A.P. State Financial Corporation vs Satya Sai Polymers Ltd. (In Liquidation) and Others

Nooty Ramamohana Rao, J.—This is an appeal preferred by the Andhra Pradesh State Financial Corporation, a statutory corporation, which advanced certain loans to the first respondent-company in liquidation.

The appellant is aggrieved by the order passed by the learned single judge in Company Application No. 1609 of 2006, dated July 3, 2007, which is essentially to the following effect:

Since claims are required to be invited by the official liquidator and it is only thereafter can such claims, including that of the appellant, be adjudicated it is appropriated that the Andhra Pradesh State Financial Corporation is directed to deposit a sum of Rs. 50,000 with the official liquidator to enable him to incur the required expenditure in inviting claims. The said amount shall be paid by Andhra Pradesh State Financial Corporation to the official liquidator within a period of two weeks from the date of receipt of copy of this order.

Company Application No. 1609 of 2006, has been preferred by the former managing director of the first respondent-company in liquidation, seeking certain directions requiring refund of monies advanced by him to the company in liquidation. It will be appropriate to notice at this stage that while dealing with O.S.A. No. 14 of 2000, arising out of this very case (R.C.C. No. 1 of 1997), by its order dated February 14, 2001, a Division Bench of this Court passed, inter alia, the following order:

... The balance of convenience lies in selling the machinery and keeping the sale proceeds in suspense account which can be used by the Andhra Pradesh State Financial Corporation, but the interest is payable together with the amount realized to the appellant in case his claim is upheld later as indicated above . . .

As a consequence of this order, the appellant herein has sold all the machinery of the company in liquidation and realized a sum of Rs. 49 lakhs and kept the said amount in a suspense account.

The grievance of the appellant is that it had been improperly directed to deposit a sum of Rs. 50,000 to meet the preliminary expenses towards advertisement for giving effect to the winding up order and for adjudicating various claims. The first respondent-company has been ordered to be wound up at the instance of the Board for Industrial and Financial Reconstruction (BIFR) in terms of Section 20 of the Sick Industrial Companies (Special Provisions) Act, 1985.

The question as to whether a secured creditor can be construed to be a petitioner in a winding up proceeding has fallen for consideration before a Division Bench of this Court in Andhra Pradesh State Financial Corporation v. Southern Transformers and Electricals Ltd. [2000] 100 Comp Cas 794 (AP) : [2000] 5 Comp LJ 144 (AP), 148 and it has been answered as under (page 798):

The appellant herein who is a secured creditor and who was in no way responsible for the order of reference u/s 20 of the Sick Industrial Companies (Special Provisions) Act, 1985, and who did not come forward to support the winding up, cannot be construed to be a petitioner, nor can the appellant be subjected to a legal obligation to deposit the advertisement costs and initial expenses of the official liquidator merely because it is a secured creditor. If at all it is the Board for Industrial and Financial Reconstruction which has referred the case to the High Court, that will broadly answer the description of the "petitioner" under Rule 113. It would be wholly inappropriate to require a third party creditor who would like to remain outside the winding up proceedings to advertise the order in the newspapers.

As regards the deposit of the amount with the official liquidator to meet the "preliminary expenses", we find no support from Section 529 read with Section 529A. A reading of the proviso makes it clear that the liability of the secured creditor to pay the expenses incurred by the liquidator for the preservation of the security arises at a stage when the secured creditor wants to realise the security on his own. Even before the winding up order is published and put into effect, there is no scope to invoke the proviso to oblige the secured creditor who wants to remain outside the winding up proceedings to advance a sum for preliminary expenses. Such order is not contemplated by the proviso to Section 529(2) or by Rule 292. We are, therefore, of the considered view that the decision in BIER Vs. Chairman and M.D. Adivasi Paper Mills Ltd. and others, , and also the impugned order of the learned single judge in so far as directing the payment of ad hoc sum towards preliminary expenses by a secured creditor consequent on the winding up order passed at the instance of the Board for Industrial and Financial Reconstruction, are not correctly decided and we hereby overrule the said decisions. At the same time, we make it clear that the appellant is bound to reimburse the official liquidator for the expenses incurred by him in connection with or for the purpose of maintenance and preservation of security. Such amount should be paid without avoidable delay after receiving a statement of expenditure from the official liquidator. The official liquidator can also require the secured creditor to pay in advance regarding the expenditure which he is called upon to incur for this purpose provided sufficient details are notified to the appellant-corporation. If there is any dispute in regard to the quantum of expenses or the justification therefor, either the official liquidator or the secured creditor can move the court.

Therefore, the principle that emerges is that where the winding up of a company has not been brought about at the instance of a secured creditor, like the appellant herein, it cannot be construed to be the "petitioner", for, it to carry out the obligation of advertising the winding up of the company in accordance with Rule 113 of the Companies (Court) Rules, 1959.

In this view of the matter, the order of the learned single judge directing the appellant herein to deposit a some of Rs. 50,000 to defray the initial advertisement expenditure cannot be sustained.

But, nevertheless, the order of winding up of the first respondent-company has got to be given effect to and the claims arising in that regard have got to be necessarily adjudicated. The same will not be possible without incurring certain expenditure and for meeting such an expenditure, a provision has been made in Rule 292. Since, it will be relevant for our enquiry, Rule 292 reads as under:

Where the company has no available assets.-Where a company against which a winding up order has been made has no available assets, the official liquidator may, with the leave of the court, incur any necessary expenses in connection with the winding up out of any permanent advance or other fund provided by the Central Government, and the expenses so incurred shall be recouped out of the assets of the company in priority to the debts of the company.

The very purpose of making a provision enabling the official liquidator to draw upon the permanent advance or any other fund provided by the Central Government for incurring the necessary expenses in connection with the winding up of the company in liquidation, which does not have any assets available is only to ensure that the winding up order will be given full effect to and be complied with or without any further loss of time, and at a later point of time, such expenditure can be recouped from out of the proceeds of the assets of the company realised, in priority to the debts of the company. Obviously, the provision under Rule 292, as can be visualised, is intended to take care of a contingent situation like the one brought about in the present case. In the absence of an agency, to be described in effective terms, to be the petitioner at whose instance, the winding up of the company has been brought about, the initial expenditure is liable to be incurred by the official liquidator for giving effect to the winding up order, and the same is liable to be borne from out of the permanent advance or any other fund provided by the Central Government. The expenditure incurred in this regard is liable to be recouped from out of the assets of the company itself and they stand a priority to the debts of the company. Thus, the interests of the Central Government are also adequately protected.

We, therefore, consider it appropriate, while allowing this appeal, to direct the official liquidator to incur the necessary expenses for advertising the winding up of the first respondent-company by drawing from the permanent fund or any other grant made available by the Central Government to him and recoup, the said expenses from out of the assets of the company in liquidation realised, later on. The order of the learned single judge, will be carried out accordingly.

To the extent indicated above, the appeal stands allowed. No costs.