SC: “Giving up security” not a prerequisite u/s 439 of Companies Act, 1956

The Hon’ble Supreme Court, today, i.e. on 29thJanuary 2019, in the matter of Swaraj Infrastructure Pvt. Ltd. v. Kotak Mahindra Bank Ltd. pronounced that under Section 439 of the Companies Act, 1956, a secured creditor’s petition for winding up is maintainable without any requirement of it having to give up/relinquish its security and a secured creditors, while recovering what is legitimately due to them, can avail more than one remedy at the same time. While doing this they do not “blow hot and cold” at the same time, but they blow hot and hotter.

The Hon’ble Supreme Court observed that:

The Companies Act, 1956 is overridden to the extent of the inconsistency between the Companies Act, 1956 and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 only qua recovery of debts due to banks and financial institutions. (Para 10)

A winding up proceeding initiated under Section 433(e) and 434 of the Companies Act, 1956 is not a means of seeking to enforce payment of a debt. (Para 11)

It is true that this Court has stated that a winding up petition is a form of equitable execution of a debt, but this is qualified by stating that a winding up order is not a normal alternative to the ordinary procedure for realization of debts due to a creditor. (Para 13)

A winding up proceeding is not a proceeding that can be referred to as a proceeding for realization of debts and would, therefore, not be covered by the language of Section 17 read with Section 18 of the Recovery of Debts Act. 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. (Para 13)

First and foremost, it is important to notice that under Section 439 of the Companies Act, 1956, a secured creditor’s petition for winding up is maintainable without any requirement of it having to give up or relinquish its security. This is in contrast to Section 9(2) of the Provincial Insolvency Act, 1920 (Para 17)

What is conspicuous by its absence is a provision akin to Section 9(2) of the Provincial Insolvency Act, 1920 in Section 439 of the Companies Act, 1956. In point of fact, Section 47 of the Provincial Insolvency Act, 1920 occurs only at the stage where an adjudication order has already been passed, which is the stage referred to by Section 529 of the Companies Act, 1956. In fact, Section 529(1)(c) of the Companies Act, 1956 specifically refers to the right of a secured creditor under the law of insolvency “with respect to the estates of persons adjudged insolvent”. The express language of Section 529(1)(c) of the Companies Act, 1956 makes it clear that it is Section 47 of the Provincial Insolvency Act, 1920 alone that is attracted, and not Section 9(2). (Para 17)

Section 441(2) has to be read with Section 441(1), and so read, makes it clear that it became necessary to enact sub-section (2), because a petition for voluntary winding up of a company presented before the Tribunal would be said to commence at an anterior point of time, namely, at the time of the passing of the resolution whereby the company resolves to voluntarily wind itself up. In contrast, therefore, Section 441(2) says “in any other case”, i.e., in cases other than those falling under sub-section (1) of Section 441 of the Companies Act, 1956, the winding up of a company by the Tribunal shall be deemed to commence at the time of presentation of the petition for winding up. The context of the provision, therefore, makes it clear that it cannot be read so as to introduce Section 9(2) of the Provincial Insolvency Act, 1920 by the back door, as it were, when no such provision is contained in Section 439 of the Companies Act, 1956 itself. (Para 17)

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.  (Para 19)

A secured creditor 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. When secured creditors are driven from pillar to post to recover what is legitimately due to them, in attempting to avail of more than one remedy at the same time, they do not “blow hot and cold”, but they blow hot and hotter. (Para 20)

Copy of judgement: Judgement_29-Jan-2019

-Tushar Kaushik

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