Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune |
Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone
# 09811415837-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com
Winding-up – a brief:
The Companies Act, 1956 contain
elaborate provisions as to when a Company is to be wound-up, the procedure for
initiating winding-up proceedings, the role of the managerial personal if the
company is wound-up by the Company Court and the liquidation process to be
conducted by the Official Liquidator appointed by the Company Court. It is
generally understood that the Company faces winding-up proceedings when its
financial position is not good or it has become insolvent. In most of the cases
it may be true that only insolvent companies are wound-up in accordance with
the provisions of the Companies Act, 1956. But, it is also true that a Company
may be wound-up due to the serious difference of opinion among the groups in
the Company and it is on the ground “just and equitable”. But, when the company
is not insolvent, then, the differences among the groups may normally lead to
approaching Company Law Board under section 397/398 of the Companies Act, 1956.
At the same time, a Company with valuable properties and the scope for
expansion of business is wound-up at times. We see few cases where the
winding-up proceedings are long fought in the Court by preferring appeals and
convincing the court with some revival scheme. There are cases where the
Company which has faced serious winding-up proceedings reviving well later.
Rules governing the payments
during liquidation process:
Dealing with the issue of making
payments during liquidation process, the Madras High Court, in In re Manasuba
and Co. (P.) Ltd, (1973) 43 Com Cases 245, was pleased to observe that “section
529 of the Companies Act, among other things, provides that in the winding up
of an insolvent company the same rules shall prevail and be observed with regard
to the respective rights of secured and unsecured creditors as are in force for
the time being under the law of insolvency with respect to the assets of
persona adjudged insolvent. While exercising jurisdiction under section 529,
the company court would observe the well established rules unless which
regulate the affairs in insolvency proceedings and the tests which would apply
for deciding whether a particular asset has vested in the official assignee for
distribution among the general body of creditors would equally apply for
determining whether the asset would vest in the official liquidator for
distribution and payment of dividend pro rata without any claim for
preferential payment. Normally, in the winding up of an insolvent company, just
as in an insolvency, a secured creditor will be out of the scope of liquidation
and he will be entitled to enforce the security and realise the same to obtain
full satisfaction of the secured debt and it is only the surplus which will go
into the hands of the official liquidator. It is settled law that were a
fiduciary relationship is established between the company and a third party and
money are paid by the third party to the company in a situation in which the
company occupies a fiduciary relationship is established between the company
and a third party and moneys are paid by the third party to the company in a
situation in which the company occupies a fiduciary relationship, with an
obligation to either use the money for a specified purpose or to retain or keep
it with the company to meet certain contingencies, the said sum would be
impressed with a fiduciary character and would not form part of the general
assets of the company. Property thus held by an insolvent company in a
fiduciary capacity, burdened with certain fiduciary obligations, is treated a
property held in trust for a specific purpose under the insolvency laws. Such
property or money held for a specific purpose is by law treated as clothed with
a species of trust governed by the same principles and rules which apply to
property held in express trust. Section 529 of the Companies Act of 1956, which
has taken the place of section 229 of the fact of 1913, corresponds to section
317 of the English Act. In the matter of preferential payments and claims for
priority resting upon a fiduciary relationship, the Companies Act of 1956,
merely provides that the provisions of the bankruptcy law would be observed.
Cases in England and in India have taken the uniform view that property
deposited with the bankrupt for a specific purpose would come under the
category of trust property and would not vest in the official assignee as
bankrupt’s property either because there is a specific trust with regard to the
same or because the property was entrusted to the bankrupt, the later being
clothed with a fiduciary obligation with regard to the property. In order that
the property may be exempted from vesting under the aforesaid provision, it is
not necessary that an express trust should have been constituted and it is
sufficient if the entrustment involves obligations on the bankrupt in the
nature of a quasi or constructive trust”.
Secured Creditors and their
steps:
The Companies Act, 1956 provides
for a preferential payment to the secured creditor and for making a payment, their
due is to be ascertained by the Official Liquidator normally. But, there can be
a special law like Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, enabling the secured creditors or
the Financial Institutions to proceed with their recovery process overriding
other laws. In such a case, it becomes the responsibility of the Official
Liquidator to represent the Company before the concerned forums like Debt
Recovery Tribunal. We can not say that the Financial Institutions or especially
public financial institutions are good and will not commit any illegalities or
irregularities. We are seeing many cases where serious allegations are being
made against the Public Financial Institutions too. Under such circumstances,
the Official Liquidator, in the interest of the workmen and shareholders,
should effectively represent the Company before the forums like Debt Recovery
Tribunal. But, the Official Liquidator may be handicapped with the relevant
information and facts to fight with the secured creditors in many cases. Other
shareholders and creditors may not be normally allowed to represent the Company
when the Official Liquidator is appointed. This is an interesting area to be
looked into during the liquidation process. It is true that when the Official
Liquidator or his office is efficient and listens to the other creditors and
shareholders of the Company, then, the Official Liquidator may be able to
effective discharge his responsibility before the Company Court and also before
other forums like Debt Recovery Tribunals under special law. But, we can not
ignore the practical difficulties, limitations and complications in the course.
Right of the Secured Creditors
and Liquidator’s Responsibility:
It is seen that, in most of the
cases, the banks or Public Financial Institution are the secured creditors.
And, for realizing their claim, they will resort to special laws like Recovery
of Debts due to Financial Institutions Act, 1993 and the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002. Stating that the official liquidator is mandated to represent the workers
in order to get their lawful stake from and out of the realization of the
money, the High Court of Madras, in V.K.Seshasayee and another Vs. Official
Liquidator, (2005) 127 Comp Case (Mad), was pleased to observe that “as a
determination of the claim of the secured creditors before the Debt Recovery
Tribunal was going on, it is was necessary for the official liquidator in the
interest of the workmen to participate in the proceedings before the Tribunal.
The official liquidator was to represent effectively in the proceedings before
the Tribunal for distribution of the sale consideration to the secured
creditors and workers and shareholders of the company”. Dealing with the scope
of the issue, the Supreme Court of India, in Industrial Credit and Investment
Corporation of India Vs. Srinivas Agencies, 1996 (5) JT 405: 1996 (4) SCC 165:
1996 (3) Supreme 40, was pleased to observe that “it may be pointed out that S.
529 and 529-A of the Act do contain provisions insofar as the priority of
secured creditor's claim is concerned. Of course, the Company Court would not
transfer the proceeding to it merely because of its convenience ignoring the
difficulties which may have to be faced by the secured creditor, who may be at
a place far away from the seat of the Company Court. The need to protect the
company from unnecessary litigation and costs have, however, to be borne in
mind by the Company Court.” Further, the court went on observing that “we are,
therefore, of the view that the approach to be adopted in this regard by the
company court does not deserve to be put in a strait-jacket formula. The
discretion to be exercised in this regard has to depend on the facts and
circumstances of each case. While exercising this power we have no doubt that
the Company Court would also bear in mind the rationale behind the enactment of
Recovery of Debts Due to the Banks and Financial Institutions Act, 1993, to
which reference has been made above. We make the same observation regarding the
terms which a Company Court should like to impose while granting leave. It need
not be stated that the terms to be imposed have to be reasonable, which would, of
course, vary from case to case. According to us, such an approach, would
maintain the integrity of that secured creditor who had approached the Civil
Court or desires to do so, and would take care of the interest of other secured
creditors as well which the Company Court is duty-bound to do. The company
court shall also appraise itself about the fact as to whether dues of workmen
are outstanding; if so, extent of the same. It would be seen whether after the
assets of the company are allowed to be used to satisfy the debt of the secured
creditor, it would be possible to satisfy the workmen's dues pari passu.”
Conclusion:
Liquidation, being the
responsibility of the Official Liquidator, is a risky process and needs
expertise. Going by the experience, the Official Liquidator and their office
attached to the High Courts, had their own difficulties or limitations in
effectively completing the liquidation process. The new Companies Bill contains
a provision for appointing experts as Liquidators and it is to be seen as to
how the liquidation is done in future. It’s a very complicated area under
Indian Company Law needing many reforms.
Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune |
Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone
# 09811415837-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com
