Workmen's pari passu priority governs sale proceeds where secured assets are sold during winding up proceedings.
Where secured assets are sold in the context of winding up proceedings, the statutory scheme requires the sale proceeds to respect workmen's pari passu priority under section 529A of the Companies Act, 1956, read with the second proviso to section 13(9) of the SARFAESI Act. The text also notes that abatement of BIFR proceedings does not arise automatically unless the secured creditor's measures are brought to the notice of the BIFR or Company Court, and that a pre-winding-up sale does not necessarily avoid the protective mandate governing workmen's dues. The secured creditor, including a consortium, must deposit the proportionate proceeds with the official liquidator for distribution.
Issues: (i) whether the reference before the Board for Industrial and Financial Reconstruction had abated on account of measures taken under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (ii) whether the sale of secured assets made before the winding up order could escape the mandate of the second proviso to section 13(9) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; and (iii) whether the sale proceeds were liable to be deposited for payment of workmen's dues in accordance with section 529A of the Companies Act, 1956.
Issue (i): whether the reference before the Board for Industrial and Financial Reconstruction had abated on account of measures taken under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
Analysis: The secured creditor had not brought its measures under section 13(4) of the Securitisation Act to the notice of the Board for Industrial and Financial Reconstruction or the Company Court before the winding up order. The Court held that abatement under the second proviso to section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 would not operate automatically in such circumstances, because the Board must be made aware of the secured creditor's action for the reference to be treated as abated. Since that was not done, the proceedings under the Sick Industrial Companies (Special Provisions) Act, 1985 culminating in winding up were treated as valid and binding.
Conclusion: The reference was not treated as having abated, and the winding up order remained valid against the secured creditor.
Issue (ii): whether the sale of secured assets made before the winding up order could escape the mandate of the second proviso to section 13(9) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
Analysis: The Court treated the expression "being wound up" in the second proviso to section 13(9) of the Securitisation Act as covering the situation where winding up proceedings had in substance commenced before the sale, especially where delay in placing the BIFR opinion before the Company Court could not prejudice the workmen. Relying on the protective object of the provision, the Court also held that the sale, at the least, was voidable because the secured creditor had proceeded without intimating the Board for Industrial and Financial Reconstruction, which retained control over the assets until the winding up order was passed.
Conclusion: The sale did not escape the operation of the second proviso to section 13(9) of the Securitisation Act, and the sale proceeds remained liable to be dealt with under the workmen-protection mechanism.
Issue (iii): whether the sale proceeds were liable to be deposited for payment of workmen's dues in accordance with section 529A of the Companies Act, 1956.
Analysis: The Court construed the statutory scheme of section 529A of the Companies Act, 1956 read with the second proviso to section 13(9) of the Securitisation Act as conferring priority on workmen's dues and requiring the secured creditor, including the consortium represented by the bank, to deposit the proportionate sale proceeds with the liquidator. The beneficial object of protecting workmen was emphasised, and the consortium was held proportionately answerable for compliance.
Conclusion: The secured creditor and the consortium were directed to deposit the workmen's dues with the official liquidator out of the sale proceeds.
Final Conclusion: The workmen's statutory priority was enforced over the secured creditor's appropriation of sale proceeds, and the consortium was bound to deposit the dues with the official liquidator for distribution in accordance with the winding up regime.
Ratio Decidendi: Where secured assets are sold during the subsistence of winding up proceedings or after the statutory winding up process has effectively commenced, the sale proceeds must be applied in conformity with the workmen's pari passu priority under section 529A of the Companies Act, 1956, and the protective mandate of section 13(9) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
TaxTMI 
AI Drafter ✕
TaxTMI 
