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A.P State Financial Corporation v. Official Liquidator .
Factual and Procedural Background
The appellant, a State Financial Corporation constituted under the State Financial Corporations Act, 1951, had advanced loans to two companies—M/s Nagarjuna Paper Mills and M/s Chandra Pharmaceuticals Ltd.—both of which were already in liquidation before the Company Court of the High Court. Seeking to realise its dues, the Corporation invoked Section 29 of the 1951 Act and, because the companies were in liquidation, filed two applications under Section 446(1) of the Companies Act, 1956 read with Sections 29 and 46 of the 1951 Act, asking for leave to “stay outside” the winding-up process.
The Company Judge allowed the Corporation to proceed outside the liquidation subject to three conditions:
- An undertaking to discharge any liability owed to workers under Section 529-A of the Companies Act.
- Advance notice of at least ten days to the Official Liquidator before calling for tenders to sell the assets.
- Prior permission of the Court before finalising any tender.
The Corporation’s appeals against these conditions were dismissed by a Division Bench of the High Court, prompting the present appeals before the Supreme Court.
Legal Issues Presented
- Whether the High Court was legally justified in imposing the above three conditions on the appellant’s exercise of its power under Section 29 of the State Financial Corporations Act, 1951.
- Whether Section 29 of the 1951 Act overrides, or is subject to, the pari passu charge and priority regime created for workmen’s dues under the proviso to Section 529(1) and Section 529-A of the Companies Act, 1956 (as inserted by the 1985 amendment).
Arguments of the Parties
Appellant's Arguments
- The State Financial Corporations Act, 1951 is a special statute; therefore, the power conferred by its Section 29 to take possession and sell the secured assets is absolute and cannot be curtailed by conditions imposed under the Companies Act.
Respondent's Arguments
The opinion does not contain a detailed account of the respondent's legal arguments.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The Supreme Court noted that the proviso to Section 529(1) and the newly inserted Section 529-A of the Companies Act (1985 amendment) expressly create a pari passu charge in favour of workmen over the security of every secured creditor and mandate priority payment of workmen’s dues. Section 529-A begins with a non obstante clause, giving it overriding effect “notwithstanding anything contained in any other provision of this Act or any other law.”
Because these provisions post-date the State Financial Corporations Act, they prevail over Section 29 of the 1951 Act. Consequently, the Corporation’s statutory right to sell secured assets under Section 29 must be exercised in harmony with the workers’ pari passu charge. The Company Court, through the Official Liquidator, is tasked with ensuring that this statutory priority is honoured.
The Court reasoned that the three conditions imposed by the Company Judge facilitate the Official Liquidator’s oversight and safeguard the workmen’s statutory rights. Imposing such conditions is consistent with the social objective of the 1985 amendment—to protect workmen’s dues—and prevents a secured creditor from circumventing those rights. Therefore, the High Court acted within its jurisdiction in attaching the conditions, even though it remarked (in the impugned judgment) that prior leave was unnecessary; that remark was deemed “uncalled for” but not determinative of the legality of the conditions themselves.
Holding and Implications
Appeals Dismissed. The Supreme Court upheld the High Court’s order, confirming that the three conditions attached to the appellant’s exercise of Section 29 powers are lawful.
Implications: The decision affirms that the statutory rights of secured creditors under the State Financial Corporations Act must yield to the later and overriding provisions of the Companies Act that protect workmen’s dues. Company Courts may impose conditions on secured creditors operating outside winding-up proceedings to ensure compliance with Sections 529 and 529-A. No new precedent was announced beyond this clarification of the interaction between the two statutes.
S.N Phukan, J.— The appellant is a Corporation established under the State Financial Corporations Act, 1951 (for short “the Act of 1951”). Two companies viz. M/s Nagarjuna Paper Mills and M/s Chandra Pharmaceuticals Limited were in liquidation and the liquidation proceedings were pending before the learned Company Judge of the High Court. The above two Companies obtained loans from the appellant and for realisation of dues, the appellant invoked the provisions of Section 29 of the Act of 1951. As both the Companies were under liquidation, the appellant filed two separate applications under Section 446(1) of the Companies Act read with Sections 29 and 46 of the Act of 1951 before learned Company Judge of the High Court for staying outside the liquidation proceedings. The learned Judge passed two similar orders in respect of both the Companies and granted permission to the appellant to stay outside the liquidation proceedings subject to the following conditions:
“1. The petitioner will undertake to discharge its liability due to the workers, if any, under Section 529-A of the Companies Act.
2. The petitioner shall inform at least 10 days in advance before a date fixed for receipt of tenders, to the Official Liquidator about the proposed sale of the properties of the Company.
3. The petitioner shall also obtain the permission of the Court before finalising the tenders.”
2. The appeals filed were dismissed by the Division Bench of the High Court by the impugned judgment and hence these appeals.
3. We have heard Mr Y. Prabhakara Rao, learned counsel for the appellant and Mr A.D.N Rao, learned counsel for the respondent.
4. The short question to be decided in these appeals is whether the order of the High Court imposing the above three conditions is lawful.
5. To appreciate the above point we may quote below sub-section (1) of Section 29 of the Act of 1951 and sub-section (1) of Section 529 and Section 529-A of the Companies Act. It may be stated that the proviso to sub-section (1) of Section 529 and Section 529-A were inserted by the Companies (Amendment) Act, 1985.
“29. (1) Where any industrial concern, which is under a liability to the Financial Corporation under an agreement, makes any default in repayment of any loan or advance or any instalment thereof or in meeting its obligations in relation to any guarantee given by the Corporation or otherwise fails to comply with the terms of its agreement with the Financial Corporation, the Financial Corporation shall have the right to take over the management or possession or both of the industrial concerns, as well as the right to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation.”
“529. (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 529-A.
529-A. (1) Notwithstanding anything contained in any other provision of this Act or any other law for the time being in 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.”
6. The only contention of Mr Y. Prabhakara Rao, learned counsel for the appellant was that the Act of 1951 being a special Act, power of the appellant Corporation to invoke provisions of Section 29 of the Act of 1951 is absolute and cannot be restricted.
7. By inserting the proviso of Section 529 of the Companies Act by the amending Act of 1985 the legislature has 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 the security and proving the debt, opts to realise 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; 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 the proviso or the amount of the workmen's portion in the security, whichever is less, shall rank pari passu with the workmen's dues for the purposes of Section 529-A.
8. Section 529-A which was also inserted by the amending Act of 1985 starts with the non obstante clause and provides that in winding up of a company, “workmen's dues and 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 with all other dues”.
9. Now the question is whether Section 29 of the Act of 1951 can override the above provisions of the proviso to sub-section (1) of Section 529 and Section 529-A of the Companies Act. In other words whether the Corporation can exercise its rights under the above Section 29 ignoring a pari passu charge of the workmen.
10. The Act of 1951 is a special Act for grant of financial assistance to industrial concerns with a view to boost up industrialisation and also recovery of such financial assistance if it becomes bad and similarly the Companies Act deals with companies including winding up of such companies. The proviso to sub-section (1) of Section 529 and Section 529-A being a subsequent enactment, the non obstante clause in Section 529-A prevails over Section 29 of the Act of 1951 in view of the settled position of law. We are, therefore, of the opinion that the above proviso to sub-section (1) of Section 529 and Section 529-A will control Section 29 of the Act of 1951. In other words the statutory right to sell the property under Section 29 of the Act of 1951 has to be exercised with the rights of pari passu charge to the workmen created by the proviso to Section 529 of the Companies Act. Under the proviso to sub-section (1) of Section 529, the liquidator shall be entitled to represent the workmen and force (sic enforce) the above pari passu charge. Therefore, the Company Court was fully justified in imposing the above conditions to enable the Official Liquidator to discharge his function properly under the supervision of the Company Court as the new Section 529-A of the Companies Act confers upon a Company Court the duty to ensure that the workmen's dues are paid in priority to all other debts in accordance with the provisions of the above section. The legislature has amended the Companies Act in 1985 with a social purpose viz. to protect dues of the workmen. If conditions are not imposed to protect the right of the workmen there is every possibility that the secured creditor may frustrate the above pari passu right of the workmen.
11. In the impugned judgment the High Court expressed its views as follows:
“In our opinion, therefore, it was not at all necessary for the Financial Corporation to approach this Court for permission to stay outside the winding-up proceedings. In spite of the same, the Financial Corporation did venture to make such an application in view of the fact that pari passu charge was created on the assets of the Company for payment of arrears to the workmen of the Company….”
In view of the above opinion of the High Court that it was not necessary for the Financial Corporation to approach the Court for permission to stay outside the winding-up proceedings, the learned counsel for the appellant has urged that High Court erred in imposing the above conditions. We are of the opinion that the above observation of the High Court was uncalled for as we have stated that power under Section 29 of the Act of 1951 can be exercised subject to the above provisions of the Companies Act.
12. For what has been stated above, we hold that imposition of the above conditions by the High Court was lawful.
13. The present appeals have no merit and are accordingly dismissed. Cost on the parties.
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