The Official Liquidators, U.P. Union Bank Ltd. vs Shri Rameshwar Nath Aggarwal

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 28 of 1958

Decision Date: 10 November 1959

Coram: J.C. Shah, P.B. Gajendragadkar, P.B. Subbarao

The judgment was rendered on 10 November 1959 in the Supreme Court of India by the bench consisting of Justice J.C. Shah, Justice P.B. Gajendragadkar, Justice Subbarao and Justice K. The case was recorded under the citation 1960 AIR 332 and 1960 SCR (2) 189. The petitioner was the Official Liquidators of U.P. Union Bank Ltd., and the respondent was Shri Rameshwar Nath Aggarwal. The matter arose under the Indian Companies Act of 1913, specifically sections 193, 230 and 230(3), and under the Company Rules framed by the Allahabad High Court, rule 97 with its proviso. The factual backdrop, as set out in the headnote, was that the U.P. Union Bank occupied a building owned by the respondent in the capacity of a tenant. After the court ordered the winding up of the bank, the Official Liquidators removed the bank’s offices from the premises and demanded that the landlord take possession. The landlord refused, asserting that part of the premises was occupied by trespassers. Subsequently, the Official Liquidators performed no business in the building in connection with the winding-up. The landlord then claimed the full amount of rent from the date of the winding-up order until the Official Liquidators delivered vacant possession. The High Court held that, in view of the proviso to rule 97 of the Company Rules, the landlord was entitled to recover the entire rent claimed and was not limited to a pro-rata share with the other creditors of the bank. The proviso reads: “Provided that where the official liquidator remains in occupation of premises demised to a company which is being wound up, nothing herein contained shall prejudice or affect the rights of the landlord of such premises to claim payment by the Company or the Official Liquidator of rent during the period of the company's or the Official Liquidator's occupation.” On appeal, the Supreme Court, by a certificate of the High Court, held that the landlord was not entitled to a priority claim for the rent. The Court explained that the proviso merely confirms the landlord’s right to claim rent accruing from the date of winding up but does not address the issue of priority in payment, and furthermore the premises were not retained by the liquidators for the purpose of liquidation. The Court followed the precedent set in In re Oak Pits Colliery Company, 1882 Ch. D. 321. Additionally, the Court observed that section 230 of the Companies Act, which specifies the categories of creditors entitled to payment priority, does not grant priority to rent due to a landlord, and that it is beyond the competence of the High Court to create a priority category not included in that statutory provision.

In this case, the Court observed that the Companies Act of 1913, specifically section 230, enumerated the categories of debts that were to receive priority in payment and that rent due to a landlord was not among those categories; consequently, the High Court did not have the authority to create a priority for a debt that the statute itself excluded. The Court further explained that, under section 193, the Court possessed the power to order that the costs and expenses of winding up be paid with priority whenever the assets of the company were insufficient to meet all liabilities. Section 230(3) likewise empowered the Court to require the company to retain such sums as might be necessary for the winding-up costs and expenses even before satisfying the debts that were entitled to statutory priority. The Court clarified that if a debt could be reasonably characterized as a cost or expense of winding up, the Court could direct that it be paid preferentially; if not, the debt could only be satisfied on a pro-rata basis together with the claims of ordinary creditors out of the remaining assets. The judgment recorded that the appeal arose from a special appeal (No. 20 of 1954) decided by the Allahabad High Court on 17 April 1956, which in turn stemmed from a judgment and order dated 10 February 1954 in Application No. 29 of 1953 (Company case No. 24 of 1949). Counsel for the appellant were identified as the Additional Solicitor-General of India and another representative. The Court noted that Rule 97 of the High Court Company Rules merely gave the landlord the right to claim rent and did not confer any priority upon that claim; the question of priority was governed by section 230, which conferred no such priority on the landlord. In the quoted passage attributed to Shah, J., the Court stated that the highest priority was accorded to the costs and expenses of winding up under sections 193 and 203(3). The Court further observed that possession of the premises had been offered to the landlord and that the premises had not been used for liquidation purposes after the winding-up order, and therefore the rent claimed could not be treated as a cost or expense of winding up. The central issue, according to the Court, was whether the premises had been employed for liquidation, and the High Court had found that they had not. The Court cited an identical provision in the English Companies Act, noting that English authorities had not held liquidators liable for rent where the premises were not used for liquidation, and referred to the decisions in In re Silkstone and Dodworth Coal and Iron Company (17 Ch.D. 158), In re Oak Pits Colliery Company (1882 Ch.D. 21), and In re Levy and Company (1919 Ch.D. 416). The Oak Pits case was highlighted as establishing that a landlord was not entitled to the full rent accruing from the commencement of winding up when the liquidator had done nothing beyond refraining from disposing of the property.

In this matter the Court observed that the rule concerning the treatment of rent under rule ninety-seven should not be interpreted so as to give any preferential right to the landlord. The principle that rent cannot automatically be treated as a cost or expense of winding-up, unless the premises are actually used for the liquidation, was applied. Counsel for the respondent argued that a prior order of the learned Justice Mootham, who had then been dealing with corporate matters in the High Court, had declared that the landlord was entitled to recover rent from the bank starting from the date of winding-up until such time as the liquidators surrendered possession and thereby terminated the tenancy. That order was said to have been made under section forty-five-B of the Banking Companies Act and, according to the respondent, required the landlord to be paid the full amount of rent due. The respondent’s counsel further submitted that a decree based on that order could be executed only after the amount was proved. The respondent’s representatives, including the Additional Solicitor-General of India and another counsel, replied that Justice Mootham’s order merely sought to declare the liability of the liquidators and did not resolve the question of the landlord’s priority in the payment of rent. The Court noted that the earlier order, while indicating a liability, fell short of determining whether the landlord’s claim should rank ahead of other debts of the liquidated bank.

The Court then set out the factual background. The United Provinces Union Bank Ltd., hereinafter referred to as the Bank, occupied a building in the town of Agra as a tenant, paying a monthly rent of rupees three hundred and twenty-five together with municipal taxes of ten rupees. The Bank fell into arrears and the landlord instituted suit number eight hundred ten of 1949 before the Munsiff at Agra, seeking a decree for three months’ rent and obtaining an attachment before judgment against the Bank’s movable property. By a decree dated 2 December 1949, the Munsiff awarded the landlord’s claim and affirmed the attachment. While these proceedings were pending, a petition dated 13 September 1949 was filed before the High Court of Allahabad seeking winding-up of the Bank; the High Court ordered the winding-up and appointed the official liquidators. The Bank’s employees vacated the premises on 10 September 1949, but, with the landlord’s consent, the attached property was placed under the custody of a commissioner appointed by the Munsiff’s court and stored in the Banking Hall, which was sealed by that officer. A portion of the premises remained occupied by trespassers. The official liquidators invited the landlord to take possession, but the landlord refused unless the entire premises were vacated and handed over to him. On 30 November 1950 the landlord applied to the High Court for leave to institute an ejectment suit and to recover rent arrears accruing from 30 September 1949. Justice Mootham, hearing the application, declined to grant leave, holding that the landlord’s claim could be adjudicated within the winding-up proceedings, and, with the parties’ consent, the judge proceeded to consider that claim.

In the winding-up proceedings, the learned judge determined that the claim could be decided within that litigation and, with the parties’ consent, proceeded to resolve it. By an order dated 30 August 1951, Justice Mootham held that the petitioner, who was the landlord, was entitled to recover rent from the Bank at a rate of Rs 325 per month beginning on 1 October 1949 and continuing until the Official Liquidators granted the landlord possession of the premises in a manner that would lawfully terminate the Bank’s tenancy. Dissatisfied with this order, the Official Liquidators filed a special appeal—identified as appeal No. 17 of 1952—before a Division Bench of the High Court.

Subsequently, on 23 April 1953, the respondent applied to the Joint Registrar of the High Court for a certificate of non-satisfaction of the rent order and for its transfer to the Civil Judge of Allahabad for execution. The Joint Registrar issued the certificate and directed its transmission to the District Judge of Allahabad for execution. Acting on the certificate, the respondent obtained an execution order from the Civil Judge, Allahabad, which attached Rs 12,000 existing as a credit of the Official Liquidators in the Allahabad Bank. The Official Liquidators then approached the High Court, seeking a declaration that the execution proceedings were void and requesting the quashing of the attachment order. Justice Brij Mohan Lall heard this application and held that the proceedings against the Official Liquidators had been instituted without the sanction required under sections 171 and 232, clause I of the Indian Companies Act, 1913; consequently, the attachment was void and he ordered the certificate of non-satisfaction to be recalled. The respondent appealed this decision by filing a special appeal—appeal No. 20 of 1954—before the High Court. Both appeal No. 17 of 1952 and appeal No. 20 of 1954 were then heard. Appeal No. 17 of 1952 was dismissed, and on 17 April 1956 the High Court partially modified Justice Brij Mohan Lall’s order, directing the Official Liquidators to pay the respondent the full amount of rent that had become due after 1 October 1949. The High Court reasoned that, because the Official Liquidators continued to occupy the Bank’s premises, the proviso to rule 97, framed by the High Court, entitled the respondent to receive the entire rent due without having to share the Bank’s assets proportionally with other ordinary creditors. The present appeal was filed against that High Court order, and the record noted that Justice Mootham’s order had merely declared the Bank’s liability to pay the rent that had accrued since 1 October 1949.

In this case, the Court observed that the order in question did not contain any specific direction to pay the amount claimed, and therefore it was unnecessary to address the argument presented by counsel for the respondent that, because the order was essentially one made under section 45-B of the Banking Companies Act, the respondent should receive payment in accordance with the terms of that order. The Court explained that the order merely declared the liability of the bank and did not resolve any issue concerning the priority of the respondent’s claim relative to the claims of other creditors of the bank. The Court then turned to the statutory framework governing the winding-up. Under section 647 of the Companies Act No. 1 of 1957, a winding-up that began before the commencement of that Act remains governed by the provisions of the Indian Companies Act No. VII of 1913, as if the 1957 Act had never been enacted. Accordingly, the rules applicable to the present winding-up are those contained in the 1913 Act. Section 230 of the Indian Companies Act, 1913, provides that certain specified categories of debts are to be paid with priority over all other debts in the winding-up; however, rent due to a landlord is not listed among the debts that enjoy such statutory priority. The High Court had previously held that rule 97 of the Company Rules states that when any rent or other payment becomes due at regular intervals and the winding-up order is issued at a time that does not coincide with one of those intervals, the persons entitled to the rent may prove a proportionate share of that rent up to the date of the winding-up order as if the rent accrued day by day. The rule further provides, by way of a proviso, that if the Official Liquidator continues to occupy premises leased to the company that is being wound up, nothing in the rule shall prejudice or affect the landlord’s right to claim payment of rent by the company or by the Official Liquidator for the period of such occupation. Applying this provision, the Court noted that the respondent was entitled to receive the rent that accrued on the premises while they remained occupied by the Official Liquidators. The operative portion of the rule concerns rent or other payments that are in arrears up to the date of the winding-up, while the proviso merely confirms the landlord’s right to claim rent that becomes due after the winding-up order, without creating any new priority among creditors. The Court further observed that section 246 of the Indian Companies Act, 1913, empowers the High Court to make rules that are consistent with the Act and with the Code of Civil Procedure, covering the mode of proceedings in a winding-up and other related matters. The Legislature, by virtue of the same section, has the authority to prescribe such rules, but it does not extend to granting the High Court the power to create a new class of preferential debt that is not already enumerated in section 230.

Section 230 of the Companies Act specifies that certain defined categories of debts must be given priority over other debts owed by the company, and the High Court does not have the authority to create a new priority category by rule if it is not included in that provision. Under section 193, when the assets of the company are insufficient to meet its liabilities, the court unquestionably possesses the power to order that the costs, charges and expenses incurred in the winding-up be paid out of the assets in any order of priority that the court deems appropriate. In exercising the power conferred by subsection 3 of section 230, the court may also direct the company to retain such sums as are necessary for the winding-up costs and expenses before it discharges even those debts for which priority is prescribed by section 230. Consequently, if a particular debt can reasonably be characterised as part of the costs and expenses of winding up, the court may grant it priority in payment as it considers just. In the winding-up process, liquidators are authorised to dis-claim land burdened with onerous covenants, shares or stock in other companies, unprofitable contracts, or any other property that is unsaleable or not readily saleable. The disclaimer takes effect from the date of disclaimer and determines the rights, interests and liabilities of the company in respect of the disclaimed property as of that date. Section 230-A, clause 4 reserves to any person interested in the property the liberty to require the liquidator to decide whether to dis-claim. Furthermore, under subsection 5 of section 230-A, the court may, on application by any person entitled to the benefit of or subject to the burden of a contract with the company, order rescission of that contract on terms that may include payment of damages for non-performance. It is clear that, upon winding up, existing contracts do not become automatically inoperative; they remain binding until they are either dis-claimed or rescinded in the manner provided by section 230-A. The liability arising from such contracts is treated as an ordinary debt that ranks for payment on a pro-rata basis along with other creditors. If a debt can be reasonably regarded as falling within the description of winding-up costs and expenses, the court may direct that it receive preferential payment; otherwise the debt will be payable out of the company’s assets on the same basis as other ordinary creditors. English case law, where the relevant provisions of the Companies Act are substantially similar, has drawn a distinction that, where the liquidator continues to hold leaseholds for the purpose of better realising assets, the lessor is entitled to full rent as an expense properly incurred by the liquidator.

In this case, the Court noted that a landlord would normally be entitled to receive the full rent as an expense properly incurred by the liquidator, but Lord Justice Lindley, speaking in In re Oak Pits Colliery Company (1882) Ch D 321, 331, observed that no authority had ever decided that a landlord could distrain for or be paid the full rent that accrued after the commencement of winding up when the liquidator had merely abstained from attempting to dispose of the property that the company held as a lessee. The Court explained that a clear distinction was drawn between property that remained in the liquidator’s possession after winding up because the occupation was shown to be for the purpose of liquidation, and property that merely remained with the liquidator because he had refrained from finding a suitable method of disposal and there was no evidence that the property was being used for liquidation purposes. The High Court had held on the facts that the liquidators continued to occupy the premises not for the purpose of winding up but because “they could not think of any suitable method of getting rid of the premises in spite of all their desire to do so.” It was further pointed out that the bank had closed its business, that the liquidators were not carrying on any business after the winding up, and that the premises were not being used by the liquidators for the liquidation. The High Court’s conclusion on the evidence had not been challenged. Because the property had not been retained for liquidation purposes, the Court held that, unless a specific order declared the debt incurred to be part of the costs and expenses of winding up, the rent accruing from the date of winding up could not be claimed as a preferential debt over other ordinary creditors. Accordingly, the Court could not agree with the High Court’s view that, under rule 97 of the Company Rules, a landlord was entitled to priority payment of rent when the premises remained occupied by the liquidators for reasons other than the winding up. On this basis, the appeal was allowed, the order of the High Court was set aside, and the order of Mr Justice Brij Mohan Lall was restored together with costs awarded in both the Supreme Court and the High Court.