Workmen's portion under company winding up includes second-charge debt, while secured creditors' inter se priority remains unchanged.
For winding up calculations under Sections 529 and 529A of the Companies Act, 1956, a second-charge secured creditor's debt must be included in computing the workmen's portion and the distributable amount, because all secured creditors are treated together for this statutory pari passu scheme. The provisions do not distinguish between first-charge and second-charge creditors for that computation. However, they do not alter inter se priority among secured creditors, which continues to be governed by general property law under Section 48 of the Transfer of Property Act, 1882.
Issues: (i) Whether, for computing workmen's portion and distribution under Sections 529 and 529A of the Companies Act, 1956, the secured debt of a creditor holding a second charge must also be taken into account. (ii) Whether Sections 529 and 529A make any distinction between secured creditors holding first charge and second charge, or alter their inter se priority.
Issue (i): Whether, for computing workmen's portion and distribution under Sections 529 and 529A of the Companies Act, 1956, the secured debt of a creditor holding a second charge must also be taken into account.
Analysis: The scheme of Section 529 creates a pari passu charge in favour of workmen over the security of every secured creditor to the extent of the workmen's portion. The expression "workmen's portion" under Section 529(3)(c) is worked out by comparing the workmen's dues with the aggregate of the dues of all secured creditors. The statutory language uses the plural and the illustration shows that all secured debts are to be included while computing the ratio.
Conclusion: The debt of a secured creditor holding a second charge must be included while computing the workmen's portion and the amount distributable under Sections 529 and 529A.
Issue (ii): Whether Sections 529 and 529A make any distinction between secured creditors holding first charge and second charge, or alter their inter se priority.
Analysis: Sections 529 and 529A place workmen and secured creditors in a preferential class for winding up, but they do not deal with inter se priorities among secured creditors. The statutory protection of workmen does not efface the general law governing priority between mortgagees. That inter se priority continues to be governed by Section 48 of the Transfer of Property Act, 1882.
Conclusion: There is no distinction under Sections 529 and 529A between first charge and second charge secured creditors for the purpose of workmen's computation, but their inter se priority remains governed by general property law.
Final Conclusion: The Committee was required to include the second-charge secured debt in the distribution calculus, and the matter was sent back for recalculation of the payable shares in accordance with the statutory scheme.
Ratio Decidendi: For winding up purposes, all secured creditors are to be treated as one class for computing workmen's portion and pari passu distribution under Sections 529 and 529A of the Companies Act, 1956, while their inter se priority is preserved under the general law governing mortgages.
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AI Drafter ✕
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