Swaraj Infrastructure Pvt. Ltd. v. Kotak Mahindra Bank Ltd.
- shrey singh
- Jan 4, 2020
- 5 min read
Swaraj Infrastructure Pvt. Ltd. v. Kotak Mahindra Bank Ltd.
Civil Appeal No. 1291 of 2019 [Arising out of SLP (Civil) No. 6221 of 2018] decided on 29.01.2019
Bench
RF Nariman and Navin Sinha, JJ.
Fact
The respondent, Kotak Mahindra Bank Limited, advanced various loans to the companies in question. The outstanding amount against these companies as on date, together with interest, is stated to around INR 48 crores. The respondent approached the Debts Recovery Tribunal, Mumbai by filing three separate original applications to recover the debt owed to them. The Debts Recovery Tribunal delivered three separate judgments on 16.01.2015 allowing the applications filed by the respondent bank. Apparently, the said orders are final as no appeals have been preferred to the Debts Recovery Appellate Tribunal [“DRAT”], Mumbai. Recovery certificates dated 12.08.2015 for the said amounts were then issued by the Recovery Officer under Section 19(19) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 [“Recovery of Debts Act”]. It was informed to the Court that various attempts were made to auction the properties that were security for the loans granted, but each of these attempts has yielded no results.
In the meanwhile, the respondent issued statutory notices dated 15.04.2015 under Sections 433 and 434 of the Companies Act, 1956. As no payments were forthcoming, a company petition was filed before the Bombay High Court on 03.07.2015 By an order dated 26.07.2017, the said petition was admitted as the companies in question were said to be commercially insolvent.
Question of law
Whether once a secured creditor has obtained an order from the DRT, and a recovery certificate has been issued thereupon, then such secured creditor can file a winding up petition as the Recovery of Debts Act?
Argument Advance
Appellant
Defendant
It was first argued that this Court has held that the Recovery of Debts Act is a special statute qua the general statute of the Companies Act, 1956, and that this Court has further held that exclusive jurisdiction is vested in the DRT under the Recovery of Debts Act to the exclusion of the Company Court. As this is so, once the DRT has been approached, the necessary corollary is that a winding up petition to realize the same debt would be expressly barred on a conjoint reading of Sections 17 and 18 of the Recovery of Debts Act.
It was further argued that in any case, the secured creditor is put to an election where it must either relinquish its security and stand in line in the winding up proceeding or realize its security outside the winding up proceeding.
It was further argued that, in any event, Section 434(1)(b) of the Companies Act, 1956 would be attracted, and not Section 434(1)(a), and that since the security has not yet been realized, the winding up petition dressed up under Section 434(1)(a), but really under Section 434(1)(b), would not be maintainable.
The Respondent has argued, relying upon Section 439 of the Companies Act, 1956 in particular, that a secured creditor can maintain a winding up petition in the fact situation as obtains in the present case.
According to the counsel, the judgment relied upon by the appellant, namely, Allahabad Bank v. Canara Bank, (2000) 4 SCC 406, is distinguishable in that the context of that judgment was whether leave had to be obtained from the Company Court when a winding up proceeding is either pending, or a winding up order is made, in order to pursue a debt recovery proceeding under the Recovery of Debts Act.
It is also argued that the election that is to take place with the secured creditor giving up its security is at the stage of proof of claims, which is only after a winding up order has been passed, and which stage has not yet arrived on the facts of the present case.
Furthermore, it was argued that the petition has been filed only on the ground of inability to pay debts, and once the statutory presumption is raised under Section 434(1)(a) of the Companies Act, 1956, it is clear that winding up must follow in the absence of payment of outstanding amounts of debts owed.
According to the learned Senior Advocate, his client has gone from pillar to post in an attempt to recover the loans made to the appellants and has not yet succeeded in any endeavour to do so. Also, nothing has been repaid so far and the debt owed by these companies, which is mounting, amounts to a staggering figure of INR 48 crores.
Judgment
When it comes to a winding up proceeding under the Companies Act, 1956, since such a proceeding is not “for recovery of debts” due to banks, the bar contained in Section 18 read with Section 34 of the Recovery of Debts Act would not apply to winding up proceedings under the Companies Act, 1956.
A Division Bench of the Bombay High Court in Viral Filaments Ltd. v. Indusind Bank Ltd., (2001) 3 Mah LJ 552 reached this very conclusion after closely examining the judgment in Allahabad Bank v. Canara Bank (supra) of this Court.
As a matter of fact, sub-paragraphs (i) and (iv) of paragraph 18 would show that proceedings before the DRT, and winding up proceedings under the Companies Act, 1956, can carry on in parallel streams. That is why paragraph 18(i) states that a Debts Recovery Tribunal, acting under the Recovery of Debts Act, would be entitled to order sale, and sell the properties of the debtor, even of a company in liquidation, but only after giving notice to the Official Liquidator, or to the Liquidator appointed by the Company Court, and after hearing him.
It is obvious that Section 434(1)(b) is attracted only if execution or other process is issued in respect of an order of a Tribunal in favour of a creditor of the company is returned unsatisfied in whole or in part. This is only one of three instances in which a company shall be deemed to be unable to pay its debts. If the fact situation fits sub-clause (b) of Section 434(1), then a company may be said to be deemed to be unable to pay its debts. However, this does not mean that each one of the sub-clauses of Section 434(1) are mutually exclusive in the sense that once Section 434(1)(b) applies, Section 434(1)(a) ceases to be applicable.
The Court said that it may only end by saying that cases like the present one have to be decided by balancing the interest of creditors to whom money is owing, with a debtor company which will now go in the red since a winding up petition is admitted against it. It is not open for persons like the appellant to resist a winding up petition which is otherwise maintainable without there being any bona fide defence to the same. The Court may also hasten to add that the respondent cannot be said to be blowing hot and cold in pursuing a remedy under the Recovery of Debts Act and a winding up proceeding under the Companies Act, 1956 simultaneously.
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