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Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL     APPEAL     NO.6755     OF     2012          (Arising out of S.L.P. (C) No. 4104 of 2011)

  Jitendra Nath Singh                …  Appellant  

Versus

The Official Liquidator & Ors.                            … Respondents

JUDGEMENT

A.     K.     PATNAIK,     J.   

Leave granted.  

2. We have carefully read the learned opinion of our esteemed  

brother Swatanter Kumar, J. in this case but with great respect  

we are unable to persuade ourselves to agree with his  

interpretation of Sections 529 and 529A of the Companies Act,  

1956 (for short ‘the Companies Act’).  

3. Before we give our interpretation of Sections 529 and 529A of the  

Companies Act, we may very briefly state the relevant facts as

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stated by the appellant.  U.M.I. Special Steel Limited (for short ‘the  

company’) is a company registered under the Companies Act.  The  

company became sick and went before the BIFR but the BIFR in  

its opinion dated 08.03.2002 recommended for winding up of the  

company.  On 05.08.2003, the learned Company Judge of the  

High Court of Jharkhand passed orders for winding up of the  

company and appointed the official liquidator as liquidator to  

conduct the liquidation proceedings in relation to the company  

and to take over the assets, books and documents of the company.  

The liquidator then took over the assets of the company and sold  

some of the assets of the company and paid Rs.93,64,93,586/- to  

the secured creditors and Rs.8,19,22,371.12p to the workmen  

representing 50% of their verified claims towards wages.  When  

the liquidator sold some more assets and received  

Rs.8,51,01,000/-, the appellant filed I.A. No.1511 of 2008 before  

the learned Company Judge of the High Court contending that the  

assets of the company situated at Chennai, Pune, Faridabad and  

Kolkata which have been sold are not properties over which the  

banks/financial institutions have any charge and therefore, they  

cannot be treated as secured creditors in respect of these  

properties and the sale proceeds from these properties should be  

kept separately and be paid to the workmen first before disbursing

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any amount to the banks/financial institutions. The  

banks/financial institutions, which had given loans and advances  

to the company, on the other hand, contended before the learned  

Company Judge that claim of the workmen and secured creditors  

stand pari passu and the Companies Act does not make any  

difference between the mortgaged property and other properties of  

the company and, therefore, the entire sale proceeds obtained  

from the properties of the company should be distributed among  

the secured creditors and workers on pro rata basis.  The learned  

Company Judge in his order dated 28.11.2008 held that the  

workmen and secured creditors have pari passu charge over the  

properties of the company as would be clear from Sections 529  

and 529A of the Companies Act and the decision of this Court in  

Andhra Bank v. Official Liquidator & Anr. [(2005) 5 SCC 75].  

Aggrieved, the appellant filed Company Appeal No.10 of 2008  

before the Division Bench of the High Court and contended that  

the secured creditors have pari passu charge with the workmen  

only on the properties which have been offered by the company to  

the secured creditors as security.  In its order dated 30.09.2010,  

the Division Bench of the High Court, however, held that the  

secured creditors have pari passu charge with the workmen over  

all the properties of the company under sections 529 and 529A

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and dismissed the appeal.  It is this order dated 30.09.2010 of the  

Division Bench of the High Court of Jharkhand that is challenged  

in this appeal by way of special leave under Article 136 of the  

Constitution.

4. We have heard learned counsel for the appellant and the  

respondents and we are of the considered opinion that the learned  

Company Judge and the Division Bench of the High Court have  

not correctly interpreted the provisions of Sections 529 and 529A  

of the Companies Act.  For easy reference, Sections 529 and 529A  

of the Companies Act, which have to be read together, are  

extracted hereinbelow:

“529. Application of insolvency rules in winding up  of insolvent companies.— (1) In the winding up of an  insolvent company, the same rules shall prevail and be  observed with regard to—

(a) debts provable;

(b) the valuation of annuities and future and  contingent liabilities; and

(c) the respective rights of secured and unsecured  creditors; as are in force for the time being under  the law of insolvency with respect to the estates of  persons adjudged insolvent:

Provided that the security of every secured creditor  shall be deemed to be subject to a pari passu charge in

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favour of the workmen to the extent of the workmen’s  portion therein, and, where a secured creditor, instead  of relinquishing his security and proving his debt, opts  to realise his security,—

(a) the liquidator shall be entitled to represent the  workmen and enforce such charge;

(b) any amount realised by the liquidator by way of  enforcement of such charge shall be applied  rateably for the discharge of workmen’s dues; and

(c) so much of the debt due to such secured creditor  as could not be realised by him by virtue of the  foregoing provisions of this proviso or the amount of  the workmen’s portion in his security, whichever is  less, shall rank pari passu with the workmen’s dues  for the purposes of section 529A.

(2) All persons who in any such case would be entitled  to prove for and receive dividends out of the assets of  the company, may come in under the winding up, and  make such claims against the company as they  respectively are entitled to make by virtue of this  section:

Provided that if a secured creditor instead of  relinquishing his security and proving for his debt  proceeds to realise his security, he shall be liable to pay  his portion of the expenses incurred by the liquidator  (including a provisional liquidator, if any) for the  preservation of the security before its realization by the  secured creditor.

Explanation.—For the purposes of this proviso, the  portion of expenses incurred by the liquidator for the  preservation of a security which the secured creditor  shall be liable to pay shall be the whole of the expenses  less an amount which bears to such expenses the same

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proportion as the workmen’s portion in relation to the  security bears to the value of the security.

(3) For the purposes of this section, section     529A   and  section 530,—

(a) “workmen”, in relation to a company, means the  employees of the company, being workmen within the  meaning of the Industrial Disputes Act, 1947 (14 of  1947);

(b) “workmen’s dues”, in relation to a company, means  the aggregate of the following sums due from the  company to its workmen, namely:—

(i) all wages or salary including wages payable for  time or piece work and salary earned wholly or in  part by way of commission of any workman, in  respect of services rendered to the company and any  compensation payable to any workman under any of  the provisions of the Industrial     Disputes     Act,     1947    (14 of 1947);

(ii) all accrued holiday remuneration becoming  payable to any workman, or in the case of his death  to any other person in his right, on the termination  of his employment before, or by the effect of, the  winding up order or resolution;

(iii) unless the company is being wound up  voluntarily merely for the purposes of reconstruction  or of amalgamation with another company, or unless  the company has, at the commencement of the  winding up, under such a contract with insurers as  is mentioned in section 14 of the Workmen’s  Compensation Act, 1923 (8 of 1923) rights capable of  being transferred to and vested in the workman, all  amounts due in respect of any compensation or  liability for compensation under the said Act in

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respect of the death or disablement of any workman  of the company;

(iv) all sums due to any workman from a provident  fund, a pension fund, a gratuity fund or any other  fund for the welfare of the workmen, maintained by  the company;

(c) “workmen’s portion”, in relation to the security of  any secured creditor of a company, means the amount  which bears to the value of the security the same  proportion as the amount of the workmen’s dues bears  to the aggregate of—

   (i) the amount of workmen’s dues; and

(ii) the amounts of the debts due to the secured  creditors.”

“529A. Overriding preferential payment.— Notwithstanding anything contained in any other  provision of this Act or any other law for the time being  in force, in the winding up of a company—

(a) workmen’s dues; and   (b) debts due to secured creditors to the extent such  debts rank under clause (c) of the proviso to sub- section (1) of section 529 pari passu with such dues,

 shall be paid in priority to all other debts.   (2) The debts payable under clause (a) and clause (b) of  sub-section (1) shall be paid in full, unless the assets  are insufficient to meet them, in which case they shall  abate in equal proportions.”

5.  A plain reading of clause (c) of sub-section (1) of Section 529

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makes it clear that in the winding up of an insolvent company, the  

same rules shall prevail and be observed with regard to the respective  

rights of secured and unsecured creditors as are in force for the time  

being under the law of insolvency with respect to the estates of persons  

adjudged insolvent.  This would mean that the respective rights of  

secured and unsecured creditors of an insolvent company, which is  

being wound up, will be the same as the respective rights of secured  

and unsecured creditors with respect to the estates of persons adjudged  

insolvent as are in force under the law of insolvency.  In the State of  

Jharkhand, the Provincial Insolvency Act, 1920 (for short ‘the  

Insolvency Act’) is in force and accordingly the respective rights of  

secured and unsecured creditors with respect to the assets of the  

insolvent company being wound up will be the same as in the  

Insolvency Act.  The Companies Act does not define a “creditor” and a  

“secured creditor” and hence, we have to refer to the Insolvency Act for  

the definitions of these two words.  Section 2(1)(a) and Section 2(1)(e) of  

the Insolvency Act define the words ‘creditor’  and ‘unsecured creditor’  

and are extracted hereinbelow:

“2(1)(a) “creditor”  includes a decree-holder, “debt”  includes a judgment-debt, and “debtor”  includes a  judgment-debtor.”

“2(1)(e) “secured creditor”  means a person holding a  mortgage, charge or lien on the property of the  debtor or any part thereof as a security for a debt

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due to him from the debtor.”

It will be clear from the definition of ‘creditor’  in Section 2(1)(a) of the  

Insolvency Act that it is an inclusive and not an exhaustive definition,  

whereas it will be clear from the definition of ‘secured creditor’  in  

Section 2(1)(e) of the Insolvency Act that it is an exhaustive definition  

and that a secured creditor means a person holding a mortgage, charge  

or lien on the property of the debtor or any part thereof as a security for  

a debt due to him from the debtor.  The result is that the expression  

‘secured creditor’ in Section 529(1)(c) would mean a person who holds a  

mortgage, charge or lien on the property of the company or any part  

thereof as a security for a debt due to him from the company.  Where,  

therefore, a creditor, such as the bank or the financial institution in  

this case, does not hold a mortgage, charge or lien on the property of  

the company or any part thereof as a security for a debt due to it from  

the company, it is not a secured creditor for the purposes of Sections  

529 and 529A of the Companies Act.   

6. Sections 45 and 47 of the Insolvency Act, which enumerate the rights  

of unsecured creditors and secured creditors respectively are extracted  

hereinbelow:

“45.  Debt payable at a future time.- A creditor may  prove for a debt not payable when the debtor is  adjudged an insolvent as if it were payable presently,

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receive dividends equally with the other creditors, whereas the secured  

creditor has the right under Section 47 of the Insolvency Act to realize  

the security and to prove for the balance due to him in case on  

realization of such security he is not able to recover the entire amount  

due to him.  If, however, the secured creditor does not opt to realize his  

security but relinquishes it for the general benefit of the creditors, then  

he may prove for his whole debt.  Under the Insolvency Act, therefore,  

the secured creditor has only a right over the particular property offered  

to him as security and all the creditors have equal rights over the other  

properties comprising the estate of the person adjudged insolvent.     

7. In our considered opinion, therefore, on a reading of the provisions of  

clause (c) of sub-section (1) of Section 529 of the Companies Act along  

with the provisions of the Insolvency Act relating to the respective rights  

of secured and unsecured creditors, a secured creditor of an insolvent  

company which is being wound up has only a right over the particular  

property or asset of the company offered to the secured creditor as a  

security and the unsecured creditors have rights over all other  

properties or assets of the insolvent company.  We may now examine  

whether the proviso to sub-section (1) of Section 529 of the Companies  

Act makes any difference to these rights of secured creditors and  

unsecured creditors of an insolvent company.  

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8.  The first limb of the proviso to sub-section (1) of Section 529 of the  

Companies Act states that the security of every secured creditor shall  

be deemed to be subject to a pari passu charge in favour of the  

workmen to the extent of the workmen’s portion therein.  Clause (c) of  

sub-section (3) of Section 529 of the Companies Act states that the  

“workmen’s portion”, in relation to the security of any secured creditor  

of a company, means the amount which bears to the value of the  

security the same proportion as the amount of the workmen’s dues  

bears to the aggregate of –  (i) the amount of workmen’s dues; and (ii)  

the amounts of the debts due to the secured creditors.  Thus, the first  

limb of the proviso to clause (c) of sub-section (1) of Section 529 of the  

Companies Act creates a statutory charge over the security of every  

secured creditor to the extent of the workmen’s portion.  In other  

words, every property or asset of an insolvent company, which is being  

wound up and which has been offered as a security to a secured  

creditor is subject statutorily to a pari passu charge in favour of the  

workmen to the extent of the workmen’s portion by virtue of the proviso  

to sub-section (1) of Section 529 of the Companies Act.  Therefore, the  

first limb of the proviso to sub-section (1) of Section 529 does not create  

any pari passu charge in favour of secured creditor over property or  

asset of the company which has not been given as security by the

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company to the secured creditor.  Rather, the language of the first limb  

of this proviso makes it crystal clear that the security of every secured  

creditor created dehors the proviso to sub-section (1) of Section 529 of  

the Companies Act is statutorily subjected to a pari passu charge in  

favour of the workmen by the first limb of the proviso to sub-section (1)  

of Section 529 of the Companies Act.   

9.  The second limb of the proviso to sub-section (1) of Section 529 of  

the Companies Act states the consequences which follow where a  

secured creditor, instead of relinquishing his security and proving his  

debt, opts to realize his security.  These are: (a) the liquidator shall be  

entitled to represent the workmen and enforce such charge; (b) any  

amount realized by the liquidator by way of enforcement of such charge  

shall be applied rateably for the discharge of workmen’s dues; and (c)  

so much of the debt due to such secured creditor as could not be  

realized by him by virtue of the foregoing provisions of this proviso or  

the amount of the workmen’s portion in his security, whichever is less,  

shall rank pari passu with the workmen’s dues for the purposes of  

Section 529A of the Companies Act.  What is relevant in this case is the  

consequence in clause (c) which provides that the portion of the debt  

due to the secured creditor as could not be realized because of the  

statutory charge created in favour of the workmen on the security of the  

creditor shall to the extent stated therein rank pari passu with the

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workmen’s portion for the purposes of Section 529A of the Companies  

Act.   Hence, clause (c) of this proviso does not create a pari passu  

charge over properties or assets of the company which have not been  

offered to the secured creditor as security, but to the extent of the loss  

of security suffered by a particular secured creditor because of the  

statutory charge created in favour of the workmen, the secured creditor  

is ranked pari passu with the workmen for overriding preferential  

payment under Section 529A of the Companies Act.   

10.  Section 529A of the Companies Act states that notwithstanding  

anything contained in any other provision of the Companies Act or any  

other law for the time being in force, in the winding up of a company –  

(a) workmen’s dues; and (b) debts due to secured creditors to the extent  

such debts rank under clause (c) of the proviso to sub-section (1) of  

Section 529 of the Companies Act pari passu with such dues, shall be  

paid in priority to all other debts.  This would mean that the workmen’s  

dues and only the debts due to the secured creditors to the extent such  

debts rank pari passu with workmen’s dues under clause (c) of the  

proviso to sub-section (1) of Section 529 will have priority over all other  

debts of the company.  The entire object of Section 529A of the  

Companies Act is to ensure overriding preferential payment of (a) the  

workmen’s dues and (2) debts due to secured creditors to     the     extent    

such     debts     rank     under     clause     (c)     of     the     proviso     to     sub-section     (1)     of   

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Section     529     pari     passu     with     the     workmen  ’  s     dues  .  The effect of the non-

obstante clause in the opening part of Section 529A of the Companies  

Act, therefore, is that notwithstanding anything in the Companies Act  

and any other law including the Insolvency Act, workmen’s  dues and  

dues of the secured creditor which could not be realized because of the  

pari passu charge in favour of the workmen under the proviso to sub-

section (1) of Section 529 and only to the extent such dues rank pari  

passu with the dues of the workmen under clause (c) of the said proviso  

are paid in priority over all other dues.  

11. We may now refer to sub-section (2) of Section 529 of the  

Companies Act which states that all persons who in any such case  

would be entitled to prove for and receive dividends out of the assets of  

the company, may come in under the winding up, and make such  

claims against the company as they respectively are entitled to make by  

virtue of Section 529 of the Companies Act.  The proviso to sub-section  

(2), however, states that if a secured creditor instead of relinquishing  

his security and proving for his debt proceeds to realize his security, he  

shall be liable to pay his portion of the expenses incurred by the  

liquidator (including a provisional liquidator, if any) for the preservation  

of the security before its realization by the secured creditor.  This  

provision in sub-section (2) of Section 529 of the Companies Act makes

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it amply clear that all creditors, secured and unsecured, of the  

insolvent company are entitled to prove for and receive dividends out of  

the assets of the company but so far as secured creditors are  

concerned, they have the option either to relinquish their security in  

which case they like any unsecured creditor would only be entitled to  

prove for and receive the dividends out of the assets of the company or  

to realize the security instead of relinquishing the security in which  

case they have to pay to the liquidator only expenses for the  

preservation of the security until they realize the security by  

appropriate proceedings other than the winding up proceedings.  

12. Our conclusions on interpretation of the provisions of Sections  

529 and 529A of the Companies Act, therefore, are:

(i) a secured creditor has only a charge over a particular property  

or asset of the company.  The secured creditor has the option to  

either realize his security or relinquish his security.  If the  

secured creditor relinquishes his security, like any other  

unsecured creditor, he is entitled to prove the debt due to him  

and receive dividends out of the assets of the company in the  

winding up proceedings.  If the secured creditor opts to realize  

his security, he is entitled to realize his security in a proceeding  

other than the winding up proceeding but has to pay to the

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liquidator the costs of preservation of the security till he  

realizes the security.   

(ii) over the security of every secured creditor, a statutory charge  

has been created in the first limb of the proviso to clause (c) of  

sub-section (1) of Section 529 of the Companies Act in favour of  

the workmen in respect of their dues from the company and  

this charge is pari passu with that of the secured creditor and  

is to the extent of the workmen’s portion in relation to the  

security of any secured creditor of the company as stated in  

clause (c) of sub-section (3) of Section 529 of the Companies  

Act.

(iii) where a secured creditor opts to realize the security then so  

much of the debt due to such secured creditor as could not be  

realized by him by virtue of the statutory charge created in  

favour of the workmen shall to the extent indicated in clause (c)  

of the proviso to sub-section (1) of Section 529 of the  

Companies Act rank pari passu with the workmen’s dues for  

the purposes of Section 529A of the Companies Act.

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(iv) the workmen’s dues and where the secured creditor opts to  

realize his security, the debt to the secured creditor to the  

extent it ranks pari passu with the workmen’s dues under  

clause (c) of the proviso to sub-section (1) of Section 529 of the  

Companies Act shall be paid in priority over all other dues of  

the company.

13. In support of our aforesaid conclusions, we may now cite some  

authorities.  In Allahabad Bank v. Canara Bank & Anr. [(2000) 4 SCC  

406], a two-Judge Bench of this Court speaking through M.  

Jagannadha Rao, J. discussed these rights of the secured creditors in  

paragraphs 62, 63, 64 and 65 of the judgment as reported in the SCC,  

which are extracted hereinbelow:

“62. Secured creditors fall under two categories. Those  who desire to go before the Company Court and those  who like to stand outside the winding- up.

63. The first category of secured creditors mentioned  above are those who go before the Company Court for  dividend by relinquishing their security in accordance  with the insolvency rules mentioned in Section 529.  The insolvency rules are those contained in Sections 45  to 50 of the Provincial Insolvency Act. Section 47(2) of  that Act states that a secured creditor who wishes to  come before the official liquidator has to prove his debt  and he can prove his debt only if he relinquishes his  security for the benefit of the general body of creditors.  In that event, he will rank with the unsecured creditors

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and has to take his dividend as provided in Section  529(2). Till today, Canara Bank has not made it clear  whether it wants to come under this category.

64. The second class of secured creditors referred to  above are those who come under Section 529-A(1)(b)  read with proviso (c) to Section 529(1). These are those  who opt to stand outside the winding-up to realise their  security. Inasmuch as Section 19(19) permits  distribution to secured creditors only in accordance  with Section 529-A, the said category is the one  consisting of creditors who stand outside the winding  up. These secured creditors in certain circumstances  can come before the Company Court (here, the  Tribunal) and claim priority over all other creditors for  release of amounts out of the other monies lying in the  Company Court (here, the Tribunal). This limited  priority is declared in Section 529-A(1) but it is  restricted only to the extent specified in clause (b) of  Section 529-A(1). The said provision refers to clause (c)  of the proviso to Section 529(1) and it is necessary to  understand the scope of the said provision.

65. Under clause (c) of the proviso to Section 529(1), the  priority of the secured creditor who stands outside the  winding-up is confined to the “workmen's portion”  as  defined in Section 529(3)(c). “Workmen's portion”  means the amount which bears to the value of the  security, the same proportion which the amount of the  workmen's dues bears to the aggregate of (a) workmen's  dues, and (b) the amounts of the debts due to all the  creditors. This is explained in the illustration under the  said provision. If the workmen's dues in all are, say,  Rs.1 lakh and the debt due to all secured creditors is  Rs.3 lakhs, the total amount due to all of them comes  to Rs.4 lakhs. Therefore, the workmen's share comes to  25% (Rs 1 lakh out of Rs 4 lakhs). Now if the value of  the security of a secured creditor (like Canara Bank) is  Rs.1 lakh, the “workmen's portion”  will be Rs.25,000  which is the pro-rata amount to be shared by the said  secured creditor. By virtue of Section 529-A(1)(b) his  priority over all others out of other monies available in  the Tribunal is restricted to Rs.25,000 only.”

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14. In Andhra Bank v. Official Liquidator & Anr. (supra), a three-

Judge Bench speaking through S.B. Sinha, J. has also discussed  

in paragraphs 22 and 23 the rights of secured creditors, relevant  

extracts from which are quoted hereinbelow:

“22. In terms of the aforementioned provisions, the  secured creditors have two options (i) they may desire  to go before the Company Judge; or (ii) they may stand  outside the winding-up proceedings. The secured  creditors of the second category, however, would come  within the purview of Section 529-A(1)(b) read with  proviso (c) appended to Section 529(1). The “workmen's  portion” as contained in proviso (c) of sub-section (3) of  Section 529 in relation to the security of any secured  creditor means the amount which bears to the value of  the security the same proportion as the amount of the  workmen's dues bears to the aggregate of (a) workmen's  due, and (b) the amount of the debts due to all the (sic  secured) creditors. …..”

“23. The language of Section 529-A is also clear and  unequivocal, in terms whereof the workmen's dues or  the debts due to the secured creditors, to the extent  such debts rank under clause (c) of the proviso to sub- section (1) of Section 529 pari passu with such dues,  shall have priority over all other debts. Once the  workmen's portion is worked out in terms of proviso (c)  of sub-section (1) of Section 529, indisputably the  claims of the workmen as also the secured creditors will  have to be paid in terms of Section 529-A. ……”

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15.   In the present case, the learned Company Judge and the  

Division Bench of the High Court have held that all secured  

creditors along with the workmen have pari passu charge over all  

the properties or assets of the company and would be entitled to  

the dues as secured creditors along with the workmen’s dues by  

way of overriding preferential payments over all other dues under  

Section 529A of the Companies Act.  The learned Company  

Judge of the High Court has also relied on some observations of  

this Court in Andhra Bank v. Official Liquidator & Anr. (supra) in  

support of his order.  These observations of this Court in Andhra  

Bank v. Official Liquidator & Anr. (supra) were in the context of  

the observations of this Court in Allahabad Bank v. Canara  

Bank & Anr. (supra) and are quoted as under:

“25.  While determining Point (6), however, a stray  observation was made to the effect that the  “workmen’s dues”  have priority over all other  creditors, secured and unsecured because of Section  529-A(1)(a).  Such a question did not arise in the case  as Allahabad Bank was indisputably an unsecured  creditor.  

“26. Such an observation was, thus, neither required  to be made keeping in view the fact situation obtaining  therein nor does it find support from the clear and  unambiguous language contained in Section 529-A(1) (a).  We have, therefore, no hesitation in holding that  finding of this Court in Allahabad Bank to the

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aforementioned extent does not lay down the correct  law.”  

The aforesaid observations of this Court in Andhra Bank v. Official  

Liquidator & Anr. (supra) are, thus, to the effect that workmen will not  

have priority over the dues of the secured creditor and this is because  

of the unambiguous language of Section 529A (1) that the workmen’s  

dues and the dues of the secured creditor to the extent such debts rank  

under clause (c) of sub-section (1) of Section 529 pari passu with such  

dues will have to be paid in priority to all other debts.  But as we have  

held, only where under the second limb of the proviso to clause (c) of  

sub-section (1) of Section 529 the secured creditor opts to realize the  

security and is unable to realize a portion of his dues because of the  

pari passu charge created in favour of the workmen under the first limb  

of the proviso, he has pari passu charge to the extent indicated in  

clause (c) of the proviso to sub-section (1) of Section 529 and only such  

debts due to the secured creditor which rank pari passu with dues of  

the workmen under clause (c) of the proviso to sub-section (1) of  

Section 529 have to be paid in priority over all other debts of the  

company.  The High Court has clearly fallen in error by holding that all  

debts due to secured creditors will rank pari passu with the workmen’s  

dues and have to be paid along with the workmen’s dues in priority to  

all other debts of the company.

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16.   In the result, the appeal is allowed.  The impugned order of the  

Division Bench of the High Court and the order dated 28.11.2008 of  

the learned Company Judge in I.A. No.1511 of 2008 are set aside and  

the matter is remitted to the learned Company Judge to decide the I.A.  

in accordance with law as laid down in this judgment.  There will be no  

order as to costs.   

.…………………….CJI.                 (S.H. Kapadia)

.……………………….J.                                                                                     (A. K. Patnaik) New Delhi,     

   September 21, 2012.

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          IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL     APPEAL     NO.6755     OF     2012   (Arising out of SLP (C) No.4104 of 2011)

Jitendra Nath Singh       … Appellant

Versus

Official Liquidator & Ors.              …  

Respondents

J     U     D     G     M     E     N     T   

Swatanter     Kumar,     J  .

1. Leave granted.

2. An important question of law as to the ambit, scope and the  

legislative scheme of Sections 529, 529A and 530 of the Companies Act,  

1956 (for short, ‘the Act’) arises in the present case.

3. According to the appellant, on the true construction of these  

provisions, workmen have a preferential claim over all others including  

the secured creditors, in the matter of payment of dues out of the funds  

realized from sale of assets of the company in liquidation.  It will  

particularly hold true when such assets are not mortgaged in favour of

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secured creditors of the company in liquidation.  The secured creditors,  

therefore, have no charge on such unsecured assets as also no  

consequential, preferential or even pari passu claim over the sale  

proceeds derived from these assets of the company.  To the contra, the  

contention on behalf of the respondents is that the debts of the secured  

creditors would rank pari passu with that of the workmen as regards  

those dues of the secured creditors as could not be realised from the  

sale of secured assets, for the reason that they have relinquished their  

security to the extent of workmen’s dues in terms of Section 529(1) of  

the Act.  In support of their respective contentions, the appellant has  

relied upon the judgment of this Court in the case of Allahabad Bank v.  

Canara Bank and Another [(2000) 4 SCC 406], while the respondents  

have placed heavy reliance upon the judgment of this Court in the case  

of UCO Bank v. Official Liquidator, High Court, Bombay & Anr. [(1994) 5  

SCC 1]; Andhra Bank  v. Official Liquidator [(2005) 5 SCC 75]; and ICICI  

Bank Ltd. V. Sidco Leathers Ltd. and Others [(2006) 10 SCC 452].  As  

both the parties to the present lis have relied upon the different  

decisions of this Court, this Court is now called upon to state the  

correct exposition of law in view of the divergent views stated in the  

afore-referred judgments.

4. I may, at the very outset, refer in brief to the facts giving rise to  

the present appeal.  M/s. UMI Special Steels Ltd. (for short, the UMI) is

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a company incorporated under the provisions of the Act.  It possesses  

assets at different places throughout India. Out of these assets of the  

UMI, some were mortgaged to the banks and financial institutions while  

others were not, particularly the assets located at Chennai, Pune,  

Faridabad and Kolkata.  Towards the end of the year 2001, the  

company became sick.  It, thereafter, approached the Board for  

Industrial and Financial Reconstruction (for short, ‘the BIFR’) for being  

declared a sick unit.  BIFR, vide its opinion dated 8th March, 2002,  

opined that UMI should be wound up.  On consideration of the opinion  

of the BIFR, the High Court, vide its order dated 5th August, 2003  

passed an order of winding up of UMI and appointed an official  

liquidator for conducting and completing the liquidation proceedings.  

This order of the High Court attained finality.  In pursuance of this  

order, the official liquidator took over all the assets of the company.  It  

is the undisputed position before us that the SASF/IDBI, the main  

secured creditor of UMI, filed an Original Application before the Debts  

Recovery Tribunal (DRT) being OA No.72 of 2004 for recovery of its  

debts aggregating to Rs.63.34 crore as on 31st January, 2004.  Upon  

this application, the DRT issued notice on 5th July, 2004 and since  

then, the matter is pending before the DRT without any further  

proceedings.

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5. In the meanwhile, the official liquidator invited claims from all the  

secured creditors and amongst others, the IDBI also filed its claim on  

30th July, 2006.  The admitted claim of the secured creditors was  

Rs.1,60,08,43,739/- while that of the workmen was  

Rs.16,38,44,741.25.  It is also not disputed before us that the secured  

assets of the company were sold separately and a separate account  

thereof was maintained.  Similarly, the unsecured assets were sold  

separately by the official liquidator, for which again a separate account  

was maintained.  The total sale proceeds from the secured assets were  

Rs. 108.90 crore, out of which a sum of Rs.93,64,93,586/- was  

distributed amongst the secured creditors and an amount of  

Rs.8,19,22,371.12 had been paid to the workmen.   The Official  

Liquidator sold the unsecured properties of the Company for a total  

sum of Rs.8.51 crores.  This included the assets located at different  

places, which were not mortgaged to any bank or financial institution.  

The dispute between the parties primarily relates to distribution of this  

sum of Rs. 8.51 crores.  According to the workmen their entire  

remaining claim of Rs. 8.19 crores and odd should be satisfied in  

preference to all other claimants, in terms of Section 529A of the Act.  

However, it is contended on behalf of the secured creditors that they  

have a pari passu charge even on the sale proceeds of the unsecured  

assets in terms of the statutory provisions  and more  particularly , in

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view  of  the fact that they had given up their security in favour of the  

workmen to the extent of Rs.8,19,22,371.12.   It is only upon such  

satisfaction that the sale proceeds can be distributed amongst other  

creditors in accordance with law. The notice of the O.A. filed by the  

secured creditors was also issued to the Official Liquidator.   

6. One of the workmen, Jitendra Nath Singh, the appellant in the  

present appeal, filed an application being I.A. No. 1511/2008 in  

Company Petition No. 2/2002 praying that the sale proceeds from the  

unsecured assets should first be distributed to the workmen.  This IA  

was rejected by the Company Court vide order dated 28th November,  

2008.  Against this order, Company Appeal No.10 of 2008 was filed by  

the workmen before the High Court.  Three other workmen also filed an  

application praying that 50 per cent of their verified claim in respect of  

wages be paid to them by the official liquidator.   The Company Court  

passed an interim order in Company Appeal No.10 of 2008 dated 24th  

April, 2009 directing that money be distributed by the official liquidator  

only after obtaining permission of the Court.   In view of this order, the  

Company Court rejected the claim of the three workmen vide its Order  

dated 16th April, 2010.   Being aggrieved, these three workmen filed  

Company Appeal No.1 of 2010 before the High Court.

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7. Both these appeals were dismissed by the High Court by a  

common judgment dated 30th September, 2010.  Being dissatisfied with  

the judgment of the High Court, the workman Jitendra Nath Singh has  

preferred the present appeal against the decision in respect of Company  

Appeal No. 10/2008.   

8. In light of the above facts, the contention of the appellant in the  

present appeal is that in respect of unsecured assets, the claim of the  

workmen ranks higher than those of the secured creditors and should  

be paid in preference to their claims.  The rule of distribution pro rata  

applies only for proceeds from sale of properties bearing a charge of a  

particular secured creditor.  To put it simply, the statutory charge  

would get priority over any contractual charge.   

9. Let us now examine the relevant statutory provisions and their  

scheme.   By way of the Companies (Amendment) Act, 1985, Section  

529A, as well as the proviso to Section 529(1) of the Act, were inserted  

with effect from 24th May, 1985.  The purpose of these provisions  

appears to be that the dues of the workmen may be made to rank pari  

passu with those of the secured creditors and even above the dues of  

the Government, in the event of winding up of the company. The  

legislative intent appears to be that the dues of the secured creditors  

and workmen should be paid in preference to others, however, would

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remain pari passu to each other.   It was not the intention of the  

framers of law to take away or deprive a secured creditor of its dues or  

charge of the workmen, unless, it was specifically given up by the  

secured creditor.   At this stage, I may refer to the provisions of  

Sections 529, 529A and 530 of the Act which read as follows :-

"529. Application of insolvency rules in winding  up of insolvent companies.——(1) In the winding  up of an insolvent company, the same rules shall  prevail and be observed with regard to—

(a) debts provable;

(b) the valuation of annuities and future and  contingent liabilities; and

(c) the respective rights of secured and unsecured  creditors; as are in force for the time being under the  law of insolvency with respect to the estates of  persons adjudged insolvent:

Provided that the security of every secured creditor  shall be deemed to be subject to a pari passu charge  in favour of the workmen to the extent of the  workmen’s portion therein, and, where a secured  creditor, instead of relinquishing his security and  proving his debt, opts to realise his security,—

(a) the liquidator shall be entitled to represent the  workmen and enforce such charge;

(b) any amount realised by the liquidator by way of  enforcement of such charge shall be applied rateably  for the discharge of workmen’s dues; and

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(c) so much of the debt due to such secured creditor  as could not be realised by him by virtue of the  foregoing provisions of this proviso or the amount of  the workmen’s portion in his security, whichever is  less, shall rank pari passu with the workmen’s dues  for the purposes of section 529A.

(2) All persons who in any such case would be  entitled to prove for and receive dividends out of the  assets of the company, may come in under the  winding up, and make such claims against the  company as they respectively are entitled to make by  virtue of this section:

Provided that if a secured creditor instead of  relinquishing his security and proving for his debt  proceeds to realise his security, he shall be liable to  2[pay his portion of the expenses] incurred by the  liquidator (including a provisional liquidator, if any)  for the preservation of the security before its  realization by the secured creditor.

Explanation.—For the purposes of this proviso, the  portion of expenses incurred by the liquidator for the  preservation of a security which the secured creditor  shall be liable to pay shall be the whole of the  expenses less an amount which bears to such  expenses the same proportion as the workmen’s  portion in relation to the security bears to the value  of the security.

(3) For the purposes of this section, section 529A  and section 530,—

(a) “workmen”, in relation to a company, means the  employees of the company, being workmen within  the meaning of the Industrial Disputes Act, 1947 (14  of 1947);

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(b) “workmen’s dues”, in relation to a company,  means the aggregate of the following sums due from  the company to its workmen, namely:—

(i) all wages or salary including wages payable for  time or piece work and salary earned wholly or in  part by way of commission of any workman, in  respect of services rendered to the company and any  compensation payable to any workman under any of  the provisions of the Industrial Disputes Act, 1947  (14 of 1947);

(ii) all accrued holiday remuneration becoming  payable to any workman, or in the case of his death  to any other person in his right, on the termination  of his employment before, or by the effect of, the  winding up order or resolution;

(iii) unless the company is being wound up  voluntarily merely for the purposes of reconstruction  or of amalgamation with another company, or unless  the company has, at the commencement of the  winding up, under such a contract with insurers as  is mentioned in section 14 of the Workmen’s  Compensation Act, 1923 (8 of 1923) rights capable of  being transferred to and vested in the workman, all  amounts due in respect of any compensation or  liability for compensation under the said Act in  respect of the death or disablement of any workman  of the company;

(iv) all sums due to any workman from a provident  fund, a pension fund, a gratuity fund or any other  fund for the welfare of the workmen, maintained by  the company;

(c) “workmen’s portion”, in relation to the security of  any secured creditor of a company, means the  amount which bears to the value of the security the

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same proportion as the amount of the workmen’s  dues bears to the aggregate of—

(i) the amount of workmen’s dues; and

(ii) the amounts of the debts due to the secured  creditors.

Illustration

529A. Overriding preferential payment.-  Notwithstanding anything contained in any other  provision of this Act, or any other law for the time  being in force, in the winding up of a company-

(a)  workmen's dues; and

(b) debts due to secured creditors to the extent such  debts rank under clause (c) of the proviso to sub- section (1) of section 529 pari passu with such dues,

shall be paid in priority to all other debts.

(2)  The debts payable under clause (a) and clause (b)  of sub-section (1) shall be paid in full, unless the  assets are insufficient to meet them in which case  they shall abate in equal proportions.

530.  Preferential payments. - (1) In a winding up  subject to the provisions of section 529A, there shall  be paid] in priority to all other debts-  

(a) all revenues taxes, cesses and rates due from the  company to the Central or a State Government or to  a local authority at the relevant date as defined in  clause (c) of sub-section (8), and having become due  and payable within the twelve months next before  that date;

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(b) all wages or salary (including wages payable for  time or piece work and salary earned wholly or in  part by way of commission) of any employee, in  respect of services rendered to the company and due  for a period not exceeding four months within the  twelve months next before the relevant date subject  to the limit specified in sub-section (2);

(c) all accrued holiday remuneration becoming  payable to any employee, or in the case of his death  to any other person in his right, on the termination  of his employment before, or by the effect of, the  winding up order or resolution;

(d) unless the company is being wound up  voluntarily merely for the purposes of reconstruction  or of amalgamation with another company, all  amounts due, in respect of contributions payable  during the twelve months next before the relevant  date, by the company as the employer of any  persons, under the Employees’  State Insurance Act,  1948 (34 of 1948), or any other law for the time  being in force;

(e) unless the company is being wound up  voluntarily merely for the purposes of reconstruction  or of amalgamation with another company, or unless  the company has, at the commencement of the  winding up, under such a contract with insurers as  is mentioned in section 14 of the Workmen’s  Compensation Act, 1923 (8 of 1923), rights capable  of being transferred to and vested in the workman,  all amounts due in respect of any compensation or  liability for compensation under the said Act in  respect of the death or disablement of any employee  of the company;

(f) all sums due to any employee from a provident  fund, a pension fund, a gratuity fund or any other

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fund for the welfare of the employees maintained by  the company; and

(g) the expenses of any investigation held in  pursuance of section 235 or 237, in so far as they  are payable by the company.

(2) The sum to which priority is to be given under  clause (b) of sub-section (1), shall not, in the case of  any one claimant, 2[exceed such sum as may be  notified by the Central Government in the Official  Gazette].

(3) Where any compensation under the Workmen’s  Compensation Act, 1923 (8 of 1923), is a weekly  payment, the amount due in respect thereof shall,  for the purposes of clause (e) of sub-section (1), be  taken to be the amount of the lump sum for which  the weekly payment could, if redeemable, be  redeemed if the employer made an application for  that purpose under the said Act.

(4) Where any payment has been made to any  employee of a company,—

(i) on account of wages or salary; or

(ii) to him, or in the case of his death, to any other  person in his right, on account of accrued holiday  remuneration,

out of money advanced by some person for that  purpose, the person by whom the money was  advanced shall, in a winding up, have a right of  priority in respect of the money so advanced and  paid, up to the amount by which the sum in respect  of which the employee or other person in his right  would have been entitled to priority in the winding

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up has been diminished by reason of the payment  having been made.

(5) The foregoing debts shall—

(a) rank equally among themselves and be paid in  full, unless the assets are insufficient to meet them,  in which case they shall abate in equal proportions;  and

(b) 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.

(6) Subject to the retention of such sums as may be  necessary for the costs and expenses of the winding  up, the foregoing debts shall be discharged forthwith  so far as the assets are sufficient to meet them, and  in the case of the debts to which priority is given by  clause (d) of sub-section (1), formal proof thereof  shall not be required except in so far as may be  otherwise prescribed.

(7) In the event of a landlord or other person  distraining or having distrained on any goods or  effects of the company within three months next  before the date of a winding up order, the debts to  which priority is given by this section shall be a first  charge on the goods or effect so distrained on, or the  proceeds of the sale thereof:

Provided that, in respect of any money paid under  any such charge, the landlord or other person shall  have the same rights of priority as the person to  whom the payment is made.

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(8) For the purposes of this section—

(a) any remuneration in respect of a period of holiday  or of absence from work through sickness or other  good cause shall be deemed to be wages in respect of  services rendered to the company during that period;

(b) the expression “accrued holiday remuneration”  includes, in relation to any person, all sums which,  by virtue either of his contract of employment or of  any enactment (including any order made or  direction given under any enactment), are payable on  account of the remuneration which would, in the  ordinary course, have become payable to him in  respect of a period of holiday, had his employment  with the company continued until he became  entitled to be allowed the holiday;  

(bb) the expression “employees”  does not include a  workman; and

(c) the expression “the relevant date” means—

(i) in the case of a company ordered to be wound up  compulsorily, the date of the appointment (or first  appointment) of a provisional liquidator, or if no  such appointment was made, the date of the winding  up order, unless in either case the company had  commenced to be wound up voluntarily before that  date; and

(ii) in any case where sub-clause (i) does not apply,  the date of the passing of the resolution for the  voluntary winding up of the company.

(9) This section shall not apply in the case of a  winding up where the date referred to in sub-section  (5) of section 230 of the Indian Companies Act, 1913  (7 of 1913), occurred before the commencement of

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this Act, and in such a case, the provisions relating  to preferential payments which would have applied if  this Act had not been passed, shall be deemed to  remain in full force."

10. Chapter V of the Act deals with provisions that are applicable to  

every mode of winding up and in particular, the above provisions deal  

with the proof and ranking of claims.  Section 529 is concerned with  

the application of insolvency rules to winding up of an insolvent  

company.  The opening language of Section 529 contemplates that in  

winding up of an insolvent company, the Rules prevalent under the law  

of insolvency shall be applicable.  Thus, the Provincial Insolvency Act,  

1920 (for short the “Insolvency Act”), to the extent permissible, would  

be applicable in regard to the winding up of a company.  Section 47 of  

the Insolvency Act reads as under :

“47. Secured creditors.-

(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 receive a dividend only in respect of

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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 substituted 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 share in any dividend.”

11. The above provision gives different options that are available and  

can be exercised by a secured creditor.  It, however, has to be kept in  

mind that in terms of section 529 the rules of insolvency shall prevail  

and be observed but only with regard to debts provable, the valuation of  

annuities and future and contingent liabilities and the respective rights  

of secured and unsecured creditors. Where a secured creditor realizes  

his security, he may prove the balance due to him after deducting the  

net amount realized; or where a secured creditor relinquishes his  

security for the general benefit of the creditors, he may prove for whole  

of his debt.  Still, where a secured creditor does not exercise either of  

these options, he is entitled to have his debt entered in the schedule  

and would be entitled to receive the dividend in terms of Section 47(3).  

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12. It is worthwhile to note that the proviso to Section 529  of the Act  

creates a deeming fiction in law and makes it clear that the security of  

every secured creditor shall be deemed to be subject to a pari passu  

charge in favour of the workmen, to the extent of the workman’s portion  

thereunder.  This fiction is intended to give the workmen a preferential  

right to recover their dues.  The expression ‘workmen’s portion’  

appearing in the proviso to Section 529(1) is explained under clause (c)  

of Section 529(3) of the Act.  The workmen’s portion in relation to the  

security of any secured creditor of a company means the amount which  

bears to the value of the security the same proportion as the amount of  

the workmen’s dues bears to the aggregate of the amount of the  

workmen’s dues and the amount of the debts due to the secured  

creditors.  The workmen’s portion is to be computed in terms thereof  

with the aid of the illustration given in that provision.  Thus, the  

security of every secured creditor, by fiction of law, is subject to a pari  

passu charge in favour of the workmen to the extent of the workmen’s  

portion and where the secured creditor, instead of relinquishing his  

security and proving his debt, opts to realize his security, in that event,  

so much of the debt due to such secured creditor as could not be  

realized by him by virtue of the pari passu charge in favour of the  

workmen or the amount of the workmen’s portion in his security,

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whichever is less, shall rank pari passu with the workmen’s dues for  

the purposes of Section 529A.   

13. Section 529A of the Act opens with non-obstante clause, giving the  

workmen’s dues and secured creditors’  dues, as defined under the  

proviso to Section 529(1), an over-riding effect over the other provisions  

of the Act as well as any other law in the matter of priority of payment  

of dues.  Application of Section 529A of the Act is not dependent upon  

any other provision of the Act including Section 529 except to the  

extent specified in Section 529, proviso (c).   So, it is not dependent  

upon the limitation imposed by any other law for the time being in  

force, including Section 47 of the Insolvency Act.   The non-obstante  

opening words of Section 529(A) are intended to give precedence to the  

‘overriding preferential payments’  in contrast to the ‘preferential  

payments’  as contemplated under Section 530 of the Act. This non-

obstante language attains even greater significance as it, in no  

uncertain terms, provides that Section 529(A) shall have effect  

notwithstanding anything contained in any other provision of the Act or  

any other law for the time being in force.  No law, including the  

insolvency law can undermine the application and effect of Section 529  

read with Section 529A of the Act.  Thus, the provisions are exceptions  

to all other laws in force.  

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14. Once the contents of proviso to Section 529 and its clauses (a) to  

(c) are satisfied, then the secured creditor would be entitled to invoke  

the provisions and receive the benefits of Section 529A(i), subject to  

pari passu charge and in terms of the priority stated therein.   The  

workmens’ dues are to get preference in the winding up of a company  

under Section 529A of the Act.  The workmens’ dues, however, have not  

been singularly placed in the preferential clause.  The expression used  

in Section 529A is ‘and’  meaning thereby that the dues stated under  

clauses (a) and (b) of the section would remain pari passu.  But it is not  

the entire dues of the secured creditors that will get preference over  

other dues and remain pari passu with the charges payable to the  

workmen.  Their dues are limited only to the extent of the debts which  

are due to the secured creditors under clause (c) of the proviso to sub-

Section (1) of Section 529 which are pari passu with such dues.  The  

term ‘such dues’ here refers to the dues of the workmen.  The Andhra  

Bank case has clearly stated that not only the dues of the workmen  

would be paid in terms of Section 529A in precedence to all others but  

are pari passu to the amounts due to the secured creditors in terms of  

Section 529(1) proviso (c).    On a plain reading of the language of these  

two Sections, i.e., 529 and 529A, it is clear that it is not the entire or  

unrealised amount owed to secured creditors which is protected under  

the provisions of Section 529A and stands pari passu with the

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workmen’s charges, but it is only the portion or amount relinquished  

under proviso to Section 529(1), whichever is less that is protected.  In  

other words, the amount which is due to the secured creditors and  

remains unpaid due to enforcement of the pari passu charge of the  

workmen under Section 529(1) is the portion of dues of secured  

creditors that are protected in terms of Section 529A.  There is a direct  

link in the application of both these provisions.  In a situation of the  

present kind, these provisions would have to be applied collectively and  

that too, upon the correct appreciation of the legislative intent.  As far  

as Section 530 of the Act is concerned, it simpliciter provides for  

preferential payments with regard to persons other than those covered  

under Sections 529 and 529A of the Act.  However, in the present case,  

we are primarily concerned with the application of Sections 529 and  

529A.    

15. If one analyses the scheme of the above-stated provisions, it is  

clear that in a winding up petition of an insolvent company, Rules of  

insolvency would apply to the stated extent.  In terms of the proviso to  

Section 529(1), there is a deemed fiction created in law on the security  

of every secured creditor to the extent of the workmen’s portion therein.  

The second part of the proviso states that where the secured creditor  

instead of relinquishing his security and proving his debts opts to  

realize his security, there the liquidator is entitled to represent the

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workmen and enforce the said charge in favour of the workmen to the  

extent of the workmen’s dues.  From a cumulative reading of the  

relevant provisions under the Act as well as under the Insolvency Act, it  

is clear that neither the legislature intended nor can it be  

comprehended that where an act is done in complete adherence to the  

relevant statutory provisions, it can lead to two different results merely  

because such act is done before different forums/courts.  That is to say  

that if a secured creditor realises his security before a forum other than  

the Company Court strictly in compliance to the provisions of Section  

529 of the Act, then favourable consequences of Section 529A would  

follow but if he acts in identical terms before the Company Court and  

without prejudice to his remedy outside the winding up and without  

putting his sale proceeds in the common hotch potch in the winding up  

proceedings, he would not be entitled to the benefits of Section 529A.  It  

is more so since even the sale of a security by a secured creditor before  

such other forum cannot be completed without approval of the  

Company Court.  The Company Court has even been vested with the  

jurisdiction to transfer such proceedings in exercise of its powers under  

Section 446 of the Act.  At this stage, it will be useful to refer to the  

dictum of this Court in Andhra Bank (supra) where the Court noticed,  

“where the matter is not pending before the Tribunal under the  

Recovery of Debts Due to Banks and Financial Institutions Act, 1993

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( “the RDB Act”), in terms of Section 19(19) thereof, the secured  

creditors would not get priority per se ……” to show that mere pendency  

of proceeding before a Tribunal would not deprive the secured creditor  

of the statutory benefits.    Of course, the situation will be entirely  

different where the secured creditor does not follow the scheme of the  

provisions of Section 47(1) of the Insolvency Act read in conjunction  

with Sections 529 and 529A of the Act but puts the sale proceeds in the  

winding up proceedings in a common hotch-potch or even relinquishes  

the security for general benefit of the creditors at large, then the  

creditor would not be entitled to the benefit of Section 529A and would  

stand in line with the unsecured creditors of the company. Further,  

where the secured creditor has been unable to fully realize his dues  

owing to the taking of share from his security towards workmen’s  

portion in terms of the proviso to Section 529(1), then to the extent  

specified, the secured creditor is entitled to a charge pari passu with  

the workmen’s dues for the purposes of Section 529A.  

16. The situation may be different where the secured creditor  

relinquishes his security in favour of or upon realization submits the  

proceeds in the common hotch-potch in winding up proceedings and for  

the benefit of the creditors in general.    Proviso to Section 529(1) has a  

very significant role in this entire process for recovery.   It has two  

contents which have to be read conjunctively.   First, that creates a

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pari passu charge by legal fiction on the security of a secured creditor  

in favour of the workmen and, second, where the secured creditor  

instead of relinquishing his security and proving his debts opts to  

realize his security.  The expression ‘and’ used in the proviso has to be  

read and construed conjunctively and not disjunctively.  The word ‘and’  

specifies two specific conditions aforenoticed for the proviso and sub-

clauses (a) to (c) to become enforceable.  Clauses (a) and (b) to the  

proviso give right of representation to the liquidator for enforcing the  

statutory right in favour of the workmen to the extent of the portion of  

the workmen’s dues.  Clause (c) of proviso to Section 529(1) provides  

the mode for recouping the shortfall in the amount which the secured  

creditor loses upon sale of security and creation of pari passu charge.  

Of course, as already noticed, such recovery is again pari passu and  

limited to the extent of the amount of workmen’s dues.  The realization  

of the security may be in the proceedings outside the winding up, i.e.,  

before a special forum or otherwise or it may be in the winding up but  

not for the benefit of the general creditors but strictly in compliance  

with the provisions of the proviso to Section 529(1) of the Act.  In both  

such situations, the secured creditor would be entitled to the protection  

and right of preferential payment contemplated under Section 529A(1)  

of the Act.  

17. Now, I may refer to the judgments of this Court relied upon by the

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respective parties.  In the case of Allahabad Bank (supra) the Allahabad  

Bank was an unsecured creditor of the company in liquidation in that  

case and had obtained a simple money decree from the Debts Recovery  

Tribunal (for short ‘the DRT’) at Delhi against the debtor-company.  The  

Canara Bank was a secured creditor of the debtor-company but its  

claim was pending before the same Tribunal.  The Allahabad Bank had  

taken out the sale proceedings before the Recovery Officer under the  

RDB Act.  The Company Court, however, stayed these sale proceedings  

under Sections 442 and 537 of the Act, in a winding up petition by  

Ranbaxy Ltd.  Dissatisfied, the Allahabad Bank had challenged the  

order of the Company Court before this Court.  This Court in that case  

was primarily dealing with the question whether the amount directed to  

be realized by sale of assets of the debtor company by the DRT, at the  

instance of Allahabad Bank, may straightaway be released in its favour,  

or whether, keeping in view the provisions of Section 19(19) of the RDB  

Act read with Section 529A of the Act, the other parties such as secured  

creditors, would still have a charge over the monies so realized.  Thus,  

the question primarily before the Court in that case was the order of  

priority of discharging debts between a secured and an unsecured  

creditor, with respect to funds realized from sale of assets of the debtor  

company.  While dealing with this question, the Court made an  

observation that the workmen’s dues have priority over all other

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creditors, secured or unsecured, because of Section 529A(1)(a) of the  

Act.  The following paragraphs of this judgment can usefully be referred  

to at this stage:

“62.  Secured creditors fall under two categories.  Those who desire to go before the Company Court and  those who like to stand outside the winding-up.

XXXX   XXXX     XXXX XXXX

68. In our opinion, the words “so much of the debt due  to such secured creditor as could not be realised by  him by virtue of the foregoing provisions of this  proviso” obviously mean the amount taken away from  the private realisation of the secured creditor by the  liquidator by way of enforcing the charge for  workmen's dues under clause (c) of the proviso to  Section 529(1) “rateably”  against each secured  creditor. To that extent, the secured creditor —  who  has stood outside the winding-up and who has lost a  part of the monies otherwise covered by security — can  come before the Tribunal to reimburse himself from  out of other monies available in the Tribunal, claiming  priority over all creditors, by virtue of Section 529A(1) (b).

XXXX   XXXX     XXXX XXXX

76. The next question is whether the amounts realised  under the RDB Act at the instance of the appellant can  be straight away released in its favour. Now, even if  Section 19(19) read with Section 529A of the  Companies Act does not help the respondent Canara  Bank, the said provisions can still have an impact on  the appellant Allahabad Bank which has no doubt a  decree in its favour passed by the Tribunal. Its dues  are unsecured. The “workmen's dues”  have priority  over all other creditors, secured and unsecured  because of Section 529-A(1)(a). There is no material  before us to hold that the workmen's dues of the  defendant Company have all been paid. In view of the  general principles laid down in National Textile

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Workers' Union v. P.R. Ramakrishnan (1983) 1 SCC 228  there is an obligation resting on this Court to see that  no secured or unsecured creditors including banks or  financial institutions, are paid before the workmen's  dues are paid. We are, therefore, unable to release any  amounts in favour of the appellant Bank straight  away.”

18. Firstly, the question now before this Court was not raised on the  

facts of that case. Secondly, the Court recorded no reasons for making  

such an observation.  It, therefore, was a mere obiter and would not  

satisfy the essentials of a binding precedent.   For it to be a binding  

precedent, the Court should directly be concerned with such issue.  

There should be an issue which should be concluded by appropriate  

reasoning to give it colour of a binding precedent.      

19. However, this very question came up for consideration before a  

three-Judge Bench of this Court in the case of Andhra Bank (supra).  

The facts of that case were that under the scheme of amalgamation the  

assets and properties of the Tobacco Division of Duncan Agro  

Industries Ltd. were transferred to its subsidiary New Tobacco Ltd.  The  

subsidiary had been enjoying diverse financial credit facilities from  

Andhra Bank which was its secured creditor.  Andhra Bank had filed a  

suit for recovery of its dues.  A winding up petition was also filed.  

Finally, the subsidiary company was ordered to be wound up and the  

assets of the company were ordered to be taken over by the Official

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Liquidator.  Some assets had been sold by Receivers appointed in the  

said separate suit, but in view of approval of a scheme of revival of the  

company, the winding up order was stayed.  This scheme of revival,  

however, failed.  Thus, the assets and properties of the company were  

directed to be sold.  The Company Court passed an order directing that  

out of the sale proceeds of the assets of the company, the wages of the  

employees and the workmen be paid.  Therein, the Andhra Bank was a  

secured creditor, the dues of the workmen were payable under Sections  

529 and 529A of the Act and there were also other creditors of the  

company.  The larger Bench considered various judgments and finally,  

while commenting upon the observations made by the two-Judge Bench  

of this Court in the case of Allahabad Bank (supra), this Court held as  

under:

“26. Such an observation was, thus, neither required  to be made keeping in view the fact situation obtaining  therein nor does it find support from the clear and  unambiguous language contained in Section 529A(1) (a). We     have,     therefore,     no     hesitation     in     holding     that    finding     of     this     Court     in     Allahabad     Bank     to     the    aforementioned     extent     does     not     lay     down     the     correct    law.

27. The Court also wrongly placed reliance on National  Textile Workers' Union v. P.R. Ramakrishnan. The  question which arose therein was only as regards the  right of the workers to be heard in the winding-up  proceeding. The said decision was, therefore, not  applicable.

Determination

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28. By reason of the order dated 12-10-1993, the  learned Single Judge while issuing various directions,  directed:

“Andhra Bank is directed to pay a sum of Rs 38  lakhs to the Official Liquidator for the purpose of  disbursing forthwith the salary to the officers, staff  and workers of New Tobacco Co. Ltd., both at  Calcutta and Durgapur, before the ensuing Puja.  The Official Liquidator will disburse such salary to  the officers, staff and workers of New Tobacco Co.  Ltd., as aforesaid, before the ensuing Puja.”

29. No reason has been assigned in support of the said  direction. The contentions of the parties had not been  noticed. What impelled the learned Judge in issuing  the said directions is not discernible. The jurisdictional  question had also not been addressed.

30. Whether the workmen could be directed to be paid  on an ad hoc basis having regard to their claim of past  dues vis-à-vis the claim of the appellants had not been  deliberated upon. When     a     matter     is     not     pending     before    the     Tribunal     under     the     RDB     Act,     in     terms     of     Section    19(19)     thereof,     the     secured     creditors     would     not     get    priority     per     se     as     it     is     qualified     by     the     words   “  in    accordance     with     the     provisions     of     Section     529A  ”  .     The    claims     of     the     secured     creditors     are,     thus,     required     to    be     considered     giving     priority     over     unsecured     creditors    but     their     claim     would     be     pari     passu     with     the    workmen.”

(Emphasis supplied)

20. The principles enunciated by this Court in the case of Andhra  

Bank (supra) clearly establish the fact that out of the dues payable,  the  

workmen have a preferential charge, but the dues of the secured  

creditors, as protected under Section 529A of the Act, have to rank pari

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passu with the dues of the workmen, without any preference to the  

latter.   

21. Firstly, this being a Bench of equi-strength, I see no reason for not  

following the view expressed by this Court in the case of Andhra Bank  

(supra) and secondly, any other interpretation is likely to defeat the  

legislative balance in the underlying genesis of the amended provisions  

of Sections 529 and 529A of the Act.

22. It may also be noticed that prior to the pronouncement of the  

judgment of this Court in the case of Allahabad Bank (supra), the  

settled view of this Court was that the charge of the secured creditors  

and that of the workmen would rank pari passu within the ambit of  

Section 529A of the Act. [refer UCO Bank (supra)].  Usefully, reference  

can also be made to the judgment of this Court in the case of A.P.  

Financial Corporation v. Official Liquidator [(2000) 7 SCC 291] wherein  

this Court was dealing with the provisions of Section 29 of the State  

Financial Corporations Act, 1951 and the question as to whether these  

provisions could be implemented, ignoring the pari passu charge of the  

workmen as contemplated under Sections 529 and 529A of the Act.  

The High Court, in that case, had imposed certain conditions in regard  

to sale of the property under Section 29 of the State Financial  

Corporations Act to protect the pari passu charge contemplated under  

the provisions of Section 529A of the Act.  Besides holding that the

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provisions of the Act shall prevail, this Court held that the pari passu  

charge has to be maintained and also held as under :

“We are, therefore, of the opinion that the above  proviso to sub-section (1) of Section 529 and Section  529A will control Section 29 of the Act of 1951. In  other words the statutory right to sell the property  under Section 29 of the Act of 1951 has to be  exercised with the rights of pari passu charge to the  workmen created by the proviso to Section 529 of the  Companies Act. Under the proviso to sub-section (1)  of Section 529, the liquidator shall be entitled to  represent the workmen and force (sic enforce) the  above pari passu charge. Therefore, the Company  Court was fully justified in imposing the above  conditions to enable the Official Liquidator to  discharge his function properly under the  supervision of the Company Court as the new  Section 529A of the Companies Act confers upon a  Company Court the duty to ensure that the  workmen's dues are paid in priority to all other debts  in accordance with the provisions of the above  section. The legislature has amended the Companies  Act in 1985 with a social purpose viz. to protect dues  of the workmen. If conditions are not imposed to  protect the right of the workmen there is every  possibility that the secured creditor may frustrate  the above pari passu right of the workmen.”

23. As per the scheme and the relevant provisions of the Act, it is clear  

that a secured creditor can relinquish his security, participate in  

winding up proceedings and file his claim before the official liquidator,  

as and when invited.  In the case of Andhra Bank (supra), this Court  

has clearly stated the principle that the dues of the secured creditors  

and of the workmen would rank pari passu as regards the order of

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preference of their discharge.  This, of course, is subject to satisfying  

the conditions as stated in Sections 529 and 529A of the Act.  The  

proviso to sub-section (1) of Section 529, by a deemed fiction, makes  

the  dues of the workmen pari passu with that of the secured creditors  

and creates a charge in favour of the workmen upon the amounts  

realized from the enforcement of such security, to the extent of the  

workmen’s portion therein. As already noticed, the ‘workmen’s portion’  

has been explained under sub-section (3)(c) of Section 529 which  

requires that in relation to the security of any secured creditor of the  

company, workmen’s portion would mean the amount which bears to  

the value of the security the same proportion as the amount of the  

workmen’s dues bears to the aggregate of the amount of workmen’s  

dues and the amounts of the debts due to the secured creditors.  The  

illustration to this sub-section provides the mode in which the  

workmen’s portion is to be calculated.  Once the workmen’s portion is  

computed, then in terms of Section 529A, again it has to be treated as a  

charge pari passu to the debts of the secured creditor.  In the case of  

the latter, the charge will be limited to the extent such debt ranks  

under clause (c) of the proviso to sub-section (1) of Section 529 pari  

passu with such dues for preferential payment.  The dues payable to  

the workmen and the secured creditors have to be paid in priority to all  

other debts.  But the dues payable to the secured creditor will not be

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more than the amount that remains unsatisfied after the security is  

relinquished in favour of the workmen under Section 529 of the Act.

24. The relinquishment of security by a secured creditor certainly  

requires some conscious act on his part more than the mere filing of a  

claim in response to a public notice issued by the official liquidator.  

Once the secured creditor takes such further actions like sale of the  

secured assets through the liquidator and subject to the control of the  

Company Court in that event, he would be part of the scheme of  

payment as rationalized under Section 529 and 529A of the Act.     

25. In the case of Andhra Bank (supra), this Court, after discussing  

the law in paragraphs 25 and 26, clearly held in paragraph 30 of the  

judgment that claims of the secured creditors are, thus, to be  

considered giving priority over the unsecured creditors but their claim  

would be pari passu with the workmen.  In my view, this is the correct  

exposition of law.

26. The learned counsel appearing for the appellant also raised an  

issue with regard to the secured creditors having stood outside the  

winding up and, therefore, not entitled to the benefit of pari passu  

charge in terms of Section 529A of the Act.  According to respondent  

No.8, they had taken steps for realizing the security without prejudice  

to the proceedings initiated by them before the Debts Recovery Tribunal

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and they had never given up their claim.  According to this respondent,  

they have not been able to realize their entire dues as a result of taking  

out of the workmen’s portion out of their security.  It is also their  

contention that once having obtained the benefit under the Proviso to  

Section 529(1) of the Act, it is not open to the workmen to disregard the  

rest of the provisions and deny the benefit to respondent No.8 of the  

provisions of Section 529A.  To the contra, as already noticed, the  

submission of the appellant is that the secured creditors have given up  

their security and joined the winding up proceedings and are covered  

under Section 47(2) of the Insolvency Act.  Resultantly the provisions of  

Section 529A(1)(b) are not applicable.   

27. A secured creditor who has a charge over the assets of a company  

in winding up, merely by instituting an application before the DRT or  

any other special forum without effectively pursuing that remedy and  

taking effective steps to realize his security would not stand outside the  

winding up proceedings.  If the sale of secured assets is effected by the  

Official Liquidator subject to control of the Company Court and such  

amounts are utilized for discharging the debts of the secured creditor  

as well as statutory charge of the workmen created under Sections 529  

and 529A, then, in effect, the secured creditor would be deemed to have  

participated in the winding up proceedings and not stood outside the  

same.  It is for the reason that a secured creditor has to take steps by

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filing petition before any other forum just to protect his legal right and  

to prevent the claim from getting barred by time.  On the contrary, if he  

realizes his security within the four corners of the company law, i.e.,  

before the Official Liquidator and the Company Court, in that event it  

would not be possible to hold that such secured creditor has given up  

his option to participate in the winding up proceedings.  However, the  

matter would be quite different where the secured creditor elects not  

only to institute a petition before the specialized forum but also takes  

effective steps to realize his security and pursues the proceedings  

effectively, in which event, the conclusion has to be that such secured  

creditor has stood ‘outside the winding up’ proceedings.

28. Equally, it can be stated that a secured creditor who, after  

institution of a claim but without pursuing the remedy outside the  

provisions of this Act, files claim before the official liquidator,  

relinquishes his security and agrees to the distribution of the sale  

proceeds through the official liquidator, subject to jurisdiction of the  

Company Court, could always be said to be not ‘standing outside the  

winding up’  proceedings.  However, where he institutes a petition,  

proceeds with it and seeks realisation of security before a forum outside  

the Company Court, then he obviously pursues the remedy beyond  

mere filing of a claim and would be a person ‘standing outside the  

winding up’ proceedings and shall be subject to the rights enforced by

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the official liquidator in terms of the proviso to Section 529 of the Act.  

As it has also been held by this Court in the case of ICICI Bank (supra),  

the secured creditor has to take some positive steps to participate in  

the winding up petition.

29. In the case of ICICI Bank (supra), this Court had taken the view  

that filing an affidavit or proof of claim with the official liquidator  

pursuant to notice issued by him does not amount to the  

relinquishment of his security by a secured creditor in terms of Section  

47(2) of the Insolvency Act.  In this very judgment, the Court also stated  

that ‘only because the dues of the workmen and the debts due to the  

secured creditor are treated pari passu with each other, the same by  

itself, would not lead to the conclusion that the concept of inter se  

priorities amongst the secured creditors had thereby been intended to  

be given a total goby’.  The Court also explained that relinquishment  

has to be by virtue of a specific act and a conscious decision on behalf  

of the secured creditor.  Similarly, merely filing a proceedings before a  

special forum to save limitation without taking any effective steps to  

realize the security there, would not necessarily mean that the secured  

creditor has stood outside the winding up proceedings.

30. From the respective contentions raised by the parties, one fact is  

clear that respondent No.8 has realized its security without prejudice to

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the proceedings taken by it before the Debts Recovery Tribunal.  

Furthermore, the security was realized strictly within the scope of  

Section 529(1) and its proviso.  That has to be protected in terms of  

Section 529A(1)(b) because the secured creditor has not relinquished its  

security for the general benefit of the creditors but realized the same in  

terms of Section 47(1) of the Insolvency Act.  The argument raised on  

behalf of the appellant in this regard is not well-founded.  If this  

contention is accepted in the facts of the present case, then it would  

run contra to the principles stated by this Court in the case of Andhra  

Bank (supra) and ICICI Bank (supra).  It has already been noticed that  

the provisions of Section 529A are not controlled and/or subservient to  

any other provision of the Act or any other law.  Once the twin  

requirements stated in the proviso to Section 529(1) are satisfied, the  

scheme contemplated under clause (c) of the proviso to Section 529  

read with Section 529A of the Act would come into play.  The Court  

cannot overlook the reality that intention of the framers of law could  

not have been that the public funds, for instance, the money of secured  

creditor (like banks), should be completely ignored for the benefit of the  

creditors in general, despite there being a definite protection in law,  

more so, when the security may be sufficient for recovery of dues of  

such secured creditors to a limited extent, if not in entirety.  The  

scheme of these provisions, thus, has to be understood to make it

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practicable and in consonance with the accepted commercial principles.  

It is precisely for these reasons that I am taking the view that the  

workmen’s charges as well as that of the secured creditors have to be  

paid in preference to all others, but with inter se pari passu charge on  

the amounts realized from the sale of the security or otherwise.   

31. From the above discussion on law and the judgments of this  

Court, the following principles can be safely deduced :

1.  The rules of insolvency or the provisions of the Provincial  

Insolvency Act, 1920 would apply in the winding up of an  

insolvent company under the provisions of Section 529 of the Act  

but it has a limited application as per terms of clauses (a) to (c) of  

Section 529(1) of the Act.

2.  The provisions of the Insolvency Act and even Section 529 of the  

Act cannot control the scope and application of Section 529A of  

the Act.

3. Merely submitting of an affidavit or demand by the secured  

creditor in response to the notice issued by the Official Liquidator  

inviting claims would not tantamount to effective participation in  

the winding up proceedings (Ref. ICICI Bank (supra)).

4. Mere institution of a petition by a secured creditor before a court  

or forum of competent jurisdiction per se will not lead to an

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inference that the secured creditor has stood outside the winding  

up proceedings unless it takes some effective steps to pursue  

those proceedings and realizes its security de hors the specific  

procedure under the Act.

5. The proviso to Section 529(1) has two prescribed contents which  

have to be satisfied cumulatively.  The expression ‘and’ appearing  

therein will have to be read as ‘conjunctive’ and not ‘disjunctive’.

The contents are, firstly, that the provision creates a legal  

fiction of pari passu charge in favour of the workmen on the  

security of a secured creditor and, secondly, that the secured  

creditor should realise its security in contradistinction to  

relinquishment of his security for recovery of its dues in  

accordance with law.

6. Relinquishment has to be a conscious act on the part of the  

secured creditor and is incapable of being construed by  

implication.

7. The secured creditor and dues of the workmen in the proportion  

calculated in terms of Section 529A are liable to be paid in  

preference to all other dues but are pari passu inter se. (Ref.  

Andhra Bank (supra)

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32. Reverting to the facts of the present case, the judgment of the High  

Court, to the extent it takes the view that the charges of the workmen  

and secured creditors have to rank pari passu, cannot be faulted with.  

However, where the learned Single Judge as well as the Division Bench  

of the High Court have fallen in error of law, is the computation and  

adjustment of the shares between the workmen, on the one hand and  

the secured creditors, on the other. Particularly, the learned Single  

Judge directed the amounts recovered from the secured creditors to be  

distributed between the workmen and the secured creditors in equal  

proportion of 50 per cent of their respective admitted claims.  This order  

and calculation is opposed to the very scheme of the above provisions,  

particularly with respect to determination of the workmen’s portion.  

Another error in the calculation that appears from the record is that  

though the total sale proceeds from the secured assets were Rs.108.90  

crore, the Court directed the payment of only Rs.101 crore which is the  

aggregate of the amount directed to be paid to the workmen and to the  

secured creditors.  Thus, there has been an error of law in applying the  

statutory provisions in this regard.  The High Court erred in not  

noticing that the Company Court has not made calculation and  

computation in accordance with law.  The Company Court as well as  

the Appellate Court should have considered the workmen’s portion in  

terms of proviso to Section 529(1) and Section 529(3)(c) along with the

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illustration appended thereto and thereafter, its over-riding preferential  

payment vis-a-vis all other unsecured creditors in terms of Section  

529A and 530 of the Act.  Once that is done, the Court could then have  

settled the payment received by the Official Liquidator from the sale of  

the unsecured assets of UMI.  The amounts, thus, are required to be  

recalculated in terms of the above provisions and the law stated herein.  

33. In the present case, the secured creditor has realized its security  

but without putting the security or the receipts thereof in the common  

hotch potch of the winding up proceedings for the general benefit of the  

creditors.   Thus, in terms of Section 47(1) of the Insolvency Act, the  

secured creditor in the present case is entitled to the balance due to it,  

deducting the net amounts realized.   If the secured creditor would have  

participated in the winding up proceedings in its entirety with the  

security being realised and/or relinquished for the general benefit of the  

creditors and not restricted to the compliance of Section 529 of the Act,  

it would not be entitled to the benefit of Section 529A of the Act.   As  

already discussed, it is not the case herein.   It may also be noticed that  

the amounts, by the consent of the parties, have already been  

disbursed and utilized by the workmen as well as the secured creditors  

in terms of Section 529 of the Act which obviously, in my view, are  

subject to adjustment as per the orders of the Court.

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34. For the reasons afore-recorded, while reiterating the view  

expressed in Andhra Bank (supra), I am of the considered view that the  

High Court should re-compute the amounts payable pari passu  

between the secured creditors and the workmen in accordance with the  

principles stated above.   

35. Therefore, I remand the matter to the Company Court to apply the  

above-stated principles and calculate the amount payable to the  

respective parties afresh and in accordance with law.   

...….…………......................J.                                                     (Swatanter Kumar)

New Delhi; September 21, 2012