2007 (11) TMI 408 - HC - Companies Law

Appellant granted challenge opportunity in company liquidation case, court finds order lacking statutory analysis.

Official Liquidator, Jiyajeerao Cotton Mills Ltd. (In Liquidation) Versus Board For Industrial And Financial Reconstruction

The court allowed the appellant to challenge the order dated 4-4-2007 in a company liquidation case, emphasizing the need for appropriate opportunity. The ... Winding up - Overriding preferential payment - Held that:- Once it is held that section 529A has effected overriding preferential payment and treats the dues of the workmen and debts due to the secured creditors at par then before entering into any other controversy the Company Court is obliged to see as to whether the amounts already paid or proposed to be paid to the workmen would stand pari passu with the rights of the secured creditors. With due respect to the learned Company Judge, it is held that the learned Single Judge did not see as to whether the payment of amount of ₹ 6,45,40,834 would still be under the provisions of section 529A, whether it would come beyond the pari passu claim of the workmen and whether the Department still would be entitled to recover the money before settlement of the dues of the secured creditors so also of the workmen. It appears that all these arguments were not raised before the learned Single Judge and the question for making an order on those lines never cropped up before the learned Single Judge. With utmost respect at our command we set aside the judgment/order dated 4-4-2007, passed by the learned Single Judge. As a consequence of this order, we direct respondent No. 3 to deposit back the amount of ₹ 6,45,40,834 with the Official Liquidator. We remit the matter to the learned Single Judge with a request to reconsider the entire matter in accordance with law. Issues:1. Challenge to orders dated 25-4-2007 and 4-4-20072. Priority of payment between secured creditors and workers in a company liquidationAnalysis:1. The appellant initially challenged the order dated 25-4-2007 and later sought to challenge the order dated 4-4-2007. The court allowed the appellant to challenge the latter order as well, emphasizing the need for appropriate opportunity. The company petition was filed in 1997, leading to liquidation in 1998 under the Official Liquidator's supervision.2. The dispute revolved around the direction given by the Company Judge to the Official Liquidator to deposit a substantial amount with the employees' provident fund organization. The priority of payment between secured creditors and workers was debated, with arguments based on the Companies Act and the Provident Funds Act. The court examined the provisions of section 529, 529A, and 530 of the Companies Act to determine the hierarchy of payment.3. The legal representatives presented conflicting views on the priority of payments, with emphasis on the rights of workers and the obligations of the Official Liquidator. Reference was made to a Supreme Court judgment regarding the interpretation of section 529A and the interplay between workmen's dues and secured creditors' claims. The court highlighted the need to ensure proper distribution of assets in line with the relevant legal provisions.4. The court concluded that the Company Judge's order lacked a thorough analysis of whether the payment directed to the employees' provident fund organization adhered to the statutory priorities outlined in section 529A. Consequently, the judgment dated 4-4-2007 was set aside, instructing respondent No. 3 to return the deposited amount to the Official Liquidator for reconsideration. The matter was remitted to the Company Judge for a reevaluation in compliance with the law, with a scheduled appearance date set for the involved parties. No costs were imposed in this decision.