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State Bank Or India v. M/S. Spintex Tubes & Cones. Ltd.
Judgment Summary — Application by Rajasthan State Industrial Development and Investment Corporation Ltd. (RIICO)
Factual and Procedural Background
An application dated 5 May 1992 was filed by the Rajasthan State Industrial Development and Investment Corporation Ltd. (RIICO) seeking leave to remain outside winding-up proceedings under Section 446 read with Section 456 of the Companies Act, 1956, Rules 6 and 9 of the Companies (Court) Rules, 1959, and Section 151 of the Civil Procedure Code.
The State Bank of India (SBI) filed an application stating that the Board for Industrial and Financial Reconstruction (BIFR), after inquiry under Section 16 of the Sick Industrial Companies (Special Provisions) Act, 1985, recorded an opinion on 10 May 1991 under Section 20(1) of that Act that it was just and equitable and in the public interest that the respondent-company should be wound up; that opinion was forwarded to the court. The SBI's application noted that RIICO and ICICI were aware of the BIFR proceedings and order, and that RIICO had taken possession of the respondent-company's movable and immovable assets on 13 February 1992 and was proceeding with their sale.
The SBI also pointed out outstanding dues: about Rs. 16,53,986 payable to the SBI (for which a civil suit had been filed) and outstandings of RIICO and ICICI of about Rs. 1 crore and Rs. 155 lakhs respectively. This Court passed an order dated 27 March 1992 to wind up Spintex Tubes and Cons. Ltd., and notice of that order was given to the official liquidator.
RIICO's May 5, 1992 application asserted that it was a secured creditor entitled to recover dues under Section 29/30 of the State Financial Corporations Act, 1951 (the Act, 1951) and that Section 46B of that Act gives it overriding effect over inconsistent laws. RIICO sought leave to remain outside the winding-up proceedings so it could realize its security under the Act, 1951.
Legal Issues Presented
- Whether a secured creditor (RIICO) is entitled to remain outside winding-up proceedings and enforce its security rights under Section 29 of the State Financial Corporations Act, 1951, including taking possession and selling company assets, even where a winding-up order has been passed in respect of the company.
- Whether leave of the court is necessary for RIICO to sell assets of the company when it had taken possession prior to the winding-up order.
- Whether the provisions of the State Financial Corporations Act, 1951 (including Section 46B) have overriding effect that prevents curtailment of RIICO's statutory rights under Section 29 by the Companies Act or by the winding-up order.
- Whether sale of the assets by RIICO should be subject to this Court's confirmation (or should be conducted jointly with the bank) and how the rights of workmen under Sections such as Section 529A of the Companies Act should be protected.
Arguments of the Parties
RIICO (Applicant)
- RIICO asserted it is a secured creditor authorised to recover dues under Section 29/30 of the State Financial Corporations Act, 1951, and that Section 46B gives the Act overriding effect over inconsistent laws.
- RIICO stated it had taken possession of movable and immovable assets on 13 February 1992 and sought leave to remain outside the winding-up proceedings to realize its dues under the Act, 1951. RIICO did not oppose the winding-up.
- RIICO undertook to have valuation done by a Government approved valuer, to associate the official liquidator during valuation and sale, to pay the official liquidator's expenses for involvement, and to advertise the sale as agreed in the November 20, 1992 order. RIICO and ICICI agreed to keep funds ready for workmen's claims as per Section 529A of the Companies Act.
State Bank of India and other objectors
- SBI (and counsel) pointed out the BIFR opinion recommending winding-up and argued RIICO, being aware of those proceedings, should not have taken possession and thereby attempted to overreach the court.
- It was emphasised that Sections 529A and 530 of the Companies Act concern preferential payments (including payments to workmen) and that such payments should be made from sale proceeds.
- SBI noted its own position as first secured creditor in respect of current assets (e.g., hypothecated stocks) and as holding a second charge on fixed assets.
Official Liquidator
- The learned official liquidator contended that since the winding-up order had been passed by the court, any sale should be conducted subject to confirmation by the court.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Aryavarta Plywood Ltd. v. Rajasthan State Industrial and Investment Corporation Ltd., [1990] 1 Comp LJ 222; [1991] 72 Comp Cas 5 (Delhi) | Held that a financial corporation, as secured creditor, which took possession and disposed of assets before the winding-up order, was justified under Section 29 of the Act, 1951; Section 537 of the Companies Act was inapplicable in such a case; the corporation could enforce a mortgage under Section 29 without approaching a civil court. | The court relied on this authority to support the proposition that RIICO was justified in taking possession and selling assets under Section 29 of the Act, 1951, without court intervention. |
| Boolani Engineering Corporation v. Asup Synthetics and Chemicals Ltd., [1990] 1 RLR 10; [1994] 81 Comp Cas 872 (Raj) | Held that even where winding-up proceedings have commenced and are pending, a financial corporation has a right under Section 29 of the Act, 1951, to sell property without leave of the court; court jurisdiction arises only if such sale is challenged as not bona fide or for extraneous considerations. | The court cited this case to confirm that RIICO could sell assets under Section 29 notwithstanding pending winding-up proceedings and that leave was unnecessary absent a challenge to bona fides. |
| Ayrgee Engineering and Co. v. India Electricals Ltd., Misc. Appl. No. 16 of 1990 in S.B. Company Petition No. 1 of 1985 (Order dated 29 Nov 1991) | Adopted the same view as the above authorities regarding the rights of financial corporations under Section 29 to take possession and sell without court intervention. | The court referred to this order as an additional instance where the principle was applied, reinforcing the conclusion reached in the present matter. |
Court's Reasoning and Analysis
The Court proceeded by applying the statutory framework and the sequence of factual events set out in the record:
- Temporal fact: RIICO had taken possession of the company's assets on 13/14 February 1992, which was before the winding-up order of 27 March 1992 was made. This temporal sequence was central to the Court's reasoning.
- Statutory entitlement: The Court found that RIICO was entitled to act under Section 29 of the State Financial Corporations Act, 1951 (the Act, 1951), which permits a financial corporation to take possession and enforce security. Section 46B of the Act, 1951 was noted to give the Act overriding effect over inconsistent laws, reinforcing RIICO's statutory rights.
- No necessity for leave: The Court held that, given RIICO's statutory powers and the fact possession was taken before the winding-up order, no leave of the Court was necessary for RIICO to realize its security. The court's jurisdiction to interfere would arise only if the sale were challenged as not bona fide or motivated by extraneous considerations.
- Protective measures and conditions: The Court accepted and recorded undertakings and agreed procedural safeguards: valuation by a Government-approved valuer; association of the official liquidator during valuation and sale (with RIICO bearing the official liquidator's related expenses); wide publicity of the sale (one local Hindi daily in Rajasthan and two national dailies from Delhi); and undertakings by RIICO and ICICI to keep money ready for payments to workmen in accordance with Section 529A of the Companies Act, 1956.
- Distinction noted: The Court observed that the legal position might differ if the official liquidator had taken possession after the winding-up order and thereafter a financial institution attempted to exercise powers under Section 29; however, that situation did not arise here.
- Rejection of other contentions: The Court rejected the submission that sale should be conducted jointly by RIICO and the bank as unnecessary, noting that a bank representative would be associated in accordance with RIICO's guidelines. The Court also rejected the official liquidator's contention that court confirmation was required for the sale when Section 29 and Section 46B applied.
Holding and Implications
Holding: The application dated 5 May 1992 filed on behalf of RIICO is allowed.
Direct consequences and directions given by the Court:
- RIICO is permitted to remain outside the winding-up proceedings and to exercise its statutory powers under the State Financial Corporations Act, 1951 (notably Section 29) to realize its security, subject to the conditions and undertakings recorded by the Court (valuation, association of the official liquidator, advertising, and readiness of funds for workmen's claims as per Section 529A).
- The Court explicitly vacated the earlier stay order dated 27 March 1992 that had directed RIICO not to take steps for sale; the related application dated 30 April 1992 filed on behalf of RIICO is also allowed.
- The RIICO is required to act in accordance with this order and with the November 20, 1992 order regarding advertising and sale procedures; it must keep the share of sale proceeds ready for payment to workmen as finalised by the official liquidator under Section 529A of the Companies Act.
No broader precedent was purportedly set beyond the application of established authorities cited and the application of statutory provisions; the decision confirms and applies prior case law permitting financial corporations to enforce securities under Section 29 where possession was taken prior to winding-up.
1. An application dated May 5, 1992, under Section 446 read with Section 456 of the Companies Act, 1956, and Rules 6 and 9 of the Companies (Court) Rules, 1959, read with Section 151 of the Civil Procedure Code, has been filed by the Rajasthan State Industrial Development and Investment Corporation Ltd. (RIICO), in which it has been prayed that leave be granted to the applicant-RIICO to remain outside the winding-up proceedings.
2. An application has also been filed on behalf of the State Bank of India, stating therein that the Board for Industrial and Financial Reconstruction (BIFR), after conducting an enquiry under Section 16 of the Sick Industrial Companies (Special Provisions) Act, 1985 (for short, "the Act, 1985"), vide its order dated May 10, 1991, has recorded the opinion under Section 20(1) of the Act, 1985, that it was just and equitable as also in public interest that the respondent-company should be wound up. This opinion was forwarded by the Registrar, BIFR to this court for further action according to law. It was further stated that RIICO and ICICI were fully aware of the proceedings in respect of the company before BIFR as also the order dated May 10, 1991, passed by BIFR. After the passing of the aforesaid order, RIICO, on February 13, 1992, has taken over possession of the immovable and movable assets of the respondent-company. It was also stated that RIICO and ICICI were proceeding with the sale of the same. It was pointed out that the respondent-company had to pay about Rs. 16,53,986 to the State Bank of India (SBI), for recovery of which, a civil suit has already been filed by the bank against the respondent-company. It was further pointed out that the outstandings of RIICO and ICICI against the respondent-company are about rupees one crore and rupees 155 lakhs, respectively. In these circumstances, an order dated March 27, 1992, was passed by this court to wind up Spintex Tubes and Cons. Ltd. and notice of this order was given to the official liquidator to proceed in accordance with law.
3. The application dated May 5, 1992, has been filed on behalf of the RIICO with a prayer that RIICO is a secured creditor of the respondent-company, which is authorised under law to recover its dues in the manner provided under Section 29/30 of the State Financial Corporations Act, 1951 (hereinafter referred to as "the Act, 1951"). It is also provided under Section 46B that it shall have overriding effect over other laws, which may be inconsistent therewith. The RIICO, therefore, being a secured creditor, opts to remain out of the winding-up proceedings by way of abundant caution, prays that leave be granted to RIICO to remain outside the winding-up proceedings, so that it may proceed to realise its dues in the manner provided under the provisions of the Act, 1951,
4. It is pointed out by Shri G.S. Bapna, G.K. Garg and Sudhir Gupta, learned counsel that Sections 529A and 530 of the Companies Act deal with preferential payments to be made, therefore, provision for making such payments, including the payments payable to workmen, shall have to be made from the sale proceeds. It is further pointed out that RIICO was party to the proceedings before BIFR and was well aware of the opinion regarding winding-up of the company given by the BIFR. It is, therefore, submitted that RIICO should not have taken possession of the assets of the company but allowed the official liquidator to proceed with the matter in accordance with the provisions of the Companies Act. The RIICO has, thus, tried to overreach the court. It is also pointed out that the SBI is the first secured creditor for current assets, e.g., stocks, which are hypothecated with the bank and has a second charge on the fixed assets.
5. I have heard all the parties and gone through the relevant provisions of law. It is evident that RIICO had already taken possession on February 13/14, 1992, before the winding-up order was passed on March 27, 1992. The contention that since RIICO was aware of the proceedings before the BIFR and the recommendation made regarding winding-up and that, therefore, it has tried to overreach the court by taking over possession, has no force, because RIICO is entitled to act under the provisions of the State Financial Corporations Act, 1951 (for brevity, "the Act, 1951"). It may be pointed out that RIICO does not oppose the winding-up proceedings even now and has merely made a prayer for granting leave to remain outside the winding-up proceedings, in accordance with the provisions of the Act, 1951. Under Section 29, possession has already been taken by RIICO. The RIICO is a statutory body and there is no reason to doubt its bona fides while it exercises its power under Section 29 of the Act, 1951. The RIICO has exercised its right under Section 29 to sell the property and, in fact, no leave of court is necessary. It may also be pointed out that the jurisdiction of this court may arise only when the sale is challenged on the ground that it is not bona fide and has been made for extraneous considerations. In such circumstances, this court may interfere, if any occasion so arises. In the matter under consideration, the company, admittedly, has taken loans from RIICO and ICICI. It has mortgaged and hypothecated its assets and properties in their favour by executing various documents. When the winding-up order was passed, all the assets of the company were in the possession of RIICO. As mentioned in the order dated November 20, 1992, Mr. Mathur, learned counsel, agreed that the valuation of the property shall be done by a Government approved valuer. The official liquidator will be associated during that process and all the expenses of the official liquidator for going or sending his representative will be paid by the RIICO. He further agreed that wide publicity in at least one local Hindi daily of Rajasthan and two national dailies, published from Delhi, will be made, regarding the sale. Keeping in view the provisions of Section 529A of the Companies Act, it was also agreed by Mr. Mathur that ICICI and RIICO will give undertakings that they will keep the money ready payable to workmen, regarding their claims, which may be filed with the official liquidator. The official liquidator shall call for applications from the workmen to file their claims, if any, and verify their genuineness.
6. I do not find any force in the contention of Mr. Gupta that sale should be conducted by RIICO and the bank jointly, so that, the best price may be secured. As pointed out by Mr. Mathur, a representative of the bank will be associated with the sale as per the guidelines of the RIICO, therefore, the bank will have opportunity to examine the process of sale as also to give any suggestions in this regard. I do not find any force in the contention of the learned official liquidator that since the order of winding up has already been passed by this court, the sale should be conducted subject to confirmation of this court. It may be pointed out that Section 46B of the Act, 1951, provides that the provisions of the Act, 1951, and of any rules or orders made thereunder shall have overriding effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. Therefore, the rights of RIICO under Section 29 and other relevant provisions of the Act cannot be curtailed. However, it may be pointed out that the position may be different in a situation, where the official liquidator has taken possession of the assets of the company after the winding up order has been passed by this court and, thereafter the financial institutions like RIICO/RFC want to exercise their powers under Section 29 of the Act, 1951. However, this position does not exist in the matter under consideration.
7. A similar view was taken in Aryavarta Plywood Ltd. v. Rajasthan State Industrial and Investment Corporation Ltd. [1990] 1 Comp LJ 222 ; [1991] 72 Comp Cas 5 (Delhi), in which, it was held by the Delhi High Court that even where the financial corporation, which is a secured creditor, took over the assets of the company during the winding up proceedings and disposed of the same before passing of the winding up order, it was held that by virtue of Section 29 of the Act, 1951, the corporation was justified in taking possession and selling the assets of the company without intervention of the court. It was further held that Section 537 of the Companies Act was inapplicable to such a case and that the financial corporation was competent to enforce a mortgage under Section 29, without approaching a civil court. In Boolani Engineering Corporation v. Asup Synthetics and Chemicals Ltd. [1990] 1 RLR 10 ; [1994] 81 Comp Cas 872 (Raj), it was held by this court that despite the fact that winding up proceedings have commenced and are pending, the financial corporation has a right under Section 29 of the Act, 1951, to sell the property and no leave of the court is necessary. It was further observed that the court's jurisdiction may arise only when such sale is challenged as being not bona fide and for extraneous considerations. The application to opt to remain out of the winding up proceedings was allowed. In Miscellaneous Application No. 16 of 1990 in S. B. Company Petition No. 1 of 1985 (Ayrgee Engineering and Co. v. India Electricals Ltd.), vide order dated November 29. 1991, the same view was taken.
8. In the result, the application dated May 5, 1992, filed on behalf of the RIICO is allowed. However, it shall be liable to act in accordance with this order as also the order dated November 20, 1992, regarding advertising, sale, etc., of the property. It shall also keep the share of the sale proceedings ready for payment to the workmen regarding their claims as finalised by the official liquidator in accordance with the provisions of Section 529A of the Act.
9. In view of the above order, the stay order dated March 27, 1992, directing the RIICO not to take any steps for the sale, is vacated and application dated April 30, 1992, filed on behalf of the RIICO is also allowed.
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