Bombay High Court
Official Liquidator vs M/S. Malhotra Steels (Bombay) Ltd on 19 April, 2023
Bench: N. J. Jamadar
2023:BHC-OS:3203
12-OLR-71-19.DOC
Sayali Upasani
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
OFFICIAL LIQUIDATOR'S REPORT NO- 71 OF 2019
IN
COMPANY PETITION NO. 753 OF 2004
In the mater of Malhotra Steel (Bombay) Ltd. (In Liquidation)
B.I.F.R. ...Petitioner
Mr. Aditya Pimple, for Applicant.
Mr.Rohit Gupta with Mr. Nikhil Rajani with Ms. Jyoti Sanap
i/b V. Deshpande and Co., for Kotak Mahindra Bank.
Mr. A.B. Shinde for Workmen.
Mr. Shatrughan Chauhan, Dy. Official Liquidator, Present.
CORAM: N. J. JAMADAR, J.
RESERVED ON : 14th DECEMBER, 2022
PRONOUNCED 19th APRIL, 2023
ON :
JUDGMENT:-
1) The Official Liquidator has filed this report seeking, inter
alia, directions to Kotak Mahindra Bank Ltd., the secured
creditor of Malhotra Steel (Bombay) Ltd., (in liquidation) to
deposit an amount of Rs.86,89,421/-, towards workers dues.
2) The report arises in the backdrop of the following facts:-
(a) Pursuant an order dated 15th October, 2008 passed in
Company Petition No.753 of 2004 in B.I.F.R. Case No. 50 of 1994,
the Official Liquidator came to be appointed as the Provisional
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Liquidator of Malhotra Steel (Bombay) Ltd., with usual powers
under the Companies Act, 1956 ("the Act, 1956"). By a further
order dated 16th July, 2009, the company was ordered to be
wound up and the Official Liquidator came to be appointed as
the Liquidator of the company in liquidation.
(b) The Official Liquidator, based on the inspection of the
records maintained by the Registrar of Companies, claimed to
have had correspondence with the secured creditors of the
company, the Ex-directors of the company and meetings with
the Ex-directors and secured creditors of the company in
liquidation. Kotak Mahindra bank Ltd., ("the Bank"), the Noticee,
informed the Official Liquidator under cover of the letter dated
16th February, 2009 that ICICI Bank Ltd., IDBI and State Bank of
India, the secured creditors of the company in liquidation, had
assigned their rights to the Noticee. The Official Liquidator
claims despite repeated requests the Bank had not shared the
Deeds of Assignments.
(c) In the meanwhile, the Official Liquidator has adjudicated
the claims of workers. The Official Liquidator claims a certified
list of Proof of Debts of claims of workers as of 3 rd October, 2017
aggregating to Rs.86,89,421/-, has been filed. It is further
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asserted that the Official Liquidator was apprised of the
proceedings before the DRT along with copies of the orders
passed therein which indicated that sale of assets of the
company in liquidation by DRT has generated proceeds of
Rs.8,54,00,000/-.
3) On the strength of the documents furnished on behalf of
the workers, the Official Liquidator issued a letter dated 12 th
December, 2017 to the Bank requesting it to deposit a sum of
Rs.8,49,434/-, towards the workers dues. In response vide letter
dated 27th December, 2018, the Bank disputed the liability on the
count that properties of the company in liquidation were sold
prior to the appointment of the Official Liquidator. Thus there
was no question of application of the provisions contained in
Section 529A of the Act, 1956. It was further contended that
DRT had adjudicated their claim against the company in
liquidation in the sum of Rs.8,53,70,641/-.
4) In the light of the aforesaid claim of the Bank, the Official
Liquidator asserts since the claim of the Bank has been
adjudicated for an amount of Rs.8,53,70,641/- the workers have
a pari-passu charge under Section 529A of the Act, 1956. The
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Bank be thus directed to deposit a sum of Rs.86,89,421/- with
the office of Official Liquidator.
5) A number of affidavits have been filed on behalf of the Bank
as well as the Official Liquidator. It would be unwarranted to
refer to all the affidavits filed by the parties as the controversy
between the parties gradually got narrowed down to the question
as to at what point of time there was a full and final disbursal of
the amount received by the Bank. The Bank was directed to file
an affidavit categorically stating the dates on which the amounts
were received supported by the entries in the accounts. The
Bank was also directed to explain in the affidavit the dates on
which it became assignee of prior lenders of the company in
liquidation and the particulars of the Deed of Assignments.
6) The Bank filed an additional affidavit dated 29th August,
2022, furnishing the requisite details. In the context of the
controversy, the averments in paragraph Nos. 12, 14, 15 and 19
of the affidavit become relevant.
7) A conjoint reading of these paragraphs would indicate that
the Bank receivedtotal sum of Rs.11,32,95,352/-.Out of this sum
of Rs.6,71,79,912/-, was received from sale of assets of the
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company in liquidation, a sum of Rs.3,93,84,855/- from the sale
of the assets belonging to the guarantors, a sum of
Rs.18,06,210/- by way of rent, which was deposited pursuant to
the order of this Court in Suit No.4928 of 1993 and interest
thereon, and Rs.49,24,375/- towards reimbursement of
expenses. Out of this a sum of Rs.90,50,124/-, was received by
Bank from the sale of the other properties of the company in
liquidation on 29th April, 2008 and a sum of Rs.18,06,210/-, was
paid to Bank by the Tribunal-Receiver on 12 th November, 2008.
8) In response to the additional affidavit, the Official
Liquidator filed an additional affidavit-in-reply. It was contended
that in the meeting held on 25 th April, 2022 to compute the ratio
of the secured creditors and the workmen as also the workmen's
portion over the security sold by the Bank, the ratio of
workmen's dues was arrived at 0.35%. The workmen's portion
thus comes to Rs.2,95,769.427/-. The liability of the Bank in the
ratio of 85.87% comes to Rs.2,53,977.20/- and the balance
amount, in the ratio of 13.71%, is to be contributed by IFCI Ltd.
9) It was further contended that two sale certificates, dated
23rd March, 2009 and 19th May, 2009, were executed after the
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date of the appointment of the Provisional Liquidator. Since the
full and final disbursement of the sale proceeds was not complete
before the appointment of the Provisional Liquidator, the Bank is
liable to bring back the said amount of Rs.2,53,977.20/-. The
Official Liquidator further asserts that the Bank received a sum
of Rs.18,06,210/-, towards the rent and interest initially
deposited with the Court Receiver, High Court and later on
transferred to DRT Receiver on 12th November, 2008, again after
the appointment of the Provisional Liquidator on 5 th October,
2008. The Bank thus is liable to bring back the said amount as
well. The contention of the Bank that the said sum of
Rs.18,06,210/-, does not constitute an asset of the company in
liquidation was sought to be refuted. Reserving the right to prefer
an appropriate report for further reliefs, the Official Liquidator
contended that, in the least, the Bank is liable to being back the
sum of Rs.2,53,977.20/- from aforesaid amounts.
10) In the backdrop of the aforesaid facts and pleadings, I have
heard Mr. Pimple, the learned Counsel for the Official Liquidator,
Mr. Rohit Gupta, the learned Counsel for the Kotak Mahindra
Bank Ltd., and Mr. A.B. Shinde, the learned Counsel for the
Workmen.
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11) Mr. Pimple, submitted that from the contentions in the
additional affidavit-in-reply of the Bank, it becomes clear that
there is not much controversy over the workers dues of
Rs.86,89,421/-. Mr. Pimple would further urge that the liability
of the secured creditor to bring back the workers portion out of
the sale proceeds of the secured assets is also incontestable.
Since there was no final distribution of the proceeds in respect of
few of the secured assets and other properties of the company in
liquidation before the appointment of the Provisional Liquidator,
the statutory charge created in respect of the workmen's dues
over the security of the secured creditor operates over the sale
proceeds. Thus, the Bank cannot avoid the liability to bring back
the workmens portion of Rs.2,53,977.20/-.
12) Mr. Pimple would further urge that the receipt of a sum of
Rs.18,06,210/- by the Bank from the receiver of DRT on 12 th
November, 2008, much after the appointment of the Provisional
Liquidator, is indubitable. Since the said amount represented the
rent which was receivable by the company in liquidation, the
character of the said amount as the asset of the company in
liquidation can not be put in contest, urged Mr. Pimple.
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13) Mr. Gupta, countered the submissions on behalf of the
Official Liquidator. It was urged that all the assets of the
company in liquidation were sold and proceeds realised prior to
the date of the appointment of the Provisional Liquidator, except
the sum of Rs.18,06,210/- which was received on 12 th November,
2008. Controverting the character of the said amount, as the
asset of the company in liquidation, Mr. Gupta would urge that
the said amount came to be deposited with the receiver
appointed by this Court in Suit No.4928 of 1998, instituted by
ICICI Ltd., the Assignor of the Bank. Therefore, the rent so
received by Court Receiver can not be said to have retained the
character of the property of the company in liquidation.
14) Mr. Gupta would further urge that the fact that sale
certificate came to be issued subsequent to the date of the
appointment of the Provisional Liquidator and the amount was
actually transmitted later is of no significance. It is the date of
the sale which is determinative and since all the assets of the
company in liquidation were sold before the appointment of the
Provisional Liquidator, the provisions contained in Section 259A
of the Act, 1956 have no application to the facts of the case.
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15) Mr. Shinde, would urge that the statements of account
placed by the Bank do not reveal a true picture. Inviting
attention of the Court to few entries in the statement of account
(Exhibit-U collectively to the affidavit-in-reply), Mr. Shinde
submitted that those entries do not disclose the identity of the
person from whom the amounts were received.
16) I have given careful consideration to the aforesaid
submissions. Few facts deserve to be noted to determine the
question in controversy in a correct perspective. In Company
Petition No.753 of 2004, Provisional Liquidator came to be
appointed on 15th October, 2008. Winding up order was passed
on 6th July, 2009. Certificates of Sale were issued in respect of
the properties at Ajiwali, Horale on 23rd March, 2009 and certain
other properties at Horale, Tal. Khalapur, Dist. Raigad on 19th
May, 2009. Those certificates of sale were issued post the
appointment of the Provisional Liquidator. The sum of
Rs.18,06,210/-, was received on 12th November, 2008.
17) In the backdrop of these facts, the crucial question that
arises for consideration is whether the workmen's dues charge
operates over the aforesaid amount.
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18) For an answer, recourse to Sections 529 and 529A of the
Act, 1956 becomes imperative. A conjoint reading of the
provisions contained in Section 529 and 529A, would indicate
that a secured creditor has the option to realise his security or
relinquish his security. If the secured creditor exercises the
option to realise his security, he is entitled to do so in a
proceedings other than the winding up proceedings. The
workmen of the company in winding up also acquire the status of
secured creditors. Where a company is in liquidation, a statutory
charge is created in favour of workmen in respect of dues over
the security of every secured creditor and this charge is pari
passu with that of the secured creditor. Such statutory charge is
to the extent of workmen's portion in relation to the security held
by the secured creditors of the company as illustrated by Section
529 of the Act.
19) A useful reference in this context can be made to a three
Judge Bench judment of the Supreme Court in the case of
Jitendra Nath Singh Vs. Official Liquidator and Others 1, wherein
the postulates with emerge on interpretation of the provisions
contained in Section 529 and 529A of the Act, 1956 were
enunciated as under:-
1 (2013) 1 SCC 462
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"..........16. Our conclusions on interpretation of the provisions
of Sections 529 and 529A of the Companies Act, therefore, are
as follows:
16.1 A secured creditor has only a charge over a particular
property or asset of the company. The secured creditor has the
option to either realize his security or relinquish his security. If
the secured creditor relinquishes his security, like any other
unsecured creditor, he is entitled to prove the debt due to him
and receive dividends out of the assets of the company in the
winding up proceedings. If the secured creditor opts to realize
his security, he is entitled to realize his security in a proceeding
other than the winding up proceeding but has to pay to the
liquidator the costs of preservation of the security till he realizes
the security.
16.2 Over the security of every secured creditor, a statutory
charge has been created in the first limb of the proviso to
clause (c) of sub- section (1) of Section 529 of the Companies
Act in favour of the workmen in respect of their dues from the
company and this charge is pari passu with that of the
secured creditor and is to the extent of the workmen's portion
in relation to the security of any secured creditor of the
company as stated in clause (c) of sub- section (3) of Section
529 of the Companies Act.
16.3 Where a secured creditor opts to realize the security
then so much of the debt due to such secured creditor as
could not be realized by him by virtue of the statutory charge
created in favour of the workmen shall to the extent indicated
in clause (c) of the proviso to sub-section (1) of Section 529 of
the Companies Act rank pari passu with the workmen's dues
for the purposes of Section 529A of the Companies Act.
16.4 The workmen's dues and where the secured creditor
opts to realize his security, the debt to the secured creditor to
the extent it ranks pari passu with the workmen's dues under
clause (c) of the proviso to sub-section (1) of Section 529 of the
Companies Act shall be paid in priority over all other dues of
the company........"
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20) In the case at hand, as noted above, the controversy
essentially revolves around the point at which the secured
creditor realised his security standing outside the liquidation
process. It is well recognized that the filing of a Petition for
winding up of a company does not preclude the secured creditor
from enforcing his security. It is only when Liquidator is
appointed, the secured creditor becomes liable to associate the
Liquidator in sale assets of the company in liquidation. The fact
that after the sale of the assets of the company in liquidation by
the secured creditor by resorting to the provisions contained in
the Recovery of Debts Due to banks and Financial Institutions
Act, 1993 and/or The Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002,
the Company goes into liquidation does not warrant the
reopening of the sale and appropriation of the sale proceeds by
the secured creditor.
21) With the incorporation of Section 529 A of the Act, 1956,
the workmen's dues rank pari passu with secured creditors. To
put it differently, the workmen of the company in widning up
acquire the status of secured creditors. This position is further
reinforced by the proviso to Sub Section (1) of Section 529 of the
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Act, 1956 which provides that the security of every secured
creditor shall be deemed to be subject to a pari passu charge in
favour of the workmen to the extent of the workmen's portion.
This would imply that the workmen become entitled to
distribution of sale proceeds in the ratio as explained in the
illustration appended to Section 529 (3) (c) of the Act, 1956. The
moot question is as to at what point the workmen become
entitled to distribution of sale proceeds ?
22) A three Judge Bench judgment of the Supreme Court in
the case of Bank of Maharashtra Vs. Pandurang Keshav
Gorwadkar and Others2 wherein the legal position was
expounded by the Supreme Court, illuminates the path. The
propositions read as under:-
".........67. In light of the above discussion, we sum up our
conclusions thus:
67.1. If the debtor company is not in liquidation nor any
provisional liquidator has been appointed and merely winding up
proceedings are pending, there is no question of distribution of
sale proceeds among secured creditors in the manner prescribed
in Section 19(19) of the 1993 Act.
67.2. Where a company is in liquidation, a statutory charge is
created in favour of workmen in respect of their dues over the
security of every secured creditor and this charge is pari passu
with that of the secured creditor. Such statutory charge is to the
extent of workmen's portion in relation to the security held by
the secured creditor of the debtor company.
67.3. The above position is equally applicable where the assets
of the debtor company have been sold in execution of the recovery
2 (2013) 7 SCC 754
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certificate obtained by the bank or financial institution against
the debtor company when it was not in liquidation but before the
proceeds realized from such sale could be fully and finally
disbursed, the company had gone into liquidation. In other
words, pending final disbursement of the proceeds realized from
the sale of security in execution of the recovery certificate issued
by the debt recovery tribunal, if debtor company becomes
company in winding up, Section 529A read with Section 529(1)
proviso come into operation and statutory charge is created in
favour of workmen in respect of their dues over such proceeds.
67.4. The relevant date for arriving at the ratio at which the sale
proceeds are to be distributed amongst workmen and secured
creditors of the debtor company is the date of the winding up
order and not the date of sale.
67.5. The conclusions (ii) to (iv) shall be mutatis mutandis
applicable where provisional liquidator has been appointed in
respect of the debtor company.
67.6. Where the winding up petition against the debtor company
is pending but no order of winding up has been passed nor any
provisional liquidator has been appointed in respect of such
company at the time of order of sale by DRT and the properties of
the debtor company have been sold in execution of the recovery
certificate and proceeds of sale realized and full disbursement of
the sale proceeds has been made to the concerned bank or
financial institution, the subsequent event of the debtor company
going into liquidation is no ground for reopening disbursement by
the DRT.
67.7. However, before full and final disbursement of sale
proceeds, if the debtor company has gone into liquidation and a
liquidator is appointed, disbursement of undisbursed proceeds
by DRT can only be done after notice to the liquidator and after
hearing him. In that situation if there is claim of workmen's
dues, the DRT has two options available with it. One, the bank
or financial institution which made an application before DRT for
recovery of debt from the debtor company may be paid the
undisbursed amount against due debt as per the recovery
certificate after securing an indemnity bond of restitution of the
amount to the extent of workmen's dues as may be finally
determined by the liquidator of the debtor company and payable
to workmen in the proportion set out in the illustration
appended to Section 529(3)(c) of the Companies Act. The other,
DRT may set apart tentatively portion of the undisbursed
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amount towards workmen's dues in the ratio as per the
illustration following Section 529(3)(c) and disburse the balance
amount to the applicant bank or financial institution subject to
an undertaking by such bank or financial institution to restitute
the amount to the extent workmen's dues as may be finally
determined by the liquidator, falls short of the amount which
may be distributable to the workmen as per the above
illustration. The amount so set apart may be disbursed to the
liquidator towards workmen's dues on ad-hoc basis subject to
adjustment on final determination of the workmen's dues by the
liquidator.........."
23) The Supreme Court has ruled in clear and explicit terms
that if the company goes into the liquidation, before the sale
proceeds are fully and finally disbursed, Section 529A read with
Section 529(1) proviso come into operation and statutory charge
is created in favour of workmen in respect of their dues over such
proceeds. The Supreme Court has made it clear that the relevant
date to arrive at the ratio at which the sale proceeds are to be
disbursed among the workmen and secured creditors of the
company is the date of winding up order and not the date of sale.
These principles apply even where the Provisional Liquidator has
been appointed in respect of the company.
24) On the aforesaid touchstone, reverting to the facts of the
case, it is pertinent to note that so far as the quantum of
workmen's portion i.e. Rs.2,53,977.20/- which the Bank is stated
to be liable to contribute, there is not much controversy. From
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the affidavit of the Bank especially averments in paragraph No.
15 under the, "caption dates on which amount was received" it
becomes evident that all the amounts except a sum of
Rs.18,06,210/- were received by the Bank even before the
appointment of the Provisional Liquidator. The controversy thus
boils down to the consequences which ensue the receipt of the
amount of Rs.18,06,210/-, by the Bank on 12 th November, 2008
after the appointment of the Provisional Liquidator.
25) To ascertain the character of the said amount of
Rs.18,06,210/-, it is necessary to note the circumstances in
which the said amount came to be accumulated. By an order
dated 22nd December, 1998 in Suit No. 4928 of 1998 instituted by
ICICI Ltd., the Assignor of the Bank, the following directions were
issued:-
"2. This motion is taken out by the plaintiff I.C.I.C.I. for
recovery of its dues. Heard learned Counsel for the
Plaintiff and the Defendants. Ad-interim order in terms
of prayer Clause (a) is granted only in relation to the
property desscribed in Exh. A-2. The Receiver is
appointed only for the purpose of receiving the lease
money being paid to Defendant No. 1 by the lessee of the
machinery. Ad-interim injunction in terms of prayer
Clause (b) is granted, restrloted to the property
described in Exh. A-2."
26) The submissions on behalf of the Bank that the said
amount did not retain the character of the property of the
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company in liquidation does not merit acceptance. The
provisions of Section 456 of the Act, 1956 provide an answer.
"456. Custody of company' s property.- (1) Where a winding
up order has been made or where a provisional liquidator
has been appointed, the liquidator 2 [or the provisional
liquidator, as the case may be,] shall take into his custody or
under his control, all the property, effects and actionable
claims to which the company is or appears to be entitled.
............
(2) All the property and effects of the company shall be
deemed to be in the custody of the court as from the date of
the order for the winding up of the company."
27) Indisputably, the amount which came to be accumulated
constituted the lease rent which the company in liquidation was
entitled to receive. The lease rent clearly falls within the ambit of
the property which forms part of the assets of the company in
liquidation. In the circumstances, distribution qua the said
amount paid to the Bank by the Tribunal-Receiver can not be
said to have been fully and finally complete before the
appointment of the provisional liquidator. The analogy of sale
proceeds of the assets sold by secured creditor standing outside
winding up can be applied to the said amount. Consequently, the
provisions contained in Section 529 A read with the proviso to
Section 529 (1) of the Act come into play and the charge of the
workers dues operates on the said amount as well.
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28) Hence, the following order.
:ORDER:
(i) The report stands partly allowed.
(ii) The Kotak Mahindra Bank Ltd., Noticee shall deposit
a sum of Rs. 2,53,977.20/- with the Official Liquidator
towards the workmen's dues, within four weeks from today.
(iii) No order as to costs.
At this stage, the learned Counsel for the Bank seeks
stay to the operation of this order. In the light of the view
taken in this order, the oral application for stay stands
rejected.
[N. J. JAMADAR, J.]
