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Judgment
V.V.S. Rao, J.—These company appeals (applications) are filed by the A. P. State Financial Corporation (SFC) under Rule 164 of the Companies (Court) Rules, 1959, against the notice of rejection of proof of debt issued by the official liquidator of the High Court of A. P., dated June 17, 2002. C. A. No. 535 of 2002 is filed seeking suspension of the notice of rejection dated June 17, 2002, whereas C. A. No. 536 of 2002 is filed to set aside the said notice of rejection.
The affidavits and the documents filed in these matters disclose the following facts. M/s. Mopeds India Ltd., the first respondent herein (hereafter called "the ''company") was ordered to be wound up by this court by an order dated October 17, 1990, passed in C. P. No. 48 of 1989 pursuant to the recommendation made by the Board for Industrial and Financial Reconstruction under the Sick Industrial Companies (Special Provisions) Act, 1985. The Canara Bank, the second respondent herein, filed a suit being O. S. No. 139 of 1980 on the file of the court of the Subordinate Judge, Tirupati, for enforcing the debt of the company. The SFC which also financed the company filed an appropriate application u/s 446 of the Companies Act, 1956 seeking leave of the company court to pursue the statutory remedy u/s 29 of the State Financial Corporations Act ("SFC Act" for brevity). This court by an order dated December 20, 1994, passed in C. A. No. 235 of 1994 permitted sale of assets by the SFC. The SFC proceeded u/s 29 of the SFC Act and ultimately on June 23, 1995, the SFC and Canara Bank realised a sum of Rs. 405 lakhs and the assets were already handed over to the purchaser.
The appellant filed a claim petition in Form No. 66 as per Rule 151 of the Companies (Court) Rules, on December 1, 2001, to admit its claim treating it as secured creditor by receiving the certified copy of the statement of account as proof of debt. The official liquidator, by proceedings dated December 28, 2001, adjudicated the claim accepting part of the claim to the extent of Rs. 70.01 lakhs whereas the SFC claimed Rs. 833.91 lakhs. The SFC was treated as an unsecured creditor. Aggrieved by the same, the SFC filed Company Application No. 257 of 2002 (Company Appeal No. 2 of 2002).
The official liquidator filed a report before this court to the effect that the company has created a charge to the extent of Rs. 13 lakhs signed by the SFC and relevant Form No. 8 was filed with the Registrar of Companies, which was registered as document No. 206, that though the principal amount as on January 30, 2001, is shown as Rs. 23.12 lakhs, interest and other expenses allegedly incurred by the SFC were shown as Rs. 810.79 lakhs and that as the charge was created by the SFC only on January 11, 1982, disbursement of the amount between September 12, 1981, and December 4, 1981, to the extent of Rs. 19,37,275 cannot form part of the charge created on January 11, 1982. In the report, the official liquidator also mentioned that the SFC has no claim before him as secured creditor and that the amount lying with the SFC by sale of assets of the company in liquidation has to be remitted to the account of the official liquidator together with interest. This court, having regard to the report of the official liquidator, by an order dated April 11, 2002, allowed the appeal and remitted the matter back to the official liquidator to adjudicate the claim expeditiously. The SFC was directed "to place whatever material it is interested to place before the official liquidator within a period of three weeks from the date of the order".
On May 3, 2002, the SFC filed a claim petition before the official liquidator under Rule 147 of the Companies (Court) Rules praying to consider the document filed along with the statement of account for admitting the proof of debt. The Manager (Law) of the SFC filed an affidavit giving the basis on which the prayer was made. In the affidavit, it is stated that the view taken by the official liquidator earlier that the charge created in favour of the SFC on January 11, 1982, cannot cover the amount disbursed between September 12, 1981 and December 4, 1981, in a sum of Rs. 19,37,275 is not correct, that the appellant sanctioned a term loan of Rs. 30 lakhs and apprehending the delay in submitting the document, due to legal formalities, obtained a bank guarantee as interim security, which was executed by the Canara Bank, and that the said bank guarantee duly executed by the company shall remain in force for a period of three months from the date of execution on August 7, 1981, or till the completion of legal formalities whichever is earlier. The charge created is not only in relation to the loan disbursed on January 11, 1982, but also disbursed subsequently. In the affidavit it was specifically stated that the SFC would lead evidence in support of the above contention.
The official liquidator, by notice of rejection dated June 17, 2002, rejected the claim of the SFC to the extent of Rs. 70.01 lakhs (Rs. 23.12 lakhs as against the principal and Rs. 46.89 lakhs towards interest) as on the date of passing of the winding up order, as the claim is not substantiated and not proved as a secured loan. The official liquidator also observed that the claim ranks pari passu with other unsecured creditors.
Learned standing counsel for the APSFC, Sri Y. N. Lohita submits that the official liquidator has erred in adjudicating the claim of the SFC though there is sufficient proof in support of the claim. He contends that the common seal of the company having been affixed on the deed of hypothecation dated January 11, 1982, pursuant to the resolution of the board of directors dated June 23, 1981, the official liquidator failed to take note of the same and, therefore, it is a secured creditor. Placing reliance on Section 44 read with Section 29 of the SFC Act, he contends that the order of the official liquidator is illegal in the face of these provisions. According to learned counsel, in view of Section 44 of the SFC Act, the appellant is deemed to be a bank for the purpose of Bankers'' Books Evidence Act, 1918, and, therefore, the statement of account is prima facie proof of the debt incurred by the company in liquidation. The company or the Canara Bank never repudiated the debts of the SFC and, therefore, the SFC which has a pari passu charge with that of the Canara Bank is a secured creditor. He placed reliance on the judgment of the Supreme Court in Haryana Financial Corporation and Another Vs. Jagdamba Oil Mills and Another, , and a Division Bench judgment of the Gujarat High Court in Gujarat State Financial Corporation v. Official Liquidator [1996] 87 Comp Cas 658.
He also referred to Industrial Credit and Investment Corporation of India Ltd. Vs. Srinivas Agencies and Others, in support of his contentions. Learned counsel has also placed before this court the deed of hypothecation dated January 11, 1982, executed by the company in favour of the SFC, inter se agreement creating a pari passu charge dated January 11, 1982, between the company, the SFC and Canara Bank, the supplementary agreement inter se between the participating institutions and the memorandum of deposit of title deeds executed by the directors of the company.
The official liquidator appeared in person and made submissions as noticed herein. Though this court earlier set aside the notice of rejection passed by the official liquidator by order dated April 11, 2002 and remitted the matter to the official liquidator directing the SFC to place proof in support of their claim, the appellant did not produce any proof in support of the claim that they have a charge over the assets of the company and, therefore, it should be treated as an unsecured creditor. As per the provisions of Rules 148, 149 and 151, the statement of account produced by the SFC is not a proof that a charge is created in its favour, but it is only a piece of evidence in support of their claim as on the date of winding up. In spite of giving adequate opportunity, the SFC did not enclose any evidence with their claim petition dated May 3, 2002, enclosing a report of the mediation, legal formalities, deed of hypothecation and statement of account. They did not produce Form No. 8 in order to prove that a charge is created in their favour u/s 125 of the Companies Act. Any claim by the SFC, subsequent to the date of winding up, cannot be the subject matter of adjudication under Rule 147 of the Companies (Court) Rules. He placed reliance on the judgment of the Madras High Court in A. Shanmugham v. Official Liquidator [1992] 75 Comp Cas 181.
Points for consideration :
In view of the rival submissions, the points that arise for consideration are--
"(1) Whether the official liquidator passed an order of rejection under Rule 159 of the Companies (Court) Rules, 1959, which is clearly wrong requiring adjudication by this court acting as appellate court under Rule 164 of the Companies (Court) Rules, 1959 ?
(2) Whether the appellant/SFC can be treated as secured creditor for the purpose of winding up of the company ?"
In re point No. 1 :
As per Rule 164 of the Companies (Court) Rules, if a creditor is dissatisfied with the decision of the official liquidator in respect of his proof, the creditor may, within 21 days from the date of service of notice of rejection of claim, appeal to the company court and on such appeal, the company court shall have all powers of an appellate court under the Code of Civil Procedure, 1908 (CPC). The jurisdiction exercised by this court is essentially jurisdiction u/s 96 read with Order XLIX of the Code of Civil Procedure. Therefore, the same limitations shall apply to the appellate court and the provisions of the CPC should be borne in mind. It is well-settled that while exercising powers of an appellate court, though the appellate court is entitled to re-appraise evidence recorded by the trial court, the appellate court can only interfere with the finding of the trial court not when such finding is incorrect, but when such finding is clearly wrong. A reference may be made to Laxminarayan and Another Vs. Returning Officer and Others, , and Baburao Bagaji Karemore and Others Vs. Govind and Others, .
In Laxminarayan and Another Vs. Returning Officer and Others, , the hon''ble Supreme Court, after referring to the judgments in AIR 1949 32 (Privy Council) and Sarju Pershad Vs. Raja Jwaleshwari Pratap Narain Singh and Others, , laid down as under (page 78 of AIR 1974) :
"The power of the appellate court is very wide. It can reappraise the evidence and reverse the trial court''s findings of fact. But like any other power it is not unconfined : it is subject to certain inherent limitations in relation to a conclusion of fact. While the trial court has not only read the evidence of witnesses on record but has also read their evidence in their faces, looks and demeanour the appellate court is confined to their evidence on record. Accordingly ''the view of the trial judge as to where credibility lies is entitled to great weight'', (see AIR 1949 32 (Privy Council) However, the appellate court may interfere with a finding of fact if the trial court is shown to have overlooked any material feature in the evidence of a witness or if the balance of probabilities as to the credibility of the witness is inclined against the opinion of the trial court, (see Sarju Pershad Vs. Raja Jwaleshwari Pratap Narain Singh and Others, ). This limitation on the power of the appellate court in a first appeal from decree, on principle will also apply to an election appeal u/s 116A."
The above ratio came to be laid down in the context of exercise of powers of the appellate court u/s 116A of the Representation of the People Act, 1951. In Baburao Bagaji Karemore and Others Vs. Govind and Others, , the Supreme Court again in an appeal under the Representation of the People Act, observed as under (page 413 of AIR 1974) :
"It is needless for us to reiterate what has over a long course been observed in numerous decisions that a finding arrived at on an appreciation of conflicting testimony by a trial judge who had the opportunity of observing the demeanour of witnesses while giving evidence should not be lightly interfered with merely because an appellate court which had not the advantage of seeing and hearing the witnesses can take a different view. Before a finding of fact by a trial court can be set aside it must be established that the trial judge''s findings were clearly unsound, perverse or have been based on grounds which are unsatisfactory by reason of material inconsistencies or inaccuracies. This is not to say that a trial judge can be treated as infallible in determining which side is indulging in falsehoods or exaggerations and consequently it does not preclude an appellate court from examining and appreciating the evidence in order to ascertain whether the finding arrived at by the trial judge is warranted. If that is not warranted, it can, on its view of the evidence, arrive at a conclusion which is different from that arrived at by the trial court, (emphasis1 supplied)
Therefore, the first question is whether the official liquidator committed a grave error apparent on the face of the record while deciding the claim of the SFC based on the evidence produced before him. The following facts are not denied. After the official liquidator issued notice to the creditors in Form No. 66 as per Rule 148 of the Companies (Court) Rules, the SFC did not file a claim petition as required under Rule 151 of the said Rules. It was only Canara Bank, the second respondent herein, which preferred the same. When C. A. No. 257 of 2002 was taken up by this court, the official liquidator informed the court that the SFC did not prefer its claim and, therefore, its claim is not adjudicated. This court permitted the appellant to file claim petition within one week from November 29, 2001. Accordingly, they filed a claim petition in Form No. 66 supported by evidence. The claim was not supported by any document and it was submitted with vague particulars. The SFC has not enclosed any documents except a certified copy of the statement of account. When the official liquidator, by notice of rejection dated December 28, 2001, rejected the claim of the SFC, they filed Company Application No. 257 of 2002 (later registered as Company Appeal No. 2 of 2002 under Rule 164 of the Companies (Court) Rules). This court allowed the same and remitted the matter to the official liquidator giving liberty to the SFC to place whatever material it is interested to place before the official liquidator. The relevant observations of this court are as under :
Here printed in italics.
"Under the above circumstances, the impugned adjudication order passed by the official liquidator in respect of the claims of the corporation is set aside and the matter is remitted back to the official liquidator for fresh adjudication in accordance with law after giving an opportunity to the corporation. However, the corporation is directed to place whatever material it is interested to place, before the official liquidator within a period of three weeks from today. Thereafter, the official liquidator is directed to adjudicate the matter expeditiously.
Office is directed to number this C. A. No. 257 of 2002 as appeal and not as company application and furnish the copy of this order to learned counsel urgently, (emphasis (Here printed in italics) supplied)
The appellant again approached the official liquidator by filing a fresh claim in Form No. 66 reiterating its earlier stand. They did not produce any evidence in proof of their claim like charge in Form No. 8. They produced a certificate issued by Canara Bank dated August 8, 1981, original bank guarantee dated August 7, 1981, original agreement dated August 3, 1981, with Canara Bank, resolution of the board of directors of the company and copy of the letter from the SFC dated June 11, 1981, addressed to the company. They did not produce Form No. 8 registered by the company creating charge over the assets in their favour. The appellant merely relied on pari passu agreement with Canara Bank and it expected the official liquidator to draw an inference that the charge created by the company in favour of Canara Bank also enures to the benefit of the company. The same was rejected by the official liquidator by the impugned order. This court repeatedly asked learned counsel for the SFC to produce any charge in Form No. 8 created if any in favour of the SFC. Except filing an affidavit, no such document is produced. In fact, in the affidavit accompanying the present appeals, the SFC stated that they have called for the documents from Canara Bank, which were not produced to them, and, therefore, the official liquidator passed the rejection order. This would show that even according to the SFC, the documents are not placed before the official liquidator. Therefore, this court is of the considered opinion that based on the material placed before him the official liquidator has arrived at an appropriate decision and the same does not in any manner warrant interference under Rule 164 of the Companies (Court) Rules or the order of the official liquidator cannot be said to be illegal. Now, I will take up the documents produced before this court by learned standing counsel for the SFC in support of the claim that there was a charge created by the company in favour of the SFC.
Section 124 of the Companies Act provides that the expression "charge" includes mortgage. Section 125 provides that unless the instrument by which the charge is created or evidenced or a copy thereof verified in the prescribed manner is filed with the Registrar for registration within thirty days of the date of creation, such charge will be void against the liquidator and any creditor of the company. Sub-section (4) of Section 125 lays down that Section 125 applies to various charges inter alia a charge on any immovable property or any interest therein. If the charge is not registered with the Registrar of Companies, sale, lease, mortgage, hypothecation, security by way of guarantee, so far as the Companies Act is concerned, the same cannot be treated as charge. Be it also noted that when a charge on any property of the company is registered u/s 125 with the Registrar of Companies, any person acquiring the property or any part thereof shall be deemed to have notice of the charge from the date of such registration. Section 127 provides that when a company acquires property which is subject to a charge of any kind, which had been created by the company after acquisition of the property, the company shall cause the particulars of the charge, together with a copy of the instrument by which the charge is created or is evidenced, to be delivered with the Registrar for registration under the Act. A plain reading of Sections 124 - 127 leaves no doubt that unless and until a charge is registered with the Registrar of Companies, it has no sanctity notwithstanding the fact that such charge was brought into vogue by reason of agreement inter-parties between the two creditors or by registration of guarantee bond. A charge to be a charge for the purpose of the Companies Act, must be registered with the Registrar of Companies. Here it is appropriate to refer to a recent judgment of the apex court in International Coach Builders Ltd. v. Karnataka State Financial Corporation [2003] 114 Comp Cas 614 AIR [2003] SCW 1524. The Supreme Court considered the effect of Section 29 of the State Financial Corporations Act, 1951 (SFC Act) on the winding up of a company. In the light of the provisions of Sections 529 and 529A of the Companies Act, the Supreme Court repelled the contention that by reason of Section 29 of the SFC Act, a State financial corporation has no absolute right over the assets of the company in winding up. It was further observed as under (page 627) :
"Of course, even in such a situation, if the same property was mortgaged to more than one secured creditor, they had to either come to an agreement, or in the event of disagreement, there had to be a suit in which dissenting mortgagee had to be sued as a necessary party defendant: No doubt Section 29 of the SFC Act was intended to place the SFCs on a better footing. But, in our view, this better footing is available only so long as the debtor is not a company or is a going company. The moment a winding up order is made in respect of a debtor company, the provisions of Sections 529 and 529A come into play and whatever superior rights had been ensured to SFCs under the provisions of the SFC Act are now subjected to and operate only in conjunction with the special rights given to the workmen, who as pari passu charge holders are represented by the official liquidator. We are, therefore, of the view that the unhindered right hitherto available to the SFCs to realise their security, without recourse to the court, no longer holds true as the right vested in the official liquidator is a statutory impediment to such exercise and has to be reckoned with. And since the official liquidator can do nothing without the leave or concurrence of the court, all necessary applications must, therefore, come to the company court."
It was again held (page 630 of 114 Comp Cas) :
"Finally, counsel for the SFCs urge that the view we are to take would obliterate the difference between a creditor opting to stay outside winding up and one who opts to prove his debts in winding up. We are unable to accept it. As a result of the amendments made by the Act of 1985 in the Companies Act, 1956, the SFCs as secured creditors, must seek leave of the company court for the limited purpose of ensuring that the pari passu charge in favour of the workmen is safeguarded by imposition of suitable conditions under the supervision of the company court. If this amounts to impeding their hitherto unimpeded rights, so be it. Such is the Parliamentary intendment, according to us. This impediment is of a limited nature for the specific purpose of protecting the pari passu charge of the workmen''s dues and subject thereto, SFCs can continue to exercise their statutory rights as secured creditors without being reduced to the status of unsecured creditors required to prove their debts in insolvency and stand in line with other unsecured creditors. Neither is the apprehension expressed justified, nor the contention sound."
The Supreme Court laid down the following principles (page 630 of 114 Comp Cas) :
"(1) ''The right unilaterally exercisable u/s 29 of the SFC Act is available against a debtor, if a company, only so long as there is no order of winding up ;
(2) The SFCs cannot unilaterally act to realise the mortgaged properties without the consent of the official liquidator representing workmen for the pari passu charge in their favour under the proviso to Section 529 of the Companies Act, 1956 ;
(3) If the official liquidator does not consent, the SFCs have to move the company court for appropriate directions to the official liquidator who is the pari passu charge holder on behalf of the workmen. In any event, the official liquidator cannot act without seeking directions from the company court and under its supervision."
Therefore, unless and until the pari passu agreement between SFC and Canara Bank and memorandum of deposit of title deeds executed by the company are treated as a charge by operation of law, i.e., company law, the SFC cannot claim to be a secured creditor. It is not denied that the company registered charge in Form No. 8 in favour of Canara Bank. No such charge was created or registered by the company in favour of the SFC. There was, however, an inter se agreement pari passu between Canara Bank, the SFC and the company wherein it was covenanted that hypothecation deed dated January 11, 1982, created by the company in favour of the SFC and Canara Bank shall rank pari passu with other creditors. There was also a supplementary agreement inter se between the participating institutions dated August 5, 1986, i.e., Canara Bank, the SFC and the company wherein it was agreed by the parties that the company has created charge over the movable and immovable properties in favour of consortium of the Canara Bank and SFC by executing deed of hypothecation in favour of SFC for Rs. 30 lakhs, deed of hypothecation and indenture of equitable mortgage dated January 11, 1982, deed of hypothecation dated May 5, 1980, for Rs. 200 lakhs, letter evidencing deposit of title deed dated May 5, 1980. Clause 3 of the supplementary agreement provided that the right in respect of the security created in favour of participating institutions by way of hypothecation/equitable mortgage shall rank pari passu in all respects and for all purposes inter se the participating institutions and without any preference or priority over the other.
These two documents above referred to are mainly pressed into service in support of the contention that these documents amount to creating a charge in favour of SFC. I am afraid, I cannot agree with the same. Hypothecation deed, equitable mortgage, letter of depositing title deeds, etc., may amount to charge. In the absence of such charge being registered with the Registrar of Companies as required u/s 125 of the Companies Act, these documents would not operate against the liquidator or any creditor. This does not, however, mean that the SFC cannot impose the charge against the company by reason of the hypothecation deed, deed of mortgage and pari passu agreement. However, for the purpose of Section 529A(1)(b)/ the debt covered by an unregistered charge cannot be treated as secured. Be it noted, u/s 528 of the Companies Act, all debts payable by the company in liquidation shall be admissible to proof against the company, but the debts of workmen shall be paid equally with all other debts.
Further, the guarantee agreement executed by the company in favour of the appellant on August 7, 1981, stipulated that the said guarantee is valid for a period of three months or till the completion of the legal formalities whichever is earlier. The guarantee expired on July 6, 1989, and the legal formalities were completed on January 11, 1982. Thereafter, there is no continuity of guarantee and in the absence of any charge registered with the Registrar of Companies, and hence, the claim of SFC has to be treated as unsecured loan.
In the statement of account filed before the official liquidator, the SFC claimed the amount as on the date of filing the application in Form No. 66 which is not permissible under law. The company was ordered to be wound up by this court on October 17, 1990. The liabilities of the company have to be determined as on the date of winding up and not subsequent thereto. This is made clear by Rule 154 of the Companies (Court) Rules, which is to the effect that the value of debts and claims against the company shall be estimated according to the value thereof at the date of the order of winding up of the company or where before the presentation of the petition for winding up, a resolution has to be passed by the company for voluntary winding up, at the date of passing of such resolution. None the less, as per Rule 156, it is competent for the official liquidator to allow interest at the rate not exceeding 4 per cent. per annum from the date when the debt becomes payable if such debt is payable by virtue of written agreement. In Rajasthan Financial Corporation v. Official Liquidator, Jaipur Spinning and Weaving Mills Ltd. (In Liquidation) [1997] 88 Comp Cas 192 (Raj) it was laid down (page 194) :
"In respect of the claim of the appellant for expenses and interest from the order passed by the official liquidator, I find that the said order is neither speaking nor the provisions of law have been considered. With regard to expenditure incurred the estimate has to be made in accordance with Rule 154 of the Companies (Court) Rules, 1959, and for the purpose of interest provisions exist under Rule 156 of the said Rules. The responsibility remains of the creditor for proving the debt. In the order of the official liquidator though it is mentioned that entries in respect of expenditure are not existing in the books of the company in liquidation, it has to be seen as to whether the creditor has been able to establish the claim and the same is the position in respect of interest as to under law how much interest could be allowed. The order of the official liquidator in this regard cannot be sustained."
As seen from the order of the official liquidator, the claim of the SFC was admitted to the extent of Rs. 23.12 lakhs as an unsecured claim ignoring subsequent interest of Rs. 46.89 lakhs, which was not proved as a secured loan. The official liquidator has thoroughly analysed the statement of account and came to a conclusion that after giving credit to the various amounts paid by the company in repayment of the loan, the balance outstanding as on the date of passing of the winding up order, is only about Rs. 23,11,670 rounded off to Rs. 23.12 lakhs. This is not seriously disputed. What is disputed is that the amount payable by the company should be determined as on the date of confirmation of sale which cannot be accepted in view of Rule 154 of the Companies (Court) Rules. In A. Shanmugham v. Official Liquidator [1992] 75 Comp Cas 181 (Mad), hon''ble Sri Justice AR. Lakshmanan (as his Lordship then was) considered the question whether the cut-off date for allowing the ratio at which sale proceeds divided on a pari passu basis as per Section 529 of the Companies Act should be the date of winding up order. His Lordship, after referring to the relevant case law, ruled as follows (page 197) :
"Thus, I hold that (i) the workmen become secured creditors by operation of law from the date of winding up order, (ii) the workmen have a pari passu charge over the security which is held by the secured creditor under the contract, and (iii) the cut off date for arriving at the ratio at which the sale proceeds should be divided on a pari passu basis as per Section 529 of the Companies Act, 1956, should be the date of the winding up order and not the date of sale. The workmen are entitled to claim interest from the date of the winding up order till the date of realisation of security."
After perusing the impugned order passed by the official liquidator and examining the material placed before me, I am convinced that the order of the official liquidator does not warrant any interference by this court exercising the appellate power. Both the appeals fail and are accordingly dismissed with costs assessed at Rs. 5,000 in both the appeals/applications.