Abid Aziz Sheikh, J. This order will decide C.M. No.1/2019, C.M. No.1/2020 and Report No.3/2020 filed by the learned Official Liquidator (OL) and objections filed by Syndicate Banks (Financial Institutions) on Report No.3/2020 filed by OL.
2. The above two applications are filed by the learned OL for permission to sell the "Furnace Oil" stored in the storage tanks (approximately 600 Metric Ton) and for sale of spare parts, to meet the day to day expense for the security and necessary maintenance of plant, machinery and assets of the respondent company under liquidation (company). Report No.3/2020 has been filed by learned OL interalia for issuing directions to the Financial Institutions to reimburse the amount already spent and likely to be spent by OL to meet the expense of winding up.
Request is also made to determine the accrued monthly remuneration of the learned OL and appropriate directions for its payment. Further direction is sought against financial institutions to take over possession of the project' s site and manage/fund the security of mortgaged properties own its own. The Financial Institutions on the other hand filed objections on Report No.3/2020, mainly to the effect that Financial Institut ions are secured creditors and exclusive charge holders on assets of respondent company and they are in no way surrendering/relinquishing their charges/rights and have no intention to become party to the current winding up proceedings.
3. In support of C.M. No.1/2019, C.M. No.1/2020 and Report No.3/2020, the learned counsel for the OL submits that respondent company was a power generation company engaged in production of electricity through furnace oil. He submits that at present one of the biggest hazards being faced by the OL is the safeguard of nearly 600 metric ton of furnace oil which is otherwis e declared unfit for plant' s consumption on the basis of tests conducted by the Pakistan State Oil (PSO). Similar request made for the sale of spare parts, which are deteriorating with passage of time. The learned counsel for the OL submits that sale of these moveable assets is necessary to meet day to day expense of the winding up including the security and necessary maintenance of plant & machinery , project, salary of the employees and remuneration of the OL. The learned counsel for the OL submits that on furnace oil and spare parts, the financial institutions do not have any prior charge, therefore, the same can be auctioned to meet the expense of the winding up. In this regard, he referred to supplemental MODTD dated 30.06.2006, according to which the charge is only on building, structure, plant and machinery . He further submits that even if there is hypothecation charge of the financial institutions on stock in trade, the same being not fixed charge but a floating charge, the winding up expense including remuneration of the OL will have priority over said floating charge under section 390(4) of the Companies Act, 2017 (Act). He adds that even if financial institutions are treated as secured creditors through mortgage and they have not yet realized or relinquished their securities, they still have to contribute towards the maintenance and preservation of their security or manage and fund the preservation of security on its own.
4. Learned counsel representing the financial institutions submits that financial institutions have mortgage charge on the immovable property of the respondent company and hypothecation/floating charge on the undertaking including stock in trade of the company under liquidation through agreement of hypothecation dated 10.06.2000 and Memorandum of Deposit of Title Deed (MODTD) dated 10.06.2000. He submits that financial institutions want to remain outside the winding up and proceed entirely on the basis of the above security . He in the circumstances argued that mortgaged and hypothecation assets cannot be auctioned in this winding up petition even to meet day to day expense of the winding up. He placed reliance on Pakistan Industrial Credit and Investment Corporation Limited vs. Messrs Ajma Corporation Limited (2014 CLD 1097 ) and Orix Leasing Pakistan Limited (2001 PTD 3146 ). Learned counsel further submits that liability to pay expense of liquidation is of the petitioner under rule 257 of the Company (Court) Rules, 1997 (Rules) and as per law settled by this Court in State Bank of Pakistan vs. M.Z. Khalil, Of ficial Liquidator ( 1986 CLC 2826 ).
5. Learned counsel for the petitioner submits that the petitioner is unsecured creditor of respondent company for approximate amount of Rs.20 Million. Submits that to burden petitioner to pay winding up expense to maintain and secure the charged assets of financial institutions, who wants to remain outside winding up is not justified. He however , submits that financial institutions have no priority over preferential payments including winding up expense to be made under section 390 of the Act and therefore, the charge asse ts can only be auctioned in this winding up petition.
6. I have heard learned counsel for the parties and perused the record on the abov e legal issues. It is not disputed that financial institutions are secured creditors and they have mortgage charge on immovable assets of the respondent company . However , the moot questions require determination are, firstly whether financial institutions also have existing floating charge on stock in trade (i.e. Furnace Oil etc.) through hypothecation. Secondly , whether financial institutions have the option to remain outside the winding up and proceed entirely on the basis of their security . Thirdly , whether option of remaining outside winding to realize charged securities, shall also be applicable to assets under floating charge/hypothecation and finally even if financial institutions remain outside the winding up whether they are not required to fund winding up expense to maintain, manage and secure their charged assets by the OL.
7. Regarding first question, the claim of the financial institutions is that they have mortgage charge on fixed assets through MODTD dated 10.06.2000 and floating charge on the undertaking or property of the company including stock in trade through letter of hypothecation dated 10.06.2000. They are also claiming that said charges are registered with Security Exchange Commission of Pakistan (SECP) under section 129 of the Companies Ordinance, 1984 (Ordinance). The perusal of record shows that thoug h MODTD dated 10.06.2000 and letter of hypothecation dated 10.06.2000 are not available on file, however , Form X submitted with SECP duly recorded particulars of above charge documents. The learned OL on the other hand annexed with Report No.3/2020 Form X submitted with SECP dated 28.06.2006 alongwith supplemental MODTD dated 28.06.2006. He argued that under supplemental MODTD dated 28.06.2006 and modified charge with SECP , the floating charge on stock in trade is not mentioned, hence hypothecation charge no more exist after 28.06.2006. I am afraid this argument of learned counsel for OL is misconceived. The MODTD dated 28.06.2006 is for the increase of charge amount on the fixed mortgaged assets and has nothing to do with floating charge under the hypothecation agreement dated 10.06.2000. Nothing has been placed on record to show that hypothecation agreement dated 10.06.2000 is not in the field or registered with SECP anymore. In the circumstances, it can safely be concluded that financial institutions beside mortgaged charge on fixed assets have floating charge on the undertaking of the respondent company including stock in trade i.e. Furnace Oil.
8. Now regarding second question that whether financial institutions who are secured creditors have option to remain outside the winding up and proceed entirely on the basis of their security , the law is well settled. Section 390 of the Act, which deals with preferential payments to certain persons in priority to other debts do not include secured creditors. The interest of secured creditors is however , protected under section 47 of the Provincial Insolvency Act, 1920 (Insolvency Act). Under said section, secured creditors have different options including to remain outside the winding up and proceed on the basis of their security .
9. The rights of secured creditors under section 47 of the Insolvency Act, regarding mortgage charge (fixed charge) was discussed in detail by honourable Supreme Court in United Bank Limited vs. PICIC and others (1992 SCMR 1731 ). The relevant part of the said judgment is reproduced hereunder:- "9. It would not be out of place to mention that in the Act due care has been taken to protect the interest of secured creditors. After an order of adjudication has been made all persons claiming to be creditors of the insolvent are required to prove their respective debts and as provided by section 33 of the Act a schedule of such persons and debts is framed. Section 47 provides procedure for proof of debts by a secured creditor and reads as follows:-- 47-(1) Where a secured creditor realizes his security , he may prove for the balance due to him, after deducting the net amount realized.
(2) Where a secured creditor relinquishes his security for the general benefit of the creditors, he may prove for his whole debt.
(3) Where a secured creditor does not either realize or relinquish his security , he shall before being entitled to have his debt entered in the schedule, state in his proof the particulars of his security and the value at which he assesses it, and shall be entitled to receiv e a dividend only in respect of the balance due to him after deducting the value so assessed.
(4) Where a security is so valued, the Court may at any time before realization redeem it on payment to the creditor of the assessed value.
(5) Where a creditor after having valued his security , subsequently realizes it, the net amount realized shall be submitted for the amount of any valuation previously made by the creditor and shall be treated in all respects as an amended valuation made by the creditor .
(6) Where a secured creditor does not comply with the provisions of this section, he shall be excluded from all shares in any dividend."
Section 47 clearly demonstrates that it deals with three situations:-
(1) Where the secured creditors realizes his security .
(2) Where the secured creditor relinquishes his security for the general benefit of the creditors.
(3) Where the secured creditor does not realize or relinquish his security .
10. In the first situation if the secured creditor realizes his security , he will be entitle d to prove the debt to the extent of the balance left after satisfaction from the securities. He has, thus been benefit ted with the security in full. The second category of secured creditor is that who relinquishes his security for the benefit of the creditors and, therefore, he is entitled to prove his entire debt. No credit is given for the security he holds. In the third category falls such a creditor who has neither realized nor relinquished his security . He holds the security intact for satisfaction of his debt. Before the debt of such a creditor is entered in the schedule he is required to state the particulars of his security and the value at which he assesses it. At the time of distribution of the insolvent properties such a creditor will be entitled to receive dividend in respect of the balance due to him after deducting the value of the security , so assessed. A secured creditor if he has not relinquished his security is, thus, provided adjustment of the security and he can make claim in respect of such balance amount of debt which remains unsatisfied after realization of the security ."
10. The honourable Supreme Court in case of UBL supra held that section 47 demonstrate three situations, firstly where secured creditor realizes his security, secondly where secured creditor relinquishes his security for the general benefit of the creditors and thirdly , where secured creditor does not realize or relinquish his security . In the first situation, if secured creditor realizes his security , he will be entitled to prove the debt to the extent of the balance left after satisfaction from the security . In second category , the secured creditor who relinquished his security for the benefit of the creditors, he is entitled to prove his entire debt. Howe ver, in the third category where secured creditor has neither realized nor relinquished his security and holds the security intact for the satisfaction of his debt, he is required to state the particulars of the security and the value at which he assesses it at the time of distribution of insolvent property and creditors will be entitled to receive dividend in respect of balance due to him after deducting the value of security so assessed. In the present case, the financial institutions fall under the third category , where they have neither realized nor relinquished the security and therefore, they can hold the mortgaged security intact for the satisfaction of their debt outside the winding up.
11. The next question is that whether same option of remaining outside the windin g up and realize security will be available to the secured creditors in respect of assets under floating charge of hypothecation. In the instant matter , the financial institutions have mortgage as well as hypothecation charge on the assets of the respondent company .
In so far as the position of secured creditor , who is a mortgagee is concerned, there is no cavil with the proposition that said creditor remained unaffected by the fact that company has wound up and said secured creditor has the option to remain outside the winding up and may proceed entirely on the basis of his said mortgage security . The mortgage created by company in favour of the financial institutions constitute a transfer of interest in company' s property and what is left with the company is merely an equity of redemption, therefore, unsecured creditors and persons claiming preferential payment under section 390 of the Act can at best lay hand on the equity of redemption for whatever its worth. However , it is not possible for the general and unsecured creditors of the company including claimants under section 390 of the Act to assert a claim on the mortgage property or on the proceeds realized from the sale thereof. This legal position is also supported by express provision of section 58 of the Transfer of Property Act, 1882. However , the position will be different when creditor is claiming a hypothecation/ floating charge on the assets of the comp any. In contrast to mortgage/fixed charge, hypothecation/ floating charge leaves the charger free to deal with the charge property in the ordinary course of business without reference to the chargee. A floating charge thus has very practical advantage that it allows a company to give security over assets, which are continually turned over or used up and replaced as a matter of routine trading. The company can thus raise money on secured loans without removing any of its property from routine business activity and it remains free to continue to deal with the assets for its own benefit in the ordinary course of business.
12. Section 390 (3) (b) of the Act deals with the payment to general creditors, where assets are under floating charge. For convenience, the said provision is reproduced hereunder:- "(b) so far as the assets of the company available for payment of general credito rs are insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company , and be paid accordingly out of any property comprised in or subject to that charge".
The plain reading of section 390(3)(b) of the Act, shows that when the assets of the company available for payment of general creditors are insuf ficient to meet their claims, they will have priority over the claims of holders of debentures under any floating charge created by the company and be paid accordingly out of any property comprising in or subject to that charge. By virtue of section 390(3)(b) of the Act, the position of floating charge holder is different from the fixed charge. The fixed charge holder 's assets are not subject to claims from liquidator , to fund liquidation expense or payment to preferential or unsecured creditors mentioned in section 390 of the Act, however , the amounts realized from floating charge assets can be used for liquidation expense and payment to unsecured creditors as per their priority under section 390 of the Act (previously section 405 of the Ordinance). In this case, there is no dispute that entire assets of the respondent company are under fixed or floating charges of financial institutions and after exercising the option of remaining out of the winding up by them, the said assets are indeed insuf ficient for payment to general creditors.
13. As discussed above, under section 390(3)(b) of the Act, in case assets of the company are insuf ficient for payment to general creditors, they will have priority over the claim of holder of debentures under any floating charge, however , section 390 (4) of the Act, provides that the debts including preferential payments under section 390 of the Act shall be discharged after retaining sum as may be necessary for the costs and expense of the winding up. Therefore, the winding up expense has even higher priority in payments, comparing to all other preferential payments, including paymen t to general creditors under section 390 (3)(b) of the Act. Therefore, the fund realized from the assets under floating charge can be utilized for payment towards winding up expense beside payment to general creditors if assets are insuf ficient.
14. No doubt under section 47 of the Insolvency Act, the secured creditor has optio n to remain outside the winding up and realize its security and the definition of "secured creditor" under section 2(e) of the Insolvency Act, include a person who has charge or lien on the property beside mortgage charge. Therefore, it can be argued that floating charge is also covered under section 47 of the Insolvency Act. However , this argument lost its efficacy due to no- obstante clause contained in section 4 of the Act, whereby the provisions of the Act (including section 390(3)(b) of the Act) will have over riding effect over the provision of any other law including section 2(e) and 47 of the Insolvency Act. Therefore, it can safely be concluded that status of floating charge under section 390 (3)(b) of the Act, will not be ef fected, due to options to secured creditor available under section 47 of the Insolvency Act.
15. The above status of floating charges is not unique in our jurisdiction. In United Kingdom (UK), the decision that liquidation expense constitute a prior claim on the floating charge receipts and not on fixed charge receipt was first reached by the Court of Appeal in Barleycorn Enterprises Ltd. Re (1970 CH 465). However , this judgment was over-ruled in Buchler vs. Talbot [2004] 2 A.C.298 , where it was held that liquidation expense are not payable out of the floating charge assets, those being the property of chargee and not charger . However , the legislation inserted section 176-ZA in to the UK Insolvency Act, 1986 (which is similar to section 390(3)(b) of the Act) as under:- "the expenses of winding up in England and Wales, so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over any claims to property comprised in or subject to any floating charge created by the company and shall be paid out of any such property accordingly ."
After insertion of section 176ZA in the UK Insolvency Act, the current position is that assets subject to floating charge are available for payment of liquidation expense and payment of general creditors. The provision of section 176ZA in the UK Insolvency Act, 1986 is similar to provision of section 390(3)(b) of the Act.
16. In Ireland, the identical provision as in section 390(3)(b) of the Act is available under section 285(7)(b) of the Ireland Companies Act, 1963 which is reproduced hereunder:- "So far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company , and be paid accordingly out of any property comprised in or subject to that charge."
The High Court of Ireland in matter of J.D. Brian Limited [2011] IEHC 113, while interpreting this provision held that the preferential debts rank in priority to the claim of the bank as debenture holder , to the fund realized from the assets subject to floating charge in debenture, irrespective whether that floating charge crystalized prior to commencement of winding up. The relevant observation by the learned Court in above judgment is reproduced hereunder:- "19. If there were no relevant judicial authority on the construction of s. 285(7) or a predecessor or similar section in the UK Companies Acts, I would have no hesitation in construing the section as giving priority to preferential debts over the claims of holders of debentures under floating charges which crystallize prior to the commencement of winding up. Further , I would construe the section as meaning that the preferential debts were entitled to be paid out of the realization of assets subject to a floating charge in the Debenture, notwithstanding that such floating charge crystalized prior to the commencement of winding up. My reasons for so construing the section, in accordance with the ordinary and plain meaning of the words used, and the definition of debenture in s. 2 of the Act of 1963, are as follows.
20. The priority given to the preferential debts by s. 285(7) is "over the claims of holders of debentures under any floating charge created by the company". How does the Bank claim an entitlement to the Floating Charge Assets herein? It appears to me the answer is self-evident. The only entitlement of the Bank to make a claim to such assets is as the holder of a debenture or security under the floating charge created by the Company . It has no other right to such assets. The only charge created by the Company over the assets is a floating charge. It is of the essence of a floating charge that it is a charge which will change in nature prior to realization. It is a charge which "floats? over the assets until the happening of an event which, in accordance with the terms of the debenture, and by law, causes it to attach to or become fixed on the relevant assets. Of course, the nature of the security , which the Bank holds, post-crystallization, is a fixed charge. It is important to note that the section, by its words, gives priority "over the claims of holder of debentures under any floating charge created by the company", and not over the claim of holders of any floating charge created by the company . Debentures, as already stated, is defined in s. 2 to include "any other securities of a company , whether constituting a charge on the assets of the company or not". It appears to me that the phrase "holders of debentures under any floating charge created by the company" is deliberately worded, having regard to the potentiality for a floating charge to crystallize and become a fixed charge so as to include persons who hold security of whatever nature, provided it is held under or by reason of a floating charge created by the company . It is the floating charge created by the company which gives the Bank the right to make a claim to the assets. It is only the nature of the claim which changes post-crystallization. The Bank' s claim to the charged assets remains a claim as the holder of a debenture or security under the floating charge created by the company .
21. Similarly , in my judgment, the word "charge" in the phrase "property comprised in or subject to that charge" refers to the floating charge created by the company , notwithstanding that by reason of crystallization, such floating charge may have become fixed on such property prior to the commencement of winding up."
Therefore, even in other jurisdiction during winding, the liquidation expense and the claim of unsecured creditors can be satisfied from the assets under the floating charge.
17. Now the final question is that when financial institutions/secured creditors want to remain outside the winding up and realize charge assets, whether they are not required to meet expense to maintain, manage and secure their charge assets by OL till these assets are realized by financial institutions. In this context the supplemental MODTD shows that consortium of 9 different banks have secured debts including sum of Rs.11,606,916,917/-. Against the aforesaid amount of more than rupees eleven billion and six hundred million, the said banks/financial institutions mortgaged approximate land measuring 20 Acres, including building, structure, plant and machinery of the respondent company . The said banks also have floating charge over movable assets of the company . To preserve, manage and secure these charged assets, the substantial amount is being spent from the liquidation account. The said financial institutions on one hand are claiming that they want to remain outside the winding up and may proceed entirely on the basis of their mortgage charge property , however , at the same time neither they are securing the said charged properties under their supervision nor they are ready to bear expense to lookafter those charged assets. It is not disputed that the learned OL has to spend heavy amou nt from liquidation fund for the preservation/security of the mortgage properties, benefit of which will ultimately go to the financial institutions as a secured creditor , who wants to remain outside the winding up. In all fairness, the financial institutions cannot be allowed to have two bites on their cherry . It is highly unrealistic that the secured creditors stay outside the winding up but want the Official Liquidator to make efforts and spend money from liquidation amount to preserve the security of the secured creditors till same is realized by them.
18. In this regard, rule 257 of the Companies (Court) Rules, 1997 (Rules) is also relevant which deals with the situation, where company has no available assets to meet the expense. For ready reference, said rule is reproduced hereunder:-
257. Where the company has no available assets.- Where a company against which a winding up order has been made has no available assets, the official liquidator may, with the leave of the Court, incur essential preliminary expenses out of funds to be provided by the petitioners and the secured creditors as the Court may direct, and the expenses so incurred shall be recouped out of the assets of the company in priority to the debts of the company ."
The above rule does not specify that in case of no available assets who will be exclusively responsible to pay the essential expense incurred, however the Court may considering the circumstances, direct the petitioners or secured creditor to pay the expenses incurred. In the present case, the petitioner is unsecured creditor with total approximate claim of Rs.20 Million and is not likely to get anything from the mortgaged assets of the company , for preservation and management of which expense are being incurred. On the other hand the financial institutions may not join the winding up but they are secured creditors having charge of more than Rs.11.6 Billion, which amount they want to recover by realizing the charged securities for preservation and management of which the necessary expenses are being incurred from liquidation account. Therefore, there is no justification to direct the petitioner to bear the above winding up expense incurred and it should be the responsibility of the financial institutions/secured creditors, to pay these expenses.
19. The same issue was raised and discussed in Indian Jurisdiction where in case of New Swadeshi Mills of Ahmedabad Ltd. and Manjushri Textiles vs. Unknown [1985 58 CompCas 86 Guj], it is held that responsibility to bear expense to manage security of secured creditor , who wants to remain outside the winding up, shall be of that secured creditor . The relevant discussion is as under:- "10....Now , it cannot be disputed that the provisional liquidator or, for that matter , the liquidator , has to spend large amounts for preservation of the security , benefit of which will naturally go to the secured creditors, however , safe distance at which they may remain outside the winding up. In fact, the proviso is meant to cater to such situations.
It postulates that secured creditors inste ad of relinquishing his security and proving his debt in winding up, may stand outside the winding up. Still the expenses which the liquidator incurs for preserving his security must be met by him because he remains liable to pay these expenses. Once the provisional liquidator spends for preserving his security , the corresponding liability of the secured creditor standing outside the winding up automatically arises.
Then, the short question remains as to when such liability can be enforced. Should it be at the end after the provisional liquidator or the liquidator has actually incurred the expenses for preserving the security by getting finance from the secured creditors thems elves who would remain ultimately liable to reimburse these expenses?
Once the provisional liquidator spends for preserving his security , the corresponding liability of the secured creditor standing outside the winding up automatic ally arises. Then, the short question remains as to when such liability can be enforced. Should it be at the end after the provisional liquidator or the liquidator has actually incurred the expenses for preserving the security by getting finance from the secured creditors themselves who would remain ultimately liable to reimburse these expen ses? In my view, it would be taking too truncated and unrealistic a view of the provisions of s. 529(2), proviso, to even contend that even though ultimately the secured creditor standing outside the winding up would be liable to reimburse all the expenses incurred by the liquidator for preservation of the security , in the process of preservation, no contribution can be asked for from such secured creditor".
The same view was also followed in the cases of Punjab United Forge Limited vs. Punjab Financial Corporation [1993 76 CompCas 660 P H, (1993) 103 PLR 75] and Bier vs. Chairman and M.D. Adivasi Paper [1999 (3) ALD 655].
20. The above discussion and the law settled in aforenoted judgments establishes beyond doubt that financial institutions may remain outside the winding up and proceed entirely on the basis of their mortgage property , however , they will have to reimburse all the expenses incurred including remuneration of the Official Liquidator , for the management and preservation of the charged properties in favour of secured creditors. However , for future, they may appoint their own staff and employees to preserve and safeguard their mortgage securities from their account at their own risk to avoid said winding up expense incurred by OL.
21. For reasons recorded in the preceding paragraphs, these applications and Report No.3/2020 and objections on report are disposed of in following terms:- (i). The Official Liquidator will auction the furnace oil and other assets which are under floating charge, through open auction after publication in the two daily newspapers, one "English" and one "Urdu" and the amount realized therefrom shall form part of liquidation account.
(ii). As petitioner also has claim on above said funds, under section 390(3)(b) of the Act, therefore, the expense for said publications shall be paid by the petitioner .
(iii). So far as the mortgage properties are concerned, the same shall remain outside the winding up for exclusive benefit of the financial institutions. The spare parts being essential part of the plant and machinery , shall also remain outside the winding up.
(iv). However , the financial institutions shall pay the expense (as detailed in Report No.3/2020, subject to verification if required by the financial institutions) already incurred by the Official Liquidator to preserve and protect the said securities with in period of 15 days.
(v). The future expense incurred by OL shall also be borne by the financial institutions unless they make their own arrangements to preserve and manage the mortgaged assets from their own account at their own risk.
(vi). The remuneration of OL (as may be determined by this Court in view of this Court' s order dated 25.06.2019), shall also be paid by the secured creditors/financial institutions till sufficient funds are available in liquidation account for said purpose.