BIHAR WOOLLEN FABRICS LTD Vs. STATE OF BIHAR

JUDGEMENT

(1.) Section 446 of the Companies Act, 1956 (in short, "the Act"), provides that after a winding-up order with respect to a company has been made or the official liquidator has been appointed as provisional liquidator, no suit or other legal proceeding shall be commenced, or if pending at the date of winding-up order, shall be proceeded with, against the company, except by leave of the court and subject to such terms as the court may impose. In view of that provision, Canara Bank, the Bihar State Credit Investment Corporation Limited (in short, BISCICO) and the ex-managing director of the company have filed applications seeking, in the case of Canara Bank and the ex-managing director, leave to prosecute suits (Title Suits Nos. 104 and 106 of 1991, before the Subordinate Judge, Patna), and in the case of BISCICO, leave to file the suit for recovery of the money against the company. This order will dispose of the said applications.

(2.) Both the Canara Bank and the BISCICO are secured creditors. It is well settled that the secured creditors stand outside the liquidation proceeding and can realise their respective security without leave of the court but if they file the suit or take up other legal proceeding for realisation of the security, by reason of Section 446(1) of the Act, they are bound to obtain leave of the winding-up court. The BISCICO has further pressed into service the provisions of Section 29 of the State Financial Corporations Act, 1951 (in short, "the SFC Act"), to make out a case of pre-eminence. Section 29 of the SFC Act lays down that where any industrial concern, which is under liability to the financial corporation under an agreement, makes any default in repayment of loan or advance, etc., the financial corporation is entitled to take over the management of the industrial concern including the right to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated or assigned to the financial corporation. The BISCICO is said to be a "financial institution" within the meaning of Section 46 of the SFC Act to which the provisions of the SFC Act have been made applicable by the Central Government by notification, and thus entitled to put the assets of the defaulting company to sale and secure its liability from the sale proceeds. The point for consideration is whether having regard to the provisions of Section 446 of the Companies Act, a financial institution can be permitted to take recourse to the provisions of Section 29 of the SFC Act without taking leave of the company court. The other point for consideration is whether leave is to be granted to the secured creditors as a matter of course.

(3.) Section 537 of the Companies Act provides that where any company is being wound up by or subject to the supervision of the court, any attachment, distress or execution put in force, against the estate or effects of the company, or any sale of the properties or effects of the company held after the commencement of the winding-up proceeding, without leave of the court, shall be void, except a proceeding for recovery of any tax or impost or any dues payable to the Government. In view of the said provision there cannot be any doubt that the provisions of Section 29 of the SFC Act have to be read as subject to the provisions of the Companies Act. Besides, the provisions of Section 446 as also Sections 529 and 529A give enough indication that a secured creditor cannot be given a free choice in the matter of sale of the assets of the company and its appropriation.