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Friday, June 15, 2012

Companies Act, 1956-Section 537(2)-Company took loan from Appellant which it failed to repay-Properties of company attached pursuant to recovery proceedings initiated by Appellant under the Kerala Revenue Recovery Act-Company went for voluntary liquidation-Claim by Appellant, a Government company, for precedence in recovery of dues in terms of S.537(2)-Maintainability of-Held, not maintainable-S.537(2) had no application inasmuch as recovery proceedings initiated by Appellant cannot be said to be a proceeding for recovery of any tax or impost or any dues payable to the Government-Kerala Revenue Recovery Act, 1968. Companies Act, 1956-Sections 125 & 446-Company-in-liquidation had failed to repay loan-Its properties had been attached by a Recovery Court under the Kerala Revenue Recovery Act-Effect of the earlier order of attachment in pending company proceedings-Held: An attachment itself does not create any charge in the property-By reason of attachment, no decree is passed-Distinction between attachment before judgment in terms of Order 38 and attachment for execution of decree under Order 21 explained-Provisions of the Companies Act shall prevail-Applicability of S.125 discussed-Words and Phrases-"Attachment"-Meaning of-Code of Civil Procedure, 1908-Order 21 & 38-Kerala Revenue Recovery Act, 1968. Recovery proceedings were initiated against a company under the Kerala Revenue Recovery Act, 1968 after it failed to repay loan taken from Appellant Government company. Properties belonging to the defaulting company were attached. In the meanwhile, the defaulting company went for voluntary liquidation whereupon a provisional liquidator was appointed. In the pending company proceedings, Appellant filed application seeking leave to proceed with sale of the properties, which was objected to by the Respondent, inter alia, on the premise that the charge in respect of the alleged debt was not registered with the Registrar of Companies and, thus, it was an unsecured creditor. High Court rejected the application. Hence the present appeal in which it was contended for the Appellant that the Kerala Revenue Recovery Act being a special statute prevailed over the Companies Act, 1956; that Section 125 of the Companies Act was not attracted and that in any event the dues of Appellant got precedence in terms of sub-Section (2) of Section 537 of the Companies Act. Dismissing the appeal, the Court HELD: 1. Appellant is a Government company. Its dues are not Government dues. The provisions of the Kerala Revenue Recovery Act might have been made applicable, but only by reason thereof, dues of a Government company would not become the dues of the Government within the meaning of sub-section (2) of Section 537 of the Companies Act. Sub-section (2) of Section 537 will have no application in the instant case, inasmuch the recovery proceeding initiated by Appellant cannot be said to be a proceeding for recovery of any tax or impost or any dues payable to the Government. [859-c; 860-g-h] 2.1. An attachment itself does not create any charge in the property. By reason of attachment, no decree is passed. Section 125 of the Companies Act contains a special provision. It may not have any application in a case where a decree has already been passed. [859-e; 861-a] 2.2. The word `attachment' would only mean `taking into the custody of the law the person or property of one already before the court, or of one whom it is sought to bring before it. It is used for two purposes : (i) to compel the appearance of a defendant; and (ii) to seize and hold his property for the payment of the debt. It may also mean prohibition of transfer conversion, disposition or movement of property by an order issued by the court. [859-f] 2.3. There, indisputably, exists a distinction between attachment before judgment in terms of Order XXXVIII of the Code of Civil Procedure and attachment for execution of a decree under Order XXI thereof. An order of attachment before judgment passed under Order XXXVIII seeks to safeguard the interests of plaintiff so that in the event a decree is passed, the same stands satisfied. On the other hand, the essential parties of Order XXI is to see that the process of court is not defeated once execution starts, but the same would not mean that the provisions of the Companies Act become wholly inapplicable. [860-e-f] Faqir Chand Gupta v. Tanwar Finance P. Ltd., (1981) 51 Com. Cases 60, approved. Sardar Govindrao Mahadik and Anr. v. Devi Sahai and Ors., AIR (1982) SC 989: [1982] 1 SCC 237 and Indian Bank v. Official Liquidator, Chemmeens Export (P) Ltd. and Ors., [1998] 5 SCC 401, referred to. 3.1. Save and except certain special statutes in relation to recovery of debts from the properties of a company which has directed to be wound up, the provisions of the Companies Act shall apply. [860-d] 3.2. It may be true that if there exists a statute like SICA, the provisions thereof may prevail over the Companies Act. But in absence of a clear provision, the Companies Act cannot be held to give way to another Act providing for recovery only leaving the rights and liabilities of the parties to be dealt with a general law. [863-g, h] Ovation International (India) P. Ltd., Re (1969) 39 Com. Cases 595 (Bom.), approved. Maharashtra State Financial Corporation v. Official Liquidator, Sidhu Tyres (P) Ltd. (1988) 64 Com. Cases 641, distinguished. NGEF Ltd. v. Chandra Developers (P) and Anr., [2005] 8 SCC 219 and Jay Engineering Works Ltd. v. Industry Facilitation Council and Anr., (2006) 9 SCALE 285, relied on. Kerala Financial Corporation, Trivandrum v. C.K. Sivasankara Panicker and Ors., (1978) TAX L.R. 1860; International Coach Builders Ltd. v. Karnataka State Financial Corporation, [2003] 10 SCC 482; Rajasthan State Financial Corporation and Anr. v. Official Liquidator and Anr., [2005] 8 SCC 190 and ICICI Bank Ltd. v. SIDCO Leathers Ltd. and Ors., (2006) 5 SCALE 27, referred to. 4. The High Court has not committed any error in refusing to exercise its discretionary jurisdiction under Section 446 of the Companies Act. C.N. Sree Kumar for the Appellant. Romy Chacko for the Respondent.2007 AIR 63 , 2006(6 )Suppl.SCR855 , 2006(10 )SCC709 , 2006(10 )SCALE28 , 2006(12 )JT603


CASE NO.:
Appeal (civil)  4333 of 2006

PETITIONER:
Kerala State Financial Enterprises Ltd.

RESPONDENT:
Official Liquidator, High Court of Kerala

DATE OF JUDGMENT: 29/09/2006

BENCH:
S.B. Sinha & Dalveer Bhandari

JUDGMENT:
JUDGMENT

S.B. SINHA. J.


Leave granted.

Appellant herein is a Government company. It is engaged in conduct of
chitties. M/s Concert Capital Limited together with its sister concern M/s
Concert Securities Limited took loan from it. They failed to repay the said
loan. A recovery proceeding was initiated against the defaulting company
under the Kerala Revenue Recovery Act, 1968. A notification was issued in
that behalf in terms of Section 71 thereof.

The properties belonging to the defaulting company were attached. In the
meanwhile, the Company went for voluntary liquidation. A provisional
liquidator was appointed. Appellant was informed thereabout.

In the pending company proceeding being C.A. No. 165 of 2001, Appellant
filed an application seeking leave to proceed with the sale of the
properties, which was objected to, inter alia, on the premise that the
charge in respect of the alleged debt was not registered with the Registrar
of Companies and, thus, it was an unsecured creditor. A Counter Affidavit
thereto was filed by Respondent. A prayer was also made by the Official
liquidator for a direction upon Appellant to surrender the original
documents. The application for leave to proceed with the revenue recovery
proceeding was rejected by a learned Single Judge of the High Court by its
order dated 28.11.2003.

An appeal thereagainst being Company Appeal No. 14 of 2004 preferred by
Appellant was dismissed by a Division Bench of the High Court. Appellant
is, thus, before us.

The contentions raised in support of the appeal are :

(i) In view of the fact that an order of attachment was passed by the
Revenue Recovery Officer, the provisions of Section 125 of the Companies
Act, 1956 were not attracted;

(ii) The provisions of the Kerala Revenue Recovery Act being a special
statute, the same shall prevail over the Companies Act;

 (iii) The order of attachment passed in favour of Appellant was saved
 under sub-section (1) of Section 537 of the Companies Act;

(iv) In any event, the dues of Appellant shall get precedence in terms
of sub-section (2) of Section 537 of the Companies Act.

The Official Liquidator, on the other hand, contended that no charge is
created by reason of an order of attachment and as upon liquidation all the
properties vest in the Official Liquidator being an unsecured creditor, the
provisions of the Companies Act shall prevail.

Appellant is a Government company. Its dues are not Government dues. The
provisions of the Kerala Revenue Recovery Act might have been made
applicable, but only by reason thereof, dues of a Government company would
not become the dues of the Government within the meaning of subsection (2)
of Section 537 of the Companies Act.

Ordinarily a charge should be registered in terms of Section 125 of the
Act. If the charges are not registered, the same would be void against the
liquidator or creditors. The question which arises for consideration is as
to whether if the properties are attached by a Revenue Recovery Court,
Section 125 of the Act would be applicable? An attachment itself does not
create any charge in the property. By reason of attachment, no decree is
passed.

The expression `attachment' has no definite connotation. An order of
attachment is passed for achieving a limited purpose. It is subject to
further orders as also provisions of other statute.

The word `attachment' would only mean `taking into the custody of the law
the person or property of one already before the court, or of one whom it
is sought to bring before it. It is used for two purposes : (i) to compel
the appearance of a defendant; and (ii) to seize and hold his property for
the payment of the debt. It may also mean prohibition of transfer,
conversion, disposition or movement of property by an order issued by the
court.

In Sardar Govindrao Mahadik and Anr. v. Devi Sahai and Ors., AIR (1982) SC
989 : [1982] 1 SCC 237, this Court held :

"What is the effect of attachment before judgment? Attachment
before judgment is levied where the court on an application of the
plaintiff is satisfied that the defendant, with intent to obstruct
or delay the execution of any decree that may be passed against him
(a) is about to dispose of the whole or any part of his property,
or (b) is about to remove the whole or any part of his property
from the local limits of the jurisdiction of the court. The sole
object behind the order levying attachment before judgment is to
give an assurance to the plaintiff that his decree if made would be
satisfied. It is a sort of a guarantee against decree becoming
infructuous for want of property available from which the plaintiff
can satisfy the decree. The provision in Section 64 of the Code of
Civil Procedure provides that where an attachment has been made,
any private transfer or delivery of the property attached or of any
interest therein and any payment to the judgment-debtor of any
debt, dividend or other monies contrary to such attachment, shall
be void as against all claims enforceable under the attachment.
What is claimed enforceable is the claim for which the decree is
made...."

Save and except certain special statutes in relation to recovery of debts
from the properties of a company which has been directed to be wound up,
the provisions of the Companies Act shall apply. An order of attachment
made prior to passing of an order of winding up may not be void, but then
the execution proceedings must be allowed to continue with the leave of the
court in terms of Section 446 of the Companies Act. [See Ovation
International (India) P. Ltd., Re (1969) 39 Com. Cases 595 (Bom)].

There, indisputably, exists a distinction between attachment before
judgment in terms of Order XXXVIII of the Code of Civil Procedure and
attachment for execution of a decree under Order XXI thereof. An order of
attachment before judgment passed under Order XXXVIII seeks to safeguard
the interests of plaintiff so that in the event a decree is passed, the
same stands satisfied. On the other hand, the essential parties of Order
XXI is to see that the process of court is not defeated once execution
starts, but the same would not mean that the provisions of the Companies
Act become wholly inapplicable.

[See Faqir Chand Gupta v. Tanwar Finance P. Ltd., (1981) 51 Com. Cases 60].

The matter may, however, be different where the proceeding itself commenced
with the leave of the court. We have noticed hereinbefore that sub-section
(2) of Section 537 will have no application in the instant case, inasmuch
the recovery proceeding initiated by Appellant cannot be said to be a
proceeding for recovery of any tax or impost or any dues payable to the
Government.

Section 125 of the Companies Act contains a special provision. It may not
have any application in a case where a decree has already been passed, as
was the case of Indian Bank v. Official Liquidator Chemmeens Exports (P)
Ltd. and Ors., [1998] 5 SCC 401, on the ground that in terms of sub-section
(2) of Section 446, the Company Court is not empowered to declare a decree
passed by a competent court to be void. In that case it was held that the
provisions of a special statute would apply subject to the provisions of
the Companies Act. Therein a decree was already operative and observations
were made only in that context.

Mr. C.N. Sree Kumar, the learned counsel appearing on behalf of Appellant,
placed reliance upon a decision of the Kerala High Court in Kerala
Financial Corporation, Trivandrum v. CK. Sivasankara Panicker and Ors.,
(1978) TAX. L.R. 1860, wherein in view of the fact that the State Financial
Corporation had already taken recourse to Section 31 of the State Financial
Corporations Act.

The question therein was as to whether the order Ext. PI8 has the effect of
a decree creating a charge and Sec. 46B of the State Financial Corporations
Act has overriding effect over the provisions of Sec. 125 of the Companies
Act. It was held :

"...Section 46B, no doubt, provides that the provisions of the State
Financial Corporations Act shall have effect notwithstanding anything
contained in any other law for the time being in force. An order for
realization of the amount due to the Financial Corporation by sale of the
assets of the Company amounts to a charged decree. The assets attached and
ordered to be sold constitute the security for the amount due to the
Corporation. But S. 125 of the Companies Act declares that the charge so
created by the company will be invalid as against the Liquidator and any
creditor if it is not registered with the Registrar of Companies. This is
inconsistent with the provisions of State Financial Corporations Act and
therefore under S. 46B of the latter Act which is a special Act the legal
effect of the order passed will be binding on the Liquidator of the company
also. This is further clear by sub-sec. (10) of S.32 of the State Financial
Corporations Act..."

It was further observed :

"...Section 125 applies to every charge created by the company in so far as
any security of the company's property is conferred thereby. It cannot be
said that a decree by which the company's property is ordered to be sold
for realization of the amount due to the creditor is a charge created by
the company. It may be that the decree is based on a mortgage created by
the company. But, once that mortgage has merged in the decree the
relationship of the parties is governed by the terms of the decree and the
decree creating a charge is not hit by Section 125 of the Act (See
Subrahmanyan v. Muttuswami, AIR (1941) FC 47). If the charge has not
matured in a decree, no doubt, S. 125 will apply and the charge will be
void against all creditors and the Liquidator. It is not possible to extend
the scope of that Section to cases where there are supervening events which
are not covered by the Section. Moreover, in this case in the light of
S.46B of the State Financial Corporations Act the charge created by the
order of the District Court under section 32 of the said Act will not be
affected by S. 125 of the Companies Act inasmuch as the latter section is
inconsistent with the right created in favour of the creditor by Section 32
of the Act..."

We may notice that this Court, however, has taken a somewhat different
view.

The question as to whether Sections 28, 31 and 46B of the State Financial
Corporations Act shall prevail over Section 529 and 529-A of the Companies
Act came up for consideration before this Court in International Coach
Builders Ltd. v. Karnataka State Financial Corporation, [2003] 10 SCC 482,
wherein this Court opined :

"We do not really see a conflict between Section 29 of the SFC Act
and the Companies Act at all, since the rights under Section 29
were not intended to operate in the situation of winding up of a
company. Even assuming to the contrary, if a conflict arises, then
we respectfully reiterate the view taken by the Division Bench of
this Court in AP. State Financial Corpn. case. This Court pointed
out therein that Section 29 of the SFC Act cannot override the
provisions of Sections 529(1) and 529-A of the Companies Act, 1956,
inasmuch as SFCs cannot exercise the right under Section 29
ignoring a pari passu charge of the workmen..."

The view taken therein was reiterated by a three-Judge Bench of this Court
in Rajasthan State Financial Corporation and Anr. v. Official Liquidator
and Anr., [2005] 8 SCC 190 wherein it was stated:

"18. In the light of the discussion as above, we think it proper to sum up
the legal position thus:

(i) A Debts Recovery Tribunal acting under the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993 would be entitled to order the
sale and to sell the properties of the debtor, even if a company-in-
liquidation, through its Recovery Officer but only after notice to the
Official Liquidator or the Liquidator appointed by the Company Court and
after hearing him.

(ii) A District Court entertaining an application under Section 31 of the
SFC Act will have the power to order sale of the assets of a borrower
company-in-liquidation, but only after notice to the Official Liquidator or
the Liquidator appointed by the Company Court and after hearing him.

(iii) If a financial corporation acting under Section 29 of the SFC Act
seeks to sell or otherwise transfer the assets of a debtor company-in-
liquidation, the said power could be exercised by it only after obtaining
the appropriate permission from the Company Court and acting in terms of
the directions issued by that court as regards associating the Official
Liquidator with the sale, the fixing of the upset price or the reserve
price, confirmation of the sale, holding of the sale proceeds and the
distribution thereof among the creditors in terms of Section 529-A and
Section 529 of the Companies Act.

(iv) In a case where proceedings under the Recovery of Debts Due to Banks
and Financial Institutions Act, 1993 or the SFC Act are not set in motion,
the creditor concerned is to approach the Company Court for appropriate
directions regarding the realisation of its securities consistent with the
relevant provisions of the Companies Act regarding distribution of the
assets of the company-in-liquidation."

[See also ICICI Bank Ltd. v. SIDCO Leathers Ltd. & Ors., (2006) 5 SCALE
27].

It may be true that if there exists a statute like SICA, the provisions
thereof may prevail over the Companies Act. But in absence of a clear
provision, the Companies Act cannot be held to give way to another Act
providing for recovery only leaving the rights and liabilities of the
parties to be dealt with a general law. [See NGEF Ltd. v. Chandra
Developers (P) Ltd, and Anr., [2005] 8 SCC 219 and Jay Engineering Works
Ltd. v. Industry Facilitation Council and Anr. - (2006) 9 SCALE 285]

Reliance has also been placed by Mr. Sree Kumar on Maharashtra State
Financial Corporation v. Official Liquidator, Sidhu Tyres (P) Ltd., (1988)
64 Com. Cases 641 is also not apposite. Therein the charge was created not
by the company, but by its predecessor which was a partnership firm.

For the reasons aforementioned, we do not think that the High Court has
committed any error in refusing to exercise its discretionary jurisdiction
under Section 446 of the Companies Act. The appeal is dismissed. No costs.






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