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Andhra Pradesh High Court on section 529A of Companies Act,

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Court :
High Court

Brief :
Section 529A, read with section 457 of Companies Act, 1956 - Overriding preferential payments - Applicants were secured creditors of respondent company which was ordered to be wound up - As ordered by Court, Official liquidator sold assets of company and realised certain amount - When liquidation proceedings were pending, applicants filed instant application seeking direction of court to official liquidator to disburse 50 per cent of realised amount towards dues of interest - Whether since no provision of law had been brought to notice of Court, which conferred jurisdiction on court to grant interim payment, instant application was not maintainable - Held, yes - Whether, furthermore, in view of fact that claims made by secured creditors as well as workers were under adjudication and in such a situation even if interim order was passed in exercise of inherent jurisdiction, same would result in denying right of workers to claim their dues and also render section 529A ineffective - Held, yes - Whether, consequently, instant application being devoid of merit was to be dismissed - Held, yes

Citation :
Yet to Report

FACTS The applicants were secured creditors of the respondent company. The said company was ordered to be wound up. As ordered by the Court, the official liquidator sold the assets of the company and realised certain amount. When the liquidation proceedings were pending, an application was moved by the applicants for disbursement of 50 percent of realised amount towards the dues of interest. The said application was dismissed by the court directing the official liquidator to complete the adjudication. Yet again the instant application was filed. HELD The application was moved by the applicants under sections 457 and 529A. A careful perusal of these provisions would show no such power inheres either in the Court or in Official Liquidator to make interim payment out of liquidation assets to the secured creditors even before claims of such secured creditors are adjudicated by Official Liquidator in accordance with Rules 159, 163 and 169 of the Companies (Court) Rules, 1959. Indeed no provision of law had been brought to the notice of the Court, which conferred jurisdiction on the Court to grant interim payment. Therefore, the application was not maintainable. Secondly, admittedly, a similar application filed by applicants was already rejected by the Court and hence instant application could not be entertained. [Para 6] Furthermore, admittedly, the claims made by the secured creditors as well as workers were under adjudication and in such a situation even if interim order was passed in exercise of inherent jurisdiction, the same would result in denying the right of workers to claim their dues and would also render section 529A ineffective. Such an interpretation was neither permissible nor proper. [Para 8] It was no doubt true that as was the practice in the Court immediately after realisation of the assets by sale of the properties of the company in liquidation by Official Liquidator, the Court was permitting Official Liquidator to make interim payment to secured creditors. This was so inspite of the fact that there was no such power. Reason for the Court in allowing such interim payment was that by paying at least a part of loan amount to the secured creditors, financial damage already done could be ameliorated to certain extent. Rule of practice as is in vogue cannot however ignore sections 529, 529A and 520. When the liquidator is adjudicating the claim made by the secured creditors, other creditors and also workmen, the Court by resorting to such practice cannot and should not make orders directing the Official Liquidator to make interim payment. [Para 9] Thus, the instant application was devoid of merit and was to be dismissed accordingly. [Para 10]
 

CA Pawan Goswami
on 11 May 2008
Published in Corporate Law
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