M J Antony: Liquidation pangs

OUT OF COURT

The official liquidator has wide powers regarding debts

The news of liquidation of a company sets off a tremor all around it. Banks and financial institutions, secured creditors, employees and assorted predators mill around the industrial concern to protect their interests.

This leads to legal tangles involving the courts, the official liquidators, the debt recovery tribunals and other authorities. Which one will have dominating jurisdiction over the spoils?

This was the issue in the judgement of the Supreme Court delivered the other day in Rajasthan Financial Corporation vs Official Liquidator.

The Rajasthan Financial Corporation and the State Industrial Development & Investment Corporation Ltd were secured creditors of a company in liquidation.

By an order, the company judge of the Bombay High Court ordered the winding up of the company and the official liquidator was directed to take charge of its assets.

He decided to get the properties valued before selling them by public auction. To start with, he asked the two state financial bodies to contribute to the expenses in valuation.

This alerted the FIs, who were apparently not aware of the company judge's move. They told the liquidator that they have their own remedies under the State Financial Corporations (SFC) Act and they would pursue them.

They would stand outside the high court's winding up proceedings. They applied to the company court to permit them to realise the securities in their own way. The company court rejected this application.

According to it, even if the FIs stood outside the winding up proceedings, their rights under Sections 29 and 31 of the Financial Corporations Act should be exercised in coordination with the official liquidator.

The sale proceeds will be retained by the liquidator. Challenging this order, the FIs moved the high court, without success. Their further appeal to the Supreme Court was also not successful.

According to Section 32(10) of the SFC Act, when the liquidation proceedings have already started before the finance corporations move in, the corporations cannot claim any preference over other creditors. That was one initial point against the corporations, which chose to stand outside the winding up proceedings.

There was apparent conflict of views in the Supreme Court itself. Its decision in Allahabad Bank vs Canara Bank (2000) seemed to contradict the opinion expressed in International Coach Builders Ltd vs Karnataka State Financial Corporation (2003).

Therefore, the issue was decided in the present case by a larger bench. According to the FIs, the first case was an authority in support of the proposition that the SFC Act would prevail over the Companies Act, the former being a special law protecting corporations like theirs.

The latter decision did not take into account Sections 46B of the SFC Act which gave it overriding effect. Therefore, the FIs are entitled to sell the properties independent of the official liquidator, it was argued.

While conceding the power of the FIs to take over the management and the possession of assets of the sinking industrial unit, the Supreme Court pointed out that the FIs in this case had chosen not to invoke the power.

Therefore, they stood only in the shoes of the secured creditors. Once the winding up of the concern is resorted to, Sections 529 and 529-A of the Companies Act come into play.

Section 529(1) (c) specifically deal with the rights of the creditors. Section 529-A deals with preferential payments, like the workers' dues and the debts due to secured creditors.

The Supreme Court ruled that the right to sell under the SFC Act qor under the Recovery of Debts Act by a creditor under those Acts and standing outside the winding up was different when the winding up proceedings were on. Then the sale of security and distribution of the sales proceeds could only be in terms of the Companies Act.

"After all, the liquidator represents the entire body of creditors and also holds a right on behalf of the workers.... In other words, the distribution of the sale proceeds under the direction of the company court is his responsibility," the judgement said.

If a financial corporation intends to sell the assets of a company in liquidation, the power can be exercised only after obtaining permission from the company court and associating the official liquidator in the process.

A debt recovery tribunal would be entitled to sell the properties of the debtor-company only after notice to the official liquidator. A district court also must notify the official liquidator if the FIs invoke the SFC Act to recover their debts.

In a case where proceedings under the Debts Act or the SFC Act are not set in motion, the creditors must approach the company court for realisation of their securities.

The Supreme Court did not find any discrepancy in its earlier judgements as alleged. Thus, its present ruling has set at rest doubts regarding the rights of the creditors.