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PETITIONER:
ALLAHABAD BANK
Vs.
RESPONDENT:
CANARA BANK & ANOTHER
DATE OF JUDGMENT: 04/04/2000
BENCH:
M.J.Rao, N.S.Hegde
JUDGMENT:
M.JAGANNADHA RAO,J.
Leave granted.
The case raises issues relating to the impact of the
provisions of the Recovery of Debts due to Banks and
Financial Institutions Act, 1993 (hereinafter called the RDB
Act ) on the provisions of the Companies Act, 1956. The
immediate dispute before us is between two nationalised
Banks, the Allahabad Bank (appellant) on the one hand which
has obtained a simple money decree against the
debtor-company (M/s M.S.Shoes (East) Co. Ltd. from the
Debt Recovery Tribunal at Delhi under the RDB Act and the
Canara Bank on the other, whose claim as a secured creditor
is still pending before the same Tribunal at Delhi against
the same company. The Allahabad Bank has appealed before us
against an order passed by the learned Company Judge under
sections 442 and 537 of the Companies Act, (in a winding up
petition by Ranbaxy Ltd.) staying the sale proceedings taken
out by the Allahabad Bank before the Recovery Officer under
the RDB Act. Applications for winding up the defendant
company are pending in the Delhi High Court. As yet no
winding up order has been passed nor a provisional
liquidator appointed as contemplated by section 446(1).
Point has been raised by the respondent - Canara Bank that
the appellant Allahabad Bank is obliged to seek leave of the
Company Court under the Companies Act, 1956 and the Company
Court can stay these proceedings as aforesaid under Sections
442 and 537 for the ultimate purpose of deciding the
priorities, in the event of a winding up order or other
order appointing a provisional liquidator being passed under
section 446(1) of the Companies Act, 1956. After the
appellant obtained decree from the Debt Recovery Tribunal,
some properties of the company have been sold by the
Recovery Officer. Appellant contends that the Tribunal
under the RDB Act can itself deal with the question of
appropriation of sale proceeds in respect of sales of the
company properties held at the instance of the appellant and
the priorities and that the appellant alone is entitled to
all the sums so realised. The matter was argued and
judgment was reserved. Thereafter, our attention was
invited by the learned counsel for the respondent - Canara
Bank to the Amending Ordinance(Ordinance 1 of 2000) which
came into force with effect from 17.1.2000. The effect of
the Ordinance and in particular section 19(19) then fell for
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consideration. Question of distribution of the sale
proceeds by Company Court/Tribunal and method of working out
priorities among creditors was argued. The facts of the
case are as follows: The appellant Bank filed O.A.No.109 of
1995 before the Debt Recovery Tribunal, Delhi under section
19 of the RDB Act, 1993 for recovery of Rs.21,49,29,520 and
a simple money decree was passed on 13.1.1998 with interest
at 18% and interest tax levy at 0.75% p.a. Recovery Case
(R.C.No.9 of 98) was filed by the Allahabad Bank for
recovery before the Recovery Officer. The debtor Company
filed appeal No.270 of 1998 before the appellate Tribunal
and there was no stay inasmuch as there was default in
deposit of the money directed to be deposited. O.A. No.784
of 1996 was filed by the Canara Bank also under the RDB Act
in the Debt Recovery Tribunal, Delhi for a decree for
Rs.14,40,05,982.98 plus interest and it was said that a sum
of about Rs.25 crores was due from the same company. The
said O.A. of Canara Bank is pending in the Delhi Tribunal
under the RDB Act. The Canara Bank filed interlocutory
application before the Recovery Officer for impleadment in
the said recovery case of the appellant, viz., R.C.9/98
seeking pro-rata distribution of sale proceeds from auctions
of the debtor company’s properties. The appellant Bank
resisted the same contending that inasmuch as no orders have
been passed in favour of the Canara Bank in its claim filed
before the Delhi Tribunal against the same company, there
was no question of impleading the Canara Bank. As regards
proportionate disbursement of sale proceeds, it was observed
that that question was premature and that the said issue
could be considered after sale proceeds were received by the
Tribunal. These applications were dismissed on 28.9.98.
The property of the debtor company situated at Village
Kherki Daula, admeasuring Ac 32.64 was sold on 8.1.99 for
Rs.2,30,11,200. The sale was confirmed on 16.2.99 by the
Recovery Officer. Property of the Company at village
Dundahera admeasuring Ac 4.23 was also sold on 15.1.99 for
Rs.3,17,34,375, but the Recovery Officer declined to confirm
that sale and directed fresh auction and the appellant Bank
filed W.P. under Articles 226, 227. Canara Bank then filed
applications in the Debt Recovery Tribunal under section 22
of the RDB Act in January,1999 seeking stay of recovery
proceedings in RC No.9/98. They were heard on 25.2.99,
adjourned to 3.3.99 then to 5.3.99. On 5.3.99, the counsel
for Canara Bank informed the Recovery Officer that it had
filed Company application No.296 of 1999 in Company Petition
No.141/95 (being a winding up petition filed by Ranbaxy Ltd.
against M.S.Shoes Co.) under sections 442, 537 of the
Companies Act for stay of the appellant’s Recovery Case, RC
No.9/98. The said CA 296/99 was filed by Canara Bank in CP
141/95 under section 442 and section 537 of the Companies
Act seeking stay of RC 9/98 and for staying sales of assets
of company by the appellant Bank. Later on Canara Bank
filed CA 323/99 again under section 442 and section 537 for
similar reliefs as in CA 296/99. On 9.3.99, the learned
Company Judge passed the impugned order in CA 323/99 under
section 442 read with section 537 of the Companies Act
staying the further sale of assets of the Company in RC 9/98
in OA 109/95 and also restraining disbursement of monies
already realised in other sales. It is against the above
order dated 9.3.99 that this appeal has been preferred.
(While narrating the facts, we have not referred to a number
of other proceedings taken out by the debtor- company before
various Courts to stall the sales. In fact allegations have
been made that the action of the Canara Bank in trying to
stall sales - which are being held at the instance of the
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Allahabad Bank - was intended to benefit the
debtor-company.These allegations were, of course, denied by
the Canara Bank. We shall refer to some subsequent events
which took place during the pendency of this appeal. On
14.5.99 this Court passed an order in favour of the
Allahabad Bank directing that the sale of the debtor
company’s property in shed No.15 to go on but that the sale
proceeds be not distributed. Unfortunately, the sale was
not held for quite some time due to an omnibus stay order
dated 29.6.99 passed by the Tribunal at Delhi. That order
was stayed by the Appellate Tribunal, Bombay on 29.6.99.
The sale did not take place even by 7.1.2000. This Court
then issued further orders on 7.1.2000 for sale of the
company’s property in Shed No.15. Thereafter, sale of
Industrial Shed No.15/Category-II under SFS at Rohtak Road,
Industrial Complex, New Delhi-110005 was held on 28.1.2000.
(The raw material and machinery in the shed which were said
to have been mortgaged to Canara Bank were removed and
segregated. An order was passed that an inventory be
prepared and to remove the pledged property). It appears
the sale proceeds of about Rs. 20 lakhs are in deposit in
this Court. Now, the position is that some sale proceeds
are in deposit in the Tribunal and some in this Court, all
such sales having been held at the instance of the appellant
Bank alone. Questions have been raised by the respondent as
to whether the Tribunal can entertain proceedings for
recovery, execution proceedings, and also for distribution
of monies realised by sales of properties of a company
against which winding up proceedings are pending, whether
leave is necessary and as to which Court is to distribute
the sale proceeds and according to what priorities among
various creditors? In this appeal, Sri Soli Sorabjee, the
learned Attorney General for India appearing for the
appellant, Allahabad Bank has submitted that the RDB Act of
1993 is a special statute intended for expeditious
adjudication and recovery of debts due to banks and
financial institutions and it contains two crucial
provisions. One of them is section 18 which ousts the
jurisdiction of all Courts or other authorities (except the
Supreme Court and the High Court exercising powers under
Articles 226, 227) in relation to matters covered by section
17 and that section 17 covers the entire procedure from the
filing of an application under section 19, to the
‘adjudication’ and ‘recovery’. These matters are taken out
from the purview of the Companies Act, including sections
442, 537 and section 446 of the said Act. The proceedings
under the RDB Act cannot be stayed by the Company Court nor
can they be transferred to the Company Court. No leave of
the Company Court is necessary either for the filing of the
OA for adjudication of the debt nor for executing the decree
passed by the Tribunal. Section 34(1) gives overriding
effect to the provisions of the Act save as provided in
section 34(2). Section 34(2) as amended by Ordinance 1/2000
proceedings saves only six statutes from the purview of
section 34(1). The Companies Act, 1956 is not one of them.
Hence, the RDB Act, 1993 overrides sections 442, 537 and
also section 446 of the Companies Act. It is contended that
even otherwise section 446 cannot be invoked in this case
because there is no winding up order nor an order appointing
a provisional liquidator so far. So far as principles
underlying section 73 CPC are concerned, even if
applicable,- on facts, they are not attracted before the
Tribunal since no decrees have been obtained from any Civil
Court or Debt Recovery Tribunal by the Canara Bank
(respondent) nor any steps as visualised by section 73 have
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been taken by the Canara Bank. It is urged that Courts must
interpret the RDB Act of 1993 so as to subserve the purpose
of realisation of thousands of crores of Bank funds which
are due. The legislature intended to avoid the long drawn
proceedings in the Civil Court as well as under section 442
and 446 and 537 of the Companies Act and this is now clear
from section 19(19) as re-enacted by Ordinance 1/2000 which
permits even the working out of priorities by the Tribunal.
Several rulings of this Court and of High Courts under
various other statutes have been cited before us and we
shall refer to them at the appropriate stage. It is
submitted that the appellant Bank having got a decree and
having got the properties sold is solely entitled to the
entirety of these proceeds and there is no question of the
appellant sharing the sale proceeds with others nor is it
necessary to wait till the Canara Bank gets a decree in its
O.A. pending before the Delhi Tribunal. Important
submissions have been made by the learned Attorney General
as to the effect of section 19(19) introduced by Ordinance
1/2000, it is contended by the learned Attorney General that
only section 529A of the Companies Act is attracted and that
too for a limited purpose if a question of "workman’s
portion" is involved. No such question has arisen so far.
Hence no other provision of the Companies Act, much less
section 529(1) or (2) are attracted. In the Company Court,
any secured creditor who has not stood out of winding up but
wants to come before the Company Court has to give up his
security and prove his debt before the liquidator to seek
dividends as per the insolvency rules mentioned in section
529(1), read with sections 45 to 50 of the Provincial
Insolvency Act and stand in the queue along with all
unsecured creditors under section 529(2). Even that
procedure is applicable only in respect of any monies
realised by the Company Court and not by the Tribunal. The
limited extent to which secured creditors can claim priority
under the RDB Act is as limited by section 19(19) of the RDB
Act and this is covered by section 529A alone read with
sub-clause (c) to the proviso to section 529(1). The effect
of these provisions is that if any monies are realised by
Canara Bank by standing outside winding up and if any part
of such realisations of the Canara Bank are taken away by
the liquidator for payment to workmen, only to the extent of
such "workmen’s portion", can the Canara Bank have priority
over other creditors. Otherwise, Canara Bank cannot invoke
Section 529(1), (2) and that too before the Tribunal. On
the other hand, learned counsel for the Canara Bank Sri
Y.P.Narula has submitted that when a winding up petition is
pending in the Company Court, it is necessary that the leave
of the Company Court is obtained for obtaining a decree
before the Tribunal or for execution before the Recovery
Officer. Sections 442, 446, 537 applied even to proceedings
under the RDB Act. Leave is necessary under section 537
even if no winding up order is passed. It is therefore
necessary to stay the sale proceedings before the Recovery
Officer or the distribution of sale proceeds. The Company
Court alone can sell the properties of the Company in the
winding up proceedings. The recovery proceedings must be
stayed and then the proceedings must be transferred to the
Company Court and thereafter, once the proceeds of sale come
before the Company Court, the said Court alone will have to
distribute the monies according to priorities as mentioned
in sections 446(2)(d), 529, 529A and 530 etc. The Canara
Bank is also a nationalised bank and merely because the
Allahabad Bank has been able to get a decree from the Debt
Recovery Tribunal earlier than the Canara Bank, under the
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RDB Act, the Allahabad Bank can not be allowed to
appropriate the entire sale proceeds recovered by it. Even
if the Canara Bank has only a ‘claim’ and not a decree - in
view of section 2(g), its security has preference. Unlike
section 73 CPC, section 446 does not require a decree and it
is sufficient to prove a debt before the liquidator.
Alternatively, it is submitted that even before the Tribunal
section 73 CPC and also section 529(1) and (2) of the
Companies Act read with sections 529A, 530 etc. are
attracted for purposes of distribution of the sale proceeds
and working out priorities, assuming that jurisdiction of
the Company Court is excluded in so far as recovery of debts
due to Banks and financial institutions are concerned. From
the aforesaid contentions, the following points arise for
consideration: (1) Whether in respect of proceedings under
the RDB Act at the stage of adjudication for the money due
to the Banks or financial institutions and at the stage of
execution for recovery of monies under the RDB Act, the
Tribunal and the Recovery Officers are conferred exclusive
jurisdiction in their respective spheres? (2) Whether for
initiation of various proceedings by the Banks and financial
institutions under the RDB Act, leave of the Company Court
is necessary under Sections 537 before a winding up order is
passed against the Company or before provisional liquidator
is appointed under section 446(1) and whether the Company
Court can pass orders of stay of proceedings before the
Tribunal, in exercise of powers under section 442? (3)
Whether after a winding up order is passed under Section 446
(1) of the Company Act or a provisional liquidator is
appointed, whether the Company Court can stay proceedings
under the RDB Act, transfer them to itself and also decide
questions of liability, execution, and priority under
section 446 (2) and (3) read with sections 529, 529A and 530
etc. of the Companies Act or whether these questions are
all within the exclusive jurisdiction of the Tribunal? (4)
Whether, in case it is decided that the distribution of
monies is to be done only by the Tribunal, the provisions of
section 73 CPC and sub- clause (1) and (2) of section 529,
section 530 of the Companies Court also apply - apart from
section 529A - to the proceedings before the Tribunal under
the RDB Act? (5) Whether in view of provisions in section
19(2) and 19(19) as introduced by Ordinance 1/2000, the
Tribunal can permit the appellant Bank alone to appropriate
the entire sale proceeds realised by the appellant except to
the limited extent restricted by section 529A? Can the
secured creditors like the Canara Bank claim under section
19(19) any part of the realisations made by the Recovery
Officer and is there any difference between cases where the
secured creditor opts to stand outside the winding up and
where he goes before the Company Court? (6) What is the
relief to be granted on the facts of the case since the
Recovery Officer has now sold some properties of the company
and the monies are lying partly in the Tribunal or partly in
this Court? Points 1: This point concerns the question as
to the exclusive jurisdiction of the Tribunal and the
Recovery Officer in their respective spheres. The RDB Act
is, as disclosed by its preamble, an Act to provide for the
establishment of Tribunals for expeditious adjudication and
recovery of debts due to banks and financial institutions.
The said Act is the result of two Reports, one of 1981 of a
Committee headed by Sri T. Tiwari and the other by a
Committee headed by Sri M. Narasimham in 1991. As on
30.9.90, more than 15 lakh cases filed by public sector
Banks and about 304 cases filed by financial institutions
were pending in various civil courts, and recovery of debts
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to Banks in a sum of Rs.5622 crores and to financial
institutions in a sum of Rs. 391 crores, was held up. That
was the immediate cause for the passing of the Act. Under
sub-clause (4) of Section 1 of the RDB Act, it is stated
that the Act will not apply if the debt due is less than Rs.
10 lakhs or such other amount as may be notified. Section
2(d) defines ’Banks’ as including (i) Bank Companies, (ii)
corresponding new banks, (iii) State Bank of India, (iv)
subsidiary Banks and (v) Regional Rural Banks. ’Banking
Company’ is defined in Section 2(e) and ’Corresponding New
Bank is defined in Section 2(f) and it refers to Section
5(da) of the Banking Regulation Act, 1949. Clause (da) of
Section 5 of the Banking Regulation Act, 1949, defines
’corresponding new banks’ as Banks constituted under the
Banking Companies ( Acquisition and Transfer of
Undertakings) Act, 1970 and Section 3 of the Banking
Companies ( Acquisition and Transfer of Undertakings) Act,
1980. About 20 nationalised banks have come under the
purview of RDB Act. Section 2(h) defines ’financial
institutions’ and refers to public financial institutions
falling within Section 4A of the Companies Act, 1956 -
namely (i) the Industrial Credit and Investment Corporation
of India Ltd; (ii) the Industrial Finance Corporation of
India; (iii) the Industrial Development Bank of India;
(iv) the Life Insurance Corporation of India and (v) the
Unit Trust of India. Other financial institutions since
notified are large in number. Section 2(g) as amended by
Ordinance 1/2000 defines ’debt’ as meaning any liability
which is "claimed" as due from any person to a Bank or
financial institutions. It includes the liability and
interest in cash or otherwise, whether secured or unsecured
or whether payable under a decree or order of any civil
Court or otherwise and subsisting, and legally recoverable
on, the date of the application filed to the Tribunal.
Exclusive Jurisdiction of the Tribunal under Sections 17 18
and 25 of the RDB Act: (i) adjudication, (ii) execution The
initial question is as to the jurisdiction of the Tribunal
under Sections 17 and 18 of the RDB Act in the matter
passing the order of adjudication and to what extent it is
exclusive. The next question will be whether the
jurisdiction of the Recovery Officer is also exclusive for
purposes of execution of the adjudication order passed by
the Tribunal. (i)adjudication by Tribunal: Does the
Tribunal have exclusive jurisdiction? We shall refer to
Sections 17 and 18 in Chapter III of the RDB Act which deal
with adjudication of the debt. "Section 17: Jurisdiction,
powers and authority of Tribunals - (1) A Tribunal shall
exercise, on and from the appointed day, the jurisdiction,
powers and authority to entertain and decide applications
from the banks and financial institutions for recovery of
debts due to such banks and financial institutions. (2) An
Appellate Tribunal shall exercise, on and from the appointed
day, the jurisdiction, powers and authority to entertain
appeals against any order made, or deemed to have been made,
by a Tribunal under this Act. Section 18: Bar of
Jurisdiction- On and from the appointed day, no court or
other authority shall have, or be entitled to exercise, any
jurisdiction, powers or authority ( except the Supreme
Court, and a High Court exercising jurisdiction under
Article 226 and 227 of the Constitution) in relation to the
matters specified in Section 17." It is clear from Section
17 of the Act that the Tribunal is to decide the
applications of the Banks and Financial Institutions for
recovery of debts due to them. We have already referred to
the definition of ’debt’ in Section 2(g) as amended by
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Ordinance 1/2000. It includes "claims" by Banks and
financial institutions and includes the liability incurred
and also liability under a decree or otherwise. In this
context Section 31 of the Act is also relevant. That
section deals with transfer of pending suits or proceedings
to the Tribunal. In our view, the word ’proceedings’ in
Section 31 includes an ’execution proceedings’ pending
before a Civil Court before the commencement of the Act.
The suits and proceedings so pending on the date of the Act
stand transferred to the Tribunal and have to be disposed of
"in the same manner" as applications under Section 19. In
our opinion, the jurisdiction of the Tribunal in regard to
adjudication is exclusive. The RDB Act requires the
Tribunal alone to decide applications for recovery of debts
due to Banks or financial institutions. Once the Tribunal
passes an order that the debt is due, the Tribunal has to
issue a certificate under Section 19(22)(formerly under
section 19(7)) to the Recovery Officer for recovery of the
debt specified in the certificate. The question arises as
to the meaning of the word ’recovery’ in Section 17 of the
Act. It appears to us that basically the Tribunal is to
adjudicate the liability of the defendant and then it has to
issue a certificate under Section 19(22). Under Section 18,
the jurisdiction of any other court or authority which would
otherwise have had jurisdiction but for the provisions of
the Act, is ousted and the power to adjudicate upon the
liability is exclusively vested in the Tribunal. (This
exclusion does not however apply to the jurisdiction of the
Supreme Court or of a High Court exercising power under
Articles 226 or 227 of the Constitution). This is the
effect of Sections 17 and 18 of the Act. 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 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 (1): Act to have over-riding effect-
(1) Save as otherwise provided in sub- section (2), the
provisions of this Act shall 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
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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. There is one more reason as to
why it must be held that the jurisdiction of the Recovery
Officer is exclusive. The Tiwari Committee which
recommended the constitution of a Special Tribunal in 1981
for recovery of debts due to Banks and financial
institutions stated in its Report that the exclusive
jurisdiction of the Tribunal must relate not only in regard
to the adjudication of the liability but also in regard to
the execution proceedings. It stated in Annexure XI of its
Report that all "execution proceedings" must be taken up
only by the Special Tribunal under the Act. In our opinion,
in view of the special procedure for recovery prescribed in
Chapter V of the Act, and section 34, execution of the
certificate is also within the exclusive jurisdiction of the
Recovery Officer. Thus, the adjudication of liability and
the recovery of the amount by execution of the certificate
are respectively within the exclusive jurisdiction of the
Tribunal and the Recovery Officer and no other Court or
authority much less the Civil Court or the Company Court can
go into the said questions relating to the liability and the
recovery except as provided in the Act. Point 1 is decided
accordingly. Points 2 and 3: Does the Act override the
provisions of Sections 442 and 537 and Section 446 of the
Company Act? These points deal with the question whether
the Company Court can stay proceedings before the Tribunal
or the Recovery Officer under section 442 and whether the
said court can stall proceedings under section 537 unless
leave is obtained. Question also arises in regard to
‘priorities’ under section 446(2)(d), read with sections
529, 529A, 530 of the Companies Act and whether the Company
Court alone can distribute and decide priorities among
creditors or whether the Tribunal can do this in view of
section 19(19) of the RDB Act, as introduced by Ordinance 1
of 2000. It is necessary first to refer to Sections 442,
537 and then to 446(1)(2) and 446(3). of the Companies Act.
Sections 442 and 537 deal with situations before the passing
of a winding up order. Under section 442, at any time after
the filing of a winding up petition and before the passing
of a winding up order, the Company, or any creditor or
contributors may apply for stay of suits or proceedings
before the High court/supreme Court and for this purpose
file an application in those Courts. If, they are pending
in other courts, applications may be filed in the Company
court to stay those proceedings and the said Courts where
applications are filed can stay the suits or proceedings.
Under section 537, where any Company is being wound-up by or
subject to the supervision of the Court, any attachment,
distress or execution put in force, without leave of the
Company Court, against the estate or effects of the Company,
after the commencement of the winding up, or any sale held -
without the leave of the Court, if any of the properties or
effects of the Company, after such commencement, shall be
void. Nothing in this section applies to any proceedings
for the recovery of any tax or import or any dues payable to
the government. After a winding up order is passed,
provisions of section 446 become applicable. Under
sub-clause (1) of section 446, when a winding up order is
passed or the official liquidator is appointed as a
provisional liquidator, no suit or other legal proceeding
shall be commenced, or if pending at the date of winding up
order, shall be proceeded with against the company,except by
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leave of the Court and subject to such terms as the Court
may impose. Under sub-clause (2), the Company court shall,
notwithstanding anything contained in any other law for the
time being inforce, have jurisdiction to entertain, or
dispose of (a) any suit or proceeding by or against the
Company (b) any claim made by or against the Company
(including claims by or against any of its branches in
India); (c) any application made under section 391 by or in
respect of the Company; (d) any question of priorities or
any other question whatsoever, whether of law or fact, which
may relate to or arise in course of the winding up of the
Company. This provision applies whether such suit or
proceeding has been institutes, or is instituted, or such
claims or question has arisen or arises or such application
has been made or is made before or after the order for the
winding up of the Company, or before or after the
commencement of the Companies (Amendment) Act, 1960.
Sub-clause (3) of section 446 is important. It states that
any suit or proceeding by or against the Company which is
pending in any Court other than that in which the winding up
of the Company if proceeding, may, notwithstanding anything
contained in any other law for the time being in force, be
transferred to and disposed of by that Court. Question of
leave and control by the Company Court: Learned Attorney
General has, in this connection, relied upon Damji Valji
Shah & Another vs. Life Insurance Corporation of India &
Others [1965 (3) SCR 665 = AIR 1966 SC 135] to contend that
for initiating and continuing proceedings under the RDB Act,
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. 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 LIC 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 9.1.1959. The claim was filed by the LIC
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 LIC tribunal, there was no purpose of requiring
leave of the Company Court or permitting transfer. It was
held by this Court: "In view of section 41 of the LIC 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 LIC Act. It must
follow that the consequential provisions of sub-section (1)
of section 446 of the Companies Act will not operate on the
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proceedings which be pending before the Tribunal or which
may be sought to be commenced before or." Just as the
Company Court was held incompetent to stay or transfer and
decide the claims made before the LIC Tribunal because the
Company Court could not decide the claims before the LIC
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, 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. It may also be noticed that in the LIC Act
of 1956, there was no provision like section 34 of the RDB
Act giving overriding effect to the provisions of the LIC
Act. Still this Court upheld the exclusive jurisdiction of
the LIC Tribunal observing as follows: "the provisions of
the special Act i.e. the LIC Act will override the
provisions of the general Act, the Companies Act which is an
Act relating to Companies in general." We are of the view
that the appellant’s case under the RDB Act - with an
additional section like section 34 - is on a stronger
footing for holding that leave of the Company Court is not
necessary under section 537 or under section 446 for the
same reasons. If the jurisdiction of the Tribunal is
exclusive, the Company Court cannot also use its powers
under section 442 against the Tribunal/Recovery Officer.
Thus, sections 442, 446 and 537 cannot be applied against
the Tribunal. Purposive interpretation adjudication,
execution and working out priorities : As there is some
difference between various High Courts as to the
applicability of the principle of purposive interpretation
to the RDB Act, we shall deal with the said question. It is
true that it has been held in several judgments of this
Court that there is a special purpose behind the provisions
in sections 442, 446 and 537 of the Companies Act, 1956. It
has been, in fact, so stated by the Federal Court in
Governor General in Council Vs. Shirmani Sugar Mills Ltd;
( AIR (33) 1946 SC 16) under the Old Companies Act, 1913.
Similarly, this Court in Sudarshan Chits (India) Ltd. Vs.
O. Sukukmaran Pillai and Ors. (1984(4) SCC 657) observed
that -not satisfied with sections 442 and 537 and also with
Section 446(1) (which was similar to Section 171 of the Old
Companies Act, 1913),- Parliament enacted the Companies (
Amendment) Act, 1960 and brought in the present sub-sections
(2) and (3) into section 446. This Court pointed out that
instead of allowing claims to be proceeded with against
these companies in various Civil courts, Parliament declared
that wherever winding up proceedings were pending or when an
order of winding up was passed, it was necessary to save the
company "from this prolix and expensive litigation and to
accelerate the disposal of winding up proceedings", and "a
cheap and summary remedy" was devised by conferring
jurisdiction on the Company Court to entertain suits and
proceedings in respect of claims for and against the
company. That being the object behind enacting Section
446(2), it was held that the Companies Act "must receive
such construction at the hands of the court as would advance
the object and at any rate not thwart it". In other words,
the principle of purposive interpretation was, as contended
by respondent’s counsel, applied while construing these
provisions of the Companies Act. This principle was applied
by some High Courts to hold that provisions of the Companies
Act can be invoked against the Tribunal. While it is true
that the principle of purposive interpretation has been
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applied by the Supreme Court in favour of jurisdiction and
powers of the Company Court in Sudarshan Chits (P) Ltd.
case, and other cases the said principle, in our view,
cannot be invoked in the present case against the Debt
Recovery Tribunal in view of the superior purpose of the RDB
Act and the special provisions contained therein. In our
opinion, the very same principle mentioned above equally
applies to the Tribunal/Recovery Officer under the RDB Act,
1993 because the purpose of the said Act is something more
important than the purpose of sections 442, 446 and 537 of
the Companies Act. It was intended that there should be a
speedy and summary remedy for recovery of thousands of
crores which were due to the Banks and to financial
institutions, so that the delays occurring in winding up
proceedings could be avoided. Tiwari Committee Report:
adjudication, execution & priorities: In the Tiwari
Committee Report of 1981, it was stated in Chapter VIII,
para 8.2 that in respect of suits by Banks and financial
institutions there have been abnormal delays at the stage of
trial as well as the stage of execution in various courts
and hence it stated: "the principle that the State should
have a special procedure to enforce its own demands should
equally be extended to the recovery of dues of banks and
financial institutions as well". In fact, it was
recommended that a Tribunal under Articles 323A and 323B
should be constituted. The Tribunal should not be bogged
down by the Civil Procedure Code but should have a simple
procedure guided only by principles of natural justice. It
was stated by the tribunals: "should follow simple and
summary procedure in accordance with the principles of
natural justice". The Tiwari Committee also prepared a
draft of the proposed legislation, in Annexure XI to its
Report. It recommended disposal of cases in three months.
It stated in Annexure XI to the Report that all "execution
proceedings" were to be initiated only before the
Adjudication Officer so that such execution proceedings
could be completed speedily. The above Report of 1981 was
followed ten years later by the M. Narasimham Committee
Report which in Chapter V stated that the ’special
legislation’ recommended by the Tiwari Committee in 1981
should be immediately enacted. The latter Committee too
observed: "We regard setting up the Special Tribunals as
critical to the successful implementation of the financial
sector reforms", to ensure speedy remedy of adjudication and
execution against defaulters. Even in regard to
‘priorities’ among creditors, the said Committee stated in
Annexure I as follows: "The Adjudication Officer will have
such power to distribute the sale proceeds to the Banks and
Financial Institutions being secured creditors, in
accordance with inter-se agreement/arrangement between them
and to the other persons entitled thereto in accordance with
the priorities in the law." The above recommendations as to
working out ‘priorities’ have now been brought into the Act
with greater clarity under section 19(19) of Ordinance
1/2000. Priorities, so far as the amounts realised under
the RDB Act are concerned, are to be worked out only by the
Tribunal under the RDB Act. Section 19(19) of the RDB Act
reads as follows: "Where a certificate of recovery is
issued against a company registered under the Companies Act,
1956, the Tribunal may order the sale proceeds of such
company to be distributed among its secured creditors in
accordance with the provisions of section 529A of the
Companies Act, 1956 and to pay the surplus, if any, to the
Company." Section 19(19) is clearly inconsistent with
section 446 and other provisions of the Companies Act. Only
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section 529A is attracted to proceedings before the
Tribunal. Thus, on questions of adjudication, execution and
working out priorities, the special provisions made in the
RDB Act have to be applied. Special law vs. general law:
At the same time, some High Courts have rightly held that
the Companies Act is a general Act and does not prevail
under the RDB Act. They have relied upon Union of India vs.
India Fisheries ( 1965(3) SCR 679) There can be a situation
in law where the same statute is treated as a special
statute vis-a-vis one legislation and again as a general
statute vis-a-vis yet another legislation. Such situations
do arise as held in Life Insurance Corporation of India vs.
D.J.Bahadur [AIR 1980 SC 2181]. It was there observed:
"for certain cases, an Act may be general and for certain
other purposes, it may be special and the Court cannot blur
a distinction when dealing with finer points of law". For
example, a Rent Control Act may be a special statute as
compared to the Code of Civil Procedure. But vis-a-vis an
Act permitting eviction from public premises or some special
class of buildings, the Rent Control Act may be a general
statute. In fact in Damji Valji Shah and Anr. Vs. Life
Insurance Corporation of India and Ors. ( 1965(3) SCR
665=AIR 1965 SC 135 already referred to), this Court has
observed that vis-a-vis the LIC Act, 1956, the Companies
Act, 1956 can be treated as a general statute. This is
clear from para 19 of that judgment. It was observed:
"Further, the provisions of the Special Act, i.e. LIC Act,
will override the provisions of the general Act, viz; the
Companies Act which is an Act relating to companies in
general". Thus, some High Courts rightly treated the
Companies Act as a general statute, and the RDB Act as a
special statute overriding the general statute. Special law
versus special law: Alternatively, the Companies Act, 1956
and the RDB Act can both be treated as special laws, and the
principle that when there are two special laws, the latter
will normally prevail over the former if there is a
provision in the latter special Act giving it overriding
effect, can also be applied. Such a provision is there in
the RDB Act, namely, section 34. A similar situation arose
in Maharashtra Tubes Ltd. Vs. State Industrial and
Investment Corporation of India (1993(2) SCC 144) where
there was inconsistency between two special laws, the
Finance Corporation Act, 1951 and the Sick Industries
Companies (Special Provisions) Act, 1985. The latter
contained Section 32 which gave overriding effect to its
provisions and was held to prevail over the former. It was
pointed out by Ahmadi, J. that both special statutes
contained non-obstante clauses but that the "1985 Act being
a subsequent enactment, the non-obstante clause therein
would ordinarily prevail over the non-obstante clause in
Section 46-B of the 1951 Act unless it is found that the
1985 Act is a general statute and the 1951 statute is a
special one". Therefore, in view of section 34 of the RDB
Act, the said Act overrides the Companies Act, to the extent
there is anything inconsistent between the Acts. other
rulings of Supreme Court and High Courts cited by counsel:
It was then argued for the respondents that the proceedings
before the Tribunal/Recovery Officer under the RDB Act, 1993
are ‘legal proceedings’ and could be stayed under section
537 read with section 442 and reliance was placed on the
decision of the Federal Court in Governor General in Council
Vs. Shirmani Sugar Mills Ltd. ( AIR (33) 1946 FC 16). In
our view, this judgment cannot help the respondents. In the
above case the Income Tax Officer tried to demand income tax
from the Company through a certificate got issued by the
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Collector and the demand was sent to the official
liquidator. The official liquidator filed an application
under Section 171 of the Old Act (corresponding to Section
446(1) of the 1956 Act) and obtained stay and required a
direction from the Company Court that the Income Tax Officer
should seek leave under Section 232(1)(a) ( corresponding to
section 537 of the 1956 Act). It was held that the limited
priority extended to Crown debts was not sufficient to
enable the Income Tax Officer to avoid the provisions of the
Companies Act and that the Crown was bound by the provisions
of the Companies Act. The cases in Re Webb and Co. 1922(2)
Ch.369 (A) and Food Controller Vs. Cork ( 1923 AC 647) were
followed. It was also held that the proceedings taken by
the Income Tax Officer though they were not akin to
proceedings in a court, they were still ’legal proceedings’
as they were initiated under a statute. In our opinion,
this decision cannot help the respondents inasmuch as, as
pointed out above, the jurisdiction of the Tribunal/Recovery
Officer under the RDB Act is exclusive and Section 34 gives
overriding effect to the provisions of the RDB Act. No
provision similar to section 34 was available in the above
case before the Federal Court. The decision of this Court
in M.K. Ranganathan Vs. Govt. of Madras ( AIR 1955 SC
604) cannot also help the respondent. That was a case in
which a secured creditor standing outside the winding up
sold the property of the company, pending a winding up
petition, by private sale. It was pointed out by this Court
(see para 15) that such a sale by a secured creditor, who
opted to stand outside the winding up proceedings, would be
permissible without leave of the Company Court. It might be
different if the secured creditor tried to sell the property
through a Court by filing a suit or other proceeding. It
was argued there that the 1936 Amendment to the Companies
Act in section 232(1) (corresponding to Section 537 of the
new Act) introduced the words "or any sale held without
leave of the court of any of the properties", and those
words were introduced for the purpose of staying even
private sales by the secured creditor unless leave was
obtained for such sales. This contention was rejected and
it was held that, even after the 1936 Amendment, the private
sale by the secured creditor standing outside the winding up
proceedings was valid without leave of the Company Court.
Learned counsel for respondent relied upon para 24 of the
judgment which stated that Section 171 (corresponding to
section 446(1)) was supplementary to Section 232 and 229 (
corresponding to Section 529 of the new Act). But the said
observations, in our view, cannot help the respondents, in
view of the reasons given above. When the matter was listed
for fresh arguments, learned counsel for the respondent
relied upon Ram Narain vs. The Simla Banking & Industrial
Co. Ltd. [AIR 1956 SC 614]] to contend that in that case
the Court ( the High Court of Punjab) which was winding up
the Banking company was held entitled to transfer the
execution case pending before a Tribunal to the High Court
and to dispose of the same. That case is, in our view,
distinguishable. The facts there were that the Tribunal was
one constituted under the Displaced Persons (Debt
Adjustment) Act, 1951, while the High Court of Punjab was
exercising special powers under sections 45A, 45B & 45C of
the Banking Companies Act, 1949 (as amended in 1953) for
winding up a Banking Company. Earlier, under the 1913 Act,
the District Court was dealing with winding up proceedings
but so far as Banking Companies were concerned, the Banking
Companies Act, 1949 was amended in 1953 giving powers to the
High Court to wind up Banking companies. It was held that
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the latter Act of 1953 prevailed over the former Act of 1951
in view of section 45A, and that the legislative intention
was to prescribe a speedy procedure for the winding up of
the Banking companies outside the provisions of the
Companies Act, 1913. Section 45B conferred exclusive
jurisdiction on the High Court (there the Punjab High Court)
in this behalf. The more important distinguishing feature
between that case and the present one is that section 2 of
the Banking Companies Act, 1949 specifically provided that
its provisions would be in addition to those in the
Companies Act and it was held that sections 171 and 232 of
the Companies Act, 1913 were available to the High Court as
a winding up Court to stay the execution proceedings taken
pursuant to the decree of the Tribunal under the 1951 Act
and to transfer them to the High Court. But the position
under the RDB Act is different. Sections 442, 446 and 537
are not saved by the RDB Act. Even section 34(2) of the RDB
Act does not save the provisions of the Companies Act.
Learned counsel for the respondent then relied upon certain
observations in a recent case in Industrial Credit and
Investment Corporation Vs. Srinivas Agencies ( 1996(4) SCC
165) made in relation to RDB Act, 1993 and to sections 529
and 529A of the Companies Act. That judgment related to a
batch of appeals against the judgment of the Andhra Pradesh
High Court dated 23.8.89 and certain SLPs. (C) 10101/91 and
11055/91 (from Kerala)(the Kerala SLPs were registered as
C.As.of 1996). ( see here facts in ICICI Vs. Vanjinad
Leathers Ltd. (AIR 1997 Ker.273). It has to be noticed
that when the A.P. High Court decided the matter and when
the special leave petitions from Kerala were filed in 1991,
the RDB Act, 1993 had not yet been enacted. But much later
by the time the Civil appeals came up for disposal on
22.2.96, the RDB Act of 1993 had been passed. The above
ruling of this Court did not concern itself with the RDB Act
directly on facts. The only issues which arose in that
case, as stated in para 5 of the judgment, were viz. (1)
when should leave of the winding up court be granted to a
secured creditor to proceed with the suit after an order of
winding up has been made (2) when should a winding up court
transfer to itself any suit or proceedings by or against the
Company during the period of the winding up? It was in that
connection that in para 9, a reference was made to an
argument by one of the counsel that in the case of suits
which were pending before the date of liquidation, the court
could grant leave imposing "reasonable conditions" even
against secured creditors so that genuine claims of other
secured creditors were not affected. As appears from para
10 of the judgment, the learned counsel appearing for one of
the parties in that case, appears to have incidentally
referred to the provisions of the RDB Act, 1993 which had by
then come to be enacted, for contending that while staying
suits, the Company Court could impose reasonable conditions,
keeping the rationale of the provisions of the RDB Act in
mind. In para 12, this Court accepted the submission of
counsel and in para 13, it was observed that while granting
leave to such secured creditors i.e in suits, the company
court "would also bear in mind the rationale behind the RDB
Act". In that connection sections 529 and 529A were also
referred to. The said observations do not, in our opinion,
have any bearing on the questions before us relating to the
exclusive jurisdiction of the Tribunal/Recovery Officer
under the RDB Act. Further, as we shall explain under
Points 4 and 5, section 19(19) of the Ordinance 1 of 2000,
refers only to section 529A and not to sections 529 (1) or
(2) and this is one other clear indication that the other
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provisions of the Companies Act are completely excluded.
The decision of the Delhi High Court in M/s Major Syntex
Ltd. Vs. Punjab and Sind Bank [(67)1977 Delhi Law Times
836] no doubt supports the contention of the respondents
that the Company Court’s jurisdiction prevails over that of
the Tribunal/Recovery Officer under the RDB Act, 1993. The
learned Company Judge in that case does, in fact, accept
that a statute which is a general one vis-a-vis another
statute can also be a special one, vis-a-vis yet another
statute. But the Court, in our view, was not correct in its
conclusion that, in this context, the Companies Act, 1956
was not a general statute. Further in the said judgment it
was stated that the "non-obstante clause in section 34 of
the RDB Act cannot apply because the Acts did not overlap".
According to the High Court, there was no provision like
Section 446 in the RDB Act laying down the procedure as to
what should be done in case of the passing of a winding up
order by the Company Court nor a provision for recovery of
amounts due from a company against which a winding up
petition was pending or was ordered or for distribution from
a common pool. But, now section 19(19) introduced by the
Ordinance 1/2000 clarifies and removes any such doubts in as
much as it refers to execution and distribution of sale
proceeds by the Tribunal/Recovery Officer. The observation
that the RDB Act does not operate in the same field and
hence, leave of the Company Court is necessary under Section
446(1), cannot therefore be accepted. We hold that the
Delhi High Court’s decision is not correctly decided. We
are also unable to agree with the decision of the Calcutta
High Court in UCO Bank Vs. Concast Products Ltd. (in
liquidation)[1996 (2) Com.L.J. 449]. In that case a suit
which was filed in the High Court by the Bank against the
company stood transferred to the Tribunal under the RDB Act
by virtue of section 31. Later on, the Company went into
liquidation. The High Court held that in view of section
446 of the Companies Act, 1956, the suit had to be
transferred back to the Company Court. This was done on the
basis that the Companies Act applied even to proceedings
before the Tribunal. This is not correct. In our view, the
decision of the Kerala High Court in ICICI Vs. Vanjinad
Leathers Ltd. ( AIR 1997 Ker.273) relied upon for the
appellant, is correctly decided. It was pointed out in that
case that the records leading to the decision in Srinivas
Agencies and batch ( 1996(4) SCC 165) show that suits filed
by Banks and financial institutions were pending in civil
Courts and a winding up petition was filed later on in the
High Court. The Kerala High Court held that the suits would
stand transferred to the Debt Recovery Tribunal under
section 31 of the RDB Act automatically and that section 446
of the Companies Act, 1956 could not be invoked in view of
section 34 of the RDB Act. The RDB Act was a special law
overriding another special law, the Companies Act. Leave of
the Company Court under Section 446(1) was not necessary nor
could the suit be transferred to the Company Court under
Section 446(2). Similarly, we are of the view that the
Patna High Court’s decision in Bihar Sales Pvt. Ltd. In re
[( Vol.96) Comp. Cases. 40] is also correctly decided.
There the decision of this Court in Srinivas Agencies was
not accepted as laying down anything specific about the RDB
Act and as to its interpretation. The decision of the
Kerala High Court in Vanjinad Leathers Ltd. was followed.
The decision of the Rajasthan High Court in Rajasthan
Finance Corporation Vs. Official Liquidator (1963(2)
Comp.LJ 309) relied upon for the respondent cannot be of any
help. That was a case which concerned itself with the State
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Finance Corporation Act, 1951. Section 537 of the Companies
Act was applied and it was held that the Companies Act did
not yield to the provisions of the State Finance Corporation
Act, 1951. There was no provision in the State Finance
Corporation Act, 1951 like section 34 which gave overriding
effect to its provisions. 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 2 and 3 are decided accordingly in favour of
the appellant and against the respondents. Point 4 and 5:
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
1/2000. Before we go to section 19(19), we would like to
dispose of another minor point raised by the respondent on
the basis of section 19(2). That sub-section permits other
banks or financial institutions to be impleaded in the main
application filed under section 19(1) by a Bank or a
financial institution. Question is whether Canara Bank can
be impleaded in the main application under section 19 at
this stage. We may point out that section 19(2) permits
such impleadment "at any stage of the proceedings before a
final order is passed". The final order here is the order
of adjudication under section 19(1) as to whether the debt
is due or not. In the present case, the adjudication order
in respect of the debt has already been made long back and
therefore section 19(2) does not permit any impleadment in
the main application under section 19(1) at this stage.
Hence, this relief for impleadment cannot be granted. We
shall now go into the effect of section 19(19) of the
Ordinance 1/2000. (a)Case where defendant company is not
ordered to be wound up: Where the defendant company is a
company against which no winding up order is passed, the
Company, in our view, is like any other defendant and if in
such a situation a question of priority arises before the
Tribunal, in respect of any monies realised under the RDB
Act, as between the Bank or financial institutions on the
one hand and the other creditors on the other, it will, in
our opinion, be necessary for the Tribunal to decide such
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questions of priority bearing in mind principles underlying
section 73 of the Code of Civil Procedure. Section 22 of
the RDB Act, in our view, gives sufficiently wide powers to
the Tribunal and the Appellate Tribunal to decide such
questions of priorities, subject only to the principles of
natural justice. This Court has explained that the powers
under section 22 are wider than those of Civil Courts and
the only restriction on its powers is that principles of
natural justice have to be followed. See Industrial Credit
and Investment Corporation of India Ltd. vs. Grapco
Industries Ltd. & Others [1999 (4) SCC 710] and Allahabad
Bank, Calcutta vs. Radha Krishna Maity & Others [1999 (6)
SCC 755]. But under section 73 CPC, sharing in the sale
proceeds ( here, sale proceeds realised under the RDB Act)
is permissible only if a person seeking such share has
obtained a decree or an order of adjudication from the
Tribunal and has also complied with other conditions laid
down under section 73. In the present case, the Canara Bank
is not in a position to invoke the principles underlying
section 73 CPC because it has not yet obtained any decree or
adjudication of its debt from the Tribunal. Nor has it
complied with other provisions underlying section 73 CPC.
Hence no relief can be granted on the basis of the said
principles. (b) Position of secured creditors standing
outside winding up and also not so standing out: The
discussion here is confined to sharing the realisations made
by the Recovery Officer under the RDB Act where winding up
proceedings are pending in the Company Court against the
defendant company. This is the crucial aspect of the case
upon which detailed arguments have been advanced by both
sides. Learned counsel for the respondent contended that
other secured creditors of the defendant company could seek
or share in the realisations made by the Recovery Officer.
Counsel relied upon the following words in section 19(19)
"to be distributed among its secured creditors" and
contended that though the said words are followed by the
words "in accordance with the provisions of section 529A of
the Companies Act, 1956", it is implicit that out of the
sale proceeds secured creditors are paid first. Counsel
submitted that, in any event, even if section 529A is
attracted, the provisions of section 529(1) and (2) are also
attracted by implication. The sale proceeds realised by the
appellant Bank will be subject to "claims" of the Canara
Bank as a secured creditor, even if it has not obtained a
decree or adjudication from the Tribunal. The mere
existence of the security is sufficient. And as a secured
creditor the Canara Bank will have priority over the
appellant Bank which has no security in its favour. On the
other hand, learned Attorney General has contended that in
respect of the monies realised under the RDB Act, the only
restriction on the distribution of dividends is the one
specified in section 529A, so far as secured creditors are
concerned. The secured creditor has no other general right
of preference. Sections 529(1) and (2) are also not
attracted. Workmen’s dues are entitled to highest priority
even as against other secured creditors. Any other secured
creditor like the respondent Bank has only a limited claim
of priority to the extent stated in section 529A and that
too in case the said secured creditor has opted to stand
outside the winding up proceedings and realised his dues on
the security as per the terms of contract or by private sale
as might have been permissible in law. It is argued that in
that event, the secured creditor has only the benefit given
by sub-clause (b) of section 529A(1), namely, to the extent
permitted by clause (c) of the proviso to section 529(1).
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Reading the definition of ’workmen’s portion’ in section
529(3)(c) read with the illustration given in that clause, a
secured creditor who stands outside the winding up, in case
he loses any part of that security towards ’workmen’s dues’
at the instance of the liquidator under clause (a), (b) of
the proviso to section 529(1), then to that extent only he
has priority over all other creditors under section
529A(1)(b). His priority is confined again to amounts not
realised by him or the ’workmens portion’ above referred to,
whichever is less. In reply to this submission, learned
counsel for the respondent has submitted that the words in
the first part of the clause (c) to proviso to section
529(1) "so much of the debt due to such secured creditor as
could not be realised by him" meant the entire unrealised
amounts of the secured creditor and not merely the
"workmen’s portion". To understand the submission, it is
necessary to refer to section 529A as well as section 529,
to the extent relevant for this discussion. They read as
follows: "Section 529-A: Overriding preferential payments
- (1) Notwithstanding anything contained in any other
provision of this Act or any other law for the time being
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." "S.529.
Application of insolvency rules in winding up of insolvent
companies--(1) In the winding up of an insolvent company,
the same rules shall prevail and be observed with regard
to-- (a) debts provable; (b) the valuation of annuities and
future and contingent liabilities; and (c) the respective
rights of secured and unsecured creditors; as are in force
for the time being under the law of insolvency with respect
to the estates of persons adjudged insolvent: provided 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 therein, and, where a
secured creditor, instead of relinquishing his security and
proving his debt, opts to realise his security,-- (a) the
liquidator shall be entitled to represent the workmen and
enforce such charge; (b) any amount realised by the
liquidator by way of enforcement of such charge shall be
applied rateably for the discharge of workmen’s dues; and
(c) so much of the debt due to such secured creditor as
could not be realised by him by virtue of the foregoing
provisions of this proviso or the amount of the workmen’s
portion in his security, whichever is less, shall rank pari
passu with the workmen’s dues for the purposes of section
529A. (2) All persons who in any such case would be
entitled to prove for and receive dividends out of the
assets of the company, may come in under the winding up, and
make such claims against the company as they respectively
are entitled to make by virtue of this section.
(3)(a)...................................
(b)...................................... (c) "workmen’s
portion", in relation to the security of any secured
creditor of a company, means the amount which bears to the
value of the security the same proportion as the amount of
the workmen’s dues bears to the aggregate of- (i) the amount
of workmen’s dues; and (ii) the amounts of the debts due to
the secured creditors. Illustration-- The value of the
security of a secured creditor of a company is Rs.1,00,000.
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The total amount of the workmen’s dues is Rs.1,00,000. The
amount of the debts due from the company to its secured
creditors is Rs.3,00,000. The aggregate of the amount of
workmen’s dues and of the amounts of debts due to secured
creditors is Rs.4,00,000. the workmen’s portion of the
security is, therefore, one-fourth of the value of the
security, that is Rs.25,000." The respondent’s contention
that section 19(19) gives priority to all "secured
creditors" to share in the sale proceeds before the
Tribunal/Recovery Officer cannot, in our opinion, be
accepted. The said words are qualified by the words "in
accordance with the provision of section 529A". Hence, it
is necessary to identify the above limited class of secured
creditors who have priority over all others in accordance
with section 529A. Secured creditors fall under two
categories. Those who desire to go before the Company Court
and those who like to stand outside the winding up. The
first category of secured creditors mentioned above are
those who go before the Company Court for dividend by
relinquishing their security in accordance with the
insolvency rules mentioned in section 529. The insolvency
rules are those contained in sections 45 to 50 of the
Provincial Insolvency Act. Section 47(2) of that Act states
that a secured creditor who wishes to come before the
official liquidator has to prove his debt and he can prove
his debt only if he relinquishes his security for the
benefit of the general body of creditors. In that event, he
will rank with the unsecured creditors and has to take his
dividend as provided in section 529(2). Till today, the
Canara Bank has not made it clear whether it wants to come
under this category. The second class of secured creditors
referred to above are those who come under section
529A(1)(b) read with proviso (c) to section 529(1). These
are those who opt to stand outside the winding up to realise
their security. Inasmuch as section 19(19) permits
distribution to secured creditors only in accordance with
section 529A, the said category is the one consisting of
creditors who stand outside the winding up. These secured
creditors in certain circumstances can come before the
Company Court (here the Tribunal)and claim priority over all
other creditors for release of amounts out of the other
monies lying in the Company Court (here, the Tribunal).
This limited priority is declared in section 529A(1) but it
is restricted only to the extent specified in clause (b) of
section 529A(1). The said provision refers to sub-clause
(c) of the proviso to section 529(1) and it is necessary to
understand the scope of the said provision. Under
sub-clause (c) of the proviso to section 529(1), the
priority of the secured creditor who stands outside the
winding up is confined to the "workmen’s portion" as defined
in section 529(3)(c). ’Workmen’s portion’ means the amount
which bears to the value of the security, the same
proportion which the amount of the workmen’s dues bears to
the aggregate of (a) workmens dues and (b) the amounts of
the debts due to all the creditors. This is explained in
the illustration under the said provision. If the workmen’s
dues in all are (say) Rs.1 lakh and the debt due to all
secured creditors is Rs.3 lakhs, the total amount due to all
of them comes to Rs.4 lakhs. Therefore, the workmen’s share
come to 25%(Rs.1 lakh out of Rs. 4 lakhs). Now if the
value of the security of a secured creditor ( like Canara
Bank) is Rs.1 lakh, the ’workmen’s portion’ will be
Rs.25,000 which is the pro-rata amount to be shared by the
said secured creditor. By virtue of section 529A(1)(b) his
priority over all others out of other monies available in
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the Tribunal is restricted to Rs.25,000 only. Reliance is
placed by the learned counsel for the respondent on the
words "so much of the debt due to such secured creditor as
could not be realised by him by virtue of the foregoing
provisions of this proviso" occurring in the first part of
the said proviso(c) to section 529(1). Learned Attorney
General on the other hand submitted that the first part of
clause (c) of the proviso to section 529(1) is to be read
along with the words "or the amount of the workmen’s portion
in his security, whichever is less". In other words, the
priority of the secured creditor is only to the extent that
any part of the said security is lost in favour of the
workmen consequent to demands made by the liquidator under
clause (a), (b) or the said proviso to section 529(1). No
such situation has arisen so far. It is contended that
where a secured creditor keeps himself outside as stated in
the proviso to section 529(1) and seeks to recover his dues
outside the Company Court, if he loses part of his security
towards workmen’s dues, he gets reimbursed to that extent as
a secured creditor, with an overriding priority under
section 529A (1)(b). He gets priority over all other
creditors before the Tribunal, to be compensated for this
loss out of the monies that may have been realised at the
instance of other creditors before the Tribunal. It is
pointed out that Canara Bank has neither realised any amount
outside winding up nor has it lost any part of its security
towards workmen’s dues. In our view, this contention of the
learned Attorney General is well founded and is entitled to
be accepted. In our opinion, the words "so much of the debt
due to such secured creditor as could not be realised by him
by virtue of the foregoing provisions of the proviso"
obviously mean the amount taken away from the private
realisation of the secured creditor by the liquidator by way
of enforcing the charge for workmen’s dues under clause (c)
of the proviso to section 529(1) "rateably" against each
secured creditor. To that extent, the secured creditor -
who has stood outside the winding up and who has lost a part
of the monies otherwise covered by security - can come
before the Tribunal to reimburse himself from out of other
monies available in the Tribunal, claiming priority over all
creditors, by virtue of section 529A(1)(b). This can be
exemplified by three more examples. (i) Let us assume that
the total amount due to a secured creditor is Rs.90,000 and
he has a security valued at Rs.1 lakh. This security is
sufficient to cover his entire dues. Let us assume that the
total amount due to all secured creditors is Rs.3 lakhs and
workmen’s dues are Rs.1 lakh, as in the illustration given
under section 529A(3). This creditor can be made to part
pro- rata upto with Rs.25,000 out of his security of one
lakh towards the workmen’s dues. This is the "workmen’s
portion". That still leaves with him Rs.75,000 of his
security but that is not sufficient to meet his total dues
of Rs.90,000. Still Rs.15,000 of his dues have to be
cleared. By virtue of section 529A (1)(b), he can claim
this sum of Rs.15000 from monies realised by other creditors
in the Tribunal on the basis of section 529A (1)(b) claiming
overriding priority as against all other creditors. This is
because the above amount is less than the ‘workmen’s dues of
Rs.25,000 taken away from the realisation out of his
security, as prescribed in clause (c) of the proviso to
section 529(1). That is what is meant by the words
"whichever is less". (ii) Take a case where the total dues
of a secured creditor are only Rs.65,000 and his security is
Rs. 1 lakh in value. The other facts being the same as in
the illustration to section 529(3), the secured creditor
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loses his security rateably in a sum of Rs.25,000. The
balance of the available security is Rs.75,000 and that is
sufficient to meet his entire debt of Rs.65,000. He has no
occasion to claim any extra amount as a secured creditor
under section 529A(1)(b). This situation presents no
difficulty. (iii) Take yet another case where the secured
creditor has a security valued at Rs.1 lakh, but his total
dues are Rs.1.10 lakhs. In other words, Rs. 10,000 are not
secured. Other facts are as in illustration to section
529(3). He is made to part with Rs.25,000 towards workmen’s
dues rateably. He has Rs.75,000 available from his security
but he has to meet Rs.1,10,000 and that leaves a balance of
Rs.35,000 (Rs.1,10,000 - Rs.75,000) to be recovered. He can
claim overriding priority only upto Rs.25,000 as a secured
creditor, under clause (c) to proviso to section 529(1).
The priority is restricted to Rs.35,000 only because as
between Rs.25,000 and Rs.35,000, the amount of Rs.25,000
answers the description whichever is less.. It will be
noticed that, after claiming Rs. 25,000 as a secured
creditor out of the realisation of other creditors before
the Tribunal, he has still dues upto Rs.10,000 which remain
unsecured. That was also the unsecured amount to start with
initially. The above examples show that the secured
creditor who stands outside the winding up and whose claims
are restricted to section 529A read with the clause (c) of
proviso to section 529(1), does not in the ultimate analysis
stand to lose any part of his security merely because the
"workmen’s portion" is taken away from his security.
Whatever he loses towards "workmen’s portion’ out of his
security, can be claimed by him as a secured amount with
priority over such creditors out of other realisations made
by other creditors whose monies are lying in the Tribunal.
At the same time, his position would not improve from what
it was originally and his priority would not extend to his
entire unrealised sums which might be in excess of his
security. But the point here is that the occasion for such
a claim by a secured creditor ( here the Canara Bank )
against realisations by other creditors (like the Allahabad
Bank) under section 529A read with proviso (c) to section
529(1) can arise before the Tribunal only if the Canara Bank
has stood outside winding up and realised amounts and if it
shows that out of the amounts privately realised by it, some
portion has been rateably taken away by the liquidator under
sub-clauses (a) and (b) of the proviso to section 529(1).
It is only then that it can claim that it is to be
re-imbursed at the same level as a secured creditor with
priority over the realisations of other creditors lying in
the Tribunal. None of these conditions is satisfied by
Canara Bank. Thus, Canara Bank does not belong to the class
of secured creditors covered by section 529A(1)(b).
Therefore, the result is that the Canara Bank cannot rely on
the words in section 19(19) vis, "to be distributed among
its secured creditors" for claiming any amount lying in the
Tribunal towards its security nor can it claim priority as
against the Allahabad Bank. If none of the conditions
required for applying section 19(19) and section 529A is,
therefore, satisfied, then the claim of Canara Bank before
the Tribunal can only be on the basis of principles
underlying section 73 CPC. There being no decree in its
favour from any court or from any Tribunal, and the other
conditions of section 73 not having been satisfied, no
dividend can be claimed out of monies realised at the
instance of the Allahabad Bank, even if the Allahabad Bank
is an unsecured creditor. We hold accordingly on points 4
and 5. Point 6: By the sale of shed NO.15, a sum of Rs.20
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lakhs has been realised and is lying in this Court. Other
sale proceeds in respect of previous sales are lying with
the Recovery Officer. In view of our findings on points 1
to 5, no part of the said amounts is payable to the Canara
Bank. The next question is whether the amounts realised
under the RDB Act at the instance of the appellant can be
straightway released in its favour. Now, even if section
19(19) read with section 529A of the Companies Act does not
help the respondent-Canara Bank, the said provisions can
still have an impact on the appellant- Allahabad Bank which
has no doubt a decree in its favour passed by the Tribunal.
Its dues are unsecured. The ’workmen’s dues’ have priority
over all other creditors, secured and unsecured because of
section 529A(1)(a). There is no material before us to hold
that workmen’s dues of the defendant company have all been
paid. In view of the general principles laid down in
National Textile Workers’ Union etc. vs. P.R.Ramakrishnan
& Others [AIR 1983 SC 75] there is an obligation resting on
this Court to see that no secured or unsecured creditors
including Banks or financial institutions, are paid before
the workmen’s dues are paid. we are, therefore, unable to
release any amounts in favour of the appellant Bank
straightway. We, therefore, direct the Registry of the
Supreme Court to make over the monies deposited in this
Court pursuant to sale of shed No.15, to the Debt Recovery
Tribunal, Delhi and it will be for the said Tribunal to find
out if there are any workmen’s dues by issuing notice to the
workmen or other persons/bodies which can furnish
information in this behalf. The above monies to be sent
from this Court as well as the monies realised by earlier
sales,- in case they are not subject to any pending
litigation - have to be first released towards the workmen’s
dues. The balance remaining will then be released in favour
of the appellant Bank in accordance with law and subject to
the various principles stated in this judgment. In case any
machinery or goods pledged to the Canara Bank are lying in
the two other sheds already sold, it will be open to the
Canara Bank to move the Tribunal/Recovery Officer for their
removal and for an inventory. The impugned order of the
High Court is set aside, the appeal is allowed and disposed
of as stated above. There will be no order as to costs.
