AUTHOR : Rimsha Wagle, a first year student at Dharmashastra National Law University
To the Point
Allahabad Bank (secured creditor) was granted a decree by the DRT on the basis of recovery of dues against M/s M.S.Shoes (East) Co. Ltd.Canara Bank (another secured creditor) also had a claim pending before the DRT. Allahabad Bank sold the company’s mortgaged assets through the DRT recovery officer. The company had winding-up proceedings in the Delhi High Court, and the High Court issued a stay on the DRT sale, requiring Allahabad Bank to seek leave under the Companies Act. The Allahabad Bank appealed this order to the Apex Court.
The Supreme Court held that the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDB Act) being a special statute with an overriding (non-obstante) clause grants exclusive jurisdiction to the DRT and recovery officers to adjudicate and execute bank debts. The Companies Act’s winding-up provisions cannot dilute that exclusive jurisdiction. Consequently, no leave of the company court was needed, and the High Court’s stay was set aside.
All sale proceeds recovered by the DRT were to be paid first to workmen (highest priority) and then to Allahabad Bank; Canara Bank could claim no share because it had no DRT decree or execution at that time.
Use of Legal Jargon
Debt Recovery Tribunal (DRT): A specialized quasi-judicial body created under the RDB Act to expeditiously adjudicate and recover bank debts.
RDB Act (Recovery of Debts Act): The special law (1993) for bank debt recovery, containing an overriding clause (s.34) and a bar on other courts’ jurisdiction (s.18).
Companies Act Provisions:
Section 433/434: Grounds and procedure for winding up a company on creditor’s petition.
Section 442: Empowerment of making stay of suits or proceedings in the assets following presentation of the winding up petition.
Section 446: Consequence of winding-up order (all suits stand stayed unless leave granted)
Section 19(19) RDB Act (Ordinance 2000): States that when no winding up order is passed, recovery proceeds are distributed “in accordance with the provisions of section 529A” of the Companies Act.
Section 529A Companies Act: Gives limited priority to secured creditors standing outside winding-up to share “workmen’s portion” of assets, ensuring workmen’s dues rank highest in distribution.
Non-Obstante Clause: it ensures the special law overrides conflicting general laws.
The Proof
The rationale of the SupremeApex Court in the case of Allahabad Bank v. Canara Bank is based on the overriding effect of the RDB act as compared to the Companies Act. The RDB Act is a special act on bank debts having a non-obstante clause. Companies Act is a general act laying down laws on companies in general.The Court applied the principle that a special Act prevails over a general Act when there is conflict. It referred to precedents like Life Insurance Corp. v. D.J. Bahadur (1980) on overlapping statutes. In this light, the RDB Act’s bar (s.18) and overriding clause (s.34) were held to pre-empt the Companies Act’s winding-up procedures where bank debt recovery is concerned.
Allahabad Bank did not need the High Court’s “leave” under Section 446 to continue its DRT recovery actions. The Supreme Court explicitly held that “no leave of the Company Court is necessary for initiating or continuing the proceedings under the RDB Act”. Points 2 and 3 of the Court’s decision (whether RDB Act overrides Sections 442, 537, 446 of the Companies Act) were answered in Allahabad Bank’s favor on this basis.
The Court held that “the adjudication, execution and distribution of the sale-proceeds … so far as the monies realised under the RDB Act are concerned has to be done only by the Tribunal and not by the Company Court”. In practical terms, this means that once the bank has obtained a DRT decree and executed it via asset sales, the DRT exclusively handles how those proceeds are distributed among creditors. The Companies Court has no power to interfere or re-allocate DRT recovery proceeds.
For distribution, the Court noted that workmen’s dues have absolute first priority under Section 529A of the Companies Act (consistent with traditional insolvency rules). After paying workmen, a secured creditor standing outside winding-up has a limited claim under Section 529A(1)(b). But other creditors can only claim a share if they have a DRT decree or meet the criteria of Section 73 of the Civil Procedure Code (an execution distribution provision). In this case, Canara Bank had neither a DRT decree nor had it relinquished security, so it could not invoke section 19(19) or Section 73 to share in the proceeds. The Court therefore held that no part of the DRT proceeds was payable to Canara Bank.
The accumulated sale proceeds (about Rs.20 lakhs in Court from shed sales) were ordered to be transferred to the DRT. The DRT was instructed to first satisfy any outstanding workmen’s dues. Only the remaining balance would then go to Allahabad Bank in accordance with law. In sum, Allahabad Bank (with the DRT decree) would ultimately receive what was due after honoring statutory priorities.
The Supreme Court set aside the High Court’s stay order, allowed Allahabad Bank’s appeal, and vindicated the bank’s right to execute its DRT decree without Company Court interference. There was no order for costs, reflecting that each party obtained partial relief.
Abstract
In the case of Allahabad Bank v. Canara Bank (2000) a similar situation appeared before the Supreme Court where they dealt with an interaction between the Recovery of Debts to Banks Act, 1993 and the Companies Act, 1956. Allahabad Bank had secured a DRT recovery decree against a defaulting company and proceeded to sell the company’s mortgaged assets under the DRT regime. Canara Bank, another secured creditor, sought to intervene via the company winding-up proceedings, claiming a share. The question was whether the company court could stay the DRT execution and re-distribute the proceeds under winding-up laws. The Court emphatically held “the RDB Act, 1993 confers exclusive jurisdiction in the Tribunal and the Recovery Officer … and there can be no interference by the Company Court”. It declared that recovery proceedings under the special Debt Recovery law must prevail “no leave of the Company Court is necessary for initiating or continuing the proceedings under the RDB Act”. Consequently, all proceeds realized by Allahabad Bank via the DRT were to be handled by that tribunal. The High Court’s attempt to bring the sale under the Companies Act was disallowed, reinforcing that winding-up is not an alternative debt-collection procedure. This landmark ruling thus empowers banks to enforce DRT decrees directly, without being sidetracked by winding-up petitions.
Case Laws
Industrial Credit & Inv. Corp. v. Grapco Industries Ltd., – SC recognized that the RDB Act gives DRTs wider powers than ordinary civil courts. The Act’s bar shields bank recovery proceedings from collateral challenges.
Official Liquidator, U.P. & Uttarakhand v. Allahabad Bank: Reiterated DRT’s primacy. The Court ruled that any irregularity in a sale by a DRT recovery officer must be challenged via the RDB Act appeals, not by Company Court. It nullified the Company Court’s order setting aside a DRT-conducted sale. This case referred directly to Allahabad bank incidents.
Life Insurance Corp. v. D.J. Bahadur (1980) – Established that a law may be general for some purposes and special for others; when two statutes conflict, a special statute prevails. This rationale was employed by the Supreme Court to advocate the applicability of the RDB Act (special) against the Companies Act (general).
Conclusion
Allahabad Bank v. Canara Bank is a cornerstone ruling affirming that when banks recover debts under the Recovery of Debts Act, the Debt Recovery Tribunal’s jurisdiction is paramount, even if winding-up proceedings are ongoing. The judgment clarifies that winding-up under the Companies Act is not an alternative enforcement mechanism for bank debts and is thus not covered by the RDB Act’s jurisdictional bar. Practically, a bank need not stall a valid DRT recovery in deference to a winding-up petition. The RDB Act’s overriding provisions. In sum, secured creditors can press on with tribunal relief without waiting for the slow machinery of company liquidation, giving legislative teeth to swift bank debt recovery. At the same time, the Court protected statutory priorities and reaffirmed that other unsecured or late-claiming creditors cannot hijack a DRT decree’s proceeds without satisfying prescribed conditions. This balance of fast recovery for banks versus safeguarded rights of labor and others underscores the ruling’s lasting significance in bank-led insolvency law.
FAQs
Q: What was the legal question in Allahabad Bank v. Canara Bank?
Whether a Company Court can stay or control a bank’s recovery under the RDB Act when a winding-up petition is pending. Specifically, the issue was if Allahabad Bank needed the High Court’s “leave” under the Companies Act to carry on selling mortgaged assets after obtaining a DRT decree. The Supreme Court held that the DRT proceedings were exclusive.
Q: Does this case mean a winding-up petition has no effect on bank recovery?
Essentially yes, as far as the bank’s DRT recovery is concerned. The Court ruled that even during winding up, the Debt Recovery Tribunal retains exclusive authority over debts due to banks. The Companies Act cannot nullify or stay valid DRT actions. Thus, obtaining a winding-up order does not automatically cut off a bank’s power to collect via the DRT.
Q: What is section 19(19) of the RDB Act, and how did it feature in this case?
Section 19(19) (added by an Ordinance in 2000) states that if no winding-up order is passed, amounts recovered under the RDB Act “shall be distributed among its secured creditors in accordance with the provisions of section 529A” of the Companies Act. In Allahabad Bank v. Canara Bank, the Court interpreted this with section 529A. It found that Canara Bank (a secured creditor without a DRT decree) did not meet the conditions for claiming under s.19(19) or s.529A, so it could take no share. This affirmed that 19(19) does not override the basic rule: only creditors with a DRT decree (or who meet s.73 CPC criteria) share in proceeds.
Q: Do company liquidators or courts have any power over DRT sales?
No, not in debt recovery cases involving banks and financial institutions. The Supreme Court held that appeals against DRT auctions or execution orders must go through the RDB Act’s appellate mechanism (to a DRAT), not by Company Courts. If a company court were to invalidate a DRT sale, such an act would be improper; instead, any aggrieved party must appeal under the RDB Act. Essentially, once a recovery sale by the DRT is complete, the company court cannot reopen it.
Q: What about other creditors can they claim during the winding-up?
Only if they have followed the rules. Typically, only creditors with a valid judgment/decree and execution can claim a share in assets realized by others (per Section 73 CPC). In Allahabad Bank v. Canara Bank, Canara Bank had neither a tribunal decree nor had given up its security, so it could not claim a share of the assets sold by Allahabad Bank. The Court clarified that unsecured creditors cannot simply tap into DRT sale proceeds. Workmen’s dues get paid first (as per Section 529A(1)(a)); other secured creditors get only a limited priority if they had stood outside winding-up and lost part of their security to pay workmen. In absence of those conditions, distribution is strictly by the DRT’s rules.
