2005 (12) TMI 296 - HC - Companies Law

Textile Labour Association appeal dismissed, workmen's rights protected in reimbursement case

Textile Labour Association Versus IFCI

Textile Labour Association Versus IFCI - [2007] 75 SCL 248 (GUJ.) Issues Involved:1. Validity of the sale of assets of Amruta Mills Ltd.2. Reimbursement of expenses incurred by IFCI.3. Applicability of Supreme Court judgment in International Coach Builders Ltd. v. Karnataka State Financial Corporation.Detailed Analysis:1. Validity of the Sale of Assets of Amruta Mills Ltd.:The Amruta Mills Ltd. was ordered to be wound up by the Court on November 22, 1991. Following this, the assets of the company, excluding lands and buildings, were sold at a public auction under the recovery application filed by the Industrial Finance Corporation of India Ltd. (IFCI) pursuant to section 30 of the Industrial Finance Corporation Act, 1948. The sale was conducted by a court-appointed sale committee, which included representatives from various financial institutions and the Textile Labour Association (TLA). The highest bid of Rs. 2.41 crores was accepted from M/s. Shri Rajeshwari Textiles Co. The sale was confirmed by the court with specific terms and conditions.2. Reimbursement of Expenses Incurred by IFCI:IFCI sought reimbursement of various expenses incurred during the sale process, including security expenses, advertisement costs, valuation, incidental expenses, and insurance premium charges. The learned Single Judge allowed reimbursement for security expenses, advertisement costs, valuation, incidental expenses, and insurance premium related to plant and machinery but disallowed the claim for legal fees and other expenses amounting to Rs. 6,98,670. The TLA opposed this reimbursement, arguing that secured creditors who opt to realize their security outside the winding-up proceedings should bear their own expenses. However, the Single Judge's decision was based on the principle that the official liquidator, representing workmen, has a pari passu charge over the assets, and thus, certain expenses are reimbursable from the sale proceeds.3. Applicability of Supreme Court Judgment in International Coach Builders Ltd. v. Karnataka State Financial Corporation:The TLA's appeal was primarily based on the Division Bench judgment in Gujarat State Financial Corporation v. Official Liquidator, which supported their contention against reimbursement. However, the Supreme Court in International Coach Builders Ltd. v. Karnataka State Financial Corporation reversed the Gujarat judgment, establishing that secured creditors cannot unilaterally realize their security without the consent of the official liquidator representing workmen. The Supreme Court held that the official liquidator is a necessary party in the realization of security and that any sale proceeds must be distributed proportionately among all pari passu charge-holders.The Supreme Court's decision clarified that the rights under section 29 of the SFC Act do not override the provisions of sections 529 and 529A of the Companies Act, 1956, which grant workmen a pari passu charge. Consequently, the TLA's appeal was dismissed, and the Single Judge's order was upheld, confirming the reimbursement of certain expenses to IFCI from the sale proceeds.Conclusion:The High Court of Gujarat dismissed the appeal filed by the Textile Labour Association, confirming the Single Judge's order that allowed partial reimbursement of expenses to IFCI. The court relied heavily on the Supreme Court's judgment in International Coach Builders Ltd. v. Karnataka State Financial Corporation, which emphasized the pari passu charge of workmen and the necessity of the official liquidator's involvement in the realization of security. The decision underscores the legal principle that secured creditors cannot act independently in winding-up proceedings and must account for the rights of workmen and other charge-holders.