JITENDRA NATH SINGH Vs OFFICIAL LIQUIDATOR .
Bench: S.H. KAPADIA,A.K. PATNAIK,SWATANTER KUMAR
Case number: C.A. No.-006755-006755 / 2012
Diary number: 2568 / 2011
Advocates: APARNA JHA Vs
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1
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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and may receive dividends equally with the other creditors, deducting therefrom only a rebate of interest at the rate of six per centum per annum computed from the declaration of a dividend to the time when the debt would have become payable, according to the terms on which it was contracted.” “47. Secured creditors.- (1) Where a secured creditor realises his security, he may prove for the balance due to him, after deducting the net amount realised.
(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 realise 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 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 realisation redeem it on payment to the creditor of the assessed value.
(5) Where a creditor, after having valued his security, subsequently realises it, the net amount realised 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 shares in any dividend.”
On a reading of the two provisions quoted above, we find that an
unsecured creditor is entitled under Section 45 of the Insolvency Act to
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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