[FIRST PUBLISHED BY TAXMANN.COM, CITATION: [2019] 102 taxmann.com 279 (Article)]

Recently, in Swaraj Infrastructure Pvt Ltd. v. Kotak Mahindra Bank Ltd,[i] the Supreme Court of India (hereinafter “Court”) decided the question of whether a secured creditor can file a winding up petition under Companies Act, 2013 after having obtained a recovery certificate from the Debt Recovery Tribunal (DRT) under Recovery of debt due to bank and financial institution act, 1993 (Hereinafter “RDB Act, 1993”).  The Court, while dismissing the petitioner’s appeal and upholding Division bench judgement of Maharashtra High Court , settled the controversy and made certain important observations regarding the legality of parallel proceedings by the secured creditor under RDB Act, 1993 and winding up proceedings under the Companies Act, 1956. The scope of the ruling is admittedly limited yet significant since the companies (transfer of pending proceedings) Rules, 2016 prescribes that if a winding up petition has not been served on the respondent, and the petition would be transferred to the IBC regime before the NCLT. The significance of the judgment lies in the purposive interpretation undertaken by the court in interpreting the exclusive nature of proceedings under RDB Act, 1993. Such purposive interpretation has the effective of significantly widen the scope as well as inter-se relationship of and between  remedies available to the secured creditor for realization of debt due respectively.

  FACTS OF THE CASE

The respondent, Kotak Mahindra Bank Limited,  in respect of the outstanding loans to the tune of 48 Crore approached the Debt Recovery Tribunal (DRT) and had recovery certificate issued for the said amount under Section 19(19) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. Additionally and consequently, the Respondents filed a company petition for winding up of the company before the Bombay High court pursuant to statutory notices under section 433 and 434 of the companies act, 1956.

ISSUES INVOLVED

The main points that were argued before the Divisional Bench of Bombay High Court and subsequently before the Supreme Court were

1. That once a secured creditor has obtained an order from the DRT and a Recovery certificate has been issued thereupon; such secured creditor cannot file a winding up petition as the RDB Act is a special Act which vests exclusive jurisdiction in the DRT.
2. Additionally it was argued by the petitioners that a secured creditor can file a winding up petition only upon  giving up its security interest and stand as unsecured creditor

ANALYSIS OF THE JUDGMENT

The ruling of the Court can be analysed broadly under two heads

1. EXCLUSIVE JURISDICTION OF THE DRT

 The petitioner argued that RDB act, 1993 is a special law qua the general law provided under the Companies act, 1956 and that the exclusive jurisdiction  vested in the DRT under the RDB act, 1993 excludes the exercise of jurisdiction by the Company Court for the purpose of winding-up of the company under Companies act, 1956. Therefore, the Respondent, based on a conjoint reading of section 17 (Jurisdiction of tribunal) and 18 (Bar on jurisdiction) of the RDB, cannot approach the Company court in a winding up petition after having approached DRT under RDB Act, 1993. In effect, RDB Act, 1993 was conceptualized as the sole and exclusive remedy to realization of debt due to secured creditors to the point of exclusion of all other remedies.

• EQUITABLE NATURE OF WINDING-UP PROCEEDINGS

The Court restricted the bar on ‘proceedings’ as prescribed by section 18 of the RDB act, 1993 only to the ‘proceedings’ that entertain and decide applications from the banks and financial institution for recovery of debts due to such banks and financial institutions. Therefore, only proceedings under any other statute that pertains to adjudication of liability and execution of recovery certificate payments were held to be prohibited by Section 18 of RDB Act, 1993. The judgment, highlighting domestic and foreign precedents, held that winding-up is an equitable remedy as opposed to a statutorily recognized remedy for realization of the debt due to the secured creditor. Therefore, a winding up proceedings cannot be termed as a “proceeding for realization of debts” so as to be hit by the bar on jurisdiction under Section 18 read with section 17 of the RDB Act, 1993. This conclusion was based on the submission that a winding-up petitions cannot be construed as a normal alternative to the ordinary procedure for realization of debts due to a creditor.

• LIMITED OVERRIDING EFFECT OF RDB ACT, 1993

 The Court, referring to Allahabad Bank v. Canara Bank, ruled that the companies act, 1956 is overridden only to the extent of the inconsistency with the Recovery of Debts Act, 1993 qua recovery of debts due to banks and financial institutions. The overriding effect of the RDB Act, 1993 was therefore given a narrow reading by the court wherein the exclusive jurisdiction of the tribunal to the effect of prohibiting other proceedings was limited to the adjudication of liability and execution of the recovery certificate under the RDB Act, 1993. The prohibition prescribed by section 18 of the RDB act, 1993 was thus held to not forbid parallel proceedings where Companies act, 1956 is not inconsistent with the RDB Act, 1993. The judgements of Rajasthan State Financial Corporation v. Official Liquidator[ii] and Official Liquidator v. Allahabad Bank[iii] were cited to buttress the case for permissibility of such parallel proceedings under RDB and Companies Act, 1956. In Rajasthan State Financial Corporation v. Official Liquidator,[iv] it was held that DRT acting under RDB Act, 1993 would be entitled to order sale of property of debtor only after giving notice to and hearing from the official liquidator. In Official Liquidator v. Allahabad Bank,[v] it was held that in exercise of power to sell the properties, DRT is required to associate with the official liquidator at the time of auction and sale of the property in question.

In terms of law, the operation of RDB Act, 1993 is not divorced from the Companies Act, 1993 completely. The bar of jurisdiction and non-obstante effect of the RDB Act, 1993 cannot be stretched beyond the ambit and scope of the Act in order to prohibit filing of winding up proceedings. The Court clarified with ample precedents not only the permissibility of parallel proceedings but also the reliance of the RDB Act, 1993 upon the provisions for liquidation as prescribed by the Companies Act, 1956.

2. NEED OF RELINQUISHMENT OF SECURITY INTEREST BY SECURED CREDITOR UPON FILING OF WINDING UP PROCEEDING

The second contention that was raised before the court was that a conjoint reading of the Companies Act, 1956 and the Provincial Insolvency Act, 1920 would make it clear that the secured creditor must, at the time of filing the petition for winding up, state that it has given up his security, or else, such winding up petition would not be maintainable.

• STAGE SPECIFIC INVOCATION OF SECTION 529 OF THE COMPANIES ACT, 1956 QUA SECTION 9(2) OF THE PROVINCIAL INSOLVENCY ACT, 1920

The Petitioners argued that relinquishment of security in pursuance of section 9(2) of the Provisional Insolvency Act, 1920 was to be performed at the stage of filing of the winding-up proceedings by the secured creditor as opposed to such relinquishment being performed at the stage of proof of claims. Section 529 of the Companies Act, 1956 provides that in the case of winding up of an insolvent company, the laws of insolvency with respect to the estates of person adjudged insolvent would prevail and be observed with regard to the respective rights of secured and unsecured creditors. It must be noted that section 529 explicitly refers to the case of winding up of an insolvent company. The petitioner argued that pursuant to Section 529(1)(c), Section 9(2) of the Provincial Insolvency act, 1920 would be attracted and would thereby warrant that a secured creditor relinquish his security interest at the instance of filing of winding-up petition. The Court, rejecting the submission of the petitioner, affirmed that the application of rules of insolvency in matters of winding-up petition is a stage specific affair i.e. given that section 528 and 529 of the Companies Act, 1956 are in the chapter “proof and ranking of claims”, the words “in winding-up of insolvent company” clearly holds that the question of giving up of security is to be entertained, if at all, only at the post winding up stage. Therefore, the question of relinquishment of security interest at the time of filing of winding-up petition is inappropriate as the company in question is yet to be adjudged insolvent.

• NON-APPLICABILITY OF SECTION 9(2) OF PROVISIONAL INSOLVENCY ACT, 1920 IN SCHEME OF SECTION 439 & 529 OF THE COMPANIES ACT, 1956

 On the question of need of relinquishment of security interest, the Court negated the applicability of section 9(2) of the Provincial Insolvency act, 1920 on two grounds; firstly, the Court highlighted the absence of a provision akin to section 9(2) in section 439 of the Companies Act, 1956. Section 439 of the Companies Act, 1956 prescribes the provisions pertaining to the application for winding-up of a company. Secondly, The court, based on the stage of winding up contemplated by the Section 529 of the companies act 1956, held that only section 47 of the provincial insolvency act, 1920 is attracted pursuant to the rule laid down in Section 529 of the Companies Act, 1956. In support of such proposition, the court cited Asian Power Controls Ltd. v. Bubbles Goyal,[vi] Hegde and Golay Limited v. State Bank of India[vii] and Canfin Homes Ltd v. Lloyds Steel Industries Ltd[viii].  In Canfin Ltd., it was held that the stage for relinquishing security arises when a secured creditor seeks to prove the whole of his debt in the course of winding up. In other words, the scheme of the provisions relating to winding up, particularly those in section 528 and 529 would indicate that the stage of proving a claim of debt arises after an order of winding up is passed. Section 47 of the Provincial Insolvency Act, 1920 provides for the rights of the secured creditor at the proof of debt stage which is consistent with the Stage at which the Section 529 of the Companies Act, 1956 comes into operation. On the other hand, Section 9(2) of the Provisional Insolvency Act, 1920 expressly requires that the secured creditor state in his petition that he is willing to relinquish his security for the benefit of the creditors in the event of the debtor being adjudged insolvent. The mismatch of stage contemplated by Section 9(2) of the Provincial Insolvency Act, 1920 and Section 529 of the Companies Act, 1956 was held to result in non-application of section 9(2) to the winding up of a company.

CONCLUSION

In present judgment, the court undertook to balance the interest of the creditor to whom money was owed and who, as per the court, were driven from pillar to pillar to recover what was legitimately due to them. Therefore, the question of exclusivity and jurisdictional bar were interpreted by the court so as to not be a tool in the debtor to frustrate recovery of due debts by the secured creditor. However, the issues associated with parallel proceedings under companies act, 1956 and RDB act, 1993 are still far from clear. It would be interesting to see how the court resolves issues such as custody of the property in case of winding up, ambit of authority of the liquidator as well as the inter-se relationship of the Recovery officer under the RDB Act, 1993 and liquidator appointed under Companies Act 1956 in case of concurrent proceedings. The potent challenge in concurrent operation of proceedings is clear delineation of jurisdictional authority and powers derived under the respective acts, unless such balance is achieved, concurrent proceedings may inevitably end up frustrating expeditious recovery of debt due to Banks and financial institutions.

[i] [2019] 101 Taxmann.com 454 (SC).

[ii] (2005) 8 SCC 190.

[iii] (2013) 4 SCC 381.

[iv] Supra Note II.

[v] Supra Note III.

[vi] (2013) 3 Mah LJ 811.

[vii] ILR 1987 KAR 2673.

[viii] [2001] 32 SCL 283 (Bom).