1/58 CA-314-2017.doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY AND ORIGINAL CIVIL JURISDICTION
COMPANY APPLICATION NO.314 OF 2017
WITH
OFFICIAL LIQUIDATOR’S REPORT NO.116 OF 2018
IN
COMPANY PETITION NO.263 OF 2003
City Co-op Credit Capital Ltd. a Society )
Registered under the Maharashtra Co- )
operative SectionSocieties Act, 1960, having its )
registered office at 224, 1st floor, Opp )
Mahalaxmi Theatre, Dindori Road )
Panchavati, Nashik – 422003 ) ..Applicant
In the matter between :
Sunil Ratnaparkhi )
1, Gajanan, B/H Mungi Karyalay, Pumping )
Station Road, Gangapur Road, )
Nashik 422013 ) ..Petitioner
Vs.
Official Liquidator of M/a Satwik Electric )
Controls Pvt Ltd., a company incorporated )
under the SectionCompanies Act, 1956, High Court)
Bombay, Bank of India Building, 5th floor )
M. G. Road, Fort, Mumbai 400 023 ) ..Respondent
—-
Shri Rohaan Cama a/w. Shri Shanay Shah i/b. Ms. Sapana Rachure for
applicant.
Shri Naushad Engineer for Official Liquidator.
Shri Rahul Narichania, senior advocate i/b. Shri Alok Mishra for ex-director
(Shri Shivaji Bhosale).
—-
CORAM : K.R.SHRIRAM, J.
RESERVED ON : 03.05.2019
PRONOUNCED ON : 03.06.2019
JUDGMENT :
1 Applicant in company application no.314 of 2017 is City
Co-operative Credit Capital Limited (“Applicant”). Applicant had filed the
Gauri Gaekwad
::: Uploaded on – 03/06/2019 04/06/2019 02:20:09 :::
2/58 CA-314-2017.doc
above company application as a secured creditor of Satwik Electric Controls
Private Limited (“the Company”), which Company is in liquidation, having
been ordered to be wound up by an order dated 19 th July 2007 passed by
this Court. Applicant seeks directions from this Court to the Official
Liquidator to disburse/pay to applicant a sum of Rs.2,29,30,687/- which
had been adjudicated by the Official Liquidator as being payable to
applicant with an undertaking to be given by applicant to return the same
on such terms as may be directed by this Court.
2 In the above company application, the Official Liquidator has
filed the Official Liquidator’s Report (“OLR”) seeking directions inter alia to
change the status of applicant from being adjudicated as a secured creditor,
to an unsecured creditor and to permit the Official Liquidator to modify its
certified list dated 21st January 2016 to remove the name of applicant from
the list of secured creditors.
The question that arises for consideration in the present
proceedings is – Whether Applicant is an unsecured creditor or a secured
creditor?
3 It is the stand of applicant that it is a secured creditor inter alia
by operation of law and under a decree/order of the Co-operative Court
inter alia directing attachment, possession and sale of an immovable
property of the Company which was earlier mortgaged to applicant.
Gauri Gaekwad
::: Uploaded on – 03/06/2019 04/06/2019 02:20:09 :::
3/58 CA-314-2017.doc
It is the stand of the Official Liquidator that (i) decree/order did
not create a charge on the assets of the Company and applicant is not a
secured creditor, and (ii) as there is no charge created by the Company
which has been registered as required under Section 125 of the Companies
Act, 1956, applicant cannot claim to be a secured creditor.
4 The admitted position from the records is that applicant was the
mortgagee of an immovable leasehold property of the Company, being Plot
Nos.12 and 13 admeasuring approximately 7,576 square metres at Village
Satpur, District Nashik, together with construction of 2,484.03 square
metres thereon (the said land and building or property) under a Deed of
Mortgage dated 23rd January 2004. The mortgage pertained to financial
facilities extended by applicant to the Company, which remained unpaid.
5 Applicant filed a proceeding for recovery of dues under Section
101 of the Maharashtra Co-operative Societies Act, 1960, (“the Act”) in
which, after issuing notices to the parties and after making appropriate
enquiries, an order came to be passed by the Assistant Registrar, Co-
operative Societies, whereby the Company and the guarantors were jointly
and severally held liable to pay an amount of Rs.1,33,95,892/- together
with interest thereon @ 18% p.a. from 1st July 2004 till payment, together
with a sum of Rs.22,500/- towards application fees and expenses.
Gauri Gaekwad
::: Uploaded on – 03/06/2019 04/06/2019 02:20:09 :::
4/58 CA-314-2017.doc
6 Pursuant to the above order, a Recovery Certificate dated
16th November 2004 came to be issued by the Assistant Registrar of
Co-operative Societies under Section 101 of the Act (“Recovery
Certificate”). The Recovery Certificate stipulated the manner in which the
amount was to be recovered, i.e., as arrears of land revenue and further
ordered that applicant would be entitled to execute the Recovery Certificate
as per the provisions of Section 156 of the Act and Rule 107 of the
Maharashtra Co-operative Societies Rules, 1961 (“the Rules”) without
being required to file a separate application.
7 It is Applicant’s case that the Recovery Certificate contains
instructions that were peremptorily given to the officers designated under
the Act and the Rules for steps to be taken under the above provisions. Thus,
vide the Recovery Certificate there was in effect a decree for payment of
money coupled with an order for sale of the property in the event that the
decretal dues were not paid.
8 Subsequently, on 12th January 2005, pursuant to the above
directions for execution and sale of the properties, the possession of the said
land and building was taken by the authorized officer under the Act. The
Panchnama dated 1st December 2005 (“Panchnama”) notes that the said
property mentioned therein was being attached in pursuance of the
Decree/Recovery Certificate. The Panchnama identifies the property which
Gauri Gaekwad
::: Uploaded on – 03/06/2019 04/06/2019 02:20:09 :::
5/58 CA-314-2017.doc
was being seized, which seizure in turn was done for facilitating sale of the
property as directed by the Decree/Recovery Certificate. This was a step,
Shri Cama submitted, taken in furtherance of the specific provisions of
Section 156 of the Act and Rule 107 of the Rules as had been ordered by the
Decree/Recovery Certificate.
9 Thereafter, in accordance with Rule 107 (11) of the Rules, a
pre-auction notice dated 17th March 2005 was sent to the Company which
notice identified the property and notified the Company that upon failure to
pay the decretal dues within 30 days from the receipt of the notice, the
property would be sold by public auction. Shri Cama submitted, this is
consistent with Rule 107 (11) (c) of the Rules which provides the Recovery
Officer shall sell the property in execution of the Decree/Recovery
Certificate.
10 Shri Cama said all of the aforesaid steps took place in the year
2004/2005, much prior to the winding up order dated 19 th July 2007 and
thus, by 2004/2005 a charge had already been created by the
Decree/Recovery Certificate and by operation of law on account of the
Decree/Recovery Certificate providing for the attachment and sale of the
property and having regard to the fact that upon non-compliance with the
pre-auction notice to make payment within 30 days, the Recovery Officer
was bound by law to sell the property under Rule 107 (11)(c) of the Rules.
Gauri Gaekwad
::: Uploaded on – 03/06/2019 04/06/2019 02:20:09 :::
6/58 CA-314-2017.doc
Thus, according to Shri Cama, by 2004/2005 (i) there existed an order of
attachment; and (ii) this attachment was coupled with an order for sale of
an identified immovable asset, by and under orders of the functionaries
under the Act. This constituted a charge created by operation of law/by the
decree/order of sale and thus, there was no question of such a charge being
required to be registered as contemplated in Section 125 of the Companies
Act, 1956, for it to be enforceable against the Official Liquidator.
11 Before we reproduce further submissions of Shri Cama, the
following dates and events are also relevant :-
(a) On 19th July 2007, this Court passed an order directing the
Company to be wound up. The Company’s assets attached pursuant to the
Recovery Certificate were not sold as of the date of the winding up order.
(b) On 21st March 2014, this Court passed an order in Company
Application No.492 of 2013 sanctioning the sale of the said land and
building to Bhavin Wheels Pvt. Ltd. for Rs. 5,85,00,000/-. In the said order,
this Court expressly directed Applicant to deposit the entire amount of sale
proceeds less cost of the sale with the Official Liquidator since Applicant was
not a secured creditor.
(c) On 1st September 2014, much (more than 7 years) after the
Company had been wound up, Applicant filed an application under Section
87 of the Companies Act, 2013 for condoning the delay and extension of
Gauri Gaekwad
::: Uploaded on – 03/06/2019 04/06/2019 02:20:09 :::
7/58 CA-314-2017.doc
time for filing particulars for registration of charge. It is obvious that in view
of the order dated 21st March 2014, Applicant Bank had instructed the
Company to get the charge registered so that Applicant could claim to be a
secured creditor.
(d) On 23rd September 2014, Applicant filed its affidavit of
proof of debt claiming to be a secured creditor with debt amount of
Rs.6,26,05,066/-, even though its alleged security had not been registered
with the Registrar of Companies (RoC).
(e) On 21st October 2014, the Regional Director, Western
Region, condoned the delay on the part of Applicant in registering the
charge. On 7th November 2014, the Company paid a sum of Rs.10,000/-
towards penalty for delay in filing the application for registration of charge.
(f) On 17th November 2014, even though the Company had
been ordered to be wound up by this Court, the RoC registered the charge of
Applicant to secure the loan amount of Rs. 1,25,00,000/-. On the same day,
as the RoC issued the certificate for registration of charge, Applicant
addressed a letter to the Official Liquidator intimating that the charge was
registered and their claim should be considered as a secured creditor.
(g) On 29th May 2015, the Official Liquidator adjudicated the
claim of Applicant at Rs.2,29,30,687/- and Official Liquidator mistakenly,
categorized Applicant as a secured creditor.
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
8/58 CA-314-2017.doc(h) On 21st January 2016, the Official Liquidator filed a
certified list with the office of the Prothonotary Senior Master, High
Court, Bombay. The said list included, and Official Liquidator says
erroneously, Applicant's name in the list of secured creditors.
(i) On 13th December 2016, Applicant filed company application
no.314 of 2017 seeking release of the sum of Rs.2,29,30,687/- from the
Official Liquidator.
(j) On 16th March 2018, in company application no.314 of
2017, the Official Liquidator pointed out that Applicant had not offered any
proof that it was a secured creditor. This Court passed an order in the said
company application directing Applicant to file an affidavit and annex
copies of the mortgage deed, registration of charge under Section 125 of the
Companies Act, 1956 and orders passed by the Co-operative Court under the
MCS Act based on the statement of the counsel then appearing for Applicant
that the mortgage was registered and that they would produce the necessary
documents.
(k) On 6th April 2018, pursuant to the directions of this Court in
the order dated 16th March 2018, Applicant filed an additional affidavit in
company application no.314 of 2017. In the said additional affidavit,
Applicant claimed to be a secured creditor based on the Mortgage Deed
dated 23rd January 2004, order of the Deputy Registrar of Co-operative
Societies dated 16th November 2004 and the adjudication of the Official
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
9/58 CA-314-2017.docLiquidator declaring Applicant to be a secured creditor.
(l) On 6th November 2018, RoC filed an affidavit setting out the
manner in which the charge came to be registered on 17th November 2014.
12 It was further submitted by Shri Cama that Section 101 of the
Act contemplates that a proceeding may be filed inter alia by an Urban Co-
operative Bank for recovery of its dues. Sub-section 1 of Section 101 of the
Act provides that the Registrar may, after making enquiry in the manner
prescribed, grant a certificate for the recovery of the amounts stated therein
to be due as arrears. Sub-Sectionsection 3 then provides that a certificate granted
by the Registrar shall be final and conclusive proof of the arrears stated to
be due therein and the same shall be recoverable according to the law for
the time being in force as arrears of land revenue.
To facilitate the recovery of dues, Section 156 of the Act
provides inter alia that the Registrar may recover the amount due by
attachment and sale or by sale without attachment of the property of the
person against whom such decree, decision, award or order has been
obtained or passed.
Rule 107 (1) of the Rules provides the mode of sale of the
property pursuant to Section 156 of the Act, but clarifies that no separate
application is required in the event of a certificate issued under Sub-section
1 of Section 101 of the Act. Sub-rule 11 of Rule 107 of the Rules thereafter
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
10/58 CA-314-2017.docprovides that a demand notice be issued by the Recovery Officer to the
defaulting party stipulating the property to be sold and putting a defaulting
party to notice of the sale in the event of non-payment of the decretal dues.
Sub-rule 11(c) of Rule 107 of the Rules is of considerable
importance and provides a mandatory direction that the Recovery Officer
"shall proceed to attach and sell, or sell without attachment, as the case may
be, the immovable property...". Thus, upon non-payment by the defaulting
party, there is a peremptory order and a specific direction for sale of the
immovable property pursuant to the Decree/Recovery certificate.
This being the case, it is clear from the SectionScheme of the Act and
the Rules that upon a Decree/Recovery Certificate being issued, as in the
present case, the mechanism under Section 156 of the Act read with Rule
107 of the Rules automatically comes into play and on account of the non-
payment by the defaulting party, there is ipso facto by operation of law and
by virtue of the Decree/Recovery Certificate, an order of attachment of the
property and for mandatory sale thereof in furtherance of the
Decree/Recovery Certificate.
13 Shri Cama further submitted that once there is a decree or
order, which contemplates not only attachment, but specifically mandates
sale of an identified property to be carried out for repayment of identified
and crystalized dues, as in the present case, there is a charge created on the
identified assets by operation of law/the decree. Such a charge need not be
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
11/58 CA-314-2017.docregistered under Section 125 of the Companies Act, 1956, as is not a charge
created by the Company but a charge created by operation of law/decree.
According to Shri Cama, the Official Liquidator has accepted the legal
position, in paragraph 21 of the OLR that if there is an order for sale of the
property, then in that case Section 125 of the Companies Act, 1956, would
not apply.
14 Shri Cama relied upon the following two judgments:
(i) Indian Bank V/s. Official Liquidator, Chemmeens Exports
Private Limited Ors.1; and
(ii) Praga Tools Limited V/s. Official Liquidator of Bengal
Engineering Company Private Limited2.
Shri Cama submitted that these judgments categorically lay
down the proposition that Section 125 of the Companies Act, 1956, only
applies if the charge is created by the Company. This is evident from Section
125 of the Companies Act, 1956 itself. However, as held by the Hon'ble
Supreme Court in Indian Bank (Supra), where the charge is created by
operation of law or is created by an order or a decree, Section 125 of the
Companies Act, 1956, has no application. In the case of Indian Bank
(Supra), the Hon'ble Supreme Court cited with approval the judgment of the
Hon'ble Calcutta High Court in Praga Tools (Supra) and clearly held that the
1. (1998) 5 SCC 401
2. 1984 Vol. 56, Comp. Cas 214
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
12/58 CA-314-2017.docsame was good law. The Hon'ble Supreme Court proceeded to note that if
on the date of winding up what was operative was not merely a declaration
that a charge existed but in fact an order for sale of the property for
realization of the decretal amount, such an order would be deemed to be a
charge created on the property by operation of law/decree/order of the
Court and would not be void on account of being unregistered.
15 Mr. Cama added, the judgment of the Hon'ble Calcutta High
Court in Praga Tools (Supra), which was approved by the Hon'ble Supreme
Court as stated above, was a case where by a consent order a sum of Rs.1.45
lakhs was held to be payable. A sum of Rs.50,000/-, which had earlier been
deposited in the Court pursuant to the winding up proceedings instituted by
petitioner therein, was ordered to be retained as security for the purpose of
satisfaction of the decree in the event that the judgment debtor defaulted in
paying the decretal amount. It was urged by petitioning creditor that
petitioner, upon winding up, was a secured creditor to the tune of
Rs.50,000/- and there was no requirement for registration of a charge
created by the order of the Court.
The Hon'ble Calcutta High Court, Shri Cama submitted, laid
down certain principles that form a guide as to what would constitute a
charge created by a decree or order, and the same may be summarised as
under:
(i) there must be a decree or order for a certain identified amount;
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
13/58 CA-314-2017.doc(ii) a mode for payment of the money must be indicated; and
(iii) there must be a provision in the order that permits the creditor to
proceed against an identified security for the purpose of executing the
decree/order.Once these three requisites are fulfilled, then a charge was
created by the decree/order of the court, which would not require
registration and which entitles the petitioning creditor to claim as a secured
creditor. The fact that the order in Praga Tools (Supra) was a consent order,
makes no difference whatsoever; had the order been an order of the Court
or a consent order the same assessment would be required to be done to
arrive at a conclusion as to whether the order created a charge or not.
16 Shri Cama further submitted that in the facts of the present
case, the above three requisites as set out in Praga Tools (Supra), to
constitute a charge by a decree/order of the Court are clearly fulfilled in as
much as:
(i) identified amount - the Recovery Certificate clearly
identifies the amount payable as being Rs.133,95,892/-
together with interest thereon;(ii) mode of payment/recovery - the Recovery Certificate itself
states that the amount shall be recovered from the
Respondents therein as arrears of land revenue;(iii) The order directs sale of an identified security for
satisfying the decretal dues - The Recovery Certificate further
states that applicant shall be entitled to recover the dues by
executing the Recovery Certificate as per the provisions of
Section 156 of the Act and Rule 107 of the Rules without any
further application to be filed for this purpose. Mandatory
directions have been given to the designated officers to act in
accordance with Section 156 of the Act and Rule 107 of theGauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
14/58 CA-314-2017.docRules. Section 156 of the Act clearly contemplates that the
dues will be recovered by attachment and sale or sale without
attachment of the property of the persons against whom the
decree, decision, award or order has been obtained or passed.
Thus, expressly in the Recovery Certificate, by incorporation of
Section 156 of the Act, there is a direction for attachment and
sale of the property for recovery of the decretal dues. Rule
107(11) of the Rules which is also directed to be acted upon in
the Recovery Certificate clearly provides that in the event the
defaulting party does not make payment in accordance with
the notice for demand, then under Rule 107 (11)(c) of the
Rules, the Recovery Officer "shall" sell the property which has
been identified for satisfying the decree. Rule 107 of the Rules,
which forms part of the Recovery Certificate, is a mandatory
direction / order for attachment and sale of the property to
satisfy the decree. It is thus clear from the scheme of the Act
and Rules, the Recovery Certificate itself, and in any event the
Panchnama and pre-auction notice read with the Recovery
Certificate, constitutes an order for sale of the property
towards satisfying the decree. Thus such an order for sale of
the identified property in execution of the decree constitutes a
charge on the subject property of the company, i.e., the plots
and building thereon, which charge does not require
registration. In the present case, the Panchnama and the pre-
auction notice, both clearly identify the property which is
attached and which is notified and directed to be sold.
Applicant is thus, a charge holder/secured creditor to the
extent of the value of the land and building sold, and is
entitled to claim as a secured creditor in the present winding
up proceedings.17 Shri Engineer, per contra submitted as under:
A). Applicant cannot rely on the charge created by the Mortgage
Deed dated 23rd January 2004 to claim the status of a secured creditor
since the charge was registered with the Registrar of Companies
subsequent to the winding up of the Company.(i) Section 125 of the Companies Act, 1956 requires every
charge created by a company to be registered with the Registrar of
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
15/58 CA-314-2017.docCompanies. The consequence of non-registration of charge is also prescribed
therein, i.e., an unregistered charge would be void as against the liquidator
and creditors of the company.
(ii) Section 125 makes it abundantly clear that a charge which
is not registered with the company would be void as against the liquidator
and any creditor. The Hon'ble Supreme Court in Kerala State Financial
Enterprises Limited V/s. Official Liquidator, High Court Kerala 3, held as
follows :
"9. Ordinarily a charge should be registered in terms of Section 125 of the
Act. If the charges are not registered, the same would be void against the
liquidator or creditors..."(iii) Furthermore, the charge has to be registered before the
company is wound up. Any charge registered after the winding up of the
company is void. In this regard, the Hon'ble Supreme Court's in J. K.
(Bombay) Private Limited V/s. New Kaiser-I-Hind Spinning and Weaving
Company Limited Ors.4, held, in paras 31 and 32, as follows:
"31. The effect of a winding-up order is that except for certain preferential
payments provided in the Act the property of the company is to be applied in
satisfaction of its liabilities pari passu. Pari passu distribution is to be made
in satisfaction of the liabilities as they exist at the commencement of the
winding-up (cf. Sections 528 and 529 of the Act; Ghosh on Indian Company
Law, 11th Edn., Vol. 2, p. 1073). The effect of a winding-up order on rights
already completed as against rights yet to be completed is succinctly stated by
Lord Halsbury in Bank of Scotland v. Macleod, [1914] A. C. 311, as follows :"Rights in security which have been effectually completed before the
liquidation must still receive the effect which the law gives to them. But
the company and its liquidators are just as completely disabled by the
winding-up from granting new or completing imperfect rights in security3. (2006) 10 SCC 709
4. AIR 1970 SC 1041
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
16/58 CA-314-2017.docas the individual bankrupt is by his bankruptcy. This, indeed, is the
necessary effect of the express provision of the SectionCompanies Act that the
estate is to be distributed among the creditors pari passu. Every creditor
is to have an equal share, unless any one has already a part of the
estate in his hands, by virtue of an effectual legal right."SectionTulsidas Jasraj Parekh v. Industrial Bank of Western India, 32 BLR 953.
Similarly, in Re Anglo-Oriental Carpet Manufacturing Company, [1903] 1
Ch. 914, it was held that even where a company had executed a trust deed
and issued debentures creating a charge on its assets but the charge had not
been registered as required by the SectionCompanies Act by the time the company
had passed an extraordinary resolution for voluntary winding-up the
debenture-holders were not, as against the joint body of creditors, secured
creditors.32. It is thus well established that once a winding-up order is passed the
undertaking and the assets of the company pass under the control of the
liquidator whose statutory duty is to realise them and to pay from out of the
sale-proceeds its creditors. Such creditors acquire on such order being passed
the right to have the assets realised and distributed among them pari passu.
No new rights can thereafter be created and no uncompleted rights can be
completed, for doing so would be contrary to the creditors' right to have the
proceeds of the assets distributed among them pari passu..."(iv) In the present case, the charge allegedly created by the
Company pursuant to the mortgage deed dated 23 rd January 2004 was
admittedly registered on 17th November 2014, i.e., after the winding up
order dated 19th July 2007. Therefore, the registration of charge is unlawful
and void and it does not elevate applicant into a secured creditor for the
purposes of Section 529 and Section 529A of the Companies Act.
(v) The RoC has filed its affidavit to place on record the
relevant documents with regard to the registration of charge. It is clear that
the ex-directors had applied for registration. However, Applicant cannot
distance itself from this illegal and unlawful act. This registration was done
at the behest of Applicant because it is the only entity which could have
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
17/58 CA-314-2017.docattempted to benefit from the application. Further, as can be seen from the
facts, the certificate was obtained on 17th November 2014, and on the same
day Applicant wrote to the Official Liquidator that it is a secured creditor.
The fact that Applicant wrote on the same day is a telling circumstance
which shows that the same was done at the behest/request of Applicant
since this Court had vide its order dated 21 st March 2014 had held that
Applicant was not a secured creditor and could not take away the sale
proceeds. In order to overcome the hurdle, Applicant has got the erstwhile
directors of the Company to apply for registration of the charge. This shows
that Applicant violated the law. Applicant also sought to rely on the
registration of the charge as recorded in the statement of their Advocate,
who stated that he would produce the same, in the order dated 16 th March
2018. The fact that the charge was registered much after the company had
been ordered to be wound up and Applicant wrote to the Official Liquidator
on the very same day as the registration of the charge demonstrates that the
entire process of registration was a calculated move on the part of Applicant
in a desperate bid to fraudulently claim the status of a secured creditor. The
RoC in its Affidavit filed in the present proceedings has also stated that the
registration of charge was obtained on the basis of suppression of the
material fact that the Company was in liquidation.
(vi) Applicant now states that they are not relying on the
Mortgage Deed dated 23rd January 2004. This is too little too late. After
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
18/58 CA-314-2017.doccommitting an illegality and getting caught, Applicant cannot seek to avoid
the legal consequence merely by stating that they are not going to rely on
the Mortgage Deed. The very fact that the charge was registered with the
RoC after the winding up at the behest/instruction of Applicant would
warrant dismissal of their Application for withdrawal of the money lying
with the Official Liquidator.
(vii) The aforesaid clearly shows that Applicant cannot claim to
be a secured creditor on the basis of the Mortgage Deed.
B). Reliance on Sections 47 and Section48 of the Act is completely
misconceived and is wholly inapplicable in the facts of the present case,
and therefore, Applicant is not a secured creditor.(i) Section 47 of the Act reads as follows:
"47. Prior claim of society:-
(1) Notwithstanding anything in any other law for the time being in force,
but subject to any prior claim of Government in respect of land revenue or
any money recoverable as land revenue and to the provisions of sections 60
and 61 of the Code of Civil Procedure, 1908.(a) any debt or outstanding demand, owing to a society by any member or
past member or deceased member, shall be a first charge;(i) upon the crops or other agricultural produce raised in whole or in part
whether with or without a loan taken from the society by such member or
past member or deceased member,-(ii) upon any cattle, fodder for cattle, agricultural or industrial implements
or machinery, or raw materials for manufacture, or workshop, godown or
place of business supplied to or purchased by such member or past member
or deceased member, in whole or in part, from any loan whether in money or
goods made to him by the society, and(iii) upon any movable property which may have been hypothecated, pledged
or otherwise mortgaged by a member with the society and remaining in his
custody;(b) any outstanding demands or dues payable to a society by any member or
past member or deceased member, in respect of rent, shares, loans or
purchase money or any other rights or amounts payable to such society, shall
be a first charge upon his interest in the immovable property of the societyGauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
19/58 CA-314-2017.docExplanation -The prior claim of Government in respect of dues other than
land revenue shall be restricted for the purpose of subsection (1) to the assets
created by a member out of the funds in respect of which, the Government
has a claim.(2) No property or interest in property, which is subject to a charge under
the foregoing subsection, shall be transferred in any manner without the
previous permission of the society; and such transfer shall be subject to such
conditions, if any, as the society may impose.(3) Any transfer made in contravention of sub-section (2) shall be void.
(4) Notwithstanding anything contained in sub-sections (2) and (3), a
society, which has one of its objects, the disposal of the produce of its
members, may provide in its bye-laws, or may, otherwise contract with its
members, --(a) that every such members shall dispose of his produce through the society,
and (b) that any member, who is found guilty of a breach of the bye-laws or
of any such contract, shall reimburse the society for any loss, determined in
such manner as may be specified in the bye-laws." (emphasis added)(ii) A plain reading of Section 47 would indicate that a charge
is created in respect of outstanding dues of a member towards the society
only under the provisions of Section 47(1) of the Act. Section 47(1)(a) is
wholly inapplicable as none of the circumstances set out therein apply. A
charge is created on crops or other agricultural produce, cattle, fodder for
cattle, agricultural or industrial implements or machinery, raw materials for
manufacture, workshop, etc. supplied to or purchased by such member from
any loan made to the member by the society; or any moveable property
which may have been hypothecated, pledged or mortgaged by a member to
the society. It is evident that in the present case, none of these situations
exist. The Company does not have any crops or agricultural produce, it has
not purchased any fodder or any other specified item from the loan it raised
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
20/58 CA-314-2017.docfrom Applicant, and it has not hypothecated or pledged any moveable
property to Applicant. Therefore, no charge within the meaning of Section
47(1)(a) can be said to exist.
(iii) Furthermore, as regards a charge under Section 47(1)(b), a
charge is created in the member's interest in the immoveable property
belonging to the society, and not in the immoveable property of the
Company. Therefore, under Section 47 a charge is created on the member's
interest in the immoveable property of the society and not on the
immoveable property of the member who is borrowing. Therefore, no
charge exists on any property of the Company under Section 47(1)(b) of the
MCS Act.
(iv) Therefore, Section 47 is wholly inapplicable, which has
been conceded by Applicant.
(v) Section 48 of the Act reads as follows:
"48. Charge on immovable property of members, borrowing from certain
societies:-Notwithstanding anything contained in this Act or in any other law for the
time being in force;(a) any person who makes an application to a society of which he is a
member, for a loan shall, if he owns any land or has interest in any land as a
tenant, make a declaration in the form prescribed. Such declaration shall
state that the applicant thereby, creates, charge on such land or interest
specified in the declaration for the payment of the amount of the loan which
the society may make to the member in pursuance of the application and for
all future advances (if any), required by him which the society may make to
him as such member, subject to such maximum as may be determined by the
society, together with interest on such amount of the loan and advances;(b) any person who has taken a loan from a society of which he is a member,
before the date of the coming into force of this Act, and who owns any land
or has interest in land as a tenant, and who has not already made such aGauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
21/58 CA-314-2017.docdeclaration before the aforesaid date shall, as soon as possible thereafter,
make a declaration in the form and to the effect referred to in clause (a);
and no such person shall, unless and until he has made such declaration, be
entitled to exercise any right, as a member of the society;(c) a declaration made under clause (a) or (b) may be varied at any time by
a member, with the consent of the society in favor of which such charge is
created;(d) no member shall alienate the whole or any part of the land or interest
therein, specified in the declaration made under clause (a) or (b) until the
whole amount borrowed by the member together with interest thereon, is
repaid in full:Provided that, it shall be lawful to a member to execute a mortgage / bond in
respect of such land or any part thereof in favor of an Agriculture and Rural
Development Bank or of the State Government under the Bombay Canal
Rules made under the Bombay Irrigation Act, 1879 or under any
corresponding law for the time being in force for the supply of water from a
canal to such land, or to any part thereof:Provided further that, if a part of the amount borrowed by a member is paid
the society with the approval of the Central Bank to which it may be
indebted may, on an application from the member, release from the charge
created under the declaration made under clause (a) or (b), such part of the
movable or immovable property specified in the said declaration, as it may
deem proper, with due regard to the security of the balance of the amount
remaining outstanding from the member:(e) any alienation made in contravention of the provisions of clause (d) shall
be void(f) Subject to all claims of the Government in respect of land revenue or any
money recoverable as land revenue, and all claims of the Co-operative
Agriculture and Rural Multipurpose Development Bank in respect of its dues,
in either case whether prior in time or subsequent, and to the charge (if any)
created under an award made under the Bombay Agricultural Debtors Relief
Act, 1947 or any corresponding law for the time being in force in any part of
the State, there shall be a first charge in favour of the society on the land or
interest specified in the declaration made under clause (a) or (b), for and to
the extent of the dues owing by the member on account of the loan;(g) and in particular, notwithstanding anything contained in Chapter X of
the Maharashtra Land Revenue Code, 1966, the Record of Rights maintained
there under shall also include the particulars of every charge on land or
interest created under a declaration under clause (a) or (b), and also the
particulars of extinction of such charge
Explanation - For the purposes of this section the expression "society" means;(i) any resource society, the majority of the members of which are
agriculturists and the primary object of which is to obtain credit for its
members, orGauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
22/58 CA-314-2017.doc(ii) Any society, or any society of the class of societies, specified in this behalf
by him State Government, by a general or special order."(vi) Section 48 also is wholly inapplicable for the following
reasons :
(a) The Explanation to Section 48 limits the applicability of the
provisions of Section 48 only to: (i) resource societies where the majority of
members are agriculturists; and (ii) any society specified by the State
Government. Admittedly, Applicant does not fall within the scope of either
of these two societies. It is not a resource society of agriculturists. And
Applicant has failed to produce any order of the State Government
extending the application of Section 48 to societies such as Applicant.
Therefore, Applicant falls outside the scope of Section 48. This has also been
conceded by Applicant during the hearing.
(b) Without prejudice to the aforesaid, Section 48(a) of the Act
provides that a member of a co-operative society who makes an application
to the society for a loan shall make a declaration in the prescribed form with
respect to any ownership or tenancy interest the member has in any
property and in the said declaration, the member shall create a charge on
the said property in respect of the loan provided by the society to the
member. No such declaration has been pleaded, produced or proved to have
been made by the Company.
(c) A register of such declarations is also required to be
maintained under Rule 48(2) of the Rules, which is also not produced by
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
23/58 CA-314-2017.docApplicant. This also shows that the mandatory requirements before claiming
a first charge have not been fulfilled.
(d) Further, in order to claim the benefit of first charge under
Section 48(f) of the Act, every charge must be registered in the Record of
Rights, as mandate by Section 48(g) read with Rule 48(5) of the Rules,
which reads as under:
"48. Form of declarations be made by members borrowing loans from certain
societies and conditions on which any charge in favour of a society shall be
satisfied:...
(1)...
...
(5) Where a charge is created by a member on his land or on his interest in
any land as a tenant by declaration under Sectionsection 48, the society shall record
or cause to record such particulars of charge in the Record of Rights
maintained by the village officers of the village where such property is
situated. Such recording of the Charge in the Record of Rights of the village
shall be treated as a reasonable notice of such charge created under section48." (emphasis added)
(e) The mandatory nature of registration of charge created
under Section 48 of the Act pursuant to Section 48(g) of the Act and Rule
48(5) of the Rules has been upheld by this Court in Gajanan Eknath
Sonankar V/s. Shegaon Shri Agrasen Co-op. Credit Society Ltd. 5, where
the Court held as follows:
"8. A careful reading of Section 48 of the MCS Act and Rule 48 of the Rules
framed thereunder, to my mind, manifests that for knowledge to the people
at large about the charge over immovable property or for claiming protection
of Section 48 of the Act, it would be mandatory for the society to get the
charge on immovable property created or recorded in the record of rights
maintained by the village officers of the village where the property situated.
Sub-rule 5 clearly says that if such charge is shown in the record of rights the5. (2015) 1 MhLJ 579
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
24/58 CA-314-2017.docsame shall be treated as a reasonable notice of such charge created under
Sectionsection 48. Therefore, unless and until there is compliance of these two
provisions, namely Section 48 and Rule 48 (5), the people at large cannot be
expected to know about the charge, if any, on immovable property. In other
words, if a society wants to claim protection or benefit of Section 48 of the
MCS Act, the same can be obtained only from the date the charge is actually
recorded in the record of rights and not otherwise. To sum up, in answer to
Question No. 1, I hold that provisions of Section 48 and Rule 48 (5) are
mandatory in nature for a Cooperative Society if a cooperative society wants
to claim benefit /protection of the said provisions. I, therefore, answer the
question No. 1 in affirmative."(f) Thus, in the absence of any registration of the charge
created by the Company in favour of Applicant in accordance with the
provisions of Section 48 of the Act and Rule 48(5) of the Rules in the
Record of Rights, Applicant cannot claim to be a secured creditor by placing
reliance on Section 48 of the Act.
(g) That being so, it is clear that the reliance placed on Sectionsections
47 and/or 48 of the Act is wholly misplaced and inapplicable.
C). The Recovery Certificate dated 16th November 2004 does
not create a charge. Moreover, even if the terms of the Recovery
Certificate are read with the provisions of the Maharashtra Co-operative
Societies Act and/or the Maharashtra Co-operative Societies Rules
and/or the steps taken thereunder, no charge is created on the
property.(i) The Recovery Certificate dated 16 th November 2004 only
states that an amount is due and payable. It does not say that Applicant is a
secured creditor or that it has a charge on the assets of the Company.
Further, on a perusal of Section 101, it is clear that Section 101 is only a
summary manner in which certain types of societies can recover amounts
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
25/58 CA-314-2017.docthat are loaned. The section does not state that the amounts that are found
to be payable are recoverable as a secured creditor. On the contrary, Section
101(3) of the Act makes it clear that the effect of a recovery certificate
under Section 101 is that the amount so stated to be due shall be
recoverable "according to the law for the time being in force as arrears of
land revenue".
(ii) The fact that the amount under the Recovery Certificate was
recoverable from the Company "as arrears of land revenue" as per the
provisions of Maharashtra Land Revenue Code, 1966 also does not create a
charge and does not make Applicant a secured creditor. In the decision of a
Division Bench of this Hon'ble Court in SICOM Limited V/s. State of
Maharashtra6, the company in liquidation owed sales tax dues to the State
Government. One of the issues that arose for the Court's consideration was
whether the sales tax dues, which were recoverable as arrears of land
revenue, made the State Government a secured creditor of the company in
liquidation. This Court answered the question in the negative. It held that
there is a distinction between a sum which is recoverable as land revenue
and a sum which is recoverable as arrears of land revenue, and it is only in
case of the former that the State Government has a first charge under
Section 169 of the Maharashtra Land Revenue Code. The Court observed in
paras 9 and 10 as follows:
6. (2010) 6 Bombay Case Reporter, 749
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
26/58 CA-314-2017.doc"9. It is further to be seen here that if Section 38C does not operate in
relation to a property of the Company because of operation of Section 529A,
then by operation of the provisions of the Maharashtra Land Revenue Code,
there is no change brought about in the situation. In our opinion, the
provisions of Section 169 of the Maharashtra Land Revenue Code makes the
position absolutely clear. Section 169 of the Maharashtra Land Revenue
Code reads as under:169. Claims of State Government to have precedence over all others:
(1) The arrears of land revenue due on account of land shall be a
paramount charge on the land and on every part thereof and shall
have precedence over any other debt, demand or claim whatsoever,
whether in respect of mortgage judgment-decree, execution or
attachment, or otherwise howsoever, against any land or the holder
thereof.(2) the claim of the State Government to any monies other than
arrears of land revenue, but recoverable as a revenue demand under
the provisions of this Chapter, shall have priority over all unsecured
claims against any land or holder thereof.10. Perusal of the above quoted provisions shows that the Maharashtra Land
Revenue Code makes a clear distinction between the sum which is recoverable
as aland revenue and sum which is recoverable as arrears of land revenue.
What creates paramount charge is the sum which is the amount of land
revenue and not the sum which is recoverable as land revenue. The
Constitution Bench of the Supreme Court in its judgment in the case of
Builders Supply Corporation, referred to above, in our opinion, has made the
position absolutely clear. Following observations in the case of Builders
Supply Corporation, in our opinion, are relevant. They read as under:
We have referred to this decision, because it brings out emphatically the real
character of the provisions prescribed by Section 46(2). Section 46(2) does
not deal with the doctrine of the priority of Crown debts at all; it merely
provides for the recovery of the arrears of tax due from an assessee as if it
were an arrear of land revenue. This provisions cannot be said to convert
arrears of tax into arrears of land revenue either, all that it purports to do is
to indicate that after receiving the certificate from the Income Tax Officer,
the Collector has to proceed to recover the arrears in question as if the said
arrears were arrears of land revenue. We have already seen that other
alternative remedies for the recovery of arrears of land revenue are prescribed
by Sub-sections (3) and (5) of Section 46. In making a provision for the
recovery of arrears of tax, it cannot be said that Section 46 deals with or
provides for the principle of priority of tax dues at all; and so, it is impossible
to accede to the argument that Section 46 in terms displaces the application
of the said doctrine in the present proceedings."Therefore, it is clear that the Recovery Certificate under Section
101 is only in the nature of a money decree and only makes the amount
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
27/58 CA-314-2017.docrecoverable as arrears of land revenue and that does not make the amount a
secured debt. Therefore, the Recovery Certificate does not change the
nature of the claim from an unsecured one to a secured one.
(iii) The reference to Section 156 of the Act and Rule 107 of the
Rules is not sufficient to create a charge, since neither of these two
provisions contains any term that would create a charge on the Company's
properties pursuant to the issuance of a recovery certificate. Section 156 and
Rule 107 merely provide for the mode of execution of a recovery certificate
issued under Section 101 of the Act. They are akin to the provisions for
execution under Section 51 read with Order 21 of the Code of Civil
Procedure, 1908 ("CPC"). They can in no manner be construed so as to
create a charge on the assets of the Company for the purposes of execution
of a Recovery Certificate.
(iv) The plain language of Section 156 and Rule 107 shows that
what they contemplate is the 'attachment' of a property and thereafter the
sale of the property as the means of executing/enforcing the Recovery
Certificate. It is settled law as laid down in the case of Kerala State Financial
Enterprises (Supra) and Board for Industrial and Financial Reconstruction
(B.I.F.R.) V/s. Coromandel Garments Ltd. Ors. 7, that an attachment
does not create a charge on the asset. That being so, the fact that Section
156 and Rule 107 talk about the 'attachment' of properties shows that it
7. In company application no.341 of 2016 on 13th July 2018
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
28/58 CA-314-2017.docdoes not amount to creation of a charge as held by the Hon'ble Supreme
Court in Kerala State Financial Enterprises (Supra) and this Hon'ble Court in
Board for Industrial and Financial Reconstruction (B.I.F.R.)vs Coromandel
Garments (supra).
(v) The decision of the Hon'ble Supreme Court in the case of
Oil and Natural Gas Corporation Limited V/s. Official Liquidator of
Ambica Mills Company Limited8 was a case where ONGC was claiming to
be a secured creditor on the basis of an undertaking given by Ambica Mills
that it would not deal with or alienate its properties. ONGC sought to
contend that this amounted to a charge created by law or decree. The
Hon'ble Supreme Court negated this contention. It held that an undertaking
not to alienate properties would not create a charge. Further, the Hon'ble
Court noted that no particular asset was identified in the undertaking. Even
in the present case, there is no identified asset that was mentioned in any
order that was to be treated as security. The judgment in Oil and Natural
Gas Corporation Limited (Supra) further holds that if the charge is not
registered under Section 125 of the Companies Act, it would be void against
the Official Liquidator. It is only if the charge is created by operation of
law /decree that Section 125 would not be attracted. As can be seen, there
is no charge created by law/decree. The Recovery Certificate under Section
101 read with Section 156 of the Act read with Rule 107 of the Rules does
8. (2015) 5 SCC 300 (paras 20-22)
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
29/58 CA-314-2017.docnot create a charge. The Recovery Certificate is akin to a money decree and
Section 156 read with Rule 107 is just a mode of execution. The property is
merely attached, and attachment has been held not to constitute a charge.
(vi) That being so, clearly there is no charge created by the
Recovery Certificate.
D). Merely because pursuant to the Recovery Certificate a
property was attached, no charge is created.(i) It is also well-settled that attachment of properties of a
company does not create a charge on the company's properties. The Hon'ble
Supreme Court reiterated this principle in Kerala State Financial Enterprises
(Supra). In the said case, properties of a company were attached on account
of the company's failure to pay its loan pursuant to the Kerala Revenue
Recovery Act, 1968. Subsequently, the company went into liquidation. The
appellant sought leave under Section 446 of the Companies Act, 1956 to
proceed with the sale of the attached properties. The Hon'ble Supreme
Court upheld the decision of the Hon'ble High Court of Kerala refusing to
grant leave on the ground that a mere order of attachment does not create a
charge. The Hon'ble Court held (in paras 9 and 10) as follows:
"9. Ordinarily a charge should be registered in terms of Section 125 of the
Act. If the charges are not registered, the same would be void against the
liquidator or creditors. The question which arises for consideration is as to
whether if the properties are attached by a Revenue Recovery Court, Section
125 of the Act would be applicable. An attachment itself does not create any
charge in the property. By reason of attachment, no decree is passed.10. The expression 'attachment' has no definite connotation. An order of
attachment is passed for achieving a limited purpose. It is subject to furtherGauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
30/58 CA-314-2017.docorders as also provisions of other statute." (emphasis added)
(ii) The aforesaid decision was relied upon by this Hon'ble
Court in Board for Industrial and Financial Reconstruction (B.I.F.R.) vs
Coromandel Garments (Supra). In the said decision, the Hon'ble Court held
in para 25 as under:
"25. (a) The application proceeds on the basis that the attachment of the
Satara property constitutes a charge in favour of applicant. In the course of
the hearing, however, applicant has sought to abandon its stand that the
attachment would constitute a charge. If it did, it would in any event fall foul
of both Sections 531 and Section536 of the Companies Act 1956. However,
applicant has continued to maintain that by virtue of the attachment,
applicant was a secured lender and was entitled to priority of payment out of
the sale proceeds from the Satara property.(b) There is nothing in law to support this proposition. In fact, the
authorities are quite clear that an attachment does no more than prevent a
debtor from dealing with an asset, thus ensuring that it would be available
to satisfy any legitimate debt. Official Liquidator has relied in this behalf on
the judgment of the Hon'ble Supreme Court in Kerala State Financial
Enterprises Ltd. V/s. Official Liquidator, High Court of Kerala, (2006) 10
SCC 709, where the Court, inter alia, observed that 'an attachment itself
does not create any charge in the property'. Official Liquidator also relied on
the judgment of the Hon'ble Calcutta High Court in Mahadeo Saran Sahu
(Supra) where the Court following the Full Bench ruling in Frederick Peacock
V/s. Madan Gopal. I.L.R. 29 Cal 428. and the dictum of the Judicial
Committee in Motilal V/s. Karrabuldani, I.L.R. 25 Cal 179 (1897), held that
it was impossible to contend that plaintiff in that case 'acquired any title or
charge upon the property by reason of the attachment in question'."(iii) In light of the aforesaid position of law, Applicant's
contention that the attachment of the Company's property creates a charge
and makes it a secured creditor cannot be accepted.
18 On the judgements cited by Shri Engineer, Shri Cama submitted
as under:
(i) Kerala State Financial Enterprises Limited (Supra) - the
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
31/58 CA-314-2017.docOfficial Liquidator relied upon paragraph 14 of this judgment to urge that a
mere attachment would not be sufficient to constitute a charge. This
submission is inapplicable in the facts of the present case as applicant's case
is not merely one of an attachment, but is a case where there is an
order/decree for attachment coupled with sale of an identified property to
satisfy the decretal dues. Such an order of sale is not a mere attachment and
in fact constitutes a charge as set out above. The Official Liquidator further
relied upon paragraphs 16 to 20 of this judgment to urge that a similar
argument to that which was being urged by applicant herein was upheld by
the Hon'ble Kerala High Court, but in paragraph 20, the Hon'ble Supreme
Court noted that the Hon'ble Supreme Court had taken a different view
from the Hon'ble Kerala High Court's view. It was thus sought to be urged
that the view of the Kerala High Court which was analogous to applicant's
arguments herein, was rejected or differed from by the Hon'ble Supreme
Court.
This is a complete misreading of the judgment. In paragraph 18
of the judgment of the Hon'ble Supreme Court, the Hon'ble Supreme Court
sets out the issues before the Hon'ble Kerala High Court. Pertinently, there
were two distinct issues/questions which were being considered by the
Hon'ble Kerala High Court viz., (a) the effect of a decree creating a charge;
and (b) the interplay between Section 46-B of the State Financial
Corporations Act, and Section 125 of the Companies Act, 1956, i.e., as to
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
32/58 CA-314-2017.docwhich would prevail. The quoted portion of the Hon'ble Kerala High Court
judgment deals separately (albeit in the same paragraphs), with the above
two questions. The first question as to the effect of a decree creating a
charge was answered by the Hon'ble Kerala High Court to say that an order
for realization of the amount by sale of the assets of the Company amounts
to a charge/decree and such a charge having not been created by the
Company, but being under an order of the Court, Section 125 of the
Companies Act, 1956, will not apply. This issue was not differed from by the
Hon'ble Supreme Court.
The second question before the Court on the interplay between
the SectionState Financial Corporations Act and the SectionCompanies Act, was answered
by the Hon'ble Kerala High Court to say that the SectionState Financial
Corporations Act would have priority over the SectionCompanies Act. It is only in
respect of this second question as regards the interplay between the two
statutes, that the Hon'ble Supreme Court had taken a somewhat different
view [paragraph 20]. The correctness of this reading of the judgment of the
Hon'ble Supreme Court is evident from the subsequent paragraphs of the
judgment, i.e., paragraphs 21 to 23, where the "somewhat different view" of
the Hon'ble Supreme Court has been set out and which view only pertains to
the second question viz., the interplay between the SectionState Financial
Corporations Act and other similar statutes on the one hand, and the
SectionCompanies Act, 1956 on the other hand. Thus, the finding of the Hon'ble
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
33/58 CA-314-2017.docKerala High Court on the order creating a charge has been in no manner
been interfered with or differed from by the Hon'ble Supreme Court.
(ii) J. K. (Bombay) Private Limited (Supra) - This judgment has
no application, as applicant is not seeking to complete any transaction after
the order of winding up. The order/decree creating a charge in the present
case was of 2004, much prior to the winding up order of 19 th July 2007. By
the date of the winding up order, the charge already stood crystalized and
only the ministerial act of actually selling the property took place under the
order of this Hon'ble Court on 21st March 2014. It is pertinent to note that in
paragraph 26 of this judgment, the Hon'ble Supreme Court has noted that
no particular form of words is necessary to create a charge and all that is
necessary is that there must be an intention to make a property security for
payment of money in praesenti. This judgment assists applicant as it is clear
from the above facts that the Recovery Certificate and the subsequent
Panchnama and pre-auction notice make the subject property security for
payment of money.
(iii) Board for Industrial and Financial Reconstruction (B.I.F.R.)
vs Coromandel Garments (Supra) - This judgment pertained to an order of
attachment in a Consent Terms. The Hon'ble Bombay High Court has
correctly held that a mere attachment would not constitute a charge.
However, in the present case it is not a mere attachment or a pre-judgment
attachment, but in fact an order specifically directing attachment of an
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
34/58 CA-314-2017.docidentified property and sale thereof towards satisfaction of the decree. Such
an order being an order for sale stands on a different footing than a
simplicitor order for pre-judgment attachment as in the case of Forbes Co.
(supra) and in the case of Kerala State Financial Enterprises (supra), which
is relied upon by the Hon'ble Bombay High Court in this judgment.
(iv) ONGC (Supra) - Similar to the above, this was a case where
the order was simply a pre-judgment attachment in the nature of a restraint
on the Company not to further encumber its assets. It was not an order of
sale or even attachment prior to sale of the property, and has no application
in the present fact situation. In paragraph 26 of the judgment it is clarified
that the undertaking given by the Company in Liquidation showed that
there was no identified immovable asset which was to be made available in
discharging the liability of appellant therein, unlike in the present case.
(v) SICOM Limited (Supra) - This judgment was relied upon by
the Official Liquidator to contend that recovery of arrears of land revenue
was different from an order stating that the dues would be recovered "as
arrears of land revenue". Firstly, this judgment has no application to the facts
of the present case, which pertains to a charge being created under a decree
which provides for an order of sale. In any event, paragraph 12 of this
judgment makes it clear that the Court was deciding only the issue as to
whether the State would have priority over secured creditors and workers in
exercising its charge. The judgment nowhere holds that the State did not
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
35/58 CA-314-2017.dochave a charge per se. The only question was whether that charge would
prevail over the workers and secured creditors. In the present case, it is
sufficient for applicant's purpose if this Hon'ble Court was to hold that
applicant had a charge on par with secured creditors and workers and
applicant is not seeking any priority over secured creditors/workers.
19 Shri Engineer also submitted that the Recovery Certificate
issued under Section 101 of the Act is in the nature of a statutory form
being Form V and that this statutory form does not in any manner create a
charge on the assets of the Company, which would equate the position of
applicant to that of a secured creditor. He further urged that Section 156 of
the Act sets out the powers qua attachment and sale and that the exercise of
these powers would not confer any right on applicant higher than that of an
unsecured creditor.
20 In response Shri Cama submitted that there was fallacy in the
argument of Shri Engineer because the Decree read with the Recovery
Certificate has all the ingredients of an order creating a charge. In any
event, applicant has not only placed reliance on the Recovery Certificate to
contend that a charge has been created on the assets of the Company by
operation of law; it has been the consistent stand of applicant that the
Recovery Certificate read with the Panchanama as well as the pre-auction
notice (which were steps in aid of the Recovery Certificate) equates the
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
36/58 CA-314-2017.docposition of applicant to that of a secured creditor. These orders passed by
the authorities under the Act create a charge on the assets of the Company
by operation of law.
21 Shri Cama also submitted that if the arguments of Shri Engineer
were to be accepted, then there would never be a charge created by
orders/decrees passed by statutory authorities under a statute and they
would be rendered otiose and that only where a charge as contemplated
under Section 125 of the Companies Act is registered, would the same be
valid. In this case, applicant's rights qua the identified asset of the Company
crystallized before the winding up order was passed by this Court. The pre-
auction notice would indicate that the identified property was ordered to be
sold but only the formal order selling the property remained to be passed.
This would not render the orders/decrees passed by the authorities under
the Act meaningless. On a true and correct reading of the provisions of the
Act and the Rules, Shri Cama submitted that applicant by operation of law
and under the order/decree of a Court, is a secured creditor of the
Company.
22 Shri Cama also submitted that it is not in dispute that by merely
obtaining a decree, a party does not become a secured creditor; however,
when the order of sale flows from the decree and the same is given effect to
under the relevant statute, it can hardly be contended that applicant in this
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
37/58 CA-314-2017.doccase would fall within the category of those creditors who have merely
obtained money decrees from a Court.
23 Shri Narichania submitted that the ex-director, who he was
appearing for, has studied only upto B.A., did not know that getting the
charge registered after an order of winding up was passed, was incorrect
and he had no malafide intentions. Shri Narichania added now that the
company has been ordered to be wound up, he would submit to any orders
that the Court would pass in the application made by applicant and the
stand taken by the Official Liquidator.
24 Heard the counsel, considered the pleadings and written
submissions.
25 For ease of reference quoted herein are the relevant provisions
of Section 2 (16) of the SectionCompanies Act, 2013, which defines a 'charge',
Section 101 and Section 156 of the Act and Rule 107 of the Rules :
Section 2 (16) of the SectionCompanies Act, 2013
"charge" means an interest or lien created on the property or assets of a
company or any of its undertakings or both as security and includes a
mortgage;Section 101 of the Maharashtra Co-operative Societies Act, 1960 :-
"101. Recovery of arrears due to certain societies as arrears of recovery of
land revenue.(1) Notwithstanding anything contained in Sectionsection 91, Section93 and Section98, on an
application made by a resource society undertaking the financing of crop and
seasonal finance as defined under the Bombay Agricultural Debtors Relief
Act, 1947 or advancing loans for other agricultural purposes repayable
during a period of not less than eighteen months and not more than five
years for the recovery of arrears of any sum advanced by it to any of itsGauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
38/58 CA-314-2017.docmembers on account of the financing of crop or seasonal finance or for other
agricultural purposes as aforesaid or by a crop-protection society for the
recovery of the arrears of the initial cost or of any contribution for obtaining
services required for crop-protection which may be due from its members or
other owners of lands included in the proposal (who may have refused to
become members) or by a lift irrigation society for the recovery of arrears of
any subscription due from its members for obtaining services required for
providing water supply to them, or by a Taluka or Block level village artisans
multi-purpose society advancing loans and arranging for cash credit facilities
for artisans for the recovery of arrears of its dues, or by a co-operative
housing society for the recovery of arrears of its dues, or by a co-operative
dairy society advancing loans for the recovery of arrears of any sum
advanced by it to any of its members or by an urban co-operative bank for
the recovery of arrears of its dues, or any sum advanced by the District
Central Co-operative Bank to its individual members or by non-agricultural
co-operative credit society for the recovery of the arrears of its dues or by
salary-earners co-operative society for the recovery of arrears of its dues, or
by a fisheries co-operative society for the recovery of arrears of its dues), or
by any such society or class of societies, as the State Government may, from
time to time, notify in the Official Gazette, for the recovery of any sum
advanced to, or any subscription or any other amount due from, the
members of the society or class of societies so not notified; and on the society
concerned furnishing a statement of accounts and any other documents as
may be prescribed in respect of the arrears, the Registrar may, after making
the inquiry in such manner as may be prescribed, grant a certificate for the
recovery of the amount stated therein, to be due as arrears: The application
for grant of such certificate shall be made in such form and by following such
procedure accompanied by such fees and documents as may be prescribed.
Explanation-I.-For the purposes of this sub-section, the expression "other
agricultural purposes" includes dairy, pisciculture and poultry.
Explanation-II.-For the purposes of this sub-section, the expression
"maintenance and service charges" means such charges as are specified in the
by-laws of the concerned co-operative housing society.
(2) Where the Registrar is satisfied that the concerned society has failed to
take action under the foregoing sub-section in respect of any amount due as
arrears, the Registrar may, of his motion, after making such inquiries as may
be prescribed, grant a certificate for the recovery of the amount stated
therein, to be due as arrears and such a certificate shall be deemed to have
been issued as if on an application made by the society Concerned.
(3) A certificate granted by the Registrar under sub-section (1) or (2) shall
be final and a conclusive proof of the arrears stated to be due therein, and
the same shall be recoverable according to the law for the time being in force,
as arrears of land revenue. A revision shall lie against such order or grant of
certificate, in the manner laid down under Section 154 and such certificate
shall not be liable to be questioned in any court.(4) It shall be lawful for the Collector and the Registrar to take
precautionary measures authorised by Sections 140 to 144 of the Bombay
Land Revenue Code, 1879 or any law or provisions corresponding thereto forGauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
39/58 CA-314-2017.docthe time being in force, until the arrears due to the concerned society,
together with interest and any incidental charges incurred in the recovery of
such arrears, are paid, or security for payment of such arrears is furnished to
the satisfaction of the Registrar."Section 156 of the Maharashtra Co-operative Societies Act, 1960 :-
"156. Registrars powers to recover certain sums by attachment and sale of
property--(1) The Registrar or any officer subordinate to him and empowered by him
in this behalf or an officer of such society as may be notified by the State
Government, who is empowered by the Registrar in this behalf may, subject
to such rules as may be made by the State Government, but without
prejudice, to any other mode of recovery provided by or under this Act,
recover--(a) any amount due under a decree or order of a Civil Court obtained by a
society;(b) any amount due under a decision, award or order of the Registrar, Co-
operative Court or Liquidator or Co-operative Appellate Court;(c) any sum awarded by way of costs under this Act;
(d) any sum ordered to be paid under this Act as a contribution to the assets
of the Society;(e) any amount due under a certificate granted by the Registrar under sub-
section (1) or (2) of Sectionsection 101 or under subsection (1) of Sectionsection 137;
together with interest, if any, due on such amount or sum and the costs of
process according to the scales of fees laid down by the Registrar from time to
time, by the attachment and sale or by sale without attachment of the
property of the person against whom such decree, decision, award or order
has been obtained or passed.(2) The Registrar or the officer empowered by him shall be deemed, when
exercising the powers under the foregoing sub-section, or when passing any
orders on any application made to him for such recovery, to be Civil Court
for the purposes of SectionArticle 136 in the Schedule to the SectionIndian Limitation Act,
1963."Rule 107 (1), (8)(i) to (iii), (11)(a) to (c) and (12) of the Maharashtra Co-
operative Societies Rules, 1961 :-"Rule 107. (1)[Procedure for attachment and sale of property under Section
156]:-(1) A creditor holding a decree requiring the provisions of Section 156 to be
applied, or society to which--(a) any amount is due under a decree or order of a Civil Court obtained by
the society;(b) any amount is due under a decision, award or order of the Registrar,
Arbitrator, Liquidator or Tribunals;Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
40/58 CA-314-2017.doc(c) any sum is awarded by way of costs under the Acts;
(d) any amount is due under a certificate granted by the Registrar to the
assets of the society;(e) any amount is due under a certificate granted by the Registrar under
Section 98 under sub-sections (1) or (2) of Section 101 or under sub-section
(1) of Section 137 together with interest, if any, due on such amount or sum
and the costs of process by the attachment and sale or by sale without
attachment of the property of the person against whom such decree, decision,
award or order has been obtained or passed, shall apply to the Recovery
Officer within whose jurisdiction the debtor resides or the property of the
debtor is situated. In the case of a society, a copy of the resolution of the
committee of the society authorising any of the members to make and sign
the application on its behalf, shall accompany the application]:
[Provided that no such application shall be necessary in respect of a
certificate given under sub-section (1) or (2) of Section 101 of the awards or
orders referred to in Rule 84.]""Rule 107. (8) (i) to (iii)
(i) Where the property to be attached is a decree either for the payment of
money or for sale in enforcement of a mortgage or charge, the attachment
shall be made, if the decree sought to be attached was passed by the Registrar
or by any person to whom a dispute was transferred by the Registrar under
Section 93 by a nominee or a board of nominees, then by the order of the
Registrar.(ii) Where the Registrar makes an order under clause (i), he shall, on the
application of the applicant who has attached the decree, proceed to execute
the attached decree and apply the net proceeds in satisfaction of the decree
sought to be executed.(iii) The holder of a decree sought to be executed by the attachment of
another decree of the nature specified in clause (i) shall be deemed to be the
representative of the holder of the attached decree and to be entitled to
execute such attached decree in any manner for the holder thereof."
"107. (11) In the attachment and sale or sale without attachment of
immovable property, the following rules shall be observed :-(a) The application presented under sub-rule (2) shall contain a description
of the immovable property to be proceeded against, sufficient for its
identification and in case such property can be identified by boundaries or
numbers in a record of settlement of survey, the specification of such
boundaries or numbers and the specification of the defaulters share or
interest in such property to the best of the belief of the applicant and so far as
he has been able to ascertain it.(b) The demand notice issued by the Recovery Officer under sub-rule (3)
shall contain the name of the defaulter, the amount due, including the
expenses, if any, and the batta to be paid to the person who shall serve the
demand notice, the time allowed for payment and in case of non-payment,Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
41/58 CA-314-2017.docthe particulars of the properties to be attached and sold or to be sold without
attachment, as the case may be. After receiving the demand notice, the
Recovery Officer shall serve or cause to be served a copy of the demand notice
upon the defaulter or upon some adult male member of his family at his
usual place of residence, or upon his authorised agent or, if such personal
service is not possible, shall affix a copy thereof on some conspicuous part of
the immovable property about to be attached and sold or sold without
attachment, as the case may be:Provided that where the Recovery Officer is satisfied that a defaulter with
intent to defeat or delay the execution, proceeding against him is about to
dispose of the whole or any part of his property, the demand notice issued by
the Recovery Officer under sub-rule (3) shall not allow any time to the
defaulter for payment of the amount due by him and the property of the
defaulter shall be attached forthwith.(c) If the defaulter fails to pay* the amount specified in the demand notice
within the time allowed, the Recovery Officer shall proceed to attach and sell,
or sell without attachment, as the case may be, the immovable property
noted in the application for execution in the following manner."
Rule 107 (12)
Where prior to the date fixed for a sale, the defaulter or any person acting on
his behalf or any person claiming an interest in the property sought to be
sold tenders payment of the full amount due together with interest, batta and
other expenses incurred in bringing the property to sale, including the
expenses of attachment, if any, the Recovery Officer shall forthwith release
the property after cancelling, where the property has been attached, the order
of attachment."26 'Charge' is defined in Section 124 of the Companies Act, 1956
to include a mortgage. Section 124 and the relevant provisions of Section
125 read as follows:
"124. 'Charge' To Include Mortgage In This Part: In this Part, the expression
'charge' includes a mortgage.125. Certain Charges to be Void Against Liquidator or Creditors Unless
Registered:-(1) Subject to the provisions of this Part, every charge created on or after the
1st day of April, 1914, by a company and being a charge to which this
section applies shall, so far as any security on the company's property or
undertaking is conferred thereby, be void against the liquidator and any
creditor of the company, unless the prescribed particulars of the charge,
together with the instrument, if any, by which the charge is created or
evidenced, or a copy thereof verified in the prescribed manner, are filed with
the Registrar for registration in the manner required by this Act within thirtyGauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
42/58 CA-314-2017.docdays after the date of its creation:
Provided that the Registrar may allow the particulars and instrument of copy
as aforesaid to be filed within thirty days next following the expiry of the
said period of thirty days on payment of such additional fee not exceeding
ten times the amount of fee specified in Schedule X as the Registrar may
determine, if the company satisfies the Registrar that it had sufficient cause
for not filing the particulars and instrument or copy within that period.
(2) Nothing in sub-section (1) shall prejudice any contract or obligation for
the repayment of the money secured by the charge.(3) When a charge becomes void under this section, the money secured
thereby shall immediately become payable.(4) This section applies to the following charges:
(a) a charge for the purpose of securing any issue of debentures;
(b) a charge on uncalled share capital of the company;
(c) a charge on any immovable property, wherever situate, or any interest
therein;(d) a charge on any book debts of the company;
(e) a charge, not being a pledge, on any moveable property of the company;
(f) a floating charge on the undertaking or any property of the company
including stock-in-trade;(g) a charge on calls made but not paid;
(h) a charge on a ship or any share in a ship;
(i) a charge on goodwill, on a patent or a licence under a patent, on a trade
mark, or on a copyright or a licence under a copyright."27 During the oral hearings, Shri Cama for applicant after
conceded that :
(i) It was aware of the fact that the Mortgage Deed was not
registered; and that the registration of the charge on 17th November 2014
was not correctly carried out, should not have been done and is of no legal
effect. Shri Cama in fact submitted that Applicant is not relying on the
Mortgage Deed at all to claim the status of a secured creditor;
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
43/58 CA-314-2017.doc(ii) Applicant is not relying on Section 47 of MCS Act to claim
the status of a secured creditor as Section 47 is inapplicable;
(iii) Applicant is not relying on Section 48 of MCS Act to claim
the status of a secured creditor as it is inapplicable;
28 Therefore, the only submission urged by Applicant, that
remains for this Court's consideration, is that the Recovery Certificate under
Section 101 read with the attachment of the Company's properties and the
pre-auction sale notice, read with Section 156 of the MCS Act and Rule 107
of the MCS Rules has the effect of creating a charge by operation of
law/decree.
29 Applicant's submissions were, to re-cap:
(i) They have a Recovery Certificate under Section 101 of the
Act.
(ii) The Recovery Certificate specifies that the amounts shall be
recoverable under Section 156 read with Rule 107 without any further
order.
(iii) Section 156 read with Rule 107 contemplate the
attachment and sale of assets/properties.
(iv) The Company's property was attached and a pre-auction
notice was given.
(v) That viewed as a composite whole, Section 101, read with
Section 156 and Rule 107 created a charge by operation of law/decree.
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
44/58 CA-314-2017.doc30 In my view, none of these individually or cumulatively, create a
charge on the Company's properties and therefore, do not convert applicant
into a secured creditor. The submissions of applicant is misconceived, inter
alia, for the following reasons :
(i) The Recovery Certificate dated 16 th November 2004 only
states that an amount is due and payable. It does not say that Applicant is a
secured creditor or that it has a charge on the assets of the Company.
Further, on a perusal of Section 101, it is clear that Section 101 is only a
summary manner in which certain types of societies can recover amounts
that are loaned. The section does not state that the amounts that are found
to be payable are recoverable as a secured creditor. On the contrary, Section
101(3) of the Act makes it clear that the effect of a recovery certificate
under Section 101 is that the amount so stated to be due shall be
recoverable "according to the law for the time being in force as arrears of
land revenue".
(ii) The fact that the amount under the Recovery Certificate was
recoverable from the Company "as arrears of land revenue" as per the
provisions of Maharashtra Land Revenue Code, 1966 also does not create a
charge and does not make Applicant a secured creditor. In this regard, the
decision of a Division Bench of this Court in SICOM Limited (Supra) is
relevant. In the said case, the company in liquidation owed sales tax dues to
the State Government. One of the issues that arose for the Court's
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
45/58 CA-314-2017.docconsideration was whether the sales tax dues, which were recoverable as
arrears of land revenue, made the State Government a secured creditor of
the company in liquidation. This Court answered the question in the
negative. It held that there is a distinction between a sum which is
recoverable as land revenue and a sum which is recoverable as arrears of
land revenue, and it is only in case of the former that the State Government
has a first charge under Section 169 of the Maharashtra Land Revenue
Code. Therefore, it is clear that the Recovery Certificate under Section 101
is only in the nature of a money decree and only makes the amount
recoverable as arrears of land revenue and that does not make the amount a
secured debt. Therefore, the Recovery Certificate does not change the
nature of the claim from an unsecured one to a secured one.
(iii) The reference to Section 156 of the Act and Rule 107 of the
Rules is not sufficient to create a charge, since neither of these two
provisions contain any term that would create a charge on the Company's
properties pursuant to the issuance of a recovery certificate. Section 156 and
Rule 107 merely provide for the mode of execution of a recovery certificate
issued under Section 101 of the Act. They are akin to the provisions for
execution under Section 51 read with Order 21 of the CPC. They can in no
manner be construed so as to create a charge on the assets of the Company
for the purposes of execution of a Recovery Certificate.
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
46/58 CA-314-2017.doc(iv) The plain language of Section 156 and Rule 107 shows that
what they contemplate is the 'attachment' of a property and thereafter the
sale of the property as the means of executing/enforcing the Recovery
Certificate. It is settled law as laid down in the case of Kerala State Financial
Enterprises (Supra) and Board for Industrial and Financial Reconstruction
(B.I.F.R.) vs Coromandel Garments (Supra) that an attachment does not
create a charge on the asset. That being so, the fact that Section 156 and
Rule 107 talk about the 'attachment' of properties shows that it does not
amount to creation of a charge as held by the Hon'ble Supreme Court in
Kerala State Financial Enterprises (Supra) and this Court in Board for
Industrial and Financial Reconstruction (B.I.F.R.) vs Coromandel Garments
(Supra).
(v) Applicant contends that since the Recovery Certificate
expressly stipulates that the amount so decreed is recoverable pursuant to
Section 156 and Rule 107 without any further order, it creates a charge.
This is patently incorrect for the reasons set out hereunder :
(a) The Recovery Certificate is issued in the standard format
prescribed for the same under the MCS Rules. Rule 86F, which falls in
Chapter VIII-A, dealing with grant of recovery certificate under Section 101
of the Act, prescribes that the recovery certificate shall be issued in Form V.
The relevant portion of Form V reads as follows:
"I hereby order that amount mentioned above be recovered from the
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
47/58 CA-314-2017.docrespondents as per the provisions of the Maharashtra Land Revenue Code
1966 as arrears of Land Revenue or;Applicant should get the above amount recovered through the officers who
have been delegated the powers under section 156 of the Maharashtra
Cooperative Societies Act, 1960 and Rule 107 of the Maharashtra
Cooperative Societies Rules, 1961. There is no need to file a separate
application for implementation of this recovery certificate."(b) It is thus evident that the Recovery Certificate issued in
favour of applicant is in the prescribed format and the reference to the
provisions of Section 156 of the Act and Rule 107 of the Rules is not a
distinctive feature of applicant's Recovery Certificate. Every recovery
certificate issued under Section 101 will mention that the amount is to be
recovered under Section 156 read with Rule 107 without requiring any
further orders to be passed. Therefore, the sequitur to Applicant's contention
is that every holder of a recovery certificate under Section 101 of the Act
would be a secured creditor. This interpretation is against the plain
language of Section 101(3) which only sets out that the amounts are
recoverable as arrears of land revenue which does not make the holder of
the recovery certificate a secured creditor. It is a well-settled proposition of
law that a decree-holder is not a secured creditor for the purposes of Section
529A of the Companies Act. The Hon'ble Supreme Court has upheld this
principle in Textile Labour Association Anr. V/s. Official Liquidator
Anr.9, where the Hon'ble Court held (in paragraphs 8 and 9) as follows:
"8. The effect of Sections 529 and Section529-A is that the workmen of the company
become secured creditors by operation of law to the extent of the workmen's
dues provided there exists secured creditor by contract. If there is no secured9. (2004) 9 SCC 741
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
48/58 CA-314-2017.doccreditor then the workmen of the company become unsecured preferential
creditors under Section 529-A to the extent of the workmen dues. The
purpose of Section 529-A is to ensure that the workmen should not be
deprived of their legitimate claims in the event of the liquidation of the
company and the assets of the company would remain charged for the
payment of the workers' dues and such charge will be pari passu with the
charge of the secured creditors. There is no other statutory provision
overriding the claim of the secured creditors except Section 529-A. This
Section overrides preferential claims under Section 530 also. Under Section
529-A the dues of the workers and debts due to the secured creditors are to
be treated pari passu and have to be treated as prior to all other dues.9. Therefore, the law is clear on the matter as held in UCO Bank case that
Section 529-A will override all other claims of other creditors even where a
decree has been passed by a court."(c) Therefore, it is evident that a decree-holder is not a secured
creditor for the purposes of Section 529-A of the Companies Act, 1956. SectionThe
Act too does not anywhere expressly provide that a charge is created in
favour of every holder of a recovery certificate under Section 101 or that
such holder of recovery certificate is a secured creditor. In such
circumstances, I cannot accept applicant's contention that by implication, a
holder of a recovery certificate becomes a secured creditor merely because
of the reference to Section 156 of the Act and/or Rule 107 of the Rules.
Such a construction would significantly alter the priority of claims as
stipulated in Sections 529, Section529A and Section530 of the Companies Act, 1956 and
such alteration is not permissible without the express mandate of the
legislature.
(vi) The legislature, in fact, has impliedly excluded the
interpretation proposed by applicant. The latin maxim expressio unius est
exclusio alterius, i.e., the express mention of one is the exclusion of another
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
49/58 CA-314-2017.docis relevant. The Hon'ble Supreme Court of India relied on the expressio unius
principle in Ethiopian Airlines V/s. Ganesh Narain Saboo10. In this case,
one of the issues before the Hon'ble Court was whether Section 86 of the
Code of Civil Procedure, 1908 applies to proceedings under the SectionConsumer
Protection Act, 1986. The Hon'ble Court held that the SectionConsumer Protection
Act clearly enumerates those provisions of the CPC which are applicable to
proceedings under SectionConsumer Protection Act. Since the said provisions do
not include Section 86, the legislature is deemed to have excluded its
applicability to proceedings under the SectionConsumer Protection Act. The
Hon'ble Supreme Court held (in paragraph 65) as follows:
"65. However, notwithstanding the fact that proceedings of the National
Commission are 'suits' under the Carriers Act, vide the expressio unius
principle, the SectionConsumer Protection Act, 1986 clearly enumerates those
provisions of the CPC that are applicable to proceedings before the Consumer
Fora. Such provisions include 13(4), in which the SectionConsumer Protection Act,
1986 vests those powers vested in a civil court under the CPC to the District
Forum. However, according to the principle of expressio unius, because the
legislature expressly made the aforementioned provisions of the CPC
applicable to the consumer proceedings, the legislature is, therefore, deemed
to have intentionally excluded all other provisions of the CPC from applying
to the said proceedings. This is particularly true since, as explained above,
the SectionConsumer Protection Act, 1986 sets forth an exhaustive list of
procedures, distinguishable from those required under the CPC, that the
consumer redressal fora must follow. Therefore, since the SectionConsumer
Protection Act does not state that Section 86 applies to the Consumer Fora's
proceedings, that section of CPC should be held to be not applicable."(vii) In the present case, therefore, in the absence of the Act
providing for an automatic creation of a charge pursuant to a recovery
certificate granted under Section 101 of the Act, no such charge can be
10. (2011) 8 SCC 539
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
50/58 CA-314-2017.docdeemed to have been created. The only deeming fiction stipulated for the
amount due under a recovery certificate is that it shall be recoverable as
arrears of land revenue (Section 101(3) of the Act), which, as can be seen
from what is set out earlier clearly does not create a charge.
(viii) Similarly, the Act expressly stipulates the situations in
which a charge is created in respect of a debt owed by a member to the
society. These include :
(a) Under Section 46 of the Act, a society shall have a charge
upon the share or interest in the capital and on the deposits of a member
and upon any dividend, bonus or profits payable to such member in respect
of any debt due from such member to the society.
(b) Section 47(1) of the Act provides that any debt or
outstanding demand of a society against a member is a first charge upon
certain properties of the member enumerated therein.
(c) A charge under Section 48 of the Act is created on a
member's land where a member takes a loan from the society, provided the
pre-conditions of Section 48 are met.
(ix) Since the Act expressly envisages situations in which a
charge is created on members' interests in respect of debt owed to the
society, by not providing for creation of a charge in respect of amount due
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
51/58 CA-314-2017.docunder a recovery certificate granted under Section 101 of the Act, in light of
the expressio unius principle, the Act is deemed to have excluded the
creation of a charge for an amount due under such recovery certificate.
(x) Even applicant's reliance on the decision in Praga Tools Ltd.
(Supra) is misplaced for the following reasons :
(a) The judgment was cited for the proposition that an order of
a court could create a charge and Sectionsection 125 of the Companies Act would
not apply to it. However, what is important to note is that the order that
was held to have created the security was a consent order. Parties by
consent agreed that Rs. 50,000 would be the security. In law the effect of
consent terms is that it is a contract of the parties with the imprimatur of the
Court. It was in such a case that the Hon'ble Calcutta High Court held that a
charge had been created. This is completely distinguishable as compared to
the facts of the present case.
(b) The security furnished by the company in liquidation in
Praga Tools (Supra) was specific, i.e., it was a sum of Rs.50,000/- and the
order which was held to have created a charge specifically stipulated that in
case of default, it was that specific sum of Rs.50,000/- that would be
considered as security. In the present case, the Recovery Certificate does not
anywhere specify the asset of the Company which ought to be considered as
security in the event of default in payment of the amount due under the
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
52/58 CA-314-2017.docRecovery Certificate. Indeed, in similar circumstances, in the absence of any
identification of property which is rendered as security, the Hon'ble
Supreme Court in Oil and Natural Gas Corporation Limited (Supra) held that
there was no intention to create a charge and no charge had been created
on the company's property. The Court held (in paragraph 26) as follows:
"26. The undertaking given by the company in liquidation in this case was as
under:3. I state that Respondent No. 10 Company undertakes that none of
immovable assets of the company will be further charged and encumbered
hereafter with effect from 15-04-1987, i.e. from the date of order of this
Hon'ble Court except with the leave of this Hon'ble Court.4. I state that Respondent No. 10 Company further undertakes not to
alienate any of its immovable assets hereinafter with effect from 15-04-1987
except with the leave of this Hon'ble Court. The Respondent No. 10 Company
further undertakes to make available all its immovable assets in the event of
discharging the liabilities which may arise on account of the difference
between the price at which all the gas being supplied to the company during
the pendency of the proceedings in this connection and the price which may
be determined by this Hon'ble court while disposing of the present appeals
finally.A perusal of the aforesaid undertaking shows that Ambica Mills has not
identified any particular immovable assets which would be made available in
discharging the liabilities in favour of the Appellant. Therefore, we have no
hesitation in rejecting the submission of Mr. Kuhad that the interim order
read with the undertaking expressed an intention to create an enforceable
charge of any particular asset of the company in liquidation." (emphasis
added)(c) As stated above, the Recovery Certificate merely contains a
reference to Section 156 of the Act and Rule 107 of the Rules for the
purpose of execution of the Recovery Certificate. Neither the Recovery
Certificate nor Section 156 nor Rule 107 identifies any property which
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
53/58 CA-314-2017.docwould be treated as security for the amount due under the Recovery
Certificate. Therefore, no charge can be said to have been created.
(d) The Hon'ble Supreme Court in Oil and Natural Gas
Corporation Limited (Supra) also distinguished Praga Tools (Supra) and held
that no charge had been created in favour of the appellant therein.
(xi) Applicant has also relied on the decision in Indian Bank
(Supra) to contend that a charge that has been created by operation of law
and/or by the Recovery Certificate and therefore it does not have to be
registered under Section 125 of the Companies Act, 1956. This judgment is
completely distinguishable for the following reasons :
(a) The decree in the Indian Bank (Supra) case was in a
mortgage suit in which preliminary decree was passed. The fact that it was
in a mortgage suit is a crucial difference when compared to the facts in the
present case, which was just a summary procedure for recovery of money. It
was in this regard that the Hon'ble Supreme Court held in Indian Bank
(Supra) that a charge was created on the basis of a preliminary decree in a
mortgage suit because the decree had specifically directed that if the
amount due was not paid, the plaintiff would be entitled to apply to the
court for passing a final decree for sale of the property which was given as
security in an equitable mortgage. In the present case, the Recovery
Certificate neither refers to the creation of a charge in respect of the amount
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
54/58 CA-314-2017.docdue therein nor does the Recovery Certificate state that any property of the
Company shall be treated as a security for the purposes of execution of the
Recovery Certificate or that it may be attached/sold in the event of default
in payment of amount due. The Recovery Certificate is akin to a money
decree which simply orders the Company to pay the sum adjudicated
therein to applicant.
(b) The argument that the Panchnama attaching the property
and the pre-auction notice stipulates that if the amount is not paid the
attached properties would be sold and that the same would demonstrate
that a charge had been created is also misconceived. The Panchnama and
the pre-auction notice are not judgments/orders/decrees. They are mere
steps in execution of the Recovery Certificate. If applicant's contention is to
be accepted, it would tantamount to a situation where any unsecured
decree-holder could contend that merely because any property has been
attached in execution and put up for sale it is now a secured creditor, which
would run counter to the settled position in law that an unsecured creditor
who has a decree does not become a secured creditor and also that an
attachment does not create a charge.
(c) It was in the context of a mortgage suit that the Hon'ble
Supreme Court has held that if an order of sale of the mortgaged property
had been passed, then the provisions of Section 125 would not apply. It is
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
55/58 CA-314-2017.docimportant to note that a charge could be created either by the act of parties
or by operation of law. Act of parties necessarily means a situation where
parties are ad-idem/agree that a particular asset may be offered as security.
A charge created by operation of law would be a situation where a charge is
created by virtue of a legal provision such as Section 55(4)(b) and Section55(6)(b)
of the Transfer of Property Act, Sections 529 and Section529A of the Companies
Act, Section 48 of the Act, and recovery of land revenue under Section 169
of the Maharashtra Land Revenue Code. Where a charge is created by the
decree, it would necessarily contemplate a situation where a party has either
a contractual right or a statutory right for claiming a charge. If neither of
them is available, then the court would not pass a decree creating a charge.
It is for this reason that in Indian Bank (Supra) case, which was a mortgage
suit, it was held that the preliminary decree did not require to be registered.
However, parties had agreed in that case that the asset was to be the
security for the creditor and the legal proceedings had been taken out to
enforce the security. In the present case, the Recovery Certificate is only a
summary procedure for recovery of money and does not create a charge or
even refer to any property being the security. As set out above, the Recovery
Certificate is a plain and simple money decree and therefore, no analogy or
parallel can be drawn with the Indian Bank (Supra) case. The same is
completely distinguishable on facts.
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
56/58 CA-314-2017.doc31 Applicant contends that since the attachment of the Company's
assets and issuance of pre-auction sale notice took place prior to the
winding up order, it amounts to creation of a charge and thus ought to be
entitled to the sale consideration. This contention also is completely
misconceived. The Hon'ble Supreme Court in Kerala State Financial
Enterprises (Supra) and this Hon'ble Court in this Hon'ble Court in Board for
Industrial and Financial Reconstruction (B.I.F.R.) vs Coromandel Garments
(Supra) have held that the attachment of a property does not create a
charge.
32 Moreover, the fact that the Company's properties have been
attached prior to the winding up order dated 19 th July 2007 is totally
irrelevant. The Hon'ble Supreme Court in Bank of Maharashtra V/s.
Pandurang Keshav Gorwardkar11, has held that the relevant date on which
the legal status of parties for the purposes of Sections 529 and Section529-A of the
Companies Act, 1956 are determined is the date of the winding-up order.
The Hon'ble Court further held that even if the assets of the company in
liquidation have been sold (let alone attached) prior to the date of the
winding-up order, if the proceeds of the sale have not been realized by the
secured creditor as of the date of the winding-up order, such sale proceeds
cannot be said to belong exclusively to the secured creditor and the
workmen will have a pari passu charge on the company's assets, including
11. (2013) 7 SCC 754
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
57/58 CA-314-2017.docthe sale proceeds, as of the date of the winding-up order. The Hon'ble
Supreme Court held:
"67.2. Where a company is in liquidation, a statutory charge is created in
favour of workmen in respect of their dues over the security of every secured
creditor and this charge is pari passu with that of the secured creditor. Such
statutory charge is to the extent of workmen's portion in relation to the
security held by the secured creditor of the debtor company.67.3. The above position is equally applicable where the assets of the debtor
company have been sold in execution of the recovery certificate obtained by
the bank or financial institution against the debtor company when it was not
in liquidation but before the proceeds realized from such sale could be fully
and finally disbursed, the company had gone into liquidation. In other
words, pending final disbursement of the proceeds realized from the sale of
security in execution of the recovery certificate issued by the Debts Recovery
Tribunal, if debtor company becomes company in winding up, Section 529-A
read with Section 529(1)(c) proviso come into operation and statutory
charge is created in favour of workmen in respect of their dues over such
proceeds.67.4. The relevant date for arriving at the ratio at which the sale proceeds
are to be distributed amongst workmen and secured creditors of the debtor
company is the date of the winding up order and not the date of sale."33 Therefore, it is only if a creditor has realized the proceeds of
sale of an asset of the Company prior to the winding-up order can such
creditor claim to have prior rights over such asset/its sale proceeds. In the
present case, the mere fact that the Company's properties have been
attached, not even sold, prior to the winding-up order dated 19 th July 2007
does not have any consequence on its status as an unsecured creditor at all.
34 In light of the aforesaid, in the absence of a charge having been
registered by applicant prior to the winding up order dated 19 th July 2007,
applicant cannot be considered as a secured creditor. The Recovery
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
58/58 CA-314-2017.docCertificate dated 16th November 2004 does not create any charge in favour
of applicant, either by itself or when read along with any of the provisions of
the Act or the Rules. In such circumstances, the mistaken categorization of
applicant as a secured creditor has to be corrected and changed into an
unsecured creditor.
35 OLR no.116 of 2018 and company application no.314 of 2017
accordingly disposed.
(K.R. SHRIRAM, J.)
Gauri Gaekwad
::: Uploaded on - 03/06/2019 04/06/2019 02:20:09 :::
