The Supreme Court in its recent judgment, in Swaraj Infrastructure Pvt. Ltd. v. Kotak Mahindra Bank Ltd. (Civil Appeal No. 1291 of 2019), while maintaining the exclusivity of Recovery of Debt and Bankruptcy Act (RDB Act) for recovery of debts and reaffirming that the winding up process is not an alternate remedy for realization of debts due to a creditor, held that a secured creditor can file a winding up petition against the borrower even after obtaining a decree from the Debts Recovery Tribunal (DRT).
When the loan advanced by Kotak Mahindra Bank to the Appellant Company became overdue and the account became Non Performing Asset, applications were filed by the bank before DRT, Bombay to recover its dues. The DRT admitted the said applications and passed a decree in favor of the bank.
The bank also served a statutory notice on the borrower company under Sections 433 and 434 of the Companies Act 1956, however, the borrower did not come forward to make payments. Consequently, the bank filed a winding up petition before High Court of Bombay and the same was admitted.
In the proceedings before the DRT, the Recovery Certificate was issued and the bank attempted to put the secured assets to auction and realize its dues but failed.
As regards proceedings before the Bombay High Court, the borrower company preferred an appeal before Division Bench of the High Court, being aggrieved by the order admitting the winding up petition. However, the same was dismissed.
Thereafter, the borrower company approached the Supreme Court and primarily argued that once a secured creditor has obtained an order from DRT, and a recovery certificate has been issued thereupon, such secured creditor cannot file a winding up petition as RDB Act is a special Act which vests exclusive jurisdiction in the DRT to the exclusion of the Company Court. It also argued that in any case when a winding up petition is filed, a secured creditor must be put to an election where it must either relinquish its security and stand in line in the winding up proceedings or realize the security outside the winding up proceedings.
On the other hand it was argued on behalf of the Bank that a secured creditor can maintain a winding up petition even though the DRT has issued the RC. It was further argued that the election with regard to relinquishment of security is to be made at the stage of proof of claim which is only after a winding up order is passed.
The Supreme Court after considering Sections 17, 18, 19 and 34 of RDB Act and Sections 434, 439, 441 and 529 of the Companies Act, 1956 and its prior decisions, observed that as winding up proceeding do not tantamount to proceedings for realization of debts, the same would not be covered by the language of Section 17 read with Section 18 of RDB Act and the bar contained in Section 34 of the RDB Act would also not apply.
The Apex Court inter alia observed:
"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. We are of the view that both the judgements contained in Amalgamated Commercial Traders (supra) as well as in Harinagar Sugar Mills (supra) recognize the fact that 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."
The Court also referred to its decision Rajasthan Financial Corporation v. Official Liquidator1, and noted that the proceedings before DRT and winding up proceedings under the Companies Act, 1956 can carry on in parallel streams.2
Moreover, the Supreme Court while considering Sections 9(2) and 47 of the Provincial Insolvency Act, 1920 and Sections 439, 441(1), 441(2), 529 of the Companies Act, 1956 and the decisions in Hegde & Golay Ltd. v. State Bank of India3, Asian Power Controls Ltd. v. Bubbles Goyal4 and Jitendra Nath Singh v. Official Liquidator5, discarded the argument of the Appellant that the secured creditor at the time of filing of the winding up petition must give up his security. It held 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.
The Apex Court further examined Section 434(1) of the Companies Act, 1956 and held that sub-clauses thereto are not mutually exclusive. When Section 434(1)(b) applies it does not mean that Section 434(1)(a) ceases to be applicable.
Accordingly, the winding up petition filed by the Bank was held to be maintainable.
The judgment is indeed a step towards giving more power to secured creditors to recover what is legitimately due to them.
1 (2005) 8 SCC 190
2 See also Official Liquidator v. Allahabad Bank (2013)4 SCC 381
3 ILR 1987 KAR 2673
4 (2013) 3 Mah LJ811
5 (2013) 1 SCC 462
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