Holding

A winding‑up court may not transfer a suit of a secured creditor to another forum where such transfer would increase the creditor’s expense and is not necessary for the expeditious winding‑up of the company.

Summary

The Central Bank of India (appellant) had two suits in the Subordinate Court of Rangareddy, Andhra Pradesh, to enforce an equitable mortgage and recover expenses against Elmot Engineering Company (a limited company) and its directors. While the winding‑up petition against the company was pending, the Bombay High Court, acting as the winding‑up court under s.446 of the Companies Act, 1956, granted the bank leave to continue the suits but ordered that they be transferred to the High Court of Bombay, citing the official liquidator’s convenience and cost concerns. The bank appealed, arguing that as a secured creditor it stood outside the winding‑up proceedings and that the suits should remain where the property was located, as transfer would increase its own costs. The Supreme Court examined the scope of s.446, the position of secured creditors under s.231 and related provisions, and held that the transfer was not justified because the suits were not lengthy and would impose greater expense on the bank. Consequently, the Court set aside the transfer order while leaving the leave to sue intact, and allowed the appeal.

Issues considered

The scope of Section 446 of the Companies Act, 1956 regarding the winding‑up court's power to transfer pending suits.
Whether a secured creditor, standing outside the winding‑up, is entitled to have suits continued at the original forum.
The balance between the official liquidator's convenience and the secured creditor's cost considerations.

Legislation cited

Companies Act, 1913s. 171
Companies Act, 1956s. 228(1), s. 231, s. 232(1), s. 317, s. 446

Subjects

winding upsecured creditorequitable mortgageSection 446official liquidatortransfer of suitscorporate insolvency

Judgment

A CENTRAL BANK OF INDIA
v. ~

•
ELMOT ENGINEERING COMPANY AND ORS.

APRIL 27, 1994

B
(M.N. VENKATACHALIAH, CJ. ANDS. MOHAN, J.]

The Companies Act, 1956 : s. 446-Company-Suits against-by •
mortgagor for recovery of money under equitable mortgage by deposit of title
deeds-Company ordered to be wound u~Application by mortgagor for leave
c to prosecute suits against Company in civil court-Leave granted by Company
Court transfening suits to itself-ffeld, transfer of suits to Company Court will
result in greater expenditure to plaintiff-The part of order directing transfer
set aside.

D The appellant Bank filed two suits against respondent no.1, a limited
Company, and its advisors and Directors, respondents no. 3 and 4 respec-
lively, - one for enforcement or equitable mortgage seeking recovery of
certain amount witb interest tbereon and, In default of payment, a final
decree directing tbe sale of mortgaged properties and for ancillary reliefs
was sought; and tbe otber, for recovery of expenses incurred from time to
E time in respect or tbose properties-in tbe court of Subordinate Judge,
Saroor Nagar, District Rangareddy in Andhra Pradesh, witbin whose
jurisdiction tbe property was situated.

During the pendency of the suits, a winding up petition against
F respondent no. 1 was filed before tbe Bombay High Court. The Company
was ordered to be wound up and respondent no. 2 was appointed as the
\.,
Official Liquidator.

The appellant filed a Company Application, under s.446 or the
Companies Act, 1956, in the Company Petition, for leave to prosecute the
G two soi.ls before the civil court concerned. The Company Court granted
leave but directed transfer of the suits to itself holding that for the Official
Liqnidator it would be more expensive to defend the suits at a far distance
in Hyderabad an,d the wasteful expenditure could be avoided by transfer.
The appeal filed by tbe appellant was dismissed summarily by the Division 4
\
H Bench of the High Court.
766
CENTRAL BANK OF INDIA v. ELM OT ENGG. CO. 767

In appeal to this Court, it was contended on behalf of the appellant A
" ·"- that the High Court erred in not correctly appreciating s.446 of the
Companies Act, inasmuch as a secured creditor claiming under an equi~
table mortgage stood outside the winding up proceedings; the properties
being situated in Andhra pradesh, it would be not only just and convenient
but also proper for the suits to be conducted there and convenience of the B
Official Liquidator alone should not be the concern.

On behalf of the respondents, it was contended that in view of
sub-sections (2) and (3) of s. 446 of the Act, the Company Court was
entitled to grant leave on such terms and conditions as it would impose
and was empowered to transfer before it all proceedings pending against C
the Company at different places as it would be convenient for the winding
up of the Company's affairs expeditiously.

Allowing the appeal in part, this Court

HELD : In the facts of the instant case, the order of. transfer of the D
suits to the High Court of Bombay cannot be supported. The appellant is
admittedly a secured creditor. It sues on a mortgage by deposit of title
deeds. Such a suit is not likely to involve a long drawn out trial. The
transfer will result in greater expenditure to the appellant Bank which
certainly is avoidable "than the wasteful expenditure' to the Official Liq· E
uidator. Accordingly, the part of the High Court's order directing the
transfer is set aside. (772-D-H; 773-B-C)

M.K Ranganathan v. Govt. of Madras, AIR (1955) SC 604, relied on.

Sudarsan Chits (I) Ltd. v. G.Sukumarann Pillai, AIR (1984) SC 1579, F
referred to.
)
Palmer's Company Precedents, Part II, 17th Edu., p.302, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3911 of
1994. (}

From the Judgment and Order dated 15.9.92 of the Bombay High
Court in A. No. 428 of 1992.

Anil B. Diwan, P.H. Parekh and Ms. Smriti Mishra for the Appel-
lants. H
768 SUPREME COURT REPORTS {1994] 3 S.C.R.

A Arvind Kumar, K.R. Venkataraman and Ms. Laxmi Arvind for the
Respondents.

The Judgment of the Court was delivered by

MOHAN, J. Leave granted.
B
The appellant filed a suit bearing O.S. No.7 of 1986 against Respon-
dent Nos. 1, 3 and 4 in the Court of Subordinate Judge, Rangareddy
District at Saroor Nagar, Andhra Pradesh for recovery of Rs. 97,21,274.11
with interest thereon. The further prayer was, in default of payment a final
decree might be passed directing the sale of mortgaged properties and for
C ancillary reliefs. The averments in the plaint are briefly as follows :

The first respondent is a limited company, 3rd and 4th Respondent.
are the Advisors and Directors respectively of the first Respondent com-
pany. The first respondent deposited with the appellant the documents of
D title relating to its !ended property at Industrial Developmment Area,
Nacharam Tehsil, District Hyderabad (presently Rangareddy district) with
an intention to create an equitable mortgage of immoveable property
covered by those documents together with all structures and buildings
thereon.

E On 6.10.76, the third and fourth respondents executed separate
guarantee in respect of the facilities granted to the first respondent guaran-
teeing repayment of amounts. On 20.1.84, one of the Directors declared
that equitable mortgage by deposit of title deeds dated 6.10.75 could also
form security for the letters of credit, fresh funded term loan, guarantee
limited and other facilities allowed to the first respondent, by the appellant.
F The necessary forms in this regard were filed before the Registrar of
Companies, Maharashtra at Bombay for registering the charges.

In order to secure ·the amount under the various heads/credit facilites
the first respondent deposited on 17.8.79 with the appellant's Sundernagar
.G Branch, Bombay, an agreement for sale in respect of the first floor of the
building belonging to the first respondent. The first respondent requested
that its account be transferred from Sundernagar Branch, Bombay to
Hyderabad Main Branch of the appellant.

O.S. No.507 of 1989 came to be filed by the appellant for recovery
H of a sum of Rs. 58,783.25 being expenses incurred from time to time in
CENTRAL BANK OF INDIA v. ELMOTENGG. CO. !MOHAN. Jj 769

respect of these properties. Both the suits are pending adjudication. A

Premium Automobiles Limited filed a winding up petition against the\.
first respondent in Company Petition No. 645 of 1988 before the High
Court of Bombay. By an order dated 23.6.90 the first respondent was
ordered to be wouud up. An Official Liquidator (Respondent No.2) was
appointed as Liquidator of the Company. On 23.7.90 a meeting was held B
in the presence of the Official Liquidator. The appellant brought to the
notice of the Official Liquidator the pendency of these two suits.

The appellant filed Company Application No.229 of 1991 in the
aforesaid Company Petition under Section 446 of the Companies Act C
(hereinafter referred to as the Act). The prayer in the application was for
leave to prosecute the two Original Suits bearing Nos. 7 of 1986 and 507
of 1989 pending on the file of the Additional Subordinate Judge, Rangared-
dy District at Saroor Nagar. According to the appellant since the proper-
ties were situate in Rangareddy District it would be just and convenient to
continue to prosecute the suits in Hyderabad. D
On 26.3.92, the learned Single Judge passed an order directing the
two suits be transferred to the Bombay High Court. Aggrieved by that
order Appeal No. 428 of 1992 was preferred by the appellant. That was
dismissed summarily by the impugned order dated 15.12.1992. Hence, the E
special leave petition.

Mr. Anil B. Divan, learned counsel for the appellant submits that the
courts below have not correctly appreciated Section 446 of the Act. The
appellant is aggrieved in so far as the order of transfer of the suits from
Hyderabad to Bombay was made. The finding that for the Official Liqui- F
dater to ·defend. at a far distance in the Court of Additional Subordinate
)
Judge, Rangareddy District at Saroor Nagar in Andhra Pradesh is going
to be more expensive is not correct. Equally, the finding that the wasteful
expenditure could be avoided by transfer. A secured creditor like the
appellant stands outside the winding up proceedigns as laid down in M.K
Ranganathan v. Govt. of Madras AIR (1955) SC 604. After all this is a suit G
for the enforcement of an equitable mortgage. The properties are situate
in Rangareddy District. It will be not only just and convenient but also
proper for the suit to be conducted there. The convenience of the Official
Liquidator alone should not be the concern. Therefore, it is prayed that
part of the order may be set aside. H
770 SUPREME COURT REPORTS [1994] 3 S.C.R.

A In opposition to this Mr. Arvind Kumar, learned counsel would urge
that it is true that the secured creditor stands outside the winding up
proceedings. That does not mean the Company court loses its jurisdiction
under Section 446(2) and (3) the Act. The law laid down in M.K. Ran-
ganathan (supra) needs to be reviewed. As on today, the law is, the
Company Court is entitled to grant leave on such terms and conditions as
B it may impose, as laid down in Sudarsan Chits (I) Ltd. v. G. Sukumarann
Pillai, AIR (1984) SC 1579, the interest of the Official Liquidator is of
paramount p.162 consideration. Where, therefore, the transfer of suits is
necessary in the interest of justice and equity the orders of the courts below
cannot be found fault with. Under sub-section (3) of Section 446 of the Act
c the winding-up court has the power to transfer before it all proceedings
pending against the company at different places, because it is convenient
for the winding-up of the company's affairs expeditiously that all the suits
are transferred to the winding-up court.

In order to appreciate these rival contentions we will briefly set out
D the scope of Section 446.

Palmer's Company Precedents, Part II, 17th Edn. Page 302 states:

"When a winding-up order is made, the Court, acting by its
officer - the Official Receiver - lays its hand upon the assets and
E
says, no creditor or claimant must touch these assets or take
proceedings by way of action, execution or attachment pending the
distribution by the Court in due course of administration. This
protection is indispensable equally in winding-up and in
bankruptcy to prevent a scramble for the assets, but it is not always
F enough. An even-handed justice requires that the Court should
have power to intervence at an early stage for the protection of
the assets, and this power is given by this section."

This Section aims at safeguarding the assets of a company in wind-
ing-up against wasteful or expensive litigation. As far as matters which
G could be expeditiously and cheaply decided by the Company Court. In
granting leave under this Section, the court always takes into consideration
whether the company is likely to be exposed to unnecessary litigation and
cost. The position of secured creditor came to be decided by this Court in
M.K. Ranganathan (supra). At pages 607 and 608, in paragraphs 15 and 16
H it was held :
CENTRAL BANK OF INDIA v. ELMOT ENGG. CO. [MOHAN, J) 771

"The position of a secured creditor in the winding up of a A
company has been thus stated by Lord Wrenbury in - Food
Controller v. Cock, 1923 AC 647 (A):

"The phrase 'outside the winding up' is an intelligible phrase if
used, as it often is, With reference to a secured creditor, say a
mortgagee. The morgagee of a company in liquidation is in a B
position to say "the mortgaged property is to the extent of the
mortgage my property. It is immaterial to me whether my mortgage
is in winding up or not. I remain outside the 'winding up' and shall
enforce my rights as mortgagee". This is to be contrasted with the
ease in which such a creditor prefers to assert his right, not as a c
mortgagee, but as a creditor. If so, he comes into the winding up".

It is also summarised in Palmer's Company Precedents, Vol. Il,
p.415:

"Sometimes the mortgagee sells, with or without the concur- D
rence of the liquidator, in exercise of a power of sale vested in him
by the mortgage. It is not necessary to .obtain liberty to exercise
the power of sale, although orders giving such liberty have some-
times been made. 11
E
The secured creditor is thus outside the winding up and can
realise his security without the leave of the winding up Court,
though if he files a suit or takes other legal proceedings for the
realisation of his security he is bound under S.231 (corresponding
with S.171, Indian Companies Act) to obtain the leave of the
winding up Court before he can do so although such leave would F
) almost automatically be granted.

Section 231 has been read together with S-.228(1) and the
attachment, ~equestration, di~tress or e·xecution referred to in the
latter have reference to proceedings taken through the Court and G
if the creditor has resort lo those proceedings he cannot put them
in force against the estate or effects of the Company after the
commencement of the winding up without the leave of the winding
up Court.

The provisions m S. 317 are also supplemantary to the H
772, SUPREME COURT REPORTS [1994] 3 S.C.R.

A provisions of S.231 and emphasise the position of the secured
creditor as one outside the winding up, the second creditor being,
... ,,
in regard to the exercise of those rights and privileges, in the same
position as he would be under the Bankruptcy Act

The corresponding provisions of the Indian Companies Act
B have been almost bodily incorporated from those of the English
Companies Act and if there was nothing more, the position of the
secured creditor here also would be the same as that obtaining in r
,•
England and he would also be outside the winding up and a sale
by him without the intervention of the Court would be valid and
c could not be challenged as valid and could not be challenged as
void under S. 232(1), Indian Companie; Act"

That case no doubt dealt with the fore-runner to Section 446, namely,
Section 171 of the Indian Companies Act, 1913. But that does matter.

D In this case the appellant is admittedly a secured creditor. It sues on
a mortgage by deposit of title deeds. Such a suit is not likely to involve a
long drawn out trial. On the scope of Section 446(2) of the Act, this Court
had occasion to observe in Sudarsan Chits (I) Ltd. (supra), at page 1582,
in paragraph 10:
E "Sub-section (2) of Section 446 confers jurisdiction on the Court
which is winding up the company to entertain and dispose of
proceedings set out in clauses (a) to ( d). The expression 'Court
which is winding up the company' will comprehend the court
before which a winding up petition is pending or which has made
F an order for winding up of the company and further winding up •
proceedings are continued under its directions. Undoubtedly, l
looking to the language of Section 446(1) and (2) and its setting
in Part VII which deals with winding up proceedings would clearly
show that the jurisdiction of the Court entertain and dispose of
proceedings set out in sub-els. (a) to (d) of sub-sec. (2) can be
G
invoked in the Court which is winding up the company."

Without intending to lay down the law broadly but confinding only
to the facts of this case, we feel that the order of transfer of the suits to
the High Court of Bombay cannot be supported. We are unable to uphold -· '
H the finding of the High Court when it observed:
CENTRAL BANK OF INDIA v. ELMOT ENGG. CO. [MOHAN, J) · 773

' 0n examination qf facts and circumstances of the case, I am
1
A
of the opinion that defending at a far distance in the Court of
Additional Subordinate Judge, Ranga Reddy District at Saroor
Nagar in Andhra Pradesh is going to be more expensive than if
the said suits are continued and tried in this Court on the same
being transferred to this Court. It is neither convenient nor proper
that the Official Liquidator appointed Liquidator of the Respon- B
dent No.1 should be asked to defend the said suits in that Court
since the wasteful expenditure is to be avoided."

This transfer will result in greater expenditure to the appellant Bank
which certainly is avoidable "than the wasteful expenditure" to the Official
Liquidator. Accordingly that part of the order directing the transfer is set
c
aside. We make it clear we ate not interferring with the grant of leave in
favour of the appellant. Civil appeal is allowed in the above terms. No costs.

R.P. Appeal allowed.

)