A.P. State Financial Corpn. Vs. Magna Hard Tempt Ltd. (In Liquidation) - Court Judgment

SooperKanoon Citationsooperkanoon.com/436644
SubjectCompany
CourtAndhra Pradesh High Court
Decided OnFeb-15-2008
Case NumberCompany Application No. 33 of 2006 in R.C.C. No. 3 of 2001
JudgeRamesh Ranganathan, J.
Reported in[2008]146CompCas254(AP); [2008]86SCL238(AP)
ActsCompanies Act, 1956 - Sections 2(11), 10, 10(1), 10(2), 237, 391, 394, 395, 397 to 407, 425 to 560, 643(1) and 643(2); Recovery of Debts Act; State Finance Corporations Act; Contract Act; Companies (Amendment) Act, 1985; Code of Civil Procedure (CPC) , 1908 - Sections 141 - Order 27A; Companies (Court) Rules, 1959 - Rules 2(5), 2(7), 6, 154, 156, 174 and 179
AppellantA.P. State Financial Corpn.
RespondentMagna Hard Tempt Ltd. (In Liquidation)
Advocates:T. Sarath, Adv.
Excerpt:
- - on the plea that they were not aware of the dues, if any, payable to its workmen by the company in liquidation, and that the official liquidator had failed to quantify the workmen dues for enforcing the statutory charge from out of the sale proceeds realized by them, the applicant seeks permission of this court to appropriate the sale proceeds of rs. the very purpose of inserting section 529a, to treat workmen's dues on par with the dues of the secured creditors, would be defeated thereby. viewed from any angle, the contentions regarding the validity of rule 156 of the companies (court) rules, 1959, must fail.orderramesh ranganathan, j.1. this application is filed by the a.p. state financial corporation to permit them to appropriate rs. 50 lakhs, deposited in andhra bank pursuant to the orders of this court in c.a. no. 1680 of 2004, subject to enforcement of the dues of the workmen by the official liquidator.c.a. no. 1680 of 2004 was filed by the applicant-corporation seeking confirmation of the sale of the land and buildings, mortgaged in favour of the applicant- corporation by the company in liquidation, for rs. 50 lakhs. both the applicant and the a.p.i.d.c. held first charge over the properties of the company in liquidation. this court, by order in c.a. no. 1680 of 2004, directed that the amounts, realized on the sale of the lands and buildings, be kept in interest bearing deposits and.....
Judgment:
ORDER

Ramesh Ranganathan, J.

1. This application is filed by the A.P. State Financial Corporation to permit them to appropriate Rs. 50 lakhs, deposited in Andhra Bank pursuant to the orders of this Court in C.A. No. 1680 of 2004, subject to enforcement of the dues of the workmen by the Official Liquidator.

C.A. No. 1680 of 2004 was filed by the Applicant-Corporation seeking confirmation of the sale of the land and buildings, mortgaged in favour of the Applicant- Corporation by the company in liquidation, for Rs. 50 lakhs. Both the Applicant and the A.P.I.D.C. held first charge over the properties of the company in liquidation. This Court, by order in C.A. No. 1680 of 2004, directed that the amounts, realized on the sale of the lands and buildings, be kept in interest bearing deposits and that distribution of the proceeds would be subject to further orders of Court. The applicant finalized the highest bidder, deposited the amount realized on the sale of lands and buildings of Rs. 50 lakhs with Andhra Bank, R.C. Puram Branch in interest bearing deposits. On the plea that they were not aware of the dues, if any, payable to its workmen by the company in liquidation, and that the Official Liquidator had failed to quantify the workmen dues for enforcing the statutory charge from out of the sale proceeds realized by them, the applicant seeks permission of this Court to appropriate the sale proceeds of Rs. 50 lakhs with interest thereon. The applicant had earlier filed C.A. No. 573 of 2005 seeking a direction against the Official Liquidator to determine the amount liable to be enforced, by way of pari passu charge, towards the workmen portion of dues under Section 529A of the Companies Act. The applicant, while undertaking to discharge the pari passu workmen dues under Section 529A of the Act on its determination by the Official Liquidator, seeks permission to appropriate Rs. 50 lakhs subject to enforcement of the charge by the Official Liquidator.

2. On being directed by this Court, the Applicant-Corporation filed a statement of its outstanding dues, as on the date of the order of winding up, for quantification of the workmen portion of dues. On the basis of the said statement the Official Liquidator quantified the workmen portion of dues as Rs. 8,07,035. The Official Liquidator, in his report dated 27-9-2007, states that both A.P.S.F.C. and A.P.I.D.C. had calculated their outstanding dues as on 30-3-2006 though the dues should have been restricted up to the date of the order of winding-up, and that no interest was liable to be paid on the outstanding dues thereafter. The Official Liquidator would submit that the question of payment of interest, subsequent to the date of the order of winding-up till the date of payment of dues, would arise only after satisfaction of the dues of the secured creditors, and the workmen, as on the date of the order of winding up, that the question of payment of subsequent interest would not arise at this stage and since, from out of the workmen portion of dues of Rs. 8,07,035, only Rs. 4,10,000 had been deposited with the Official Liquidator, the balance due of Rs. 3,97,035 was required to be deposited by the applicant-company with the Official Liquidator.

3. In his further report dated 10-10-2007, the Official Liquidator states that the claim of the Applicant-Corporation and the A.P.I.D.C. for inclusion of interest on their outstanding dues till 31-3-2006, for computing the workmen portion of dues, was not tenable since the dues of all the creditors would have to be reckoned as on the date of the order of winding-up in terms of Rule 154 of the Companies (Court) Rules, 1959 as that would provide a uniform basis. He further states that the applicant-corporation is also required to submit itself and seek adjudication of its dues by the Company Court and that distribution of the profits, on the sale of assets of the company at the instance of the financial institutions coming under the Recovery of Debts Act or Finance Corporations coming under the State Finance Corporations Act, can only be made in terms of Section 529A of the Companies Act under the supervision of the Company Court. He would rely on Rajasthan State Financial Corporation v. Official Liquidator : AIR2006SC755 in this regard.

4. Sri T. Sharath, learned Counsel for the Applicant-A.P. State Finance Corporation, would submit that under the agreement entered into by A.P.S.F.C. and A.P.I.D.C. with the company under liquidation, they were entitled to be paid interest on their outstanding dues at 16 per cent per annum and that the Applicant had computed the amounts due to it to include interest at 16 per cent per annum till the date of filing of the application in C.A. No. 33 of 2006 i.e., till 30-3-2006. Learned Counsel would submit that Rule 156, of the Companies (Court) Rules, 1959, which restricts payment of interest, subsequent to the order of winding up, to 4 per cent p.a. is ultra vires the provisions of the Indian Contract Act and is liable to be ignored. Learned Counsel would submit that this Court could examine the vires of a statutory rule, under Order 27A C.P.C. He would submit that, under Section 141 C.P.C, the procedure prescribed in the Code with regard to suits should be followed insofar as it can be made applicable in all proceedings in any Court.

5. The Official Liquidator, on the other hand, would submit that the Companies (Court) Rules, 1959, made by the Supreme Court under Section 643(1) and (2) of the Companies Act, 1956, are statutory rules and there is a presumption regarding its constitutional validity. He would further contend that the Company Court is required to exercise its jurisdiction in accordance with the provisions of the Companies Act and the Rules made thereunder and, as such, is not entitled to examine the vires of any of these provisions. He would refer to Rules 154, 156 and 179 of the Companies (Court) Rules, 1959 to contend that the claim of the Applicant-Corporation for payment of interest at 16 per cent per annum, on the basis of the contract, would be valid only till the date of the order of winding-up, that after an order of winding-up is passed the secured creditors are not entitled to claim interest on the outstanding dues except as provided under Rule 156 of the Companies (Court) Rules, 1959, and that payment of interest to the secured creditors, that too at 4 per cent p.a., can be made only after satisfaction of the dues of the workmen. He would submit that, since the Corporation is not entitled for interest beyond the date of the order of winding-up i.e., 7-6-2001, the balance payable towards the workmen portion of dues of Rs. 3,97,035 is required to be deposited by them with the Official Liquidator.

The contention urged on behalf of the applicant, in short, is that since the agreement between the applicant and the Company, (which is now under liquidation), required the latter to pay interest at the contracted rate till the date of realization of the applicant's dues, the applicant, as the secured creditor, is entitled to put the security to sale and, from the proceeds realized, satisfy its dues which includes not only the principal and interest at the contracted rate till the date of the order of winding-up but also interest at the contracted rate till the date of realization of their dues, and since Rule 156 of the Companies (Court) Rules, 1959 limits the interest payable after the date of the order of winding-up, the said rule is ultra vires the provisions of the Indian Contract.

Order of winding-up: Its effect on repayment of the dues of the creditors of the company

6. As the validity of Rule 156 is put in issue, it is useful to extract the said rule and the related rules. Rules 154, 156 and 174 relate to the value of debts, interest and settlement of the list of creditors and read as under:

Rule 154 : Value of debts. - The value of all debts and claims against the company shall, as far as is possible, be estimated according to the value thereof at the date of the order of the winding-up of the company or where before the presentation of the petition for winding-up, a resolution has been passed by the company for voluntary winding-up, at the date of passing of such resolution.

Rule 156: Interest. - On any debt or certain sum payable at a certain time or otherwise, whereon interest is not reserved or agreed for, and which is overdue at the date of the winding-up order, or the resolution as the case may be, the creditor may prove for interest at a rate not exceeding four per cent per annum up to that date from the time when the debt or sum was payable, if the debt or sum is payable by virtue of a written instrument at a certain time, and if payable otherwise, then from the time when a demand in writing has been made, giving notice that interest will be claimed from the date of demand until the time of payment.

Rule 174: Settlement of list of creditors. - On the date fixed or on any adjourned date, the Court shall, after hearing such evidence as may be tendered, adjudicate upon the claims and settle the list of creditors. The settlement of the list of creditors shall be recorded in a certificate signed by the Judge in Form No. 75.

7. Under Section 441(2) of the Companies Act, 1956 winding-up of a company by the Court shall be deemed to commence at the time of presentation of the petition for winding-up. Section 444 requires the order of winding-up of the company to be intimated to the Official Liquidator and the Registrar of Companies. Section 445(1) casts a duty on the petitioner in the winding-up proceedings, and on the company, to file with the Registrar of Companies, a certified copy of the winding up order. The Registrar is required to make a minute thereof in his books and notify in the Official Gazette that such an order of winding-up has been made. Under Section 445(1), such an order shall be deemed to be a notice of discharge to the officers and employees of the company, except when the business of the company is continued. Under Section 447, an order of winding up of a company shall operate in favour of all the creditors, and of all the contributories of the company, as if it had been made on the joint petition of a creditor and of a contributory.

8. The making of a winding-up order brings into operation a statutory scheme for dealing with the assets of the company that is ordered to be wound-up. On an order of winding-up being passed the custody and control of the property of the company stand transferred, from those who are entitled under the Memorandum and Articles of Association to manage its affairs, to a Liquidator charged with the statutory duty of dealing with the company's assets in accordance with the statutory scheme, collect the assets of the company and to apply them in discharge of its liabilities. If there remains any surplus he must distribute it among the members of the company in accordance with their respective rights under the Memorandum and Articles of Association. In performing these duties in a compulsory winding-up the liquidator acts as an officer of the Court. All powers, of dealing with the company's assets, are exercisable by the Liquidator only for the benefit of those persons who are entitled to share in the proceeds of realization of the assets under the statutory scheme. Ayerst (Inspector of Taxes) v. C & K (Construction) Ltd. 1975 (2) All ER 537 (HL).

9. The effect of a winding-up order is that, except for certain preferential payments provided in the Companies Act, the property of the company is to be applied in satisfaction of its liabilities. Pari passu distribution is to be made in satisfaction of the liabilities as they exist at the commencement of the winding-up. Once a winding-up order is passed the undertaking and the assets of the company pass under the control of the Liquidator whose statutory duty is to realise them and to pay the creditors from out of the sale-proceeds. On such order being passed, the creditors acquire the right to have the assets realised and distributed among them pari passu. No new rights can, thereafter, be created and no uncompleted rights can be completed, for doing so would be contrary to the creditors' right to have the proceeds of the assets distributed among them pari passu. J.K. (Bombay) (P.)Ltd. v. New Kaiser-I-Hind Spg. & Wvg. Co. Ltd. : [1969]2SCR866 .

10. Section 529A of the Companies Act: Its scope:

Section 529A of the Companies Act relates to Overriding preferential payments and reads as under:

Overriding preferential payments.-(1) Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding-up of a company-

(a) workmen's dues; and

(b) debts due to secured creditors to the extent such debts rank under Clause (c) of the proviso to Sub-section (1) of Section 529 pari passu with such dues,

shall be paid in priority to all other debts.

(2) The debts payable under Clause (a) and Clause (b) of Sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.

11. Section 529A was inserted by the Companies (Amendment) Act, 1985 to provide that, in the event of winding-up of the company, the legitimate dues of workers shall rank pari passu with the secured creditors and above even the dues payable to the Government. The object for which Section 529A was introduced is to ensure that, in the unfortunate event of the company being liquidated, its resources, which constitute a major segment of the material resources of the community, is so distributed that workers, whose labour and effort constitute an important part of the activities of the company, are not deprived of their legitimate dues.

12. A combined reading of Sections 529 and 529A of the Companies Act would show that, notwithstanding anything contained in any other law for the time being in force, or in the Companies Act itself, preference is provided for workmen's dues, and debts due to the secured creditors, to the extent such debts rank under Clause (c) of the proviso to Section 529 pari passu with such dues. Therefore, when the assets of the company are sold and the proceeds realised, the debts by way of workmen's dues, and that of the secured creditors, have to be paid in full if the assets are sufficient to meet them and, if they are not sufficient, in equal proportions. Once a winding-up proceeding has commenced, and the Liquidator is put in charge of the assets of the company being wound-up, the distribution of the proceeds of the sale of the assets, held at the instance of the financial institutions coming under the Recovery of Debts Act or of financial corporations coming under the SFC Act, can only be with the association of the Official Liquidator and under the supervision of the Company Court. The right of a financial institution stands restricted by the requirement of the Official Liquidator being associated with it, giving the Company Court the right to ensure that the distribution of the assets in terms of Section 529A of the Companies Act takes place. The right to sell under the SFC Act, or under the Recovery of Debts Act, by a creditor coming within those Acts, and standing outside the winding-up, is different from the distribution of the proceeds on the sale of the security. The distribution, in a case where the debtor is a company in the process of being wound-up, can only be in terms of Section 529A read with Section 529 of the Companies Act. The Liquidator represents the entire body of creditors and also holds a right on behalf of the workers to have a distribution part passu with the secured creditors. Distribution of the sale proceeds, under the direction of the Company Court, is the Official Liquidator's responsibility. Rajasthan State Financial Corporation's case (supra).

13. The purpose of Section 529A is to ensure that the workmen are not deprived of their legitimate claims in the event of the liquidation of the company. By this provision, the workmen are statutorily allowed to recover their dues from the securities. If the securities are insufficient, the claims of the workmen and the secured creditor would abate in equal proportions. In other words, by Section 529A, the workmen of the Company in liquidation have been made the secured creditors in respect of their claims against the company and the assets of the company in liquidation would remain charged for payment of the workmen's dues and such charge will rank pari passu with the charge of the secured creditors. Giovanola Binny Ltd. (In Liquidation), In re [1990] 67 Comp. Cas. 441 (Ker.).

14. The very purpose of an order of winding up is to enable the Official Liquidator to realize the assets of the company in liquidation and to discharge its liabilities in the order of preference stipulated under Sections 529 and 529A of the Act. The workmen become the secured creditors by operation of law from the date of the winding up order. They have a pari passu charge over the security which is held by the secured creditor under the contract. The cut off date, for arriving at the ratio at which the sale proceeds should be divided on a pari passu basis as per Section 529A of the Companies Act, 1956, can only be the date of the winding-up order. A. Shanmugham v. Official Liquidator (Madras) : (1992)IILLJ221Mad .

15. Since the relevant date for computation of dues, to enable the Official Liquidator to discharge the liabilities of the secured creditors and the workmen, is the date of the winding-up order, the liability which the company has towards a secured creditor, which has contracted with it, requiring payment of the principal and the contracted rate of interest, can only be till the date of the order of winding up, and not thereafter. Accepting the submission of Sri T. Sharath, learned Counsel for the applicant, would mean that the time taken by the Official Liquidator to realize the assets, and to discharge the liabilities, would enure to the benefit of the secured creditor and to the detriment of the workmen who, under Section 529A of the Companies Act, are entitled for repayment of dues pari passu with the dues of the secured creditor.

16. This question can be examined from another angle also. The dues payable to the secured creditor inclusive of the contracted rate of interest has a bearing on the preferential payment to be made to a workman under Section 529A of the Companies Act. More often than not, the amounts received by the Official Liquidator, on the sale of the assets of the company in liquidation, is insufficient to meet the entire dues of the secured creditors and the workmen, necessitating the amount available being paid to them pari passu. If the total dues payable to a secured creditor increases, then the proportionate amount available for repayment of the dues of the workmen decreases. Accepting the contention of Sri T. Sharath, learned Counsel for the applicant, would mean that, while the secured creditor would be repaid the principal and the contracted rate of interest till the date of realization, repayment of the dues of the workmen would be restricted only to the principal and they would not be entitled for interest on their dues. The very purpose of inserting Section 529A, to treat workmen's dues on par with the dues of the secured creditors, would be defeated thereby. As the dues payable to the workmen are computed only till the date of the order of winding up, and the Companies (Court) Rules, 1959 disentitles them from claiming interest on such dues, except in accordance with Rule 156, permitting the secured creditor to claim interest at the contracted rate till the date of realization of its dues, would render the very provision under Section 529A, which has been inserted to protect the interests of the workmen of the company under liquidation, illusory.

17. The High Court, while exercising jurisdiction under the Companies Act, cannot adjudicate upon the vires of the provisions of the said act or the rules made thereunder:

Section 643(1)(b) of the Companies Act confers power on the Supreme Court to make rules consistent with the Code of Civil Procedure, 1908 including the mode of proceedings to be had for winding-up of a Company and generally for all applications to be made to the Court under the provisions of the Act. While the Code of Civil Procedure, 1908 has not, per se, been made applicable, Section 643(1)(b) mandates that the rules made under the Companies Act, regarding the mode of proceedings to be had for winding-up, and the applications to be made to the Court, should not be inconsistent with the Code of Civil Procedure.

18. Rule 6 of the Companies Court Rules, 1959 relates to practice and procedure of Courts and, thereunder, save as provided by the rules, the practice and procedure of the Court, and the provisions of the Civil Procedure Code so far as applicable, shall apply to all proceedings under the Act and the Rules. The provisions of the Civil Procedure Code are made applicable to the limited extent to which provision has not been made in that regard in the Companies Act or the rules made thereunder. Where there is a specific provision, either in the Companies Act or the Companies (Court) Rules, 1959, the provisions of the Civil Procedure Code which are inconsistent therewith, will not apply.

19. In the absence of the provisions of the Code being made applicable in its entirety, it is not free from doubt whether the provisions of Order 27A C.P.C. would apply enabling a challenge to be made to the vires of a statutory rule made under the provisions of the Companies Act, that too by way of an application to the Court established under, and required to function in accordance with, the provisions of the Companies Act. The contention, however, is that in view of Section 141 of the Civil Procedure Code, the procedure prescribed under the Code in regard to a suit shall be followed in all proceedings in any Court.

20. Section 2(11)(a) of the Companies Act defines 'Court' to mean, with respect to any matter relating to a company, (other than any offence against the Companies Act), the Court having jurisdiction under the Companies Act with respect to that matter relating to that Company, as provided under Section 10.

21. Section 10, which relates to jurisdiction of Courts, reads thus:

10. Jurisdiction of Courts.-(1) The Court having jurisdiction under this Act shall be-

(a) the High Court having jurisdiction in relation to the place at which the registered office of the company concerned is situate, except to the extent to which jurisdiction has been conferred on any District Court or District Courts subordinate to that High Court in pursuance of Sub-section (2); and

(b) where jurisdiction has been so conferred, the District Court in regard to matters falling within the scope of the jurisdiction conferred, in respect of companies having their registered offices in the district.

(2) The Central Government may, by notification in the Official Gazette and subject to such restrictions, limitations and conditions as it thinks fit, empower any District Court to exercise all or any of the jurisdiction conferred by this Act upon the Court, not being the jurisdiction conferred-

(a) in respect of companies generally, by Section 237, Section 391, Section 394, Section 395 and Section 397 to Section 407, both inclusive;

(b) in respect of companies with a paid-up share capital of not less than one lakh of rupees, by Part VII (Section 425 to Section 560) and the other provisions of this Act relating to the winding up of companies.

(3) For the purposes of jurisdiction to wind-up companies, the expression 'registered office' means the place which has longest been the registered office of the company during the six months immediately preceding the presentation of the petition for winding-up.

22. As stipulated in Section 10(1)(a) of the Companies Act, 1956 the Court, in cases relating to winding-up of companies under Part VII Chapter II of the Companies Act, 1956, is the High Court. Rule 2(5) of the Companies Court Rules, 1959 defines 'Court' to mean the Court having jurisdiction under the Act. Under Rule 2(7), High Court and District Court mean respectively the High Court and District Court having jurisdiction under the Act. The jurisdiction which High Court exercises under the Companies Act, 1956, and the Companies (Court) Rules, 1959, is as a Court constituted under the Companies Act, 1956.

23. A Court or a Tribunal constituted under a statute cannot adjudicate upon the constitutional validity of the statute concerned. Dhulabhai v. State of M.P. : [1968]3SCR662 ; CIT v. Straw Products Ltd. : [1966]60ITR156(SC) ; Central Bank of India v. Vrajlal Kapurchand Gandhi : AIR2003SC3028 ; L. Chandra Kumar v. Union of India : [1997]228ITR725(SC) ; State (Union of India) v. Ram Saran AIR 2004 SC 481. It can only decide the dispute between parties in terms of the provisions of the Act. The question of ultra vires is foreign to the scope of its jurisdiction. K.S. Venkataraman & Co. v. State of Madras : [1966]60ITR112(SC) . Similarly, regulations framed under the authority of subordinate legislation conferred under the Act become a part of the statute and the High Court, sitting as a Court under the Act, cannot go into the validity of the regulations. West Bengal Electricity Regulatory Commission v. C.E.S.C. Ltd. : AIR2002SC3588 . Since the High Court, exercising jurisdiction under the Companies Act and the rules made thereunder, is a creature of the Companies Act it cannot examine the vires of any of the provisions of the said Act or of any of the rules made thereunder.

24. It is, however, not necessary to examine these questions any further as in the present application the applicant has, in fact, not even challenged the vires of Rule 156 of the Companies (Court) Rules, 1959. It is only on this Court pointing out that, under Rule 156, the applicant, despite being a secured creditor, was not entitled to claim the contracted rate of interest subsequent to the order of winding-up, has it been urged, on behalf of the applicant, that Rule 156 of the Companies (Court) Rules, 1959 is ultra vires the provisions of the Indian Contract Act. Rule 156, in fact protects the interests of the workmen of the company under liquidation, and the proportionate amount payable to them. Even otherwise, no provision of the Indian Contract Act, which falls foul of Rule 156 of the Companies (Court), Rules, 1959 has been brought to the notice of this Court. Viewed from any angle, the contentions regarding the validity of Rule 156 of the Companies (Court) Rules, 1959, must fail.

25. It is evident from the Official Liquidator's report that the workmen portion of dues has been computed as Rs. 8,07,035 towards which the applicant herein has already deposited Rs. 4,10,000. The applicant shall deposit the balance Rs. 3,97,035, representing the remaining portion of the workmen dues, with the Official Liquidator within four weeks from the date of receipt of a copy of this order. Subject to the above, the applicant may appropriate the balance remaining from the sale proceeds of Rupees fifty lakhs deposited by it with Andhra Bank along with interest accrued thereon. Needless to state that in case any further amount is held liable to be paid towards the workmen dues, the Official Liquidator shall be entitled to enforce such dues pari passu with the dues of the applicant and APIDC. The company application is disposed of accordingly.