SFC’s entitled to realize their debt under the provisions of the SFC Act subject to right of the workers to receive their wages also as secured creditors on pari passu basis, holds SC

The Supreme Court in a judgment (Laxmi Fibres Ltd vs A.P. Industrial Dev. Corpn. Ltd. & Ors Civil Appeal No.5805 Of 2005)  rendered recently has held that the limited  impediment  to  the rights of State Financial Corporations under the State Financial Corporations Act will  not  alter  their  status as secured creditors and they will not  be  required  to  prove their debt which they are entitled to realize under the  provisions  of  the SFC Act subject to right of the workers  to  receive  their  wages  also  as secured creditors on pari passu basis.

The  question  of  law  which arose  for consideration before a bench comprising of Justices Vikramjit Sen and Shiva Kirti Singh was whether the Official Liquidator  can  claim  any  power  or jurisdiction in itself to adjudicate and quantify  the  claim  of  statutory corporations  such  as  respondent   no.1,   A.P.   Industrial   Development Corporation and respondent no.2, A.P. State Financial Corporation  when  the Company  Judge  has  permitted  them  to  stand  outside   the   liquidation proceeding  subject  to  certain  conditions  under  which  the   respondent Corporations may pursue the powers available to them  under  Section  29  of the State Financial Corporations Act, 1959 (for brevity referred to as  ‘the SFC Act’).

The brief facts are as follows: the Official  Liquidator  had  taken  over  the charge of the company, Laxmi Fibres Ltd. by virtue of Section 445 of the Companies Act and  the property of the  company  was  also  seized  by  the  first  respondent  (A.P.   Industrial   Development Corporation) under Section 29 of the SFC Act.  The sale  of  the  assets  of the company was conducted by the Corporation as per conditions  imposed  by the High Court.  To comply with one of the conditions  the  corporation  was required to obtain permission of the High  Court  for  finalizing/confirming the sale.  The Official Liquidator had already been allowed to  inspect  the properties and assets of the company and  to  take  inventory  as  and  when required.  The valuer’s report was also placed before the court before  the properties covered under the mortgage deeds in favour of  Corporation  were put to sale.  The respondent-corporation had also submitted to the order of the Company  Judge  requiring  the  corporation  to  undertake  to  deposit workmen’s dues with the Official Liquidator as and when  quantified  by  him as per the provisions of Section 529A  of  the  Indian  Companies  Act  with interest at the bank rate and whatever surplus would remain after  the  sale and realization of the dues of the secured creditors  and  the  workmen,  as per law, the balance sale proceeds could be made available to  the  Official Liquidator for being dealt with as per the provisions of the  Companies  Act and the Rules.

On the application filed by the respondent-corporation seeking  confirmation of sale of the mortgage assets of the  company,  the  learned  Single  Judge vide order dated 19.11.2003 noted the contention  of  all  the  parties  and finding that there was no objection to sale of the properties either by  the second charge holder or by the Official Liquidator, confirmed  the  sale  of land, buildings, plant and machinery in  favour  of  M/s.  Sri  Venkataswara Industries represented by Sri Adarsha Gupta for a  sum  of  Rs.86  Lacs  and carding machine in favour of M/s. Supreme Associates, Coimbatore for  a  sum of Rs.2.45 Lacs.

However, the  learned  Single  Judge  made  the  order  of confirmation subject to the following conditions :

“Before the applicant and 2nd  respondent  seek  to  appropriate  the  sale proceeds for themselves, they should prove their claim before  the  Official Liquidator.  The proceeds realised through the sale of the properties shall be kept by the applicant-Corporation in interest earning deposits till the Official Liquidator adjudicates and quantifies the claim  of  the  applicant and 2nd respondent Corporations.  The applicant  and  2nd  respondent  shall deposit 1/4th  of the sale proceeds with the Official Liquidator  to  enable him to proceed with the adjudication of the claims of the  workmen  and  for distribution among themselves.   They  shall  make  over  the  excess  sale proceeds, if any, to the Official Liquidator. After receiving the entire sale consideration only, the petitioner  is directed to hand over possession of the properties to  the  highest  bidders and execute necessary sale papers in their favour.”

Aggrieved only with the  condition  extracted  above,  the  respondent  no.1 preferred an intra-court appeal which was disposed of by the Division Bench of the High Court directing that the confirmation of sale of the properties in favour  of  the highest bidder would be subject to only  one  condition  that  the  Official Liquidator shall quantify the amounts liable to  be  paid  to  the  workmen.

The Division Bench accepted the objection raised  by  respondent-corporation that  there  could  be  no  question  of  establishing  the  claim  of   the corporation before the Official Liquidator as the corporation was a  secured creditor.

The Supreme Court held that the Division Bench came  to  a  correct  conclusion  that  the Official Liquidator does not have jurisdiction to  ascertain  or  adjudicate the claim of a secured creditor who has been permitted by the Company  Judge to stand outside the liquidation  proceeding  with  liberty  to  pursue  its remedy as per statutory rights available under the SFC Act, subject only  to the conditions imposed by the court.

The Apex Court relied on A.P. State Financial Corporation v. Official Liquidator (2000) 7 SCC 291 wherein it had held that the  power  available to a corporation under Section 29 to sell the property of a  debtor  company under liquidation is not absolute but is subject to the proviso  to  Section 529(1) and non  obstante  clause  in  Section  529A  of  the  Companies  Act providing for pari passu charge of the workmen.

The Supreme Court said: “In our considered view, the rights  of  a  financial  corporation  available under the provisions of the SFC Act have been compromised or impeded by  the amendment of 1985 in the Companies Act, particularly the  proviso  added  to Section 529(1) and Section 529A, only  to  a  limited  extent  and  for  the limited purpose of securing the right of the  workers  for  distribution  of their wages as pari passu charge.  But  such  limited  impediment  to  their rights under the SFC Act will  not  alter  the  status  of  State  financial corporations as secured creditors and they will not  be  required  to  prove their debt which they are entitled to realize under the  provisions  of  the SFC Act subject to right of the workers  to  receive  their  wages  also  as secured creditors on pari passu basis.  The control  of  the  Company  Judge and the Official Liquidator if authorized, can extend only  to  ensure  that the aforesaid purpose of Section 529A is  effectively  achieved.   Like  any other  affected  person,  if  the  Company  represented  by   the   Official Liquidator has reasons to  be  aggrieved  by  claims  made  by  a  financial corporation under the SFC Act, its remedy would be to  initiate  appropriate civil proceedings to challenge such claim  or  debt  of  a  State  financial corporation before an appropriate forum and not to  assume  jurisdiction  to sit in adjudication and decide  entitlement  of  the  financial  corporation when it has opted to stand outside the liquidation proceeding  as a  secured creditor.  As noted earlier, the statutory  powers  of  SFCs  have  suffered only a limited impediment only to serve the purpose of  protecting  workers’ dues.”

The Apex Court thus found no error in the impugned order of the Division Bench and dismissed the appeal.

Read the Judgment here.