In Re: Divya Chemicals Ltd.; In Re: ... vs Unknown
2005 Latest Caselaw 35 Bom

JUDGMENT

S.U. Kamdar, J.

1. A question of law is posed before me in the present proceedings is whether once the recovery certificate is issued by the DRT in favour of the bank and financial institutions who are secured creditors then the sale of immovable properties can be carried out by the official liquidator in winding up proceedings under the Companies Act (1 of 1956) or such sale is to be conducted by the Debt Recovery Officer in execution of the recovery certificate issued by the DRT.

2. This question of law arises on the facts which are briefly enumerated as under :

3. All these three companies are in liquidation and the banks and financial institutions as secured creditors have remained outside the winding up and have prosecuted their recovery proceedings before the DRT under the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hereinafter referred to as "the DRT Act"). Ultimately, the company has been wound up and the DRT has issued a recovery certificate in favour of the banks and financial institutions for recoveries of their dues by disposing of their securities in respect of the loan amount lent and advanced by them.

4. At the hearing of the three reports in respect of each of the companies placed before me by the official liquidator, seeks directions to dispose of the immovable assets of the company which are secured in favour of the banks and financial institutions and or subject-matter of recovery certificate issued by the DRT. The official liquidator has sought my permission to inviting bid and or wherever bids are already invited to open the same and confirm the sale in favour of the highest bidder. The banks and financial institutions who are appearing before me have raised an objection to the passing of any directions on the present report of the official liquidator inter alia by contending that the recovery officer appointed under the provisions of the DRT Act is only entitled to take further steps for sale of the properties in execution of the recovery certificate and that the official liquidator has no jurisdiction to proceed with the present sale.

5. In view of the fact that this issue is likely to arise in a large number of matters I f it necessary that the issue should be settled once and for all. I accordingly requested learned Counsel Mr. D. D. Madon to assist the court as amicus curiae who has been kind enough to make himself available and has placed before me detailed submissions in law. Learned Counsel has cited before me the various judgments of the apex court and other High Courts some of which are as under :

1. Industrial Credit and Investment Corporation of India Ltd. v. Srinivas Agencies .

2. Industrial Credit and Investment Corporation of India Ltd. v. Vanjinad Leathers Ltd. .

3. Bihar Solax P. Ltd., In re [2000] DRC 449.

4. Allahabad Bank v. Canara Bank [2000] 101 Comp Cas 64 : AIR 2000 SC 1535.

5. Punjab State Industrial Development Corporation Ltd. v. Chadha Paper Ltd. .

6. S.D. Dhandapani v. Branch Manager, Indian Overseas Bank [2004] 121 Comp Cas 669 (Mad).

7. State Bank of Hyderabad v. Pennar Paterson Ltd. [2003] 114 Comp Cas 66 : [2004] 1 Bankers' Journal 306 (SC).

6. In my opinion the judgment of the apex court in the case of Allahabad Bank v. Canara Bank [2000] 101 Comp Cas 64 : AIR 2000 SC 1535 covers the issue at hand. In the said case also the apex court has considered the scheme of the provisions of the DRT Act as well as the Companies Act (1 of 1956) particularly the provisions of winding up of the company. The apex court while considering the said scheme has formulated the question which is directly relevant in the present case. The apex court has considered whether the jurisdiction of the recovery officer is exclusive for execution of the recovery certificate and while answering the aforesaid question formulated, the apex court has stated as under (page 77) :

"22. We hold that the provisions of Sections 17 and 18 of the RDB Act are exclusive so far as the question of adjudication of the liability of the defendant to the appellant-bank is concerned.

(ii) Execution of certificate by Recovery Officer : Is his jurisdiction exclusive.

23. Even in regard to 'execution', the jurisdiction of the Recovery Officer is exclusive. Now a procedure has been laid down in the Act for recovery of the debt as per the certificate issued by the Tribunal and this procedure is contained in Chapter V of the Act and is covered by Sections 25 to 30. It is not the intendment of the Act that while the basic liability of the defendant is to be decided by the Tribunal under Section 17, the banks/financial institutions should go to the civil court or the company court or some other authority outside the Act for the actual realisation of the amount. The certificate granted under Section 19(22) has, in our opinion, to be executed only by the Recovery Officer. No dual jurisdictions at different stages are contemplated. Further, Section 34 of the Act gives overriding effect to the provisions of the RDB Act. That section reads as follows :

'Section 34. Act to have overriding effect.--

(1) Save as otherwise provided in Sub-section (2), the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.

(2) The provisions of this Act or the rules made thereunder shall be in addition to, and not in derogation of, the Industrial Finance Corporation Act, 1948 (15 of 1948), the State Financial Corporations Act, 1951 (63 of 1951), the Unit Trust of India Act, 1963 (52 of 1963), the Industrial Reconstruction Bank of India Act, 1984 (62 of 1984), and the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986)'.

The provisions of Section 34(1) clearly state that the RDB Act overrides other laws to the extent of "inconsistency". In our opinion, the prescription of an exclusive Tribunal both for adjudication and execution is a procedure clearly inconsistent with realisation of these debts in any other manner."

7. The apex court has thereafter proceeded further to consider whether the company court has any control over the execution proceedings and or leave of the company court is necessary before the recovery certificate can be executed by the recovery officer to recover the amounts from sale of the secured assets in favour of the banks and financial institutions. While considering the aforesaid issue, the apex court has held that the provisions of the DRT Act by virtue of Section 34(1) have an overriding effect and that the recovery officer has an absolute power to execute the said recovery certificate by sale of immovable assets and for that purpose neither the leave of the company court is necessary under Section 446 and nor the company court has any control on the said proceedings. The apex court in the case of Allahabad Bank v. Canara Bank [2000] 101 Comp Cas 64 : AIR 2000 SC 1535, has in paras. 30, 49 and 50 held as under (pages 79 and 88 of 101 Comp Cas) :

"30. The learned Attorney General has, in this connection, relied upon Damji Valji Shah v. Life Insurance Corporation of India , to contend that for initiating and continuing proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, no leave of the company court is necessary under Section 446. In that case, a Tribunal was constituted under the Life Insurance Corporation Act, 1956. The question was whether under Section 446 of the Companies Act, 1956, the said proceedings could be stayed and later be transferred to the company court and adjudicated in that court. It was held that the said proceedings could not be transferred. Section 15 of the Life Insurance Corporation Act, 1956--which we may say, roughly corresponds to Section 17 of the RDB Act--enabled the Life Insurance Corporation of India to file a case before a special Tribunal and recover various amounts from the erstwhile life insurance companies in certain respects. Section 41 of the Life Insurance Corporation Act conferred exclusive jurisdiction on the said Tribunal just like Section 18 of the RDB Act, 1993. There the company was ordered to be wound up by an order of the company court passed under Section 446(1) on January 9, 1959. The claim was filed by the Life Insurance Corporation against the company before the Tribunal and its directors in 1962. The respondents before the Tribunal contended that the claim could not have been filed in the Tribunal without the leave of the company court under Section 446(1). This court rejected the said contention and held that though the purpose of Section 446 was to enable the company court to transfer proceedings to itself and to dispose of the suit or proceedings so transferred, unless the company court had jurisdiction to decide the questions which were raised before the Life Insurance Corporation Tribunal, there was no purpose of requiring leave of the company court or permitting transfer. It was held by this court (page 763 of 35 Comp Cas) :

'In view of Section 41 of the Life Insurance Corporation Act, the company court has no jurisdiction to entertain and adjudicate upon any matter which the Tribunal is empowered to decide or determine under that Act. It is not disputed that the Tribunal has jurisdiction under the Act to entertain and decide matters raised in the petition filed by the Corporation under Section 15 of the Life Insurance Corporation Act. It must follow that the consequential provisions of Sub-section (1) of Section 446 of the Companies Act will not operate on the proceedings which may be pending before the Tribunal or which may be sought to be commenced before it.'

Just as the company court was held incompetent to stay or transfer and decide the claims made before the Life Insurance Corporation Tribunal because the company court could not decide the claims before the Life Insurance Corporation Tribunal, the said court cannot, in our view, decide the claims of banks and financial institutions. On the same parity of reasoning as in Damji Valji Shah's case [1965] 35 Comp Cas 755 (SC) there is no need for the appellant to seek leave of the company court to proceed with its claim before the Debt Recovery Tribunal or in respect of the execution proceedings before the Recovery Officer. Nor can they be transferred to the company court.

49. For the aforesaid reasons, we hold that at the stage of adjudication under Section 17 and execution of the certificate under Section 25, etc. the provisions of the RDB Act, 1993, confer exclusive jurisdiction in the Tribunal and the Recovery Officer in respect of debts payable to banks and financial institutions and there can be no interference by the company court under Section 442 read with Section 537 or under Section 446 of the Companies Act, 1956. In respect of the monies realised under the RDB Act, the question of priorities among the banks and financial institutions and other creditors can be decided only by the Tribunal under the RDB Act and in accordance with Section 19(19) read with Section 529A of the Companies Act and in no other manner. The provisions of the RDB Act, 1993, are to the above extent inconsistent with the provisions of the Companies Act, 1956, and the latter Act has to yield to the provisions of the former. This position holds good during the pendency of the winding up petition against the debtor company and also after a winding up order is passed. No leave of the company court is necessary for initiating or continuing the proceedings under the RDB Act, 1993. Points Nos. 2 and 3 are decided accordingly in favour of the appellant and against the respondents.

Points 4 and 5 :

50. We have already held that the adjudication, execution and distribution of the sale proceeds and working out priorities as between banking and financial institutions and other creditors of the defendant-company--so far as the monies realised under the RDB Act are concerned--has to be done only by the Tribunal and not by the company court. The next question is as to the manner of distribution of these monies between the banks or financial institutions on the one hand and the other creditors, secured or unsecured of the company under winding up. This question depends upon the effect of Section 19(19) of the RDB Act as introduced by Ordinance No. 1 of 2000."

8. In my opinion on a plain reading of the judgment of the apex court it is clear that once a recovery certificate is issued then in that event in respect of the secured assets in favour of banks and financial institutions and which is a subject-matter of recovery certificate, the Recovery Officer and particularly the DRT should have an exclusive jurisdiction and the company court cannot through the official liquidator in winding up of the company dispose of the immovable properties of the company in favour of the banks and financial institutions and distribute sale proceeds thereof. This is because the provisions of the DRT Act have an overriding effect by virtue of the provisions of Section 34 of the said Act and thus the jurisdiction of the company court is ousted in so far as the sale of immovable properties which are secured in favour of banks and financial institutions and which are subject-matter of the recovery certificate is concerned.

9. In a case where the recovery certificate is not yet issued by the DRT but the proceedings for recovery of the debt due to banks and financial institutions are pending before the DRT even in these cases the liquidator cannot proceed and dispose of the immovable assets which are secured in favour of the banks and financial institutions, in such an event the official liquidator is required to seek directions from the DRT in respect of the assets held by him and which secured in favour of the banks and financial institutions. The only effect is that the company being in liquidation, the official liquidator steps into the shoes of the company and therefore he is required to represent the company before the DRT in the proceedings where the company under liquidation is a party. In so far as the assets which are held by the official liquidator are concerned during the pendency of the proceedings before the DRT, the official liquidator shall hold the said assets till appropriate directions are given by the DRT and in an event if the DRT directs the assets to be handed over to the private receiver appointed by the DRT then in such event the liquidator is bound to hand over the possession thereof to such private receiver subject to recovery of his cost, charges and expenses as well as the payment to the security agencies which is appointed by him.

10. However, the official liquidator who has appeared in person has contested the present proceedings and has contended that the jurisdiction of the official liquidator in the winding up proceedings cannot be treated as ousted and that he has full right and power to dispose of the assets even though the same are secured in favour of the banks and financial institutions and in respect of which the recovery certificate has been issued by the DRT. In support of the aforesaid contention he has relied upon the judgment of the apex court in the case of International Coach Builders Ltd. v. Karnataka State Financial Corporation [2003] 114 Comp Cas 614 particularly the following observation (headnote) :

"The official liquidator is the representative of the workmen entitled to enforce such pari passu charge. He would be in the position of a co-mortgagee. The statutory right of the corporation to sell the property under Section 19(19) of the 1951 Act has now to be exercised in tandem with the rights of the pari passu charge in favour of the workmen created by the proviso to Section 529 of the Companies Act. The realisation of the security can therefore be done by the secured creditor either by satisfaction of the pari passu charge or by a suit in which the pari passu charge holder would be a party defendant. In other words, the existence of the pari passu charge holder being represented by the official liquidator would necessarily bring in the supervision of the company court as the official liquidator cannot act without directions from and the supervision of the company court. The realisation of the security can only be done by both charge holders joining and realising the security simultaneously. If a sale takes place, it can only be simultaneously for recovery of the claim of all pari passu charge holders and the sale proceeds are to be divided in proportion to their dues."

11. I do not see any application of the said judgment to the facts of the present case. Firstly, because the said judgment was not considering the scheme of the DRT Act vis-a-vis the provisions of the Companies Act (1 of 1956). The issue before the court was in respect of the conflict between the provisions of Section 529 and Section 529A of the Companies Act (1 of 1956) on one hand and Section 29 of the State Financial Corporations Act, 1951, on the other. In that view of the matter the aforesaid judgment has no relevance.

12. In the aforesaid analysis of the proceedings of law I answer the question which has been framed by me in this judgment that the official liquidator is not empowered and or entitled to dispose of and or sale immovable properties which are secured in favour of the banks and financial institutions and in respect of which there is a recovery certificate issued by the DRT.

13. In so far as Company Petition No. 215 of 1997 is concerned learned Counsel appearing for the State Bank has stated that there is a recovery certificate issued in their favour in respect of the assets which are secured in their favour and for which sale is proposed by the official liquidator. Similar is the case in Company Petition No. 903 of 1999 where also the recovery certificate in respect of the assets of the company in liquidation is issued and the same properties are proposed to be sold by the official liquidator.

14. In Company Petition No. 703 of 1996 the IDBI is holding the recovery certificate in respect of the assets which are proposed to be sold by the company in liquidation. In view of the aforesaid position in law the official liquidator is directed to hand over the assets of the companies in liquidation and which are mortgaged in favour of respective banks and financial institutions and which are held by him to the recovery officer and or any other person as directed by the DRT.

15. In so far as question of amounts spent by him during the period when the assets were in his possession pertaining to security charges and other charges, the official liquidator is directed to make a necessary application to the DRT for recovery of the said amount from the sale proceeds of the assets which are going to be effected by the recovery officer in pursuance to the recovery certificate issued by the DRT. On such application being made the DRT shall pass appropriate order in accordance with law.

16. All the three reports are disposed of accordingly. However there shall be no order as to costs. The official liquidator is directed to return all the amounts received by him as earnest money deposited from various bidders within one week from today.

17. The court expresses its gratitude to Mr. D. D. Madon who has been kind enough to respond to the request made by the court and make his submissions to assist the court in deciding the present matter.

18. C.C. expedited.