2019 (8) TMI 273 - HC - Companies Law

Appellant Ordered to Reimburse Security Costs & Workmen's Dues, Directed to Take Possession of Mortgaged Property

The Court held the Appellant responsible for reimbursing security costs and workmen's dues, directing them to take possession of the mortgaged property ... Taking over of property - liabilities of the workmen under Section 529A of the Companies Act, 1956 - costs of security provided at the property by the Official Liquidator - HELD THAT:- It is plain that in terms of the proviso to Section 529(1), the security of every secured creditor is deemed to be subject to a pari passu charge in favour of the workman to the extent of the workman’s dues. Consequently, the impugned order of the learned Single Judge requiring the Appellant to undertake the liability of workmen’s dues cannot be said to be contrary to the law - As far as the obligation of the Appellant to provide security at the site of the property in question is concerned, the proviso to Section 529(2) of the Act is clear in this regard that if the secured creditor proceeds to realise security, it ‘shall be liable to pay his portion of expenses incurred by the liquidator’ for preservation of security. In the present case, even if one were to consider that the Appellant could not have proceeded to realise the security till it actually got possession of the property in question i.e. from the date it was ordered to be de-sealed by the DRT i.e. 12th October 2017, certainly the obligation to preserve the property thereafter was that of the Appellant. The Appellant will be handed over possession of the property in question by the OL subject to the Appellant - Appeal disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether a secured creditor who seeks to realise security in a company under winding up proceedings is liable to meet the workmen's dues to the extent of the workmen's portion in the security under the proviso to Section 529(1) of the Companies Act, 1956. 2. Whether a secured creditor who proceeds to realise its security is liable to pay the portion of expenses incurred by the liquidator for preservation of the security under the proviso to Section 529(2) of the Companies Act, 1956. 3. Whether a secured creditor can contend ignorance of the Official Liquidator's possession where the creditor's representative has visited the property after orders permitting de-sealing and observed the Official Liquidator's locks in place. 4. Whether relief ordering handover of possession to the secured creditor can be conditioned upon payment of workmen's dues, reimbursement of preservation/security costs from a specified date, and continuity or substitution of security arrangements. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Liability of secured creditor for workmen's dues (proviso to Section 529(1)) Legal framework: The proviso to Section 529(1) deems the security of every secured creditor subject to a pari passu charge in favour of the workmen to the extent of the workmen's portion therein. Where a secured creditor opts to realise security instead of relinquishing it and proving the debt, the liquidator is entitled to represent the workmen and enforce such charge; amounts realised by enforcement are to be applied ratably for discharge of workmen's dues; and the residual debt of the secured creditor (to the extent unrealisable due to the workmen's portion) ranks pari passu with workmen's dues for section 529A purposes. Precedent treatment: Reliance was placed by the Official Liquidator on authoritative decisions (notably Pegasus Assets Reconstruction v. M/s. Haryana Concast Ltd.) addressing obligations of secured creditors and the protective role of the liquidator in preserving and realising security. The Court treated such authority as supportive of the statutory scheme; no attempt was made to distinguish or overrule the statutory effect embodied in Section 529(1). Interpretation and reasoning: The proviso to Section 529(1) unambiguously imposes a charge in favour of workmen on a secured creditor's security; thus a secured creditor cannot avoid liability for the workmen's portion by claiming status as a secured creditor standing outside winding up. The Court reasoned that the statutory language deprives a secured creditor of an absolute priority in respect of that portion and affirms the liquidator's role to protect workmen's interests. Ratio vs. Obiter: Ratio - The secured creditor is liable to meet the workmen's dues to the extent mandated by the proviso to Section 529(1); an order requiring the secured creditor to undertake such liability is consistent with the statute. Conclusion: The Court upheld the requirement that the secured creditor pay the workmen's dues (including EPF) as a condition to obtaining possession. Issue 2 - Obligation to reimburse preservation/security expenses (proviso to Section 529(2)) Legal framework: The proviso to Section 529(2) provides that if a secured creditor instead of relinquishing security proceeds to realise it, he shall be liable to pay his portion of expenses incurred by the liquidator (including a provisional liquidator) for the preservation of the security before its realization. The Explanation fixes the secured creditor's portion as the whole of the expenses less the amount which bears to such expenses the same proportion as the workmen's portion in relation to the value of the security. Precedent treatment: Prior authority addressing the interplay between preservation costs and secured creditors' obligations was invoked by the Official Liquidator; the Court relied upon the statutory text rather than novel judicial expansion, treating precedent as consistent with the statutory allocation of preservation costs to the realising secured creditor. Interpretation and reasoning: The proviso is clear and mandatory: where a secured creditor proceeds to realise security, the secured creditor must bear the liquidator's preservation expenses pro tanto. The Court found that once de-sealing orders became effective and the secured creditor could physically take possession, the obligation to preserve the property thereafter shifted to the secured creditor. The Court further held that where the Official Liquidator had deployed security guards and incurred costs for preservation from a specific date, those costs were recoverable from the secured creditor in accordance with the statutory apportionment. Ratio vs. Obiter: Ratio - The secured creditor must reimburse the liquidator for preservation/security expenses incurred prior to realisation, subject to the statutory apportionment formula in the Explanation to the proviso to Section 529(2). Conclusion: The Court directed that the secured creditor pay the costs of security provided by the Official Liquidator from 12th October 2017 (the date after DRT de-sealing orders) until handing over of possession, and either continue or immediately substitute equivalent security to avoid any gap. Issue 3 - Knowledge of Official Liquidator's possession and estoppel to claim ignorance Legal framework: The principle that a party who has actual knowledge of and physical access to property cannot feign ignorance of possession by another, when observed at the premises, is a basic factual inference affecting entitlement to relief. Precedent treatment: The Court treated the factual matrix and prior orders (DRT de-sealing orders and presence of Official Liquidator's locks) as determinative; no novel precedent was required to resolve the question of notice. Interpretation and reasoning: The Court found that after effective de-sealing, the secured creditor's officer visited the property on 31st October 2017 and observed the Official Liquidator's locks; at that point the secured creditor could not maintain unawareness of the Official Liquidator's possession. The Court rejected the contention that non-publication of the citation appointing the Official Liquidator absolved the secured creditor of notice where physical indicators of possession were present. Ratio vs. Obiter: Ratio - Actual observation of the Official Liquidator's locks by the secured creditor's representative constituted notice such that the secured creditor was not entitled to claim ignorance of the Official Liquidator's possession. Conclusion: The secured creditor was held to have constructive/actual notice of the Official Liquidator's possession and could not excuse non-action on grounds of lack of publication. Issue 4 - Conditions for handover of possession and discretion of the Court Legal framework: Courts may condition relief in possession disputes on equitable and statutory obligations being discharged; Section 529 provisos impose statutory obligations which can be made pre-conditions to relief. Precedent treatment: The Court applied statutory mandates and equitable considerations; prior decisions concerning secured creditors' obligations in winding up informed the exercise of discretion but did not override the statutory text. Interpretation and reasoning: Balancing statutory obligations and equities, the Court modified the trial court's order only to the extent of specifying that handover of possession would occur upon satisfaction of identified statutory liabilities: (1) payment of workmen's dues including EPF; (2) reimbursement of security costs incurred by the Official Liquidator from the date the secured creditor could have taken effective possession (12th October 2017) until handover; and (3) continuity or substitution of security arrangements to avoid gaps. The Court emphasized that each case depends on its facts and that the order did not create a precedent beyond the stated circumstances. Ratio vs. Obiter: Ratio - Possession may be handed over to a secured creditor subject to fulfillment of liabilities mandated by Sections 529(1) and 529(2) and such further conditions as necessary to protect the company's assets and workmen's interests. Conclusion: The Court ordered handover of possession subject to the three specified conditions and permitted the secured creditor to coordinate with the Official Liquidator to fix the precise date of takeover; the Court declined to treat the order as a precedent for other cases.