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Petitioner: Siemens Pak Engineering VS Respondent: Japan Power Generation Limited
Court Name: Lahore High Court Judge(s): Abid Aziz Sheikh Title: Siemens Pak Engineering vs Japan Power Generation Limited Case No.: Case No:C.O. No.88286/2017 Date of Judgment:2020-02-25 Reported As: 2020 CLD 619, 2020 LHC 332 Result: Application disposed off
Judgment 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
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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
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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
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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
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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
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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…
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