INTERNATIONAL COACH BUILDERS LTD. versus KARNATAKA STATE FINANCIAL CORPN.

Citation: [2003] 2 S.C.R. 631 · Decided: 05-03-2003 · Supreme Court of India · Bench: RUMA PAL · Disposal: Disposed off

Judgment (excerpt)

INTERNATIONAL COACH BUILDERS LTD. 
A 
v. 
KARNATAKA STATE FINANCIAL CORPN. 
MARCH 5, 2003 
[RUMA PAL AND B.N.SRIKRISHNA, JJ.] 
B 
State Financial Corpr,ration Act, 19511 Companies Acr, 1956 -Sections 
29 and 468/Sections 433, 529 and 529A-Right a/State Financial Corporation 
under Section 29 to sell and resell-Exercise of--Without reference to Company C 
Court-When winding up order made against the debtor-Company-Held, 
State Financial Corporation cannot exercise its power to sell and resell the 
security without reference of the Court in case of Company in a winding up, 
in view of pari passu charge of the workmen created by the proviso to Section 
529 of Companies Act-The i-ight can be exercised only with the consent of 
the Official Liquidator reprcse1:ting workmen for their pari passu charge- D 
Sections 529 and 529A of Companies Act would override and control the 
provisions of Sections 29 and 468 of Financial Corporation Act-Transfer of 
·Rraperty Act, 1882-Mortgage. 
Winding up petitions were filed against certain companies by the 
creditors. The companies had borrowed money from State Financial E 
Corporations. As security the companies had mortgaged their property with 
the respective Corporations. The Corporations took mortgaged assets of the 
Companies in exercise of their power under Section 29 of the State Financial 
Corporation Act, 1951 (SFC Act). Companies were ordered to be wound up 
by the Company Court and Official Liquidators were appointed. The F 
Corporation filed petitions before Company Court/High Court seeking 
permission to stand outside winding up proceedings and work out their 
remedies under Section 29 of SFC Act. Thus the question that arose for 
consideration before the High Courts was whether the rights of the State 
Financial Corporation under Section 29 of SFC Act to sell and resell the 
security could be exercised without reference to the Company Court when a G 
winding up order is made against a Company? Conflicting views were given 
by different High Courts. In appeal to this Court State Financial Corporations 
contended that they are secured creditors and as such were entitled to exercise 
their rights under mortgage as also statutory rights conferred under Section 
29 of SFC Act without reference of Court. Hence the Corporation could sell H 
631 
632 
SUPREME COURT REPORTS 
[2003] 2 S.C.R. 
A the mortgaged and charged properties without reference to any Court. 
Disposing of the appeals, the Court 
HELD: I. The right unilaterally exercisable under section 29 of State 
Financial Corporation Act, 1951 (SFC Act) is available against a debtor, if a 
B company, only so long as there is no order of winding up. The State Financial 
Corporations (SFCs) cannot unilaterally act to realize the mortgaged 
properties without the consent of the official liquidator representing workmen 
for the pari passu charge in their favour under the proviso to section 529 of 
the Companies Act, 1956. If the official liquidator does not consent, the SFCs 
C have to move the Company court for appropriate directions to the official 
liquidator who is the pari passu charge holder on behalf of the workmen. In 
any event, the official liquidator cannot act without seeking directions from 
the Company Court and under its supervision. [652-A-C) 
2. As a result of the proviso added in Section 529 of Companies Act, 
D the security of every secured creditor is deemed to be subject to a 'pari passu' 
charge in favour of the workmen to the extent of the workmen's dues (called 
'workmen's portion, as defined in sub-section (3)(c)) therein. Where the 
secured creditor, instead of relinquishing its mortgage and proving his debt, 
opts to stand outside the winding up proceedings and realize his security, the 
Official Liquidator shall be entitled to represent the workmen and enforce 
E such charge and that any amount realized by enforcement of such charge 
shall be applied ratably by the Official Liquidator for the discharge of 
workmen's dues. It is true that even the amended proviso does not give the 
Liquidator an independent right of enforcing the charge by selling the security 
agidnst which such charge is created. Nonetheless, it creates a 'pari passu' 
F charge in favour of the workmen to the extent of their dues and makes the 
Liquidator represeniative of the workmen to enforce such a charge. By reason 
of Clause (c) of the newly added proviso, so much of the debt due to the 
secured creditor opting to realize secu

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