Holding

Section 537(2) does not apply, attachment does not create a charge, and the Companies Act prevails; the High Court's refusal was correct and the appeal is dismissed.

Summary

Kerala State Financial Enterprises Ltd., a government company, advanced a loan to Mis Concert Capital Ltd. and its sister concern, which defaulted. The appellant initiated recovery proceedings under the Kerala Revenue Recovery Act, 1968, resulting in attachment of the debtor's assets. While the debtor was undergoing voluntary liquidation, the appellant sought leave to sell the attached properties, but the High Court rejected the application, holding that attachment does not create a charge under Section 125 of the Companies Act and that Section 537(2) does not give the appellant priority because the recovery was not for government dues. The appellant contended that the special Kerala Revenue Recovery Act should prevail over the Companies Act and that its dues should rank ahead of other creditors. The Supreme Court held that the attachment order does not constitute a charge, Section 537(2) is inapplicable, and the Companies Act governs except where a clear special statute overrides it. Consequently, the High Court's refusal to exercise its discretion under Section 446 was affirmed and the appeal dismissed.

Issues considered

The applicability of Section 537(2) of the Companies Act, 1956 to give priority to a government company's dues in liquidation when the recovery proceeding is under the Kerala Revenue Recovery Act, 1968.
Whether an attachment order under the Kerala Revenue Recovery Act creates a charge within the meaning of Section 125 of the Companies Act, 1956.
Whether the Kerala Revenue Recovery Act, as a special statute, prevails over the Companies Act in the context of a company in liquidation.
Whether the High Court erred in refusing to exercise its discretionary jurisdiction under Section 446 of the Companies Act to permit sale of the attached assets.

Legislation cited

Code of Civil Procedure, 1908s. Order 21, s. Order 38
Companies Act, 1956s. 125, s. 446, s. 537(2)
Recovery of Debts Due to Banks and Financial Institutions Act, 1993

Subjects

attachmentliquidationgovernment companypriority of duesCompanies ActSection 125Section 537Kerala Revenue Recovery Actcharge registrationspecial statuteSection 446

Judgment

KERALA STATE FINANCIAL ENTERPRISES LTD. A
v.
OFFICIAL LIQUIDATOR, HIGH COURT OF KERALA

SEPTEMBER 29, 2006

[S.B. SINHA AND DAL VEER BHANDARI, JJ.] B

Companies Act, 1956-Section 537(2)-Company took loan from
Appellant which it failed to repay-Properties ,of company attached pursuant
to recovery proceedings initiated by Appellant under the Kera/a Revenue C
Recovery Act-Company went for voluntary liquidation-Claim by Appellant,
a Government company, for precedence in recovery of dues in terms of
S.537(2)-Maintainability of-Held, not maintainable-S.537(2) had no
application inasmuch as recovery proceedings initiated by Appellant cannot
be said to be a proceeding for recovery of any tax or impost or any dues
payable 10 the Government-Kera/a Revenue Recovery Act, 1968. D
Companies Act, 1956-Sections I 25 & 446-Company-in-liquidation
had failed to repay loan-Its properties had been attached by a Recovery
Court under the Kera/a Revenue Recovery Act-Effect of the earlier order of
attachment in pending company proceedings-Held: An attachment itself
does not create any charge in the property-By reason of attachment, no ·E ·
decree is passed-Distinction between attachment before judgment in terms
of Order 38 and attachment for execution of decree under Order· 21
., explained-Provisions of the Companies Act shall prevail-Applicability of
S.125 discussed-Words and Phrases-"Attachment"-Meaning of-Code of
Civil Procedure, 1908-0rder 21 & 38-Kerala Revenue Recovery Act, F
1968.

Recovery proceedings were initiated against a company under the Kerala
Revenue Recovery Act, 1968 after it failed to repay loan taken from Appellant
Government company. Properties betpnging to the defaulting company were
attached. In the meanwhile, the defaulting company went for voluntary G
liquidation whereupon a provisional liquidator was appointed.

In the pending company proceedings, Appellant filed application seeking
leave to proceed with sale of the properties, which was objected to by the
Respondent, inter alia, on the premise that the charge in respect of the alleged
855 I-I
856 SUPREME COURT REPORTS [2006] SUPP. 6 S.C.R.

A debt was not registered with the Registrar of Companies and, thus, it was an
unsecured creditor. High Court rejected the application. Hence the present
appeal in which it was contended for the Appellant that the Kera la Revenue
Recovery Act being a special statute prevailed over the Companies Act, 1956;
...
that Section 125 of the Companies Act was not attracted and that in any event
the dues of Appellant got precedence in terms of sub-Section (2) of Section
B 537 of the Companies Act.

Dismissing the appeal, the Court

HELD: I. Appellant is a Government company. Its dues are not
Government dues. The provisions of the Kerala Revenue Recovery Act might
c have been made applicable, but only by reason thereof, dues ofa Government
company would not become the dues of the Government within the meaning of
sub-section (2) of Section 537 of the Companies Act. Sub-section (2) of Section
537 will have no application in the instant case, inasmuch the recovery
proceeding initiated by Appellant cannot be said to be a proceeding for
D recovery of any tax or impost or any dues payable to the Government.
1859-C; 860-G-HI

2.1. An attachment itself does not create any charge in the property. By
reason of attachment, no decree is passed. Section 125 of the Companies Act
contains a special provision. It may not have any application in a case where
E a decree has already been passed. [859-E; 861-AI

2.2. The word 'attachment' would only mean 'taking into the custody of
the law the person or property of one already before the court, or of one whom
it is sought to bring before it. It is used for two purposes.= (i) to compel the
appearance of a defendant; and (ii) to seiu and hold his property for the payment
F of the debt. It may also mean prohibition of transfer conversion, disposition
or movement of property by an order issued by the court. 1859-Ff

2.3. There, indisputably, exists a distinction between attachment before
judgment in terms of Order XXXVIII of the Code of Civil Procedure and
attachment for execution of a decree under Order XXI thereof. An order of
G attachment before judgment passed under Order XXXVlll seeks to safeguard
the interests of 1>laintiff so that in the event a decree is passed, the same
stands satisfied. On the other hand, the essential parties of Order XXI is to
•
see that the process of court is not defeated once execution starts, but the
same would not mean that the provisions of the Companies Act become wholly
H inapplicable. (860-E-FI
KERALA STATE FINANCIAL ENTERPRISES LTD.•·. OFFICIAL LIQUIDATOR. HIGH COURT OF KERALA 857

Faqir Chand Gupta v. Tanwar Finance P. Ltd., (1981) St Com. Cases A
60, approved.

Sardar Govindrao Mahadik and Anr. v. Devi Sahai and Ors., AIR (1982)
SC 989: (1982( t SCC 237 and Indian Bank v. Official Liquidator, Chemmeens
Export (P) Ltd. and Ors., (19981 5 SCC 401, referred to.
B
3.1. Save and except certain special statutes in relation to recovery of
debts from the properties of a company which has directed to be wound up,
the provisions of the Companies Act shall apply. (860-D)

3.2. It may be true that if there exists a statute like SICA, the provisions
thereof may prevail over the Companies Act. But in absence of a clear C
provision, the Companies Act cannot be held to give way to another Act
providing for recovery only leaving the rights and liabilities of the parties to
• be dealt with a general law. (863-G, HI

Ovation International (India) P. Ltd., Re (1969) 39 Com. Cases 595 D
(Dom.), approved.

Maharashtra State Financial Corporation v. Official Liquidator, Sidhu
Tyres (P) Ltd. (1988) 64 Com. Cases 641, distinguished.

NGEF Ltd. v. Chandra Developers (P) and Anr., 1200518 SCC 219 and
Jay Engineering Works Ltd. v. Industry Facilitation Council and Anr., (2006) E
9 SCALE 285, relied on.

Kera/a Financial Corporation, Trivandrum v. C.K. Sivasankara
Panicker and Ors., (1978) TAX L.R. 1860; International Coach Builders Ltd.
v. Karnataka State Financial Corporation, 12003) 10 SCC 482; Rajasthan F
State Financial Corporation and Anr. v. Official Liquidator and Anr., [20051
8 SCC 190 and ICICI Bank Ltd. v. SIDCO Leathers Ltd. and Ors., (2006) 5
SCALE 27, referred to.

4. The High Court has not committed any error in refusing to exercise
its discretionary jurisdiction under Section 446 of the Companies Act. G
(864-81

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4333 of2006.

From the final Judgment dated 11.3.2004 of the High Court ofKerala at
Ernakulam in Company Appeal No. 14 of2004. H
858 SUPREME COURT REPORTS [2006) SUPP. 6 S.C.R.
".
A C.N. Sree Kumar for the Appellant.

· Romy Chacko for the Respondent

The Judgment of the Court was delivered by

B . ~.B. SINHA. J. Leave granted.
Appellant herein is a Government company. It is engaged in conduct of
chillies. Mis Concert .Capital Limited together with its sister concern Mis
Concert Securities Limited took loan from it They failed to repay the said
.loan. A recovery proceeding was initiated against the defaulting company
C under the Kerala Revenue ReeoveryAct, 1968. A· notification "was issued in
that behalf in. terms of Section 71 thereof. · · ·

The properties belonging to the defaulting company were attached. In
· the meanwhile, the Company went for voluntary liquidation. A provisional
liquidator was appointed. Appellant was informed therea~out.
D ·····.-.·
In ttie pending company proceeding being C.A: No. 165 of 200 I,
Appellant filed an application seeking leave to proceed with .the ~le of the
properties, ·which was objected to; inter
alia, on the premise th~t ihe cha~ge
in respect of the alleged debt was not registered with the Registrar of Companies
.and, thus, it was an unsecured creditor. A Counter Affidavit"the~et~· was filed
E by Respondent A prayer was also made by the Official liquidat~r~for a
direction upon Appellant to surrender the original doi:~ments: The application
for
leave to proceed with the revenue.recovery proceeding was rejected by
a learned Single Judge of the High Court by its order dated 28.11.2003 0 \

F.
. .
An appeal thereagainst being Company Appeal No. 14 of2004 preferred
', '- . -_,

by Appellant was dismissed by a Division Bench of the High Court Appellant
is, thus, before us.

. The_ conten_tions raised in support of the appeal are :
(i) · · in view of the fact that an order of attachment was passed by
G the Rovenue Recovery Officer, the provisions of Section 125 _of
the Companies Act, 1956 were not attrac!ed;
.(i0 The provisions of the Kerala Revenue Recovery Act being a
special statute, the same shall prevail over the Companies Act;
_.,
H (iii} The order of attachment passed in favour of Appellant was
KERALA STATE FINANCIAL ENTERPRISES LTD. " OFFICIAL LIQUIDATOR. HIGH COURT OF KERALA (SINHA, J.] 859

saved under sub-section (I) of Section 537 of the Companies A
Act;.
(iv). In any event, the dues of Appellant shall get precedence in
... terms of sub-section (2) of Section 53 7 of the Companies Act.
.- '
The Official Liquidator, on the other hand, contended that no charge is
created by reason of an order of attachment and as upon liquidation all the B
properties vest in the Official Liquidator being an unsecured creditor, the
provisions of the Companies Act shall prevail.

Appellant is a Government company. Its dues are not Government dues.
The provisions of the Kerala Revenue Recovery Act might have been made
applicable, but only by reason thereof, dues ofa Government company would
c
not become the dues of the Government within the meaning of subsection (2)
of Section 537 of the Companies Act.

Ordinarily a charge should be registered in terms of Section 125 of the
Act. If the charges are not registered, the same would be void against the D
liquidator or creditors. The question which arises for consideration is as to
whether if the properties are attached by a Revenue Recovery Court, Section
125 of the Act would be applicable? An attachment itself does not create any
charge in the property. By reason of attachment, no decree is passed.

The expression 'attachment' has no definite connotation. An order of E
attachment is passed for achieving a limited purpose. It is subject to further
orders as also provisions of other statute.

The word 'attachment' would only mean 'taking into the custody of the
law the person or property of one already before the court, o.r of one whom
it is sought to bring before it. It is used for two purposes : (i) to compel the F
appearance of a defendant; and (ii) to seize and hold his property for the
payment of the debt. It may also mean prohibition of transfer, conversion,
disposition or movement of property by an order issued by the court.

In Sardar Govindrao Mahadik and Anr. v. Devi Sahai and Ors., AIR
G
(I982) SC 989: [1982] l SCC 237, this Court held:

·• "What is the effect of attachment before judgment? ,A;ttachment
before judgment is levied where the court on an application of the
plaintiff is satisfied that the defendant, with intent to obstruct or delay
the execution of any decree that may be passed against him (a) is H
860 SUPREME COURT REPORTS (2006] SUPP. 6 S.C.R.

A about to dispose of the whole or any part of his property, or (b) is
about to remove the whole or any part of his property from the local
limits of the jurisdiction of the court. The sole object behind the order
levying attachment before judgment is to give an assurance to the
r
plaintiff that his decree if made would be satisfied. It is a sort of a
guarantee against decree becoming infructuous for want of property
B available from which the plaintiff can satisfy the decree. The provision
in Section 64 of the Code of Civil Procedure provides that where an
attachment has been made, any private transfer or delivery of the
property attached or of any interest therein and any payment to the
judgment-debtor of any debt, dividend or other monies contrary to
c such attachment, shall be void as against all claims enforceable under
the attachment. What is claimed enforceable is the claim for which the
decree is made...."
..
Save and except certain special statutes in relation to recovery of debts
from the properties of a company which has been directed to be wound up,
D the provisions of the Companies Act shall apply. An order of attachment
· ma~e prior to passing of an order of winding up may not be void, but then
the execution proceedings must be allowed to continue with the leave of the
court in terms of Section 446 of the Companies Act. (See Ovation International
(India) P. Ltd., Re (1969) 39 Com. Cases 595 (Born)].

E There, indisputably, exists a distinction between attachment before
judgment in terms of Order XXXVIII of the Code of Civil Procedure and
attachment for execution of a decree under Order XXI thereof. An order of
attachment before judgment passed under Order XXXVIII seeks to safeguard
the interests of plaintiff so that in the event a decree is passed, the same
F stands satisfied. On the other hand, the essential parties of Order XXI is to
see that the process of court is not defeated once execution starts, but the
same would not mean that the provisions of the Companies Act become
wholly inapplicable.

(See Faqir Chand Gupta v. Tanwar Finance P. ltd., ( 1981) 51 Com. Cases 60].
G
The matter may, however, be different where the proceeding itself
commenced with the leave of the court. We have noticed hereinbefore that •
sub-section (2) of Section 537 will have no application in the instant case,
inasmuch the recovery proceeding initiated by Appellant cannot be said to
be a proceeding for recovery of any tax or impost or any dues payable to the
H Government.
KERALA STATE FINANCIAL ENTERPRISES LID. "· OFFICIAL LIQUIDATOR. HIGH COURT OF KERALA (SINHA. J.) 86 J

Section 125 of the Companies Act contains a special provision. It may A
not have any application in a case where a decree has already been passed,
as was the case of Indian Bank v. Official liquidator Chemmeens Exports
(P) Ltd and Ors., [ 1998] 5 SCC 40 I, on the ground that in tenns of sub-
section (2) of Section 446, the Company Court is not empowered to declare
a decree passed by a competent court to be void. In that case it was held
that the provisions of a special statute would apply subject to the provisions B
of the Companies Act. Therein a decree was already operative and observations
were made only in that context.

Mr. C.N. Sree Kumar, the learned counsel appearing on behalf of
Appellant, placed reliance upon a decision of the Kerala High Court in Kera/a C
Financial Corporation, Trivandrum v. CK. Sivasankara Panicker and Ors.,
(1978) TAX. L.R. 1860, wherein in view of the fact that the State Financial
Corporation had already taken recourse to Section 31 of the State Financial
• Corporations Act.

The question therein was as to whether the order Ext. PIS has the effect D
of a decree creating a charge and Sec. 468 of the State Financial Corporations
Act has overriding effect over the provisions of Sec. 125 of the Companies
Act. It was held :

" ... Section 468, no doubt, provides that the provisions of the State
Financial Corporations Act shall have effect notwithstanding anything E
contained in any other law for the time being in force. An order for
realization of the amount due to the Financial Corporation by sale of
the assets of the Company amounts to a charged decree. The assets
attached and ordered to be sold constitute the security for the amount
due to the Corporation. But S. 125 of the Companies Act declares that
the charge so created by the company will be invalid as against the F
Liquidator and any creditor if it is not registered with the Rc6istrar of
Companies. This is inconsistent with the provisions of State Financial
Corporations Act and therefore under S. 468 of the latter Act which
is a special Act the legal effect of the order passed will be binding
on the Liquidator of the company also. This is further clear by sub- G
sec. (10) of S.32 of the State Financial Corporations Act..."

It was further observed :

" ... Section 125 applies to every charge created by the company in so
far as any security of the company's property is conferred thereby. It H
862 SUPREME COURT REPORTS (2006] SUPP. 6 S.C.R.

A cannot be said that a decree by which the company's property is
ordered to be sold for realization of the amount due to the creditor is
a charge created by the company. It may be that the decree is based
on a mortgage created by the company. But, once that mortgage has

B
merged in the decree the relationship of the parties is governed by the
tenns of the decree and the decree creating a charge is not hit by
Section 125 of the Act (See Subrahmanyan v. Muttuswami, AIR
-
(1941) FC 47). If the charge has not matured in a decree, no doubt,
S. 125 will apply and the charge will be void against all creditors and
the Liquidator. It is not possible to extend the scope of that Section
to cases where there are supervening events which are not covered
c by the Section. Moreover, in this case in the light of S.46B of the State
Financial Corporations Act the charge created by the order of the
District Court under section 32 of the said Act will not be affected by
S. 125 of the Companies Act inasmuch as the latter section is •
inconsistent with the right created in favour of the creditor by Section
32 of the Act..."
D
We may notice that this Court, however, has taken a somewhat different
view.

The question as to whether Sections 28, 31 and 468 of the State
Financial Corporations Act shall prevail over Section 529 and 529-A of the
E Companies Act came up for consideration before this Court in International
Coach Builders ltd. v. Karnataka State Financial Corporation, (2003] 10
SCC 482, wherein this Court opined :

"We do n<!t really see a conflict between Section 29 of the SFC
Act and the Companies Act at all, since the rights under Section 29
F were not intended to operate in the situation of winding up of a
company. Even assuming to the contrary, if a conflict arises, then we
respectfully reiterate the view taken by the Division Bench of this
Court in AP. State Financial Corpn. case. This Court pointed out
therein that Section 29 of the SFC Act cannot override the provisions
G of Sections 529(1) and 529-A of the Companies Act, 1956, inasmuch
as SFCs cannot exercise the right under Section 29 ignoring a pari
pass11 charge of the workmen ... "

The view taken therein was reiterated by a three-Judge Bench of this
Court in Rajasthan State Financial Corporation and Anr. v. Official
H Liquidator and Anr., (2005] 8 sec 190 wherein it was stated:
KERA!..~ STATE FINANCIAL EITTERPRISES l TD. "· OFRCIAl LIQUIOA TOR, HIGH COURT Of KERALA (SINHA, J.] 86J

"18. In the light of the discussion as above, we think it proper to sum A
up the legal position thus:

(i) A Debts Recovery Tribunal acting under the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993 would be entitled
to order the sale and to sell the properties of the debtor, even if a
company-in-liquidation, through its Recovery Officer but only after B
notice to the Official Liquidator or the Liquidator appointed by the
Company Court and after hearing him.

(ii) A District Court entertaining an application under Section 31 of the
SFC Act will have the power to order sale of the assets of a borrower
company-in-liquidation, but only after notice to the Official Liquidator C
or the Liquidator appointed by the Company Court and after hearing
him.
(iii) If a financial corporation acting under Section 29 of the SFC Act
seeks to sell or otherwise transfer the assets of a debtor company-in-
liquidation, the said power could be exercised by it only after obtaining D
the appropriate pennission from the Company Court and acting in
tenns of the directions issued by that court as regards associating the
Official Liquidator with the sale, the fixing of the upset price or the
reserve price, confirmation of the sale, holding of the sale proceeds
and the distribution thereof among the creditors in tenns of Section E
529-A and Section 529 of the Companies Act.

(iv) In a case where proceedings under the Recovery of Debts Due
to Banks and Financial Institutions Act, 1993 or the SFC Act are not
set in motion, the creditor concerned is to approach the Company
· Court for appropriate directions regarding the realisation of its F
securities consistent with the relevant provisions of the Companies
·Act regarding distribution of the assets of the company-in-liquidation."

[See also ICICI Bank Ltd. v. S/DCO Leathers Ltd & Crs., (2006) 5
SCALE27].
G
It may be true that if there exists a statute like SICA, the provisions
thereof may prevail over the Companies Act. But in absence of a clear
provision, the Companies Act cannot be held to give way to another Act
providing for recovery only leaving the rights· and liabilities of the parties to
be dealt with a general law. [See NGEF Ltd. v. Chandra Developers (P) Ltd,
H
864 SUPREME COURT REPORTS (2006) SUPP. 6 S.C.R.

A and Anr., [2005] 8 SCC 219 and Jay Engineering Works ltd. v. Industry
Facilitation Council and Anr. - (2006) 9 SCALE 285]

Relianci: has also been placed by Mr. Sree Kumar on Maharashtra State
Financial Corporation v. Official liquidator, Sidhu Tyres (P) Ltd., (1988) 64
Com. Cases 641 is also not apposite. Therein the charge was created not by
B the company, but by its predecessor which was a partnership firm.

For the reasons aforementioned, we do not think that the High Court
has committed any error in refusing to exercise its discretionary jurisdiction
under Section 446 of the Companies Act. The appeal is dismissed. No costs.

C B.B.B. Appeal dismissed.

•