IMPORTANT POINTS
1. In terms of Section 48 of the Transfer of Property Act, claim of the first charge holder shall prevail over the claim of the second charge holder and in a given case where the debts due to both, the first charge holder and the second charge holder, are to be realized from the property belonging to the mortgagor, the first charge holder will have to be repaid first.
2. Right to property is a constitutional right. Right to recover the money lent by enforcing a mortgage would also be a right to enforce an interest in the property.

Headnote:(i) Companies Act, 1956 — Sections 9, 529, 529-A — Companies (Court) Rules, 1959 — Rule 148(1) — Recovery of dues by bank and financial institutions — Liquidation proceedings — Applicability of pari passu principles — Appellant, a Banking Company along with Industrial Finance Corporation of India and Industrial Development Bank of India advanced loan to respondent company — Punjab National Bank also advanced a loan to respondent for providing working capital funds — 1st respondent, in order to secure the amounts lent to it, created a first charge in favour of appellant along with other financial institutions by way of equitable mortgage — A second charge was created in favour of PNB by way of constructive delivery of title deeds — Order passed directing winding up of respondent company — Proceedings initiated by appellant and others before Debt Recovery Tribunal are still pending — Company application filed before Company Judge — Prayer made that their claim for a sum of Rs. 4,56,06,736 should be considered on pro-rata basis allowed — Appellant’s case that claim of PNB be excluded from moveable and immovable assets of the company was disallowed — Intra court appeal filed by appellant before the Division Bench of the High Court was dismissed — Whether High Court was justified in holding that appellant shall rank with unsecured creditors — (No).
       Held : Some legal propositions, which are not in controversy, may also be noticed at this stage. There are two categories of secured creditors, namely, (i) those who are desirous of going before the Company Court and; (ii) those who stand outside the winding up proceeding. Corporate insolvency procedures serve a variety of functions which include collective execution by unsecured creditors, facilitation of corporate rescue and the enforcement of security which would include certain public goals as for example, corporate morality. In an insolvency proceeding, the fundamental questions, which go to the root of the procedure, are:
       (i)which parties are involved;
       (ii)which assets are to be included; and
       (iii)how proceedings are to be funded.
       Liquidation proceeding although is a collective enforcement mechanism for the benefit of unsecured creditors, the question which invariably arises is what would be the meaning of the asset of the company in the Indian context. For the said purpose, the court has to be bear in mind that the liquidation is also the occasion for the termination of the companys affairs. Assets of the company would include debentures holder assets, free hold assets and sometimes floating assets. Applying pari passu principles, creditors claim are to be treated alike, a single point of time at which the assets are liable to be quantified must be pinpointed, but then, subsequent events are also required to be considered. For those who desire to go before the Company Court for dividend by relinquishing their security, in accordance with the Insolvency Rules, Section 529 of the Companies Act would be attracted.(Paras 22 to 27)
        Section 529-A of the Companies Act does not ex facie contain a provision (on the aspect of priority) amongst the secured creditors and, hence, it would not be proper to read thereinto things, which the Parliament did not comprehend. The subject of mortgage, apart from having been dealt with under the common law, is governed by the provisions of the Transfer of Property Act. It is also governed by the terms of the contract. The Punjab National Bank granted loan to the 1st Respondent herein knowing fully well that, over the assets of the mortgagor, the Appellant held the first charge. It in no uncertain terms stated that the charges created by reason of the loan agreement entered into by and between itself and the 1st Respondent was subservient to the charges of the appellant as also the Respondent Nos. 3 and 4. The admission of the PNB in this behalf is absolutely clear and explicit. Even in the suit filed by it for recovery of the mortgage money as against the 1st Respondent, it not only in no uncertain terms stated that the Appellant and Respondent Nos. 3 and 4 herein were the first charge holders in respect of movable and immovable properties of the 1st Respondent, but its prayers in regard thereto were also limited, as would appear from prayer (f) made in the suit.(Paras 40 & 41)
       For the aforesaid reasons, we are of the view that the High Court has overlooked salient aspects of the provisions of the relevant Acts including that of the Provincial Insolvency Act. Hence, the impugned judgment cannot be sustained. It is set aside accordingly. The appeal is allowed. (Para 61)
       (ii) Transfer of Property Act, 1882 — Section 48 — Priority of rights created by transfer — Exceptions to the provision — Whether Section 48 of the Act stands over ridden by Section 529A of the Companies Act — (No) — Companies Act, 1956 — Section 9, 529-A.
       Held : Section 9 of the Companies Act only states that provisions thereof would override the Memorandum or Articles of Association of the company or any other agreement executed or resolution passed by the company. There does not exist any provision in the Companies Act which provides that the provisions of Section 48 of the Transfer of Property Act would not be applicable in relation to the affairs of a 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. (Para 49)
       The said provision, as noticed hereinbefore, deals with a specific situation. The exceptions to the provisions of Section 48 are as under:
       (i)where parties execute a Registered Deed at any point in time which is subsequent to a prior but an unregistered deed. This is also subject to the doctrine of notice, i.e., that parties to the Registered Deed executed after the Unregistered Deed did not have notice of the same;
       (ii)where there are exceptions carved out by a statute–for example, Section 98 of the Bengal Tenancy Act.
       (iii)a mortgage executed on the directions of the Court to preserve a property;
       (iv)where a salvage lien is created, i.e., where lien is created for moneys advanced for the purposes of saving the property from destruction or forfeiture. The salvage lien is confined in English Law to maritime lien.(Para 51)
       (iii) Provincial Insolvency Act — Section 47 — Applicability — Section 47 is attracted by virtue of Section 529(1) of the Companies Act — Sub-sec. (2) of Section 47 would become applicable where a secured creditor voluntarily relinquishes his security for the general benefit of the creditors — Companies Act, 1956 — Section 529.
       Held : Section 47 of the Provincial Insolvency Act is attracted by virtue of Section 529(1) of the Companies Act. Sub-section (2) of Section 47 would become applicable where a secured creditor voluntarily relinquishes his security for the general benefit of the creditors.(Para 53)
       Sub-section (3) of Section 47 clearly envisages the position where he does not either realise or relinquish his security. He, in such a situation, may state in his Affidavit of Proof, the particulars of the security and value at which he assesses the same. The consequences therefor would ensue. If the Official Receiver proceeds to sell the security, the Court first has to pay the amount at which the security was valued to the secured creditor out of the sale proceeds. (Para 56)
       (iv) WORDS AND PHRASES — Expression ‘relinquish’ — Meaning — It envisages a conscious act.
       Held : The expression "relinquish" has a different connotation. In P. Ramanatha Aiyars Advanced Law Lexicon at page 4047, it is stated:
       "Relinquish: To give over possession or control of; to leave off."
       It envisages a conscious act, i.e., an act where a person was aware of his right and then relinquishes the same. The same must be for the general benefit of the creditors. His action must lead to a conclusion that he, for one reason or the other, intended to stand in the queue for receiving money owed to him. It, however, does not stand obliterated only by the filing of an affidavit or proof of claim with the official liquidator. Such a claim had been filed pursuant to a notice issued by the official liquidator. If the creditor does not respond to the said notice, he would not be in a position to bring to the notice of the official liquidator, the existence of his right.(Paras 54 & 55)
       (v) INTERPRETATION OF STATUTES — Right to Property — While enacting a statute, the Parliament cannot be presumed to have taken away a right in property — Right to property is a constitutional right.(Para 42)
       (vi) INTERPRETATION OF STATUTE — 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 — A non-obstante clause must be given effect to, to the extent the Parliament intended and not beyond the same.(Paras 38 & 39)

Judgement Key Points

This case involves a dispute over the priority of secured claims in the context of insolvency and liquidation proceedings of a company. The appellant, a banking institution, held the first charge over the company's assets through an equitable mortgage, while the respondent, Punjab National Bank, had created a second charge by way of constructive delivery of title deeds, which was subordinate to the first charge (!) (!) .

The company was ordered to be wound up, and the official liquidator was appointed to manage the distribution of the company's assets. The appellant and other financial institutions expressed their intention to remain outside the winding-up process and to realize their security interests separately (!) (!) . PNB filed a suit for recovery and claimed a second charge over the assets, explicitly stating that its charges were subject to the first charge of the appellant and other first charge holders (!) (!) .

The appellant filed a claim with the official liquidator, asserting its priority as a first charge holder, and sought to exclude PNB's claim from the assets for distribution. The High Court initially held that PNB, despite having a second charge, should rank with unsecured creditors because of the manner in which it opted to realize its security and participate in the winding-up process (!) (!) .

However, the appellate court reviewed the legal provisions governing priorities among secured creditors, emphasizing that rights created by transfer and mortgage under the relevant property laws are protected unless explicitly overridden by specific insolvency statutes or contractual agreements. The court noted that the law recognizes the priority of the first charge holder and that the right to enforce a mortgage is a constitutional right that cannot be presumed to be taken away without clear legislative intent (!) (!) .

The court also clarified that the act of a secured creditor choosing to realize its security outside the winding-up proceedings does not automatically mean relinquishment of its security rights unless a conscious and explicit act of relinquishment is demonstrated. The decision highlighted that the specific statutory provisions and common law principles governing mortgage rights, including the Transfer of Property Act, remain applicable and are not displaced by insolvency statutes unless expressly stated (!) (!) .

In conclusion, the court held that the legal position favors the priority of the first charge holder over subsequent claimants, and the law does not support the view that a second charge holder automatically ranks with unsecured creditors when opting to realize security outside the winding-up process. The case underscores the importance of clear legislative provisions and the preservation of contractual and legal rights relating to mortgage priorities in insolvency proceedings.

JUDGMENT

S.B. Sinha, J. — Leave granted.

2. Interpretation of Sections 529 and 529-A of the Companies Act, 1956 is involved in this appeal, which arises out of a judgment and order dated 4.8.2004 passed by the High Court of Judicature at Allahabad in Special Appeal No.698 of 2002 affirming the judgment and order dated 24.5.2002 passed by a learned Singh Judge of the said Court.

3. The appellant herein is a Banking Company. It, along with Industrial Finance Corporation of India (IFCI) and Industrial Development Bank of India (IDBI), advanced the following amounts by way of loan to Respondent No.1 with a view to give financial assistance to it in setting up a plant for manufacture of leather boards:

a)IDBI Rupee Term Loans of Rs.193.2 lacs and Foreign Currency loan of Italian Lira 1380900,000.

b)IFCI Rupee Term Loans of Rs.196.74 lacs, Central Investment subsidy of Rs.25 lacs and Foreign Currency loan of DM 2127,565.

c)ICICI Rupee Term Loans of Rs.96.61 lacs and Foreign Currency loan of Italian Lira 1380900,000.

4. The Punjab National Bank (PNB) also advanced a loan to the said Respondent for providing working capital funds. The 1st Respondent, in order to secure the amounts lent to it, created a first charge in favour of the appellant along with other financial institutions, i.e., Respondent Nos.3 (IFCI) and Respondent No.4 (IDBI) herein by way of equitable mortgage by deposit of title deeds of its immovable property. A second charge was created in favour of PNB by way of constructive delivery of title deeds remaining in deposit with Respondent No.3 herein, clearly indicating that the charge in favour of the latter was subject and subservient to charges in favour of IFCI, IDBI and ICICI.

5. On an application for winding up of the 1st Respondent made before the High Court of Judicature at Allahabad, an order was passed on 16.12.1993 directing its winding up whereupon an Official Liquidator was appointed. The borrowing facilities of the said Respondent had been terminated. A suit for recovery of the credited sum was filed by the appellant along with the Respondent Nos.3 and 4 herein against the 1st Respondent in the High court of Judicature at Bombay, which was numbered as Suit No.2789/1995. The said suit was thereafter transferred to the Debt Recovery Tribunal, Bombay. Recovery proceedings are admittedly pending adjudication.

6. The Official Liquidator was one of the defendants. Liberty was granted by the Debt Recovery Tribunal to the appellant herein and the other respondents to obtain permission of the Company Court, i.e., High Court of Judicature at Allahabad to continue the prosecution of the said suit. Thereupon, an application under Section 446 of the Companies Act, 1956 was filed by the plaintiffs in the said suit stating that they were Secured Creditors and had decided to remain outside the winding up proceedings being desirous of realizing the Security in the suit. The permission to continue the proceedings in the said Suit No.2789/95 was granted by the High Court of Judicature at Allahabad on 30.8.1995. In the said suit, however, the Respondent No.2 herein, PNB, was not impleaded as a party.

7. PNB filed a Civil Suit in the Court of Civil Judge, Fatehpur (U.P.) on 15.10.1998, which was numbered as Suit No.2/98, for recovery of money payable to it by the 1st Respondent. In its plaint it was, inter alia, averred:

"That the defendant No.1 company had secured various other financial facilities from the Defendant Nos.4, 5 and 6 in whose favour the Defendant No.1 company had created Equitable mortgage as Collateral Security by deposit of original title deeds in respect of land, building and plant and machineries situated at Village Kauriya, Tehsil Binkdi, District Fatehpur (U.P.), but, then the Defendant No.1 company agreed to secure the second charge on the said mortgaged property in favour of the plaintiff Bank, after the defendant Nos.4, 5 and 6 gave their consent to the effect that the title deeds in respect of the aforesai

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2006 Supreme(SC) 418

Cases Referred (5)