation of corporate  rescue and the enforcement of security which would include certain public  goals as for example, corporate morality.  In an insolvency proceeding, the  fundamental questions, which go to the root of the procedure, are:

(i)     which parties are involved; (ii)    which assets are to be included; and (iii)   how proceedings are to be funded.

       Liquidation proceeding although is a collective enforcement  mechanism for the benefit of unsecured creditors, the question which  invariably arises is what would be the meaning of the asset of the company  in the Indian context.  For the said purpose, the court has to be bear in mind  that the liquidation is also the occasion for the termination of the company’s

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affairs.  Assets of the company would include debentures holder assets, free  hold assets and sometimes floating assets.

       Applying pari passu principles, creditors’ claim are to be treated alike,  a single point of time at which the assets are liable to be quantified must be  pinpointed, but then, subsequent events are also required to be considered.

       For those who desire to go before the Company Court for dividend by  relinquishing their security, in accordance with the Insolvency Rules,  Section 529 of the Companies Act would be attracted.   The relevant portion of Section 47 of the Provincial Insolvency Act  reads as under:

"47. Secured creditors.-(1) where a secured creditor  realises his security, he may prove for the balance due to  him; after deducting the net amount realized.

(2) Where a secured creditor relinquishes his security for  the general benefit of the creditors, he may prove for his  whole debt.

(3) Where a secured creditor does not either realise or  relinquish his security, he shall, before being entitled to  have his debt entered in the Schedule, state in his proof  the particulars of his security and the value at which he  assesses it and shall be entitled to receive a dividend only  in respect of the balance due to him after deducting the  value so assessed.

(4) \005

(5) \005

(6) Where a secured creditor does not comply with the  provision of this section, he shall be excluded from all  shares in any dividend."

       The second class of the secured creditors are those who come under  Section 529-A (1)(b) of the Companies Act, i.e., those who opt to stand  outside the winding up to realize their security.  They also can, in certain  circumstances, go before the Company Court.

       In Allahabad Bank (supra), Jagannadha Rao, J., referring to the  Tiwari Committee Report, 1981 as regard framing of the Recovery of Debts  due to Banks and Financial Institutions Act, 1993 Act (for short "RDB  Act"), stated the law in the following terms:

"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) as  substituted by Ordinance 1 of 2000, inter alia, whereof Priorities, so far as  the amounts realized 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:

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"19. (19) 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 529-A of the  Companies Act, 1956 and to pay the surplus, if any, to  the company."                   (Emphasis supplied)

Section 19(19) is clearly inconsistent with Section  446 and other provisions of the Companies Act. Only  Section 529-A is attracted to the 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."

       In that case, this Court was not called upon to decide the question as  to whether having regard to the provisions contained in Section 529-A of the  Companies Act those who stand outside the winding up proceedings will  have to proceed with the proceedings initiated by them.  Therein, the court  was concerned with the interpretation of Section 446 of the Companies Act,  1956 vis-‘-vis the provisions of the RDB Act, namely, as to whether for  instituting or continuing proceedings thereunder, permission of the Company  Court was required to be obtained.  Having regard to the finding that the  RDB Act was a special statute enacted by the Parliament much after the  Companies Act came into force, it was opined that no permission was  required since the Debt Recovery Tribunal had exclusive jurisdiction with  respect to matters concerning recovery of dues by banks and financial  institutions.

       This legal position was considered by a Bench of this Court in  Rajasthan State Financial Corpn. & Anr. v. Official Liquidator & Anr.  [(2005) 8 SCC 190] wherein one of us (Balasubramanyan, J.) was a  member.   It was stated:

         "In Allahabad Bank v. Canara Bank the  question of jurisdiction of the Debts Recovery  Tribunal under the Recovery of Debts Due to  Banks and Financial Institutions Act, 1993, vis-‘- vis the Company Court arose for decision. This  Court held that even where a winding-up petition  is pending, or a winding-up order has been passed  against the debtor company, the adjudication of  liability and execution of the certificate in respect  of debts payable to banks and financial institutions,  are respectively within the exclusive jurisdiction of  the Debts Recovery Tribunal and the Recovery  Officer under that Act and in such a case, the  Company Court’s jurisdiction under Sections 442,  537 and 446 of the Companies Act stood ousted.  Hence, no leave of the Company Court was  necessary for initiating proceedings under the  Recovery of Debts Act. Even the priorities among  various creditors, could be decided only by the  Debts Recovery Tribunal in accordance with  Section 19(19) of the Recovery of Debts Act read  with Section 529-A of the Companies Act and in  no other manner. The Court took into account the  fact that the Recovery of Debts Due to Banks and  Financial Institutions Act, 1993 was a legislation  subsequent in point of time to the introduction of  Section 529-A of the Companies Act by Act 35 of  1985 and it had overriding effect. But it noticed  that by virtue of Section 19(19) of the Recovery of  Debts Act, the priorities among various creditors

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had to be decided by the Recovery Tribunal only  in terms of Section 529-A of the Companies Act  and Section 19(19) did not give priority to all  secured creditors. Hence, it was necessary to  identify the limited class of secured creditors who  have priority over all others in accordance with  Section 529-A of the Companies Act. The Court  also held that the occasion for a claim by a secured  creditor against the realisation by other creditors of  the debtor under Section 529-A read with proviso  (c) to Section 529(1) of the Companies Act could  arise before the Debts Recovery Tribunal only if  the creditor concerned had stood outside the  winding up and realised amounts and if it is shown  that out of the amounts privately realised by it,  some portion had been rateably taken away by the  Liquidator under clauses (a) and (b) of the proviso  to Section 529(1). The Court has not held that  Section 529-A of the Companies Act will have no  application in a case where a proceeding under the  Recovery of Debts Act has been set in motion by a  financial institution. The Court there was  essentially dealing with the jurisdiction of the  Debts Recovery Tribunal in the face of Sections  442, 537 and 466 of the Companies Act."

       Allahabad Bank (supra), therefore, is not an authority for the  proposition that in terms of Section 529-A of the Companies Act the  distinction between two classes of secured creditors does no longer survive.     The High Court, thus, in our considered opinion, was not correct in that  behalf.

       In fact in Allahabad Bank (supra), it was categorically held that the  Adjudication Officer would have such powers 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 priority in law.   

       Section 529-A of the Companies Act no doubt contains a non-obstante  clause but in construing the provisions thereof, it is necessary to determine  the purport and object for which the same was enacted.   

       In terms of Section 529 of the Companies Act, as it stood prior to its  amendment, the dues of the workmen were not treated pari passu with the  secured creditors as a result whereof innumerable instances came to the  notice of the court that the workers may not get anything after discharging  the debts of the secured creditors.  It is only with a view to bring the  workman’s dues pari passu with the secured creditors, Section 529-A was  enacted.

       The non-obstante nature of a provision although may be of wide  amplitude, the interpretative process thereof must be kept confined to the  legislative policy.  Only because the dues of the workmen and the debt due  to the secured creditors are treated pari passu with each other, the same by  itself, in our considered view, would not lead to the conclusion that the  concept of inter se priorities amongst the secured creditors had thereby been  intended to be given a total go-by.   

       A non-obstante clause must be given effect to, to the extent the  Parliament intended and not beyond the same.

       Section 529-A of the Companies Act does not ex facie contain a  provision (on the aspect of priority) amongst the secured creditors and,  hence, it would not be proper to read thereinto things, which the Parliament  did not comprehend.  The subject of mortgage, apart from having been dealt

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with under the common law, is governed by the provisions of the Transfer of  Property Act.  It is also governed by the terms of the contract.

       The Punjab National Bank granted loan to the 1st Respondent herein  knowing fully well that, over the assets of the mortgagor, the Appellant held  the first charge.  It in no uncertain terms stated that the charges created by  reason of the loan agreement entered into by and between itself and the 1st  Respondent was subservient to the charges of the appellant as also the  Respondent Nos. 3 and 4.  The admission of the PNB in this behalf is  absolutely clear and explicit.  Even in the suit filed by it for recovery of the  mortgage money as against the 1st Respondent, it not only in no uncertain  terms stated that the Appellant and Respondent Nos. 3 and 4 herein were the  first charge holders in respect of movable and immovable properties of the  1st Respondent, but its prayers in regard thereto were also limited, as would  appear from prayer (f) made in the suit.

       While enacting a statute, the Parliament cannot be presumed to have  taken away a right in property.  Right to property is a constitutional right.   Right to recover the money lent by enforcing a mortgage would also be a  right to enforce an interest in the property.  The provisions of the Transfer of  Property Act provide for different types of charges.  In terms of Section 48  of the Transfer of Property Act claim of the first charge holder shall prevail  over the claim of the second charge holder and in a given case where the  debts due to both, the first charge holder and the second charge holder, are to  be realized from the property belonging to the mortgagor, the first charge  holder will have to be repaid first.  There is no dispute as regards the said  legal position.

       Such a valuable right, having regard to the legal position as obtaining  in common law as also under the provisions of the Transfer of Property Act,  must be deemed to have been known to the Parliament.  Thus, while  enacting the Companies Act, the Parliament cannot be held to have intended  to deprive the first charge holder of the said right.  Such a valuable right,  therefore, must be held to have been kept preserved.  [See Workmen of M/s  Firestone Tyre and Rubber Co. of India (P.) Ltd. vs. Management &  Ors. (1973) 1 SCC 813]

       If the Parliament while amending the provisions of the Companies Act  intended to take away such a valuable right of the first charge holder, we see  no reason why it could not have stated so explicitly.  Deprivation of legal  right existing in favour of a person cannot be presumed in construing the  statute.  It is in fact the other way round and thus, a contrary presumption  shall have to be raised.   

       Section 529(1)(c) of the Companies Act speaks about the respective  rights of the secured creditors which would mean the respective rights of  secured creditors vis-‘-vis unsecured creditors.  It does not envisage  respective rights amongst the secured creditors.  Merely because Section 529  does not specifically provide for the rights of priorities over the mortgaged  assets, that, in our opinion, would not mean that the provisions of Section 48  of the Transfer of Property Act in relation to a company, which has  undergone liquidation, shall stand obliterated.   

       If we were to accept that inter se priority of secured creditors gets  obliterated by merely responding to a public notice wherein it is specifically  stated that on his failure to do so, he will be excluded from the benefits of  the Dividends that may be distributed by the Official Liquidator, the same  would lead to deprivation of the secured creditor of his right over the  security and would bring him at par with an unsecured creditor.  The logical  sequitor of such an inference would be that even unsecured creditors would  be placed at par with the secured creditors.  This could not have been the  intendment of the legislation.

       The provisions of the Companies Act may be a special statute but if  the special statute does not contain any specific provision dealing with the

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contractual and other statutory rights between different kinds of the secured  creditors, the specific provisions contained in the general statute shall  prevail.

       In Maru Ram vs. Union of India and Others [(1981) 1 SCC 107],  this Court distinguished between a specific provision and a special law  holding that a specific provision dealing with a particular situation would  override even a special law, which is inconsistent therewith.   

Section 9 of the Companies Act only states that provisions thereof  would override the Memorandum or Articles of Association of the company  or any other agreement executed or resolution passed by the company.   There does not exist any provision in the Companies Act which provides  that the provisions of Section 48 of the Transfer of Property Act would not  be applicable in relation to the affairs of a company.  Unless, expressly or by  necessary implication, such a provision contrary to or inconsistent therewith  carrying a different intent can be found in the Companies Act, Section 48 of  the Transfer of Property Act, cannot be held to be inapplicable.   

Section 48 of the Transfer of Property Act reads as under:

"48. Priority of rights created by transfer \026 Where  person purports to create by transfer at different times  rights in or over the same immovable property, and such  rights cannot all exist or be exercised to their full extent  together, each later created right shall, in the absence of a  special contract or reservation binding the earlier  transferees, be subject to the rights previously created."

       The said provision, as noticed hereinbefore, deals with a specific  situation.  The exceptions to the provisions of Section 48 are as under:

(i)     where parties execute a Registered Deed at any point in time which is  subsequent to a prior but an unregistered deed.  This is also subject to the  doctrine of notice, i.e., that parties to the Registered Deed executed after the  Unregistered Deed did not have notice of the same;

(ii)    where there are exceptions carved out by a statute \026 for example,  Section 98 of the Bengal Tenancy Act.

(iii)   a mortgage executed on the directions of the Court to preserve a  property;

(iv)    where a ’salvage lien’ is created, i.e., where lien is created for moneys  advanced for the purposes of saving the property from destruction or  forfeiture.  The salvage lien is confined in English Law to maritime lien.

       In Mulla’s Transfer of Property Act, 9th edition, page 346-347, it is  stated:

       "Again, when a court for the purpose of preserving  the property in suit, directs the receiver to execute a  mortgage, it has jurisdiction to order that the mortgage  shall take precedence over prior charges.  This is an  application of the equity which gives salvage liens, ie  liens for money advanced for the purpose of saving the  property from destruction of forfeiture, priority over all  their encumbrances.  With regard to such liens the  general rule is reversed and they are entitled to priority in  inverse order to their dates.  Salvage liens are confined in  English law to maritime liens.  A salvage lien was  claimed in an old Calcutta case in respect of an advance  made for the purpose of carrying on an indigo factory,

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and again in another case in respect of an advance made  to enable the mortgagor to pay the rent of the premises  mortgaged, but in both cases the claim was repelled.

       The lien of a co-sharer for owelty money on  partition is entitled to precedence over prior mortgages of  property allotted to the co-sharer who is liable to pay  owelty."

        Section 47 of the Provincial Insolvency Act is attracted by virtue of  Section 529(1) of the Companies Act.  Sub-section (2) of Section 47 would  become applicable where a secured creditor voluntarily relinquishes his  security for the general benefit of the creditors.   

The expression "relinquish" has a different connotation.  In P.  Ramanatha Aiyar’s Advanced Law Lexicon at page 4047, it is stated:

"Relinquish: To give over possession or control of; to  leave off."

       It envisages a conscious act, i.e., an act where a person was aware of  his right and then relinquishes the same.  The same must be for the general  benefit of the creditors.  His action must lead to a conclusion that he, for one  reason or the other, intended to stand in the queue for receiving money owed  to him.  It, however, does not stand obliterated only by the filing of an  affidavit or proof of claim with the official liquidator.  Such a claim had  been filed pursuant to a notice issued by the official liquidator.  If the  creditor does not respond to the said notice, he would not be in a position to  bring to the notice of the official liquidator, the existence of his right.   

       Sub-section (3) of Section 47 clearly envisages the position where he  does not either realise or relinquish his security.  He, in such a situation, may  state in his Affidavit of Proof, the particulars of the security and value at  which he assesses the same.  The consequences therefor would ensue.  If the  Official Receiver proceeds to sell the security, the Court first has to pay the  amount at which the security was valued to the secured creditor out of the  sale proceeds.

       In Mahindra and Mahindra Ltd. v. Union of India & Anr. [(1979)  2 SCC 529], it was stated:

"\005That has to be determined on an interpretation of  Section 13(2) in the light of the context or setting in  which it occurs and having regard to the object and  purpose of its enactment. Now, one thing is clear that the  power conferred under Section 13(2) is a corrective or  rectificatory power and it is conferred in terms of widest  amplitude. \005It is left to the discretion of the  Commission whether the power should be exercised in a  given case and if so, to what extent. But it must be  remembered that this discretion being a judicial or in any  event a quasi judicial discretion, cannot be "arbitrary,  vague or fanciful" : it must be guided by relevant  considerations. It is not possible to enumerate  exhaustively the various relevant considerations which  may legitimately weigh with the Commission in  exercising its discretion, nor would it be prudent or wise  to do so, since the teeming multiplicity of circumstances  and situations which may arise from time to time in this  kaleidoscopic world cannot be cast in any definite or  rigid mould or be imprisoned in any strait-jacket  formula\005"

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       The question came up for consideration before a learned Single Judge  of Karnataka High Court in State Bank of Mysore v. Official Liquidator  & Ors. [1985 (58) Company Cases 609], wherein the law was stated in the  following terms:

"It will be thus plain that what section 47 provides  is only for the benefit of the mortgagee and not to his  detriment.  He can follow any one of the three procedures  suggested in the section.  In this case, I do not think it can  be validly argued that the mortgagee has relinquished his  security.  Exhibit B-1 makes it clear that he had no  objection if the property is sold free of mortgage but a  lien is kept in so far as the value he had assessed is  concerned and is preferentially paid out of the sale  proceeds.  There are no words in Exhibit B-1 which  warrant any conclusion that the mortgagee had  relinquished his security\005

In fact, sub-section (3) of section 47 lends support  to this method of payment to the mortgagee.  If the  official receiver proceeds to sell the security, the court  first has to pay the amount at which the security was  valued to the secured creditor out of the sale proceeds.  Whatever may be the position in regard to the balance, in  so far as the value of his assessment is concerned, he can  be preferentially paid out of the sale proceeds.

If the sale was valid, I fail to see how the  mortgagee could be deprived of his security, particularly  when he had not relinquished.  The property was sold  with a clear understanding that the mortgagee will be  paid firm from the sale proceeds.  This mode of  realization of security is not, in my view, derogatory  either to section 47 or to section 59 of the Act."

       It was further held:

"\005Sub-s. (3) of s. 47 of the Act does not come in  the way of the official liquidator entertaining the  application of the bank for payment of secured loans in  accordance with the hypothecation agreement and the  mortgage by deposit of title deeds, as proved by the bank.   In the result, the bank is entitled to realize that amount on  a preferential basis as a secured creditor notwithstanding  the fact that it filed the affidavit indicating that it stands  within liquidation but subject to the reservation of its  security being continued."

       A Division bench of the Gujarat High Court in Gujarat Steel Tube  Employees Union & Anr. v. O.L. of Gujarat Steel Tubes Ltd. & Ors.  [disposed of on 9.1.2006], held:

"\005 The Court is also of the view that simply because the  secured creditors participate in the sale proceedings  undertaken by the Court and they also became the  members of the Sale Committee constituted pursuant to  the directions issued by the Court does not mean that  they have exercised their option of remaining outside the  winding up and they have relinquished their security. As  a matter of fact, relinquishment of security by the secured  creditors require a positive action on the part of the  secured creditors. They have never stated in any of the  proceedings that they are relinquishing their securities.

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On the contrary, they have made it clear that they remain  outside the winding up and they participate in the sale  proceeds only with a view to facilitate the sale proceeds  so as to get the auction proceedings completed as  expeditiously as possible. There is also substance in the  say of the secured creditors that as soon as the assets of  the companies are sold and realization is taken place,  their securities are converted from the specified assets  into cash and they have equal right in cash which is  realized on sale of the assets of the Company in  liquidation\005"

       We agree with the said view.

For the aforesaid reasons, we are of the view that the High Court has  overlooked salient aspects of the provisions of the relevant Acts including  that of the Provincial Insolvency Act.  Hence, the impugned judgment  cannot be sustained.  It is set aside accordingly.  The appeal is allowed.  The  1st Respondent shall bear the costs of the Appellant throughout.