In Re: Shivmoni Steel Tubes Employees Association - Court Judgment

D.V. Shylendra Kumar, J.

1. All these applications/reports are filed during the winding up proceedings of M/s. Shivmoni Steel Tubes Ltd., a company ordered to be wound up in terms of order dated September 8, 1995, passed by this court in Company Petition No. 49 of 1994, pursuant to the recommendation of the Board for Industrial and Financial Reconstruction, which recommendation was not disturbed in appeal by the Appellate Authority for Industrial and Financial Reconstruction, and the official liquidator attached to the High Court was appointed as liquidator of the company under the provisions of Section 449 of the Companies Act, 1956 (for short, 'the Act').

2. The winding up proceedings have now reached the stage wherein either the official liquidator or the secured creditors have sold a substantial portion of the assets of the company and the same is realised and the official liquidator had also notified inviting claims from interested persons and the last date for receipt of such claims had been notified to be August 11, 2003. The official liquidator had also been permitted by order dated September 12, 2003, passed by this court, to avail of the services M/s. H.N.S. Rao and Co. chartered accountants, for processing the claim applications of the creditors and workmen and to submit a report to the official liquidator.

3. Much prior to this, Karnataka State Industrial Investment and Development Corporation Ltd. (KSIIDC), a secured creditor, had made an application seeking permission to stand outside the winding up proceedings and to realise the assets of the company secured in its favour for repayment of loan advanced by it in favour of the company. M/s. KSIIDC, a State owned financial corporation, within the meaning of this expression under the State Financial Corporations Act, 1951 (for short, SFC Act), it appears, had invoked its powers under Section 29 of the SFC Act to take over the assets and the unit of the company under liquidation, particularly, the land, building, plant and machinery located at the Mahadevapur Industrial area, Bangalore.

4. Though the application filed by the KSIIDC to permit it to stand outside the winding up proceedings and to realise the security had not been expressly ordered for such purpose, KSIIDC had nevertheless been permitted to effect the sale of the assets of the company which it had taken over in exercise of its power under Section 29 of the SFC Act, and it appears that the KSIIDC did effect the sale of the assets of the company and the company had been initially permitted to retain the sale proceeds with itself.

5. By yet another order dated February 1, 2002, passed in C. A. No. 623 of 2001, while sale effected by the KSIIDC was confirmed by this court and out of the sale proceeds, a sum of Rs. 1.5 crores was ordered to be handed over to the official liquidator and the balance be given to KSIIDC for being apportioned amongst the secured creditors. It is noted that KSIIDC in fact had been recognised as the lead bank by the other secured creditors of the company under liquidation, viz., Karnataka State Financial Corporation (KSFC), State Bank of India, ICICI Bank Ltd., etc., while passing the said order, this court had observed that a sum of Rs. 1.5 crore out of the sale proceeds which was directed to be handed over to the official liquidator was for the purpose of settling statutory dues, levies, ESI contributions, workers' dues and dues payable to Karnataka Electricity Board, etc., on behalf of the company and the remaining amount which was ordered to be paid to the secured creditor--KSIIDC, as lead bank on the secured creditors, was subject to the further condition that if for any reason, the amount due towards statutory dues, levies or workmen's dues was found to be not capable of being met from out of the Rs. 1.5 crore that had been directed to be transferred to the official liquidator, then KSIIDC--secured creditor--is required to make good such deficit and pay the amount to the official liquidator. It was with such an observation and direction, the application had been ordered. When the official liquidator invited claims from the creditors, it appears, all the creditors including the secured creditors, except KSIIDC, have notified their claims.

6. In terms of the provisions of Section 529A of the Act, dues to the workmen are being on par with any amount payable to the secured creditor and in fact apart from the workmen having put forth their claims before the official liquidator, several secured creditors having notified with the official liquidator about the amount due to them, the official liquidator was keen on processing the claims and settling the dues, particularly as the workmen, who claim that they are out of employment ever since 1988 and are pressing hard for payment. However, the official liquidator found a stumbling block in KSIIDC--lead bank amongst the secured creditors--which in fact is holding on to the funds of the company under liquidation, having not notified the amount due to it, the official liquidator was handicapped in working out the apportionment amongst the secured creditors or even determining the amount that can be paid in favour of the workmen in particular.

7. It is at this stage, the controversy has arisen in the light of several legal contentions sought to be put forth particularly by KSIIDC through its learned counsel Sri K. Gopal Hegde, who claims that KSIIDC, being a secured creditor, is not required to join the queue of the claimants before the official liquidator ; that KSIIDC is not at the mercy of the official liquidator to distribute any amount to it on being notified about the same before the official liquidator; that KSIIDC is entitled to use from out of the sums available with it, such amount it claims, as a secured creditor and only if it chooses to realise the balance if any not covered by the value of its security it has to notify the official liquidator. It is the submission of Sri Gopal Hegde, learned counsel appearing for KSIIDC that it is a statutory right of the secured creditor to stand outside the winding up proceedings and to realise its dues ; that the only requirement is that the secured creditor should seek the permission of the company court before whom a company is being wound up, and except for this requirement, there is no other obligation on the part of the secured creditor, much less either to notify the official liquidator about the amount due to such secured creditor by the company under liquidation or to prove the amount due to it, like any other creditor.

8. Learned counsel for KSIIDC submits that such stand on the part of KSIIDC is substantiated by numerous decisions rendered in this regard by the Supreme Court, the latest in such series being the case of International Coach Builders Ltd. v. Karnataka State Financial Corporation [2003] 114 Comp Cas 614 ; AIR 2003 SC 2012, as also the case of Textile Labour Association v. Official Liquidator [2004] 120 Comp Cas 505 ; [2004] AIR SCW 2422.

9. M/s. Rangarajan and Prabhakaran, learned counsel appearing for Industrial Development Bank of India Ltd. (IDBI), another secured creditor, Sri S.G. Pandit, learned counsel appearing for KSFC and Sri Urval N. Ramanand, learned counsel appearing for the State Bank of India, have, while asserted their position as secured creditors, do not fully support the submissions of Sri K. Gopal Hegde, learned counsel for KSIIDC. Learned counsel for these other secured creditors do not find any impediment for the secured creditor notifying its claim before the official liquidator.

10. Sri Deepak, learned counsel appearing for the official liquidator and Sri Narayan Bhat, learned counsel for the workmen, have stoutly opposed and countered the arguments of Sri Gopal Hegde. The submission of Sri Deepak is that as the company has been ordered to be wound up and winding up proceedings are going on under the supervision of the court, the provisions of the Act prevail over the other provisions, including the provisions of the SFC Act; that the only right which a secured creditor can claim is for priority in payment over other unsecured creditors ; that any secured creditor ranked pari passu with the claims of the workmen, as the official liquidator usually represents and has a duty to take care of the interests of the workmen, as one wing of the secured creditors, and unless the official liquidator knows the claims of all the secured creditors, it is not possible for the official liquidator to distribute any dividend in favour of the workmen vis-a-vis their claims ; that even the secured creditor is required to notify its claims when the official liquidator invites such claims and within the permitted time; that the stand on the part of KSIIDC leads to an incongruent situation such as if a secured creditor does not notify its claim at all, the official liquidator will not be in a position to work out the proportion in which the amount is to be apportioned amongst the secured creditors including the workmen and by not notifying its claim, any one of the secured creditors can hold to ransom the other such creditors by postponing the payment indefinitely ; that it amounts to gross injustice and hardship to the workmen who are virtually on the streets and starving to get whatever is available and in a proportionate manner and therefore the official liquidator should be permitted to distribute the amount that has been realised from out of the sale of the assets of the company amongst the persons who are already notified.

11. It is in the light of such stands taken by different parties and learned counsel appearing before the court, the following questions have been posed for answer :

(i) What are the rights of a secured creditor in a winding up proceedings, particularly, in the light of the provisions of Section 529A read with Section 457 of the Companies Act and Rules 147 to 152, 156, 179 and 273 of the Companies (Court) Rules ?

(ii) Whether the position of a secured creditor who is a financial corporation under the provisions of the State Financial Corporations Act, is different from that of the other secured creditors ?

(iii) Whether non-notification of the amount due to a secured creditor from a company under liquidation within the time prescribed by the official liquidator by notifying the claims, could make any difference to the amount payable in favour of such secured creditors And if so, in what manner ?

(iv) Is the official liquidator bound to take note of the amount if notified by the secured creditor at any stage before distribution of dividend ?

(v) Is the official liquidator to remain a mute spectator in respect of the amount notified by the secured creditor to be payable to the secured creditor even when the official liquidator is not fully satisfied about either the correctness or bona fides of such claims ?

12. Learned counsel have elaborated their submissions as under :

13. The submissions of Sri K. Gopal Hegde, learned counsel for KSIIDC, a State owned financial corporation and a secured creditor of the company under liquidation, are that : KSIIDC, which had a right to bring the assets and properties of the borrower company to sale due to non-repayment of the loan amount, does not lose its right even when the company is ordered to be wound up; that KSIIDC continues to have a right to stand outside the winding up proceedings and to realise its dues; that the only requirement is that it should seek the permission of the company court in the sense it should notify the sum. In this regard, learned counsel has drawn the attention of the court to the provisions of Section 529 of the Act, wherein it is indicated that in the winding up of an insolvent company, the law and procedure to be applied is the same as in the case of a person adjudged insolvent, which is governed by the provisions of the Provincial Insolvency Act, but the provisions of the Provincial Insolvency Act do not apply to the secured creditor ; that the proviso to Sub-section (2) of Section 529 of the Act expressly indicates the situation wherein a secured creditor may not relinquish its security in which event he may stand outside the winding up proceedings and realise the amount due to him and the only condition is that such secured creditor has to pay the official liquidator the expenditure incurred by the liquidator for preservation of security before its realisation by the secured creditor. Sri Gopal Hegde submits that in the instant case, the assets having been taken over by the KSIIDC in exercise of its power under Section 29 of the SFC Act, even before the winding up order is passed, no such occasion arises for the secured creditor to pay any amount to the official liquidator ; that in such an event, it is not necessary for the secured creditor either to put forth a claim or to prove its dues and accordingly submits that the secured creditor proposed to retain such part of the amount as is due to it from out of the funds with it as of now, and remit only the balance. However, in the light of the provisions of Section 529A of the Act, Sri Gopal Hegde submits that even with regard to the amount which it proposes to retain, KSIIDC is ready to share it with the other secured creditors and workmen pari passu in view of such statutory provisions and the understanding it had with the other secured creditor. In support of such submission, Sri Gopal Hegde has relied on the following further decisions Jitendra Narottamdas Sheth v. Indradeep Co-operative Housing Society Ltd., AIR 1993 Bom 302 and Hansraj v. Official Liquidator, Dehra Dun Mussoorie Electric Tramway Co. Ltd. : AIR1929All353 .

14. Sri Narayan Bhat, learned counsel appearing for the workmen submits that the workmen having notified their claims before the official liquidator and their claims also having been adjudged and admitted, it is necessary for the official liquidator to take further steps to disburse such amounts ; that the unreasonable and unjust stand on the part of the KSIIDC has come in the way of the workmen getting their legitimate due ; that the KSIIDC having not notified its claim so far and not having put forth its claim in accordance with law within the time permitted by law, cannot hold on the funds of the company any more ; that the KSIIDC having not proved its claim before the official liquidator, is not entitled to the claim amount; that winding up proceedings being akin to the insolvency proceedings and in this regard he has relied upon the following decisions : Nur Mahommad v. Lalchand, AIR 1925 Lahore 436 ; Nathoo v. Ghulam Dastgir, AIR 1926 Lahore 638 and Gadela Venkayamma v. Gadela Ramayya, AIR 1943 Mad 767.

15. It is also the submission of Sri Narayan Bhat that even in the application KSIIDC had filed before this court seeking permission to stand outside the winding up proceedings and to realise its debts, it did not indicate the amount due to it nor the rate of interest and nothing had been asserted even at that point of time and if KSIIDC chooses to adopt a stand that it need not notify or prove before the official liquidator either the principal amount or the interest part of it, nothing can be paid to KSIIDC at this juncture, when the last date for notifying the claim before the official liquidator has already expired. Sri Narayan Bhat has also pointed out the discrepancies in the very pleadings of the KSIIDC, viz., while at one point of time, the amount due was indicated as to be Rs. 45 lakhs, it is indicated to be Rs. 72 lakhs at a subsequent point of time, i.e., in terms of memo dated July 23, 2004, which also does not have any authenticity as the memo is not supported by an affidavit of any of the responsible officer of the corporation. It is the submission of Sri Narayan Bhat that when there is a dispute as to the sum due to the secured creditor, and even as amongst the secured creditors, the workmen's due are pari passu unless the official liquidator is aware of the amount due to all the secured creditors, there is no way of the official liquidator disbursing the amounts to creditors including the workmen; that as the KSIIDC has been holding the fund belonging to the company for quite some time, it is liable to return the amount with commensurate interest to the official liquidator who can work upon the distribution of dividends among the claimants. Sri Narayan Bhat also points out that in the present case KSIIDC had given an undertaking before this court that in the event of amount available with the official liquidator falling short of the amount required to be distributed to the workmen, such deficit amount would be made good by KSIIDC ; that it is now required to honour its commitment before the court. It is also the submission of Sri Narayan Bhat that allowing the KSIIDC to notify its claim at this point of time, even without scope for any verification, it amounts to allowing KSIIDC to judge in its own cause ; that the amount claimed by KSIIDC against the company cannot simply be accepted at its face value, more so when there are conflicting claims by KSIIDC and the claim towards interest is neither known nor the basis of it ; that accepting the claim of the KSIIDC at this juncture would virtually amount to jeopardizing the interests of the workmen and to their detriment. In this regard, Sri Narayan Bhat relied upon the following further decisions : Allahabad Bank v. Canara Bank [2000] 101 Comp Cas 64; AIR 2000 SC 1535 (para. 75) and A. P. State Financial Corporation v. Official Liquidator : AIR2000SC2642 .

16. Sri Deepak, learned counsel appearing for the official liquidator has also contended that the stand on the part of KSIIDC is totally unacceptable ; that notwithstanding the provisions of Section 29 of the SFC Act, it cannot claim immunity from the provisions of the Act, particularly from the effect of an order passed for winding up of the affairs of a company, in view of the provisions of Section 456, when official liquidator has been appointed to be in charge of the winding up proceedings ; that the property of the company comes into the custody and control of the official liquidator and in that event the rights under Section 29 of the SFC Act are subject to the provisions of Section 456, particularly, in view of the provisions of Sub-section (2) of Section 456 of the Act, which reads as follows :

'(2) All the property and effects of the company shall be deemed to be in the custody of the Tribunal as from the date of the order for the winding up of the company.'

17. Sri Deepak, therefore, submits that when once the property is deemed to be in the custody of the court, it is only the official liquidator who can deal with such property for sale etc., in terms of Section 457 of the Act read with Rule 273 of the Rules, and that a secured creditor even in the nature of a State owned financial corporation, does not have any absolute right to bring to sale such properties of the company under liquidation. It is also the submission of Sri Deepak that one secured creditor cannot seek protection or claim priority or a special status over another secured creditor, to counter the submission of Sri Gopal Hegde that KSIIDC has an edge over the other secured creditors in view of the provisions of Section 29 of the SFC Act. In support of his submissions, Sri Deepak has relied on the decision in Industrial Credit and Investment Corporation of India Ltd. v. Srinivas Agencies [1996] 86 Comp Cas 255 (SC). Learned counsel for the official liquidator has also relied on the following decisions in the context of position of a secured creditor : Karnataka Bank Ltd. v. Craft Tools Pvt. Ltd. [1986] 60 Comp Cas 756 (Karn) ; Mysore Surgical Cottons (P.) Ltd. (In Liquidation) v. Karnataka State Financial Corporation [1988] 1 Comp LJ 63 (Karn) and M. K. Ranganathan v. Government of Madras : [1955]2SCR374 .

18. Relying upon these cases, it is the submission of Sri Deepak that when once a winding up order is passed, the State Financial Corporation cannot fall back on the provisions of the SFC Act to get over the effects of a winding up order. Sri Deepak submits that what is saved is only such action, which has already been taken under such enabling provisions prior to passing of the winding up order in respect of the company under the enabling provisions of the Act and these provisions cannot be pressed into service any more once the winding up order is passed.

19. It is also the submission of Sri Deepak that on a conjoint reading of the provisions of Sections 529 and 529A of the Act and Section 28 of the Insolvency Act, along with the relevant Rules, viz., Rules 147 to 152, 156, 179 of the Rules and on a harmonious understanding of these provisions, it necessarily leads to an inference that even a secured creditor, whether has opted to stand outside the winding up proceedings or not, has to necessarily lodge a claim notifying before the official liquidator in respect of the amount due to him from the company under liquidation.

20. Several contentions are urged by learned counsel for the parties, particularly learned counsel for the secured creditor--KSIIDC--and the questions that have been posed for determination, as indicated in paragraph No. 11 supra, have all arisen in the course of the consideration of the report of the official liquidator in OLR No. 327 of 2004, praying for permission to accept the interim report of the chartered accountant and for taking up further action, particularly for adjudication of various claims put forth before the official liquidator.

21. While the other secured creditors have put forth their claims before the official liquidator, KSIIDC has not put forth such claims, but on the other hand, had taken an emphatic stand that it is not required on its part to notify its claim before the official liquidator. The reason put forth by the KSIIDC is two-fold, one is its right as a secured creditor and the other is its right as a State financial corporation under the provisions of the SFC Act.

22. The rights of a secured creditor to whom money is payable by the borrower, in the instant case, the company under liquidation, is secured by creation of a charge over the properties, are to be found in Sections 172 to 176 of the Indian Contract Act (for short, the 'Contract Act') in so far as the movable assets of the company are concerned and Sections 58, 67, 78 and 81 of the Transfer of Property Act (for short, T. P. Act), in respect of immovable properties.

23. Broadly speaking, the right under Section 176 of the Contract Act of a pledgee is one to retain the possession of the pledged articles pending repayment of the amount borrowed on the security of the articles, but without actually making use of the pledged articles and to effect sale thereof on the failure of the borrower to repay the amount even after receipt of a notice, calling upon him to pay the debt. The amount realised in excess of the debt on such sale is to be restored to the borrower.

24. The pledgee has a legal obligation to restore the pledged articles if the pledgor is prepared to tender the debt amount before sale. The pledgee cannot retain possession of the pledged articles and at the same time seek realisation of debt, as held by the Supreme Court in the case of Lallan Prasad v. Rahmat Ali : [1967]2SCR233 .

25. In so far as the rights of a mortgagee in respect of a mortgaged immovable property are concerned, on the determination of the debt amount, i.e., on obtaining a decree for the amount due by the mortgagor to the mortgagee, the property in question can be brought to sale for realisation of the amount. Even to enforce such rights, it is essential that there should be a debt for repayment, for which security is offered and the charge is created, and the debt amount should be one which is ascertained and undisputed and if it carries any interest, that should also be clear. Obviously, there should be a contract, evidencing these aspects and if this is the case of mortgage, the instrument should have been registered in accordance with the requirements of the Indian Registration Act.

26. In the instant case, one aspect cannot be disputed, viz., that there was no pledge of movable articles like machinery etc., which could be detached from and separately sold, as the secured creditor KSIIDC was never put in possession of either machinery or even land and building. This is because, it is the very case of the secured creditor KSIIDC that it has, in exercise of its statutory powers under Section 29 of the SFC Act, taken over the possession and control of land, building and machinery of the unit of the company under liquidation prior to the passing of the winding up order by this court.

27. The property having been not brought to sale in exercise of such rights either as pledgee or as mortgagee prior to the passing of winding up order in respect of the company, exercise of such rights also will have to be under the supervision of the company court, as the company has gone into liquidation, the official liquidator is put in charge of the affairs of the company and in the course of winding up proceedings, the rules as are applicable during the course of distribution of assets of an insolvent as envisaged under the provisions of the Provincial Insolvency Act are put into operation.

28. There being several secured creditors even before the passing of the winding up order in respect of the company under liquidation and holding a charge either pari passu or second or third charge over the properties of the company, it will be necessary to ascertain the rights of each of such secured creditors and as after passing of the winding up order, the provisions of Section 529A of the Act also have come into operation. In the instant case considerable amount being due to the workmen from the company under liquidation in respect of which amount, a charge is created by statute, which charge runs pan passu with the other charge holders like financial corporations and financial institutions, it will be necessary to ascertain the amount due to each of such secured creditors even for a proper distribution of the dividends to various secured creditors and promoters, from out of the amount realised by sale of the assets of the company under liquidation, as the sales have taken place subsequent to the passing of the winding up order.

29. In a situation of this nature, it is not possible to accept the submission of Sri K. Gopal Hegde, learned counsel appearing for the secured creditor--KSIIDC--that the secured creditor need not put forth any claim or notify any amount before the official liquidator. It is no doubt true that the official liquidator is not determining the right of a secured creditor, which is statutorily provided for and regulated, but he is nevertheless required to ascertain such rights in the light of the competing claims of various secured creditors including the workmen on whose behalf the official liquidator himself is required to act and safeguard their interest.

30. Though a secured creditor who has not notified his claim before the official liquidator within the time allowed by the official liquidator for putting forth such claims, may not lose his right, as contended by Sri K. Gopal Hegde learned counsel appearing for KSIIDC, it is nevertheless required on the part of such secured creditor also to notify the official liquidator of the amount due to it, as this information is very necessary for the official liquidator even to distribute the amounts amongst the several secured creditors.

31. It is to be noted that a secured creditor also, who is required to notify the official liquidator as to the amounts due to such secured creditor, does not become one relegated to the status of any other creditors, inasmuch as the right of a secured creditor is not put on par with the rights of an unsecured creditor. The right of a secured creditor to realise the amount due to it by working of the security is not in any way diminished, as the sale proceeds are applied only towards the debts of secured creditors and it is only when there is a surplus amount, it is sought to be distributed rateably amongst the unsecured creditors.

32. In so far as the argument relating to the application or otherwise of the provisions of the Provincial Insolvency Act is concerned, it is significant to note that equitable distribution of the assets of the company under liquidation is only in respect of such assets which the company owned and possessed at the time of the passing of winding up order. While the provisions of the said Act do apply to the assets of the company under liquidation, the rights of the secured creditor are saved not because of the fact that the secured creditor is sought to be conferred with any special status vis-a-vis others, but because the property in question offered as security by agreement between the owner of the property and the creditor has been made subservient to the claim of the creditor by creating a charge over the property to the extent of the borrowed amount. In law, it amounts that the ownership of the borrower, in the instant case the company under liquidation, in the property is, the full rights in respect of the property reducing the sum payable to the creditor. In reality, when once the charge is legally created over the property for the borrowed amount, the de jure ownership of the borrower in the property gets reduced, to the extent of the amount borrowed, and to the extent of the obligations to repay the amount, the ownership of the borrower in the property is transferred.

33. In winding up proceedings what is distributed is such of the assets owned by the company under liquidation. What is not owned by the company cannot be the subject-matter for distribution. It is for this reason that a secured creditor is permitted to stand outside the winding up proceedings and to realise his security. In law, to the extent of the amount borrowed and to the extent of such portion of the property in question represents this amount, it has already passed to the ownership of the creditor. But, if what was the amount that was borrowed and what was the amount that was due had not been ascertained and had not been determined earlier, it will be necessary for the official liquidator or the company court to ascertain this amount based on such supporting materials that may be placed before the official liquidator or the company court by the party concerned, as there are competing claims even among the secured creditors.

34. In so far as the rights of a financial corporation under Section 29 of the SFC Act are concerned, it is an enabling provision which enables the financial corporation to take over the management or possession or both of the defaulting industrial unit concerned with corresponding right to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated or assigned to the financial corporation. While the power of a financial corporation under this provision is akin to that of a secured creditor, it is a little more in the sense that this provision enables the corporation not only to possess the unit of the defaulter but also to take over the management of such unit and it can also while so managing, lease the property instead of outright sale.

35. In the instant case, it is the definite case of the financial corporation, viz., KSIIDC that it had in exercise of such power under Section 29 of the SFC Act, taken over the possession of the industrial unit concerned. From the fact, it is not very clear as to whether the KSIIDC had exercised any further rights. But it is clear that the property in question had not been either leased or sold. The possession of the industrial unit had remained with the financial corporation on the date when this court passed an order to wind up the affairs of the company.

36. It is obvious that when once the financial corporation possesses the industrial unit by exercising its statutory rights under Section 29 of the SFC Act, the erstwhile management of the company or the industrial unit is virtually ousted, as the entire unit is under the control of the financial corporation under its lock and key and the financial corporation virtually becomes responsible for the running of the industrial unit from the date it takes over possession and control of the same. In the light of such developments, the official liquidator can definitely look up to the financial corporation to provide such information and to place before the official liquidator such other materials as are relevant and necessary for the purpose of concluding the winding up proceedings.

37. It is to be noted that while the financial corporation even after taking over by it of the industrial unit, has the option to continue the activity of the industrial unit by either managing the unit by itself or even by leasing the unit to any other person, the official liquidator comes on the scene pursuant to the order of winding up the affairs of the company passed by this court only to supervise the liquidation proceedings, which implies that it is not for keeping alive the unit or to continue the unit that the official liquidator comes on the scene, but to put an end to it for the purpose of realising the assets and for distribution of the same amongst various stakeholders. In the light of such statutory provisions, i.e., the provisions of the SFC Act vis-a-vis the provisions of the Companies Act, it is inevitable to conclude that the role of the official liquidator under the Act is much bigger and goes beyond the enabling provisions in favour of a State financial corporation provided under the SFC Act. If that is so, on and after the date of passing of winding up order, even a secured creditor like a State financial corporation, which might have exercised its power under Section 29 of the SFC Act, is nevertheless answerable to the official liquidator and has to comply with the requirements of the Act, if not all obligations of any other person staking a claim, but at least such acts as will facilitate the official liquidator to realise the assets of the company under liquidation.

38. As discussed earlier, the ownership of a property or an asset comprises of several components. Possession of the property, title to the property and a charge over the property, are all different manifestations of the ownership of the property. While some components of such ownership are with one person, some other components of the same property may be with other persons. In the instant case itself, though assuming that the land, building, plant and machinery of the company under liquidation or even other goods of the company have all been secured in favour of the creditor, neither did such creditor become full owner of the property nor had the company lost total ownership of the properties. In respect of such components of the property which continue to remain with the company under liquidation, it is the statutory obligations as well as the duty of the official liquidator to realise such assets. Even the secured creditor who had not exercised his right particularly for sale of the property before passing of winding up order by the court in respect of the company, has to necessarily co-operate with the official liquidator, as once the winding up order is passed, in respect of components of the ownership of the property in question or assets in respect of which the official liquidator is required to take action, and a secured creditor on the premise that he has a right or even ownership of some other components, cannot come in the way or obstruct the functioning of the official liquidator on the premise that the secured creditor has a right to stand outside the winding up proceedings and to realise its security. This is precisely the reason why courts inevitably direct even the secured creditor to involve the official liquidator in the course of the sale to be effected by the secured creditor even with the permission of the court, so that the official liquidator can also ensure that the property which is sold is sold for a proper price and that the interest of the company in respect of some of the components of the ownership are not jeoparadised, which in fact only amounts to safeguarding the interests of the body of creditors other than the secured creditors as also the shareholders of the company.

39. In the present case, while the official liquidator has determined and ascertained the claims put forth by the workmen and other secured creditors other than the KSIIDC, particularly with the help of the report of the chartered accountant, the amount either towards the principal or towards the interest claimed as due to KSIIDC is not clear. There are conflicting versions. Even the other secured creditors are not admitting the amount now claimed by the KSIIDC and this has to be cleared. Even with regard to the amount claimed by the workmen and as determined and admitted by the official liquidator, Sri Gopal Hegde, learned counsel appearing for KSIIDC, has sought to dispute the same by urging several contentions, inter alia that what had been indicated to be the amount due at the time when this court permitted the corporation to effect the sale of properties is different from the amount now claimed and admitted by the official liquidator.

40. Unless the amount due to each of the secured creditors is ascertained, there is no way for the official liquidator to distribute the proceeds amongst the secured creditors, who hold pari passu charge. By an understanding amongst the secured creditors and in terms of an agreement amongst them, it had been agreed that all the secured creditors hold pari passu charge over the properties of the company under liquidation. Unless and until the amount due to each of the secured creditors is clearly ascertained, there will be impediment for distribution of the amount. Sri Narayan Bhat, learned counsel appearing for the workmen has been urging for the expeditious distribution of the amount, as the workmen have been languishing for a long time without getting their salaries and what they get now is only a fraction of their total entitlement ; that at least this amount should be given without any further delay.

41. In the light of the above discussion, the questions posed for determination are answered as follows :

(i) The right of the secured creditor in winding up proceedings is the same as like any other creditor except that in respect of the security and charge such components of ownership in the property, in respect of which component, ownership has already passed to the secured creditor on creating a valid legal charge over the property and which is no more a property owned by the company, it is a matter which is definitely outside the winding up proceedings and the secured creditor, to this extent, has a right to realise the debt, subject to observing the other requirements under the Companies Act, when once the winding up order is passed in respect of a company of which such property is assigned and the secured creditor had not exercised its right of sale before the same.

(ii) The position of the secured creditor, which is a State owned financial corporation, though not any different from any other secured creditor, such corporation may have additional rights conferred under the statute such as management of the concern after possessing the same, but even all such rights are subject to the supervision of the company court, when once an order for winding up the affairs of the company is passed by the court.

(iii) The non-notification of the amount due to the secured creditor from the company under liquidation within the time prescribed by the official liquidator, though cannot make any difference to the right of the secured creditor, as discussed above, as it indicates the ownership of the secured property to the extent of the security which had already passed in favour of the secured creditor on creation of a valid and legal charge over the property, the secured creditor is nevertheless required to notify the official liquidator of the amount due not only for the purpose of verification of such amount, which in law is due to the secured creditor, but also for the purpose of determination of proportionate distribution of the assets realised, amongst the various secured creditors.

(iv) The official liquidator is bound to take note of the amount notified by the secured creditor at any stage before the distribution of the dividends, though the secured creditor has not complied with the time-limit fixed by the official liquidator to notify the claim. In the absence of a claim being put forth by the secured creditor notifying the official liquidator about the amount due, if the official liquidator proceeds on the premise that no amount is due to such a non-notified secured creditor, and distributes the available amount amongst the other secured creditors who have notified their claims, and the secured creditor who has not so notified, may be left high and dry and while it will not have any claim over the company under liquidation, which will have to be dissolved when once the winding up proceedings are concluded, the charge which such secured creditor held over the property may also be lost as the sale by the official liquidator will be free from all encumbrances and charges. So, it will be in the interest of secured creditor himself/itself to notify its claim to the official liquidator. At the same time, the official liquidator should take note of such notified amounts if the proceedings have not been concluded by him. However, it is important to note that the official liquidator cannot by himself distribute any amount to a secured creditor even on being notified of the amount. In so far as realising a security by a secured creditor is concerned, it can only be by standing outside the winding up proceedings and with the permission of the court, in which event the secured creditor cannot simultaneously put forth a claim before the official liquidator as unless the security has been realised the balance cannot be known. In respect of any distribution of dividends by the official liquidator to the creditors from out of the proceeds realised from the assets of the company under liquidation, there is no priority for payment in favour of a secured creditor under Section 530 of the Companies Act, 1956, and even in respect of any claim put forth by a creditor who might have been a secured creditor also, to the extent the claim is allowed in law, the provisions of Section 529 of the Act equally apply.

(v) The official liquidator definitely is not a passive person for the purpose of taking note of the amounts claimed and notified by the secured creditors, but has a duty to be satisfied about the precise amount that was due to the secured creditor and that the person notifying it is in fact a secured creditor in law and can go into the question of correctness or otherwise of the amount so notified. Ultimately, it is a matter to be placed before the court by the disputing person/s for determination of the same and the official liquidator will have to act in consonance with the directions issued by the company court.

42. However, the answer to these questions by themselves does not conclude the matter for passing the orders in respect of the company applications. The secured creditors in the instant case all happen to be financial institutions within the meaning of this expression under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. M/s. KSIIDC over and above is an institution governed by the provisions of the SFC Act. In so far as the claim of the financial institutions are concerned, the matter is not res integra and it is covered by the decision of the Supreme Court in the case of Allahabad Bank v. Canara Bank [2000] 101 Comp Cas 64; AIR 2000 SC 1535. In the light of the law laid down by the Supreme Court in the case of Allahabad Bank it is quite clear that the company court has no jurisdiction for determining the entitlement of the secured creditor vis-a-vis company under liquidation. Such determination is within the exclusive jurisdiction of the Debt Recovery Tribunal (Tribunal, for short), functioning under the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. Pendency of proceedings before the winding up court and an order by the company court to wind up the affairs of the company which owes amounts to financial institutions, do not have any bearing on this position regarding the exclusive jurisdiction of the Tribunal in respect of such determination and want of jurisdiction on the part of the company court.

43. While the rights of a secured creditor for the purpose of enforcing his security, even when the borrower is declared as an insolvent under the provisions of the Provincial Insolvency Act, 1920, is not affected, as protected under Sub-section (6) of Section 28 of this Act and even in respect of a company which is under liquidation, a person in the position of a secured creditor can opt to remain outside the winding up proceedings and enforce the security for the purpose of such enforcement and the entitlement should be determined in the light of the law laid down by the Supreme Court in Allahabad Bank's case [2000] 101 Comp Cas 64 ; AIR 2000 SC 1535. Such determination can be only within the exclusive jurisdiction of the Tribunal. This is not a matter which could be gone into or ascertained by the company court.

44. In the instant case, the situation is that M/s. KSIIDC as secured creditor and also a financial institution within the meaning of the SFC Act, had taken over the assets of the company under liquidation even before the passing of winding up order, in exercise of its power under Section 29 of the SFC Act. The KSIIDC in fact had also filed an application before this court praying for permission to stand outside and realise its securities. While it was open to the KSIIDC to stand outside and realise and enforce its security, it could have done only through proper determination under the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, and by obtaining a certificate issued by the Tribunal. However, M/s. KSIIDC has also claimed a statutory right that it could have brought to sale any property secured to it for the repayment of the loans borrowed from it, even by effecting the sale of such property for exercising its statutory power under the provisions of such property by exercising its statutory power under the provisions of the SFC Act. That is the legal position also.

45. This court had in fact permitted the KSIIDC to effect the sale of the assets of the company under liquidation in the possession of the KSIIDC and the KSIIDC having done so, has also realised the moneys from the sale and has now deposited the amount before this court or in the process of depositing, as per the directions of this court.

46. The statute enables the KSIIDC to bring the properties to sale and apply the proceeds to its debts owed by the company even without the KSIIDC going before the Tribunal for obtaining a certificate and for executing it. But what has been sold is not merely what had been secured in favour of KSIIDC. While, as I have already discussed earlier, it is open to the KSIIDC to retain, in law, such part of the sale proceeds representing the value of its security, the balance had to be deposited before the company court. This possibly can happen only when the amount for which the property has been secured is ascertained. Even in respect of this amount, KSIIDC is required to share it pari passu with the amount due to workmen. So far as this aspect is concerned, the official liquidator having adjudicated the claims of the workmen, that amount is ascertained. The sale proceeds of the assets of the company being available before this court, and steps having been taken at the instance of the company court and with the permission of the company court, it cannot be said that for the distribution of any part of this amount, the matter has to go before any other forum including the Debt Recovery Tribunal. If any creditor puts forth the claim for distribution of dividends before the company court as a creditor in respect of the company under liquidation, that creditor should be equipped with a certificate which perhaps is the evidence for the entitlement of such creditor, who can join the queue before the company court for claiming a share in the dividend. It is a creditor or financial institution which is compelled to go before the Tribunal for such purpose.

47. If the company court can accept a claim of a financial institution without being called upon to determine that entitlement of the financial institution, and as permitted under the provisions of the Act, that course of action can be pursued even by the company court. If the amount due to the KSIIDC as one representing the value of its security and is not in dispute, it will not be necessary for the company court to examine the question of entitlement of the financial institution which can proceed with the functioning of the company court for the distribution of the dividend from out of the realisation of the assets owned by the company under liquidation.

48. While this can be the position in so far as M/s. KSIIDC is concerned, it cannot be said so in respect of other secured creditors who may or may not be backed with the statutory provisions and who had also not sought for any leave to stand outside the winding up proceedings for realisation of security etc. But learned counsel for the other secured creditors have submitted that they had already notified their claims before the official liquidator, which, in effect, amounts that they have given up their security and joined the queue for the distribution of dividends before the official liquidator.

49. In so far as the amount available from out of the sale proceeds of the assets of the company under liquidation is concerned, while the amount due to M/s. KSIIDC representing the security it had held in respect of the borrowing by the company under liquidation, to the extent it is without any dispute can be rateably distributed vis-a-vis the admitted claim of the workmen as admitted by the official liquidator, in terms of the proviso to Sub-section (1) of Section 529 of the Act and the balance left over after satisfying such charges, can be distributed in accordance with the priority firstly as indicated in Section 529A of the Act and thereafter under Section 530 of the Act, if any amounts are still available.

50. While the questions that have been raised by several secured creditors are answered as above in so far as the report is concerned, the applications can be disposed of separately on their merits applying the questions of law as indicated in this order.