Allahabad Bank vs Canara Bank & Another

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Introduction 

The pursuant case primarily discusses the issue between two nationalised banks which are Allahabad Bank and Canara Bank, respectively. The issue that was brought before the court consisted of the contention of the latter bank whose claim as a secured creditor was pending before the same tribunal under Recovery of Debts Due to Banks and Financial Institution Act 1993 at Delhi, which allowed a simple money decree to Allahabad bank against the same company.

The appellant (Allahabad bank) raised the objection against the stay order passed for the sale proceedings of the properties of  the defendant company before the Recovery Officer by the Company Judge under Section 442 and 537 of the Companies Act 1956. A similar contention was brought before the Court by Canara Bank (Respondent) which stated that since the application of winding up of the defendant company is pending before the Delhi High Court , the appellant will have to seek leave of the Company court under Companies Act 1956.

Facts

  • Under section 19 of the RDB Act, 1993, the appellant Bank filed O.A.No.109 of 1995 with the Debt Recovery Tribunal in Delhi for the recovery of Rs.21,49,29,520, and a simple money order was issued on 13.1.1998 with interest of 18 percent and interest tax of 0.75 percent per annum.
  • Allahabad Bank filed a recovery case (R.C.No.9 of 98) with the Recovery Officer.
  • The debtor Company filed an appeal with the appellate Tribunal under No. 270 of 1998, but there was no stay because the money directed to be deposited had not been deposited. 1996 O.A. No. 784.
  • Canara Bank has filed a claim before the Debt Recovery Tribunal in Delhi under the RDB Act. A decree for Rs.14,40,05,982.98 with interest was issued, and it was estimated that an amount of Rs.25 crores was owed.
  • The Canara Bank filed an interlocutory action for impleadment in the appellant’s recovery case, viz., R.C. 9/98, seeking prorate division of sale proceeds from auctions of the debtor company’s properties before the Recovery Officer.
  • The appellant Bank objected, claiming that as no rulings had been issued in favour of the Canara Bank in its claim against the same entity before the Delhi Tribunal, there was no point in impleading . It was noted by the court that the topic of proportionate allocation of sale money was premature and that the matter may be addressed later.
  • On the date of 09.03.99, Under Section 442 read with Section 537 of the Companies Act, the learned Company Judge issued the impugned judgement in CA 323/99, halting the sale of the Company’s assets in RC 9/98 in OA 109/95 and also prohibiting the disbursement of cash already realised in earlier transaction.
  • Therefore the question was further raised by the respondent in this case that, how will the sale proceeds of the mentioned company be distributed among the creditors and whether the Tribunal at Delhi can entertain proceedings against the sale proceeds and winding up proceedings against the said company, also if the leave is necessary.

Arguments 

From Appellants

  • The learned Attorney General of India, Sri Soli Sorabjee, arguing for the appellant, Allahabad Bank, has argued that the RDB Act of 1993 is a special statute designed to expedite the adjudication and collection of debts due to banks. 
  • It applies to banks and financial institutions, and it includes two key elements.

One being Section 18 of RDB Act which ousts the jurisdiction of other courts, except for Supreme Court and High Courts exercising their power under Article 32, 226 and 227 respectively to entertain proceedings of the matters covered under Section 17.

  • The learned Counsel also argued, The procedures under the RDB Act cannot be stayed or transferred to the Company Court by the Company Court. No permission from the Company Court is also required neither for the filing of the OA for debt adjudication nor for the execution of the decree of the Tribunal’s decision.
  • Except as stated in Section 34, Section 34(1) gives an overriding effect to the Act’s provisions under Section 34(2). Only six statutes are exempt from the scope of Section 34(2) as amended by Ordinance 1/2000 procedures under  Section 34(1). Also, the Companies Act of 1956 is not one of the exemptions under Section 34(2) As a result, the RDB Act of 1993 takes precedence over Sections 442 and 537 of the Companies Act, as well as Section 446.
  • Also, it was argued by the counsel that even Section 446 can not be used in this case, the reason being  there is no winding up order or order appointing a temporary liquidator yet.
  • So far as principles underlying Section 73 CPC are concerned, even if applicable on facts, they are not attracted before the Tribunal since no decrees have been obtained from any Civil Court or Debt Recovery Tribunal by the Canara Bank (respondent) nor any steps as visualised by Section 73 have been taken by the Canara Bank.
  • It was argued that courts should interpret the RDB Act of 1993 in order to achieve the goal of recovering millions of crores in unclaimed bank funds.
  • The legislature sought to avoid lengthy civil court proceedings as well as proceedings under Sections 442, 446, and 537 of the Companies Act, and this is now obvious from the legislation Section 19(19), as re-enacted by Ordinance 1/2000, allows even the working of the Tribunal out of priorities.
  • It was argued that the appellant Bank, having obtained a decree and having had the properties sold, is solely entitled to the entire proceeds, and that there is no question of the appellant sharing the sale proceeds with others, nor is there any question of the appellant sharing the sale proceeds with others.
  • Also, nor the appellant is obliged to wait till the Canara Bank gets its O.A. pending before the Tribunal at Delhi.

From Defendant

  • On the contrary from the side of Canara Bank (defendant) Sri Y.P. Narula, experienced Counsel for Canara Bank, has argued that when a winding up petition is pending in the Company Court, leave of the Company Court is required in order to get a decree before the Tribunal or the Recovery Officer for execution.
  • Sections 442, 446, 537 applied even to proceedings under the RDB Act.
  • Also if no winding up order is issued, leave is required under Section 537. As a result, the sale proceedings must be stayed until the Recovery Officer or the sale profits are distributed.
  • In the event of a company’s winding up, only the Company Court has the authority to sell the company’s assets. The recovery processes must be halted before the proceedings can begin and a transfer of the case to the Company Court is required.
  • Following that, once the profits of sale are in the hands of the Company Court, it will be up to that Court to allocate the funds pursuant to the priorities set forth in Sections 446(2)(d), 529, 529A, and 529B, 530, and so on.
  • The Canara Bank is likewise a nationalised bank, and under the RDB Act, the Allahabad Bank cannot be allowed to operate just because the Allahabad Bank was able to obtain a decree from the Debt Recovery Tribunal before Canara Bank.
  • Nor, it shall be allowed to appropriate the total proceeds of sales on the grounds mentioned above.
  • Even if the Canara Bank simply has a ‘claim’ and not a decree, its security has priority under Section 2(g) unlike Section 73 of the Criminal Procedure Code, Section 446 does not require a decree, and it suffices as a proof to demonstrate before the liquidator.
  • Also, it was contended by the defendant that even before the Tribunal Section 73 CPC and also Section 529(1) and (2) of the Companies Act read with Sections 529A, 530 etc. are attracted for purposes of distribution of the sale proceeds and working out priorities, assuming that jurisdiction of the Company Court is excluded in so far as recovery of debts due to Banks and financial institutions are concerned.

Issues

  1. Whether in relation to RDB Act proceedings at the level of adjudication for money owed to banks or financial institutions, or at the stage of execution for the recovery of sums under the RDB Act, The Tribunal and the Recovery Officers have exclusive jurisdiction in this case their spheres of influence?
  2. Whether Before a winding up order is issued against a company, leave of the Company Court is required under Section 537 for the beginning of different processes by banks and financial institutions under the RDB Act or before the appointment of a provisional liquidator under Section 446 (1)  and whether the Company Court can pass orders of stay of proceedings before the Tribunal, in exercise of powers under Section 442?
  3. Whether after a winding up order is passed under Section 446(1) of the Company Act or a provisional liquidator is appointed, whether the Company Court can stay proceedings under the RDB Act, transfer them to itself and also decide questions of liability, execution, and priority under Section 446(2) and (3) read with Sections 529, 529A and 530 etc. of the Companies Act or whether these questions are all within the exclusive jurisdiction of the Tribunal?
  4. Whether, apart from Section 529A, the provisions of Section 73 CPC and SubClauses (1) and (2) of Section 529, Section 530 of the Companies Court also apply to the proceedings before the Tribunal if it is decided that the distribution of proceedings is to be done solely by the Tribunal in accordance with the RDB Act?
  5. Whether, in light of the stipulations of Sections 19(2) and 19(19) as established by Ordinance 1/2000, the Tribunal can allow the appellant-Bank to use the entire sale revenues solely for the benefit of the appellant-Bank Section 529A only restricts you to a certain extent?
  6. Can the secured creditors like the Canara Bank claim under Section 19(19) any part of the realisations made by the Recovery Officer and is there any difference between cases where the secured creditor opts to stand outside the winding up and where he goes before the Company Court?
  7. What is the relief to be granted on the facts of the case since the Recovery Officer has now sold some properties of the company and the monies are lying partly in the Tribunal or partly in this Court?

Summary of Court’s Decision and Reasoning

  • After listening to the contentions from the both the parties before the court, the court observed that under the Act will not apply if the debt outstanding is less than Rs. 10 lakhs or such other sum as may be notified, according to Sub-clause (4) of Section 1 of the RDB Act.
  • Section 2(d) defines ‘Banks’ as including;
  • (i) Bank Companies, 
  • (ii) corresponding new banks,
  • (iii) State Bank of India, 
  • (iv) subsidiary Banks and 
  • (v) Regional Rural Banks. 
  • ‘Banking Company’ is defined in Section 2(e) and Corresponding New Bank is defined in Section 2(f) and it refers to Section 5(da) of the Banking Regulation Act, 1949. 
  • Clause (da)[1]  of Section 5 of the Banking Regulation Act, 1949, defines ‘corresponding new banks’ as Banks constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and Section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.
  • Hereinafter, around 20 nationalised banks have come under the purview of RDB Act.
  • Also,Section 2(g) as amended by Ordinance 1/2000 defines ‘debt’ as meaning any liability which is “claimed” as due from any person to a Bank or financial institution. 
  • ●        Court while referring to Sections 17 and 18 in Chapter III of the RDB Act which deal with adjudication of the debt, further held that the Tribunal is to decide the applications of the Banks and Financial Institutions for recovery of debts due to them.
  • Hon’ble court went on and further opined that the jurisdiction of the Tribunal in regard to adjudication is exclusive. The RDB Act requires the Tribunal alone to decide applications for recovery of debts due to Banks or Financial Institutions.
  • Also, in the matter of issue raised for “execution” jurisdiction of recovery officer is also exclusive. 
  • Court also opined that the prescription of an exclusive Tribunal both for adjudication and execution is a procedure clearly inconsistent with realisation of these debts in any other manner.
  • Also while adjudicating on the other issues the court held, that as a winding up order is passed, provisions in pursuant of Section 446 become applicable. Under Sub-clause (1) of Section 446, when a winding up order is passed or the official liquidator is appointed as a 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 provided by terms imposed by the court.
  • While relying on the following case laws,  Federal Court in The Governor General In Council vs Shiromani Sugar Mills Limited under the Old Companies Act, 1913. Similarly, this Court in Sudarshan Chits (India) Ltd. v. O. Sukumaran Pillai and Ors. MANU/SC/0037/1984 : [1985]1SCR511 observed that not satisfied with Sections 442 and 537 and also with Section 446(1) (which was similar to Section 171 of the Old Companies Act, 1913), Parliament enacted the Companies (Amendment) Act, 1960 and brought in the present Sub-sections (2) and (3) into Section 446.
  • Therefore while applying the principle of purposive interpretation the court held that there exists a superior purpose of Debt Recovery Tribunal in regard of the RDB Act and the special provisions contained therein as it was intended that  a speedy and summary remedy for recovery of thousands of crores which were due to the Banks and to Financial Institutions, so that the delays occurring in winding up proceedings could be avoided.
  • The court held further that the Canara Bank cannot rely on the words in Section 19(19) vis, “to be distributed among its secured creditors” for claiming any amount lying in the Tribunal towards its security nor can it claim priority as against the Allahabad Bank.
  • Also, there being no decree in the favour of Canara Bank from any court or from any Tribunal, and the other conditions of Section 73 not having been satisfied, no dividend can be claimed out of monies realised at the instance of the Allahabad Bank, even if the Allahabad Bank is an unsecured creditor.
  • Hence while relying on the following case, National Textile Workers’ Union etc. v. P.R. Ramakrishnan and Ors.  the court directed the Registry of the Supreme Court to make over the monies deposited in this Court pursuant to sale of Shed No. 15, to the Debt Recovery Tribunal, Delhi and it will be for the said Tribunal to find out if there are any workmen’s dues by issuing notice to the workmen or other persons/bodies which can furnish information on its behalf. Also, the sales proceeds are to be first released towards the workmen’s dues. The balance remaining will then be released in favour of the appellant-Bank in accordance with law and subject to the various principles stated in this judgment.

Analysis

The Judgement in the prevalent case has been rightly decided by the Hon’ble Supreme Court: while setting aside the previous orders, court made it simply very clear how the different sections of Companies Act and other amendments in the prevalent laws can be interpreted by referring to the purposive interpretation of the statutes and; as rightly pointed out by the court that jurisdiction can not be put in question on the mere understanding of one party that the other party is being benefited from the loss of other party. Undoubtedly, it can be ascertained that in the present case the Hon’ble court has judiciously and meticulously reflected the relevant points and made the judgement which benefits the parties unbiasedly and brings justice to the class of people who are most prone to go through unjust treatments.

Conclusion

The case can be considered of prominence, as it clearly establishes principle and rules in regard of pending litigations before the winding up of company; also it differentiates well between the rights of secured and unsecured debts which could further bring more clear understanding of the rights of the Banks who act as a debtor for the companies and hierarchy of dues to be received by whom in case of pending litigations of winding up of the company. [2] 


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