Earmarked creditor fund under a sanctioned scheme cannot be diverted by priority claims while the company remains a going concern.

A court-constituted fund expressly earmarked under a sanctioned scheme for pre-scheme unsecured creditors had to be used for that class alone. Claims already adjudicated by the Registrar and accepted in earlier orders were treated as final and could not be reopened without legal basis. Priority provisions under the Companies Act and the provident fund and ESI statutes did not permit workers to divert the earmarked fund where the company was continuing as a going concern, not undergoing actual winding up. The contrary direction for fresh adjudication was therefore inconsistent with the binding scheme and prior orders, and payment from the specially reserved fund was upheld.

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Issues: (i) whether the appellants, as pre-scheme unsecured creditors, were entitled to payment from the fund specifically earmarked under the sanctioned scheme; (ii) whether the workers could withhold or divert that fund by invoking priority under the Companies Act and the provident fund and ESI statutes; (iii) whether the Division Bench could direct re-adjudication of claims already adjudicated by the Registrar and accepted in earlier orders.

Issue (i): whether the appellants, as pre-scheme unsecured creditors, were entitled to payment from the fund specifically earmarked under the sanctioned scheme.

Analysis: The fund created by the earlier orders was maintained for payment of pre-scheme unsecured creditors alone. The claims of the appellants had been included in the list of pre-scheme creditors, adjudicated by the Registrar with the assistance of the Chartered Accountant, and accepted in earlier proceedings. The scheme remained operative, the company was being run as a going concern, and all other unsecured creditors of the same class had already been paid.

Conclusion: The appellants were entitled to payment from the earmarked fund.

Issue (ii): whether the workers could withhold or divert that fund by invoking priority under the Companies Act and the provident fund and ESI statutes.

Analysis: The scheme itself made separate arrangements for workers' dues and statutory liabilities, while the disputed fund was reserved for unsecured creditors. Section 529A of the Companies Act, 1956 was held inapplicable because the company was not in an actual winding-up process but was continuing as a going concern under a sanctioned scheme. The statutory priority provisions under the provident fund and ESI enactments did not justify diverting a fund already earmarked by binding court orders for another class of creditors.

Conclusion: The workers could not oppose payment to the appellants from the earmarked fund on that basis.

Issue (iii): whether the Division Bench could direct re-adjudication of claims already adjudicated by the Registrar and accepted in earlier orders.

Analysis: The claims had already been finally adjudicated and recognized in earlier judicial orders. In the absence of any legal basis to reopen that adjudication, the direction for fresh adjudication was inconsistent with the earlier binding orders and the settled status of the claims.

Conclusion: The direction for re-adjudication was impermissible.

Final Conclusion: The appellants' entitlement as pre-scheme unsecured creditors was upheld, the contrary directions of the Division Bench were set aside, and payment from the specially earmarked fund was ordered.

Ratio Decidendi: Where a court-constituted fund is expressly earmarked for a defined class of creditors under a continuing sanctioned scheme, claims already finally adjudicated in that class cannot be reopened, and priority provisions applicable to winding-up do not override the binding allocation of such fund while the company continues as a going concern.

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