Section 529A of Companies Act and Section 48 of TP Act

Brief :  Section 529 A of  Companies Act, 1956 and Section 48 of Transfer of Property Act.   Priority over disbursement of claim between charge holders. An analysis. The analysis is based on the following case.

ICICI BANK LTD  VS SIDCO LEATHERS  LTD: civil appeal  2332 of  2006  ( Date of judgement 24-4-2006)

Brief :  The ICICI  Bank Ltd and two others advanced loan to SIDCO Leathers Ltd and created a first charge on the immovable property of the company.  The Second charge was created by Punjab National Bank   Subsequently the winding  up of the company ordered by company court  and an appointed official liquidator  First charge holder filed a suit for recovery before Debt Recovery Tribunal which is pending-Second charge holder filed a suit before trial court which was decreed-

First charge holder lodged a claim before the Official Liquidator and filed an application before the Company Court for recovery of amount Company Court dismissed the application holding that the bank is only entitled to pro-rata share since it had relinquished its first charge over the assets by filing a claim with the Official Liquidator-

While delivering the judgement, the Hon’ble High court Allahabad, that rejected the claim of ICICI Bank and others and directed the official liquidator to declare dividends  in accordance with the orders passed by the company  court.

On appeal to Supreme court, where it held that although under Section 19(19) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hereinafter referred to as the “RDB Act”), the DRT may order the distribution of sale proceeds in accordance with Section 529A of the Companies Act, 1956 and the RDB Act was a legislation overriding all other legislations in the event of inconsistency, it could not be said to take away the right of property or the fundamental rules of priority under Section 48 of the Transfer of Property Act

Understanding of each section and its contents in brief:  

Section 9 of the  Companies Act provides  that the provisions of the Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by it, or in any resolution passed by the company or by its Board of directors,  whether the same be registered , executed or passed, as the case may be, before or after the commencement of this Act:

According to Section 529 A  of the companies Act  1956  contains a non-obstante clause. The non-obstante nature of a provision although may be of wide amplitude, the interpretative process thereof must be kept confined to the legislative policy. Only because the dues of the workmen and the debt due to the secured creditors are treated pari passu with each other, the same by itself would not lead to the conclusion that the concept of inter se priorities amongst the secured creditors had thereby been intended to be given a total go-by

What is meant by non-obstante clause:  “A non-obstante clause is usually used in a provision to indicate that the provision should prevail despite anything to the contrary in the provision mentioned in such non-obstante clause. In case there is any inconsistency or a departure between the non-obstante clause and another provision, one of the objects of such a clause is to indicate that it is the non-obstante clause which would prevail over the other clause.” [Parasuramaiah vs. Lakshamma AIR 1965 AP 220

Section 529(1)(c) of the Companies Act speaks about the respective rights of the secured creditors which would mean the respective rights of secured creditors vis-a-vis unsecured creditors. It does not envisage respective rights amongst the secured creditors

In terms of Section 48 of the Transfer of Property Act, 1882 Act, the claim of the first charge holder shall prevail over the claim of the second charge holder.  No where in the Companies Act, 1956 contains provision that Section 48 of the Transfer of Property Act would not be applicable in relation to the affairs of the company. Unless, expressly or by necessary implication, such a provision contrary to or inconsistent therewith carrying a different intent can be found in the Companies Act, Section 48 of the Transfer of Property Act cannot be held to be inapplicable.

Section 48 of Transfer of Property Act is based on the maxim qui prior est tempore potior est jure   which means  that one  which is first  in time is better in law.The  transferor cannot prejudice the rights  of the transferee  by any subsequent  dealing with  the property.

These are the some of the court judgements in respect of Section 48 of Transfer of Property Act,

When  two successive transfers  of the same property have been effected  by way of mortgage or sale,  the later in date must give way to the earlier  -  Sirbadh Rai  vs  Rghunath 7 A;; 568 (572)  Karmat v Saminuddin, 8  All 409  Narayan vs Laxman 29, Bom 421

The rights of persons who have acquired  an interest in the mortgaged  estate, since the making of the mortgage of which the mortgages had notice, cannot defeated or impaired by any subsequent  arrangement to which they are not parties  H,.V.Low & Co  V Pulin Air 1993  Cal 154

Conclusion:  The claims of secured creditors will be decided based on Section 48 of the Transfer of property act  and not on Section 529A of the Companies Act, 1956.   The claims of secured creditors based on Section 529 which clearly provides respective rights of secured and unsecured creditors and not respective rights of secured creditors.