Winding-up-Priority to Secured Creditors

Can Liquidator classify a Creditor as Unsecured Creditor based on the reasons that charge created on mortgage property was not registered before Registrar of Companies (RoC) under Section 77 of Companies Act, 2013 – Canara Bank Vs. Mr. S. Rajendran, Liquidator of Cape Engineers Pvt. Ltd. – NCLAT Chennai

In this important judgment, Hon’ble NCLAT held that:

(i) A First Charge Holder, will have priority in realising its security interest if it elects to realise its security interest and does not relinquish the same.
(ii) Clubbing of debts where the charges might be different does not give a right to an assignee, to seek substitution, in place of the First Charge Holder assignor Bank
(iii) The general Rule is that the claims are to be valued as on the date of commencement of winding up, is designed to ensure that one is comparing like with like so that the Assets are distributed pari passu.
(iv) A Liquidator is not to ask the Secured Creditor to relinquish the Secured Interest over the assets of the Corporate Debtor.
(v) Since the Code, 2016 overrides the SARFAESI Act, 2002, the Liquidator ought not to prefer a petition, based on the SARFAESI Act, 2002.
(v) The non-registration of the Mortgage as per Section 77 of the Companies Act, 2013 is not a sufficient / enough ground to come to an opinion that the Appellant is not a Secured Creditor. In reality, the rights of a Mortgagee under the Transfer of Property Act, 1882 and the SARFAESI Act are not to be diluted, in terms of Regulation 21 of IBBI (Liquidation process) Regulations, 2016.
(vi) The Appellant’s rights in holding a valid mortgage right over the Secured Assets is to be protected by any means whatsoever.

Can Liquidator classify a Creditor as Unsecured Creditor based on the reasons that charge created on mortgage property was not registered before Registrar of Companies (RoC) under Section 77 of Companies Act, 2013 – Canara Bank Vs. Mr. S. Rajendran, Liquidator of Cape Engineers Pvt. Ltd. – NCLAT Chennai Read Post »

Whether the claim of a secured creditor has precedence over the right of the customs authorities to recover the customs duty – Industrial Development Bank of India Vs. Superintendent of Central Excise and Customs and Others – Supreme Court

Hon’ble Supreme Court, in this landmark judgment has clarified various issues:
(i) Interpretation of a non-obstante provision
(ii) Interpretation of the expressions ‘relevant date’, debt ‘due’ and debt ‘due and payable’.
(iii) Whether the Customs Act creates a first charge overriding the charge in favour of the secured creditor
(iv) Interpretation of Section 142A of the Customs Act, 1962
(v) The decision in Collector of Customs v. Dytron (India) Ltd. 1998 SCC OnLine Cal 674 does not lay down the correct law
(v) Examines decision in Imperial Chit Funds (P) Ltd. v. Income Tax Officer, Ernakulam and interpretation of Section 178 of the Income Tax Act.

Whether the claim of a secured creditor has precedence over the right of the customs authorities to recover the customs duty – Industrial Development Bank of India Vs. Superintendent of Central Excise and Customs and Others – Supreme Court Read Post »

The First and Second Charge Holders cannot be treated equally in cases of Company Liquidation – M/s Tata Iron & Steel Co. Ltd. Vs. M/s Jhalani Tools India Ltd. – Delhi High Court

In this case, Dena Bank’s instant application pertains to Consortium’s second charge on certain assets belonging to the company in liquidation i.e., Jhalani Tools India Limited (JTIL).
The Hon’ble High Court held that Dena Bank’s attempt to prioritize their claims above the claims of the workmen lacks a valid basis. They cannot contend that the Consortium’s second charge should be merged with their first charge. Therefore, to maintain the integrity of the statutory framework and ensure equitable treatment of all creditors, it is crucial to distinguish between first and second charge holders when applying the pari passu principle under Sections 529 and 529A of the Act.
Further, the Hon’ble Court referred judgment in ICICI Bank Ltd v. SIDCO Leathers Ltd & Ors. (2017) ibclaw.in 103 SC and held that it becomes evident that the first and second charge holders cannot be treated equally. Upholding the objection of the second charge holder would upset the priority of the first charge holder, which would go against the provisions of Section 48 of the TP Act.

The First and Second Charge Holders cannot be treated equally in cases of Company Liquidation – M/s Tata Iron & Steel Co. Ltd. Vs. M/s Jhalani Tools India Ltd. – Delhi High Court Read Post »

When there is a possibility of collusion between Banks and Borrowers in scrutinisation of loan documents, the Bank cannot claim first holder charge in respect of the property which did not belong to the borrower at all – M/s. SCM Silks Pvt. Ltd. Vs. The State of Tamil Nadu – Madras High Court

Hon’ble High Court observed that the writ petitioner M/s. International Assets Reconstruction Company Pvt Ltd., is concerned, possibly they would have misled by the borrower of loan, who purchased the land from Ramachandra Trust. Therefore, the Bank, who sanctioned the loan also failed to scrutinise the transactions thoroughly and proceed based on the mislead facts by the borrowers. Hence, their claim that they hold first charge in the SARFAESI Act, would not have any direct application, since the Bank has not granted loan in accordance with the Statutes and Rules and in this regard, it is to be investigated whether the Bank Officials had colluded with the borrowers for sanctioning such huge amount of loan. When there is a possibility of collusion between the Banks and the borrowers in the matter of scrutinisation of the documents and other relevant facts, the Bank cannot now claim that they hold first charge in respect of the property which did not belong to the borrower at all.

When there is a possibility of collusion between Banks and Borrowers in scrutinisation of loan documents, the Bank cannot claim first holder charge in respect of the property which did not belong to the borrower at all – M/s. SCM Silks Pvt. Ltd. Vs. The State of Tamil Nadu – Madras High Court Read Post »

Section 529A of the Companies Act, 1956 would prevail over the Income Tax Act, 1961 – M/s Beta Nephthol Ltd. Vs. Ref. has been Recd. from BIFR New Delhi – Madhya Pradesh High Court

Hon’ble High Court held that firstly, the provisions of s.529A of the Act of 1956 have come into force on 1985 whereas s.170 of the IT Act has come into force in the year 1961, thus, the subsequent provisions of s.529A of the Act of 1956 would have precedence over the IT Act. Secondly, the Act of 1956 is a special Act which govern the law regarding companies only whereas IT Act is a general Act which percolates in just about every sphere of life and is applicable to all the citizen of India when it comes to payment of Income Tax. Thirdly, it is also found that s.529A and s.530 of the Act of 1956 have already taken into account inter alia the provisions of Income Tax and thus, the harmonious reading of the provisions of the two Acts leads this court to the one and only unescapable conclusion, that s.529A of the Act of 1956 would prevail over the Income Tax Act.

Section 529A of the Companies Act, 1956 would prevail over the Income Tax Act, 1961 – M/s Beta Nephthol Ltd. Vs. Ref. has been Recd. from BIFR New Delhi – Madhya Pradesh High Court Read Post »

Having chosen not to realize security, a secured creditor is not entitled to lay an exclusive claim over the proceeds realised from the sale of the assets of the company by the Official Liquidator under the control of the Company Court – Export Import Bank of India Vs. GOL Offshore Ltd. – Bombay High Court

High Court held that a secured creditor, who stands outside the winding up is expected to institute proceeding, other than that of winding up proceeding, to realise his security. It could be a proceeding under Recovery of Debts and Bankruptcy Act, 1993, or the measures under the SARFAESI Act, 2002, without the intervention of the Court, or for that matter, The Admiralty (jurisdiction and settlement of Maritime Claims) Act, 2017. In conclusion, the proviso to Sub Section (1) and Sub Section (2) of Section 529 of the Act, 1956, give an option to the secured creditor to “realise” the security and not a right to “appropriate” the sale proceeds of the security which have been realised by the Official Liquidator, on the premise that he is a secured creditor. If a secured creditor exercises the option to realise the security, he has to enforce the same in a proceeding other than the one under the Companies Act, 1956 and bear the process, costs and expenses. Having chosen not to realize his security, in the manner ordained, a secured creditor is not entitled to lay an exclusive claim over the proceeds realised from the sale of the assets of the company by the Official Liquidator under the control of the Company Court.

Having chosen not to realize security, a secured creditor is not entitled to lay an exclusive claim over the proceeds realised from the sale of the assets of the company by the Official Liquidator under the control of the Company Court – Export Import Bank of India Vs. GOL Offshore Ltd. – Bombay High Court Read Post »

A bare perusal of Sections 17, 18, 19(19), 31 and 34 of Recovery of Debts & Bankruptcy Act, 1993 shows that the DRT is having exclusive jurisdiction to deal with the recovery of the secured creditors and is having an overriding effect over all other laws – The Specified Undertaking of The Unit Trust of India Vs. M/s Derby Textiles Ltd. – Rajasthan High Court

Hon’ble High Court referred various judgments of Apex Court and held that the Recovery Officer is not required to take any prior permission of the Company Court before disbursing the amount except the rider provided under Section 19 (19) of the Act of 1993 and Sections 529 and 529A of the Companies Act, 1956.

A bare perusal of Sections 17, 18, 19(19), 31 and 34 of Recovery of Debts & Bankruptcy Act, 1993 shows that the DRT is having exclusive jurisdiction to deal with the recovery of the secured creditors and is having an overriding effect over all other laws – The Specified Undertaking of The Unit Trust of India Vs. M/s Derby Textiles Ltd. – Rajasthan High Court Read Post »

Wages/Salaries of the Workmen/Employees for the period during CIRP can only be included in the CIRP costs if it is established that the IRP/Resolution Professional managed the operations of the Corporate Debtor as a Going Concern during the CIRP and that the concerned workmen/employees actually worked during the CIRP – Sunil Kumar Jain and others Vs. Sundaresh Bhatt and others – Supreme Court

The issue before Hon’ble Supreme Court is with respect to wages/salaries of the workmen/employees during the CIRP period and the amount due and payable to the respective workmen/employees towards Pension Fund, Gratuity Fund and Provident Fund. Hon’ble Supreme Court held that:

i) that the wages/salaries of the workmen/employees of the Corporate Debtor for the period during CIRP can be included in the CIRP costs provided it is established and proved that the Interim Resolution Professional/Resolution Professional managed the operations of the corporate debtor as a going concern during the CIRP and that the concerned workmen/employees of the corporate debtor actually worked during the CIRP and in such an eventuality, the wages/salaries of those workmen/employees who actually worked during the CIRP period when the resolution professional managed the operations of the corporate debtor as a going concern, shall be paid treating it and/or considering it as part of CIRP costs and the same shall be payable in full first as per Section 53(1)(a) of the IB Code;

ii) considering Section 36(4) of the IB code and when the provident fund, gratuity fund and pension fund are kept out of the liquidation estate assets, the share of the workmen dues shall be kept outside the liquidation process and the concerned workmen/employees shall have to be paid the same out of such provident fund, gratuity fund and pension fund, if any, available and the Liquidator shall not have any claim over such funds.

Wages/Salaries of the Workmen/Employees for the period during CIRP can only be included in the CIRP costs if it is established that the IRP/Resolution Professional managed the operations of the Corporate Debtor as a Going Concern during the CIRP and that the concerned workmen/employees actually worked during the CIRP – Sunil Kumar Jain and others Vs. Sundaresh Bhatt and others – Supreme Court Read Post »

Whether a Company Court, directly or through an Official Liquidator, can wield any control in respect of sale of a secured asset by a secured creditor in exercise of powers available to such creditor under the SARFAESI Act, 2002 – Pegasus Assets Reconstruction P. Ltd. Vs. M/s. Haryana Concast Ltd. & Anr. – Supreme Court

A common issue of law is that whether a Company Court, directly or through an Official Liquidator, can wield any control in respect of sale of a secured asset by a secured creditor in exercise of powers available to such creditor under the SARFAESI Act, arises in all these matters which have been heard together and shall be governed by this common judgment. Hon’ble Supreme Court held that clear intention of the Parliament expressed in Section 13 of the SARFAESI Act that a secured creditor has the right to enforce its security interest without the intervention of the court or tribunal. At the same time, this Act takes care that in case of grievance, the borrower, which in the case of a company under liquidation would mean the liquidator, will have the right of seeking redressal under Sections 17 and 18 of the SARFAESI Act.

Whether a Company Court, directly or through an Official Liquidator, can wield any control in respect of sale of a secured asset by a secured creditor in exercise of powers available to such creditor under the SARFAESI Act, 2002 – Pegasus Assets Reconstruction P. Ltd. Vs. M/s. Haryana Concast Ltd. & Anr. – Supreme Court Read Post »

Whether Company Court enjoys jurisdiction to issue supervisory direction to a securitisation company/secured creditor in connection with a company in liquidation or under winding up in the face of Section 13 of the SARFAESI Act or securitisation company opting to stand outside the winding up is absolutely free to utilise the sale proceeds of assets of the company in liquidation? – Haryana State Industrial & Infrastructure Development Corporation Vs. Haryana Concast Ltd. – Punjab & Haryana High Court

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Whether Company Court enjoys jurisdiction to issue supervisory direction to a securitisation company/secured creditor in connection with a company in liquidation or under winding up in the face of Section 13 of the SARFAESI Act or securitisation company opting to stand outside the winding up is absolutely free to utilise the sale proceeds of assets of the company in liquidation? – Haryana State Industrial & Infrastructure Development Corporation Vs. Haryana Concast Ltd. – Punjab & Haryana High Court Read Post »

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