TaxTMI 
TaxTMI 
2012 (11) TMI 529
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....ted by the appellant. U.M.I. Special Steel Limited (for short 'the company') is a company registered under the Companies Act. The company became sick and went before the BIFR but the BIFR in its opinion dated 08.03.2002 recommended for winding up of the company. On 05.08.2003, the learned Company Judge of the High Court of Jharkhand passed orders for winding up of the company and appointed the official liquidator as liquidator to conduct the liquidation proceedings in relation to the company and to take over the assets, books and documents of the company. The liquidator then took over the assets of the company and sold some of the assets of the company and paid Rs. 93,64,93,586/- to the secured creditors and Rs. 8,19,22,371.12p to the workmen representing 50% of their verified claims towards wages. When the liquidator sold some more assets and received Rs. 8,51,01,000/-, the appellant filed I.A. No.1511 of 2008 before the learned Company Judge of the High Court contending that the assets of the company situated at Chennai, Pune, Faridabad and Kolkata which have been sold are not properties over which the banks/financial institutions have any charge and therefore, they cannot be tre....
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.... and future and contingent liabilities; and (c) the respective rights of secured and unsecured creditors; as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent: Provided that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen's portion therein, and, where a secured creditor, instead of relinquishing his security and proving his debt, opts to realise his security,- (a) the liquidator shall be entitled to represent the workmen and enforce such charge; (b) any amount realised by the liquidator by way of enforcement of such charge shall be applied rateably for the discharge of workmen's dues; and (c) so much of the debt due to such secured creditor as could not be realised by him by virtue of the foregoing provisions of this proviso or the amount of the workmen's portion in his security, whichever is less, shall rank pari passu with the workmen's dues for the purposes of section 529A. (2) All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the....
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....y workman from a provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the workmen, maintained by the company; (c) "workmen's portion", in relation to the security of any secured creditor of a company, means the amount which bears to the value of the security the same proportion as the amount of the workmen's dues bears to the aggregate of - (i) the amount of workmen's dues; and (ii) the amounts of the debts due to the secured creditors." "529A. Overriding preferential payment.- Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company- (a) workmen's dues; and (b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of section 529 pari passu with such dues, shall be paid in priority to all other debts. (2) The debts payable under clause (a) and clause (b) of sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions." 5. A plain reading of clause (c) of sub-section (1) of Section 529....
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....reof as a security for a debt due to it from the company, it is not a secured creditor for the purposes of Sections 529 and 529A of the Companies Act. 6. Sections 45 and 47 of the Insolvency Act, which enumerate the rights of unsecured creditors and secured creditors respectively are extracted hereinbelow: "45. Debt payable at a future time.- A creditor may prove for a debt not payable when the debtor is adjudged an insolvent as if it were payable presently, and may receive dividends equally with the other creditors, deducting therefrom only a rebate of interest at the rate of six per centum per annum computed from the declaration of a dividend to the time when the debt would have become payable, according to the terms on which it was contracted." "47. Secured creditors.- (1) Where a secured creditor realises his security, he may prove for the balance due to him, after deducting the net amount realised. (2) Where a secured creditor relinquishes his security for the general benefit of the creditors, he may prove for his whole debt. (3) Where a secured creditor does not either realise or relinquish his security, he shall, before being entitled to have his debt entered in the sch....
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....of the proviso to sub-section (1) of Section 529 of the Companies Act states that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen's portion therein. Clause (c) of sub-section (3) of Section 529 of the Companies Act states that the "workmen's portion", in relation to the security of any secured creditor of a company, means the amount which bears to the value of the security the same proportion as the amount of the workmen's dues bears to the aggregate of - (i) the amount of workmen's dues; and (ii) the amounts of the debts due to the secured creditors. Thus, the first limb of the proviso to clause (c) of sub-section (1) of Section 529 of the Companies Act creates a statutory charge over the security of every secured creditor to the extent of the workmen's portion. In other words, every property or asset of an insolvent company, which is being wound up and which has been offered as a security to a secured creditor is subject statutorily to a pari passu charge in favour of the workmen to the extent of the workmen's portion by virtue of the proviso to sub-section (1) of Section 529 of the ....
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....on of the Companies Act or any other law for the time being in force, in the winding up of a company - (a) workmen's dues; and (b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of Section 529 of the Companies Act pari passu with such dues, shall be paid in priority to all other debts. This would mean that the workmen's dues and only the debts due to the secured creditors to the extent such debts rank pari passu with workmen's dues under clause (c) of the proviso to sub-section (1) of Section 529 will have priority over all other debts of the company. The entire object of Section 529A of the Companies Act is to ensure overriding preferential payment of (a) the workmen's dues and (2) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of Section 529 pari passu with the workmen's dues . The effect of the non-obstante clause in the opening part of Section 529A of the Companies Act, therefore, is that notwithstanding anything in the Companies Act and any other law including the Insolvency Act, workmen's dues and dues of the secured creditor which could not be rea....
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....ecurity in a proceeding other than the winding up proceeding but has to pay to the liquidator the costs of preservation of the security till he realizes the security. (ii) over the security of every secured creditor, a statutory charge has been created in the first limb of the proviso to clause (c) of sub-section (1) of Section 529 of the Companies Act in favour of the workmen in respect of their dues from the company and this charge is pari passu with that of the secured creditor and is to the extent of the workmen's portion in relation to the security of any secured creditor of the company as stated in clause (c) of sub-section (3) of Section 529 of the Companies Act. (iii) where a secured creditor opts to realize the security then so much of the debt due to such secured creditor as could not be realized by him by virtue of the statutory charge created in favour of the workmen shall to the extent indicated in clause (c) of the proviso to sub-section (1) of Section 529 of the Companies Act rank pari passu with the workmen's dues for the purposes of Section 529A of the Companies Act. (iv) the workmen's dues and where the secured creditor opts to realize his sec....
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....n 529(1) and it is necessary to understand the scope of the said provision. 65. Under clause (c) of the proviso to Section 529(1), the priority of the secured creditor who stands outside the winding-up is confined to the "workmen's portion" as defined in Section 529(3)(c). "Workmen's portion" means the amount which bears to the value of the security, the same proportion which the amount of the workmen's dues bears to the aggregate of (a) workmen's dues, and (b) the amounts of the debts due to all the creditors. This is explained in the illustration under the said provision. If the workmen's dues in all are, say, Rs.1 lakh and the debt due to all secured creditors is Rs.3 lakhs, the total amount due to all of them comes to Rs.4 lakhs. Therefore, the workmen's share comes to 25% (Rs 1 lakh out of Rs 4 lakhs). Now if the value of the security of a secured creditor (like Canara Bank) is Rs.1 lakh, the "workmen's portion" will be Rs.25,000 which is the pro-rata amount to be shared by the said secured creditor. By virtue of Section 529-A(1)(b) his priority over all others out of other monies available in the Tribunal is restricted to Rs.25,000 only." 14. In Andhra Bank (supra), a three....
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....n the case as Allahabad Bank was indisputably an unsecured creditor. "26. Such an observation was, thus, neither required to be made keeping in view the fact situation obtaining therein nor does it find support from the clear and unambiguous language contained in Section 529-A(1) (a). We have, therefore, no hesitation in holding that finding of this Court in Allahabad Bank to the aforementioned extent does not lay down the correct law." The aforesaid observations of this Court in Andhra Bank (supra) are, thus, to the effect that workmen will not have priority over the dues of the secured creditor and this is because of the unambiguous language of Section 529A (1) that the workmen's dues and the dues of the secured creditor to the extent such debts rank under clause (c) of sub-section (1) of Section 529 pari passu with such dues will have to be paid in priority to all other debts. But as we have held, only where under the second limb of the proviso to clause (c) of sub-section (1) of Section 529 the secured creditor opts to realize the security and is unable to realize a portion of his dues because of the pari passu charge created in favour of the workmen under the first limb of t....
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....e case of UCO Bank v. Official Liquidator [1994] 2 SCL 276 (SC), Andhra Bank (supra), and ICICI Bank Ltd. v. Sidco Leathers Ltd. [2006] 67 SCL 383 (SC). As both the parties to the present lis have relied upon the different decisions of this Court, this Court is now called upon to state the correct exposition of law in view of the divergent views stated in the afore-referred judgments. 4. I may, at the very outset, refer in brief to the facts giving rise to the present appeal. M/s. UMI Special Steels Ltd. (for short, the UMI) is a company incorporated under the provisions of the Act. It possesses assets at different places throughout India. Out of these assets of the UMI, some were mortgaged to the banks and financial institutions while others were not, particularly the assets located at Chennai, Pune, Faridabad and Kolkata. Towards the end of the year 2001, the company became sick. It, thereafter, approached the Board for Industrial and Financial Reconstruction (for short, 'the BIFR') for being declared a sick unit. BIFR, vide its opinion dated 8th March, 2002, opined that UMI should be wound up. On consideration of the opinion of the BIFR, the High Court, vide its order dated 5th....
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....editors in accordance with law. The notice of the O.A. filed by the secured creditors was also issued to the Official Liquidator. 6. One of the workmen, Jitendra Nath Singh, the appellant in the present appeal, filed an application being I.A. No. 1511/2008 in Company Petition No. 2/2002 praying that the sale proceeds from the unsecured assets should first be distributed to the workmen. This IA was rejected by the Company Court vide order dated 28th November, 2008. Against this order, Company Appeal No.10 of 2008 was filed by the workmen before the High Court. Three other workmen also filed an application praying that 50 per cent of their verified claim in respect of wages be paid to them by the official liquidator. The Company Court passed an interim order in Company Appeal No.10 of 2008 dated 24th April, 2009 directing that money be distributed by the official liquidator only after obtaining permission of the Court. In view of this order, the Company Court rejected the claim of the three workmen vide its Order dated 16th April, 2010. Being aggrieved, these three workmen filed Company Appeal No.1 of 2010 before the High Court. 7. Both these appeals were dismissed by the High Cour....
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.... debt, opts to realise his security,- (a) the liquidator shall be entitled to represent the workmen and enforce such charge; (b) any amount realised by the liquidator by way of enforcement of such charge shall be applied rateably for the discharge of workmen's dues; and (c) so much of the debt due to such secured creditor as could not be realised by him by virtue of the foregoing provisions of this proviso or the amount of the workmen's portion in his security, whichever is less, shall rank pari passu with the workmen's dues for the purposes of section 529A. (2) All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the winding up, and make such claims against the company as they respectively are entitled to make by virtue of this section: Provided that if a secured creditor instead of relinquishing his security and proving for his debt proceeds to realise his security, he shall be liable to [pay his portion of the expenses] incurred by the liquidator (including a provisional liquidator, if any) for the preservation of the security before its realization by the secured creditor....
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....ors. Illustration 529A. Overriding preferential payment. - Notwithstanding anything contained in any other provision of this Act, or any other law for the time being in force, in the winding up of a company- (a) workmen's dues; and (b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of section 529 pari passu with such dues, shall be paid in priority to all other debts. (2) The debts payable under clause (a) and clause (b) of sub-section (1) shall be paid in full, unless the assets are insufficient to meet them in which case they shall abate in equal proportions. 530. Preferential payments. - (1) In a winding up subject to the provisions of section 529A, there shall be paid] in priority to all other debts- (a) all revenues taxes, cesses and rates due from the company to the Central or a State Government or to a local authority at the relevant date as defined in clause (c) of sub-section (8), and having become due and payable within the twelve months next before that date; (b) all wages or salary (including wages payable for time or piece work and salary earned wholly or in part by way of ....
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....ny,- (i) on account of wages or salary; or (ii) to him, or in the case of his death, to any other person in his right, on account of accrued holiday remuneration, out of money advanced by some person for that purpose, the person by whom the money was advanced shall, in a winding up, have a right of priority in respect of the money so advanced and paid, up to the amount by which the sum in respect of which the employee or other person in his right would have been entitled to priority in the winding up has been diminished by reason of the payment having been made. (5) The foregoing debts shall- (a) rank equally among themselves and be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions; and (b) so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company, and be paid accordingly out of any property comprised in or subject to that charge. (6) Subject to the retention of such sums as may be necessary for the costs and expenses of the wind....
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....lating to preferential payments which would have applied if this Act had not been passed, shall be deemed to remain in full force." 10. Chapter V of the Act deals with provisions that are applicable to every mode of winding up and in particular, the above provisions deal with the proof and ranking of claims. Section 529 is concerned with the application of insolvency rules to winding up of an insolvent company. The opening language of Section 529 contemplates that in winding up of an insolvent company, the Rules prevalent under the law of insolvency shall be applicable. Thus, the Provincial Insolvency Act, 1920 (for short the "Insolvency Act"), to the extent permissible, would be applicable in regard to the winding up of a company. Section 47 of the Insolvency Act reads as under : "47. Secured creditors.- (1) Where a secured creditor realizes his security, he may prove for the balance due to him, after deducting the net amount realized. (2) Where a secured creditor relinquishes his security for the general benefit of the creditors, he may prove for his whole debt. (3) Where a secured creditor does not either realize or relinquish his security, he shall, befor....
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....the amount of the workmen's dues bears to the aggregate of the amount of the workmen's dues and the amount of the debts due to the secured creditors. The workmen's portion is to be computed in terms thereof with the aid of the illustration given in that provision. Thus, the security of every secured creditor, by fiction of law, is subject to a pari passu charge in favour of the workmen to the extent of the workmen's portion and where the secured creditor, instead of relinquishing his security and proving his debt, opts to realize his security, in that event, so much of the debt due to such secured creditor as could not be realized by him by virtue of the pari passu charge in favour of the workmen or the amount of the workmen's portion in his security, whichever is less, shall rank pari passu with the workmen's dues for the purposes of Section 529A. 13. Section 529A of the Act opens with non-obstante clause, giving the workmen's dues and secured creditors' dues, as defined under the proviso to Section 529(1), an over-riding effect over the other provisions of the Act as well as any other law in the matter of priority of payment of dues. Application of Section 529A of the Act is not....
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....tected under the provisions of Section 529A and stands pari passu with the workmen's charges, but it is only the portion or amount relinquished under proviso to Section 529(1), whichever is less that is protected. In other words, the amount which is due to the secured creditors and remains unpaid due to enforcement of the pari passu charge of the workmen under Section 529(1) is the portion of dues of secured creditors that are protected in terms of Section 529A. There is a direct link in the application of both these provisions. In a situation of the present kind, these provisions would have to be applied collectively and that too, upon the correct appreciation of the legislative intent. As far as Section 530 of the Act is concerned, it simpliciter provides for preferential payments with regard to persons other than those covered under Sections 529 and 529A of the Act. However, in the present case, we are primarily concerned with the application of Sections 529 and 529A. 15. If one analyses the scheme of the above-stated provisions, it is clear that in a winding up petition of an insolvent company, Rules of insolvency would apply to the stated extent. In terms of the proviso to Se....
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....n hotch-potch or even relinquishes the security for general benefit of the creditors at large, then the creditor would not be entitled to the benefit of Section 529A and would stand in line with the unsecured creditors of the company. Further, where the secured creditor has been unable to fully realize his dues owing to the taking of share from his security towards workmen's portion in terms of the proviso to Section 529(1), then to the extent specified, the secured creditor is entitled to a charge pari passu with the workmen's dues for the purposes of Section 529A. 16. The situation may be different where the secured creditor relinquishes his security in favour of or upon realization submits the proceeds in the common hotch-potch in winding up proceedings and for the benefit of the creditors in general. Proviso to Section 529(1) has a very significant role in this entire process for recovery. It has two contents which have to be read conjunctively. First, that creates a pari passu charge by legal fiction on the security of a secured creditor in favour of the workmen and, second, where the secured creditor instead of relinquishing his security and proving his debts opts to realize....
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....editors, would still have a charge over the monies so realized. Thus, the question primarily before the Court in that case was the order of priority of discharging debts between a secured and an unsecured creditor, with respect to funds realized from sale of assets of the debtor company. While dealing with this question, the Court made an observation that the workmen's dues have priority over all other creditors, secured or unsecured, because of Section 529A(1)(a) of the Act. The following paragraphs of this judgment can usefully be referred to at this stage: "62. Secured creditors fall under two categories. Those who desire to go before the Company Court and those who like to stand outside the winding-up. ** ** ** 68. In our opinion, the words "so much of the debt due to such secured creditor as could not be realised by him by virtue of the foregoing provisions of this proviso" obviously mean the amount taken away from the private realisation of the secured creditor by the liquidator b....
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....perties of the Tobacco Division of Duncan Agro Industries Ltd. were transferred to its subsidiary New Tobacco Ltd. The subsidiary had been enjoying diverse financial credit facilities from Andhra Bank which was its secured creditor. Andhra Bank had filed a suit for recovery of its dues. A winding up petition was also filed. Finally, the subsidiary company was ordered to be wound up and the assets of the company were ordered to be taken over by the Official Liquidator. Some assets had been sold by Receivers appointed in the said separate suit, but in view of approval of a scheme of revival of the company, the winding up order was stayed. This scheme of revival, however, failed. Thus, the assets and properties of the company were directed to be sold. The Company Court passed an order directing that out of the sale proceeds of the assets of the company, the wages of the employees and the workmen be paid. Therein, the Andhra Bank was a secured creditor, the dues of the workmen were payable under Sections 529 and 529A of the Act and there were also other creditors of the company. The larger Bench considered various judgments and finally, while commenting upon the observations made by th....
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....the Act, have to rank pari passu with the dues of the workmen, without any preference to the latter. 21. Firstly, this being a Bench of equi-strength, I see no reason for not following the view expressed by this Court in the case of Andhra Bank (supra) and secondly, any other interpretation is likely to defeat the legislative balance in the underlying genesis of the amended provisions of Sections 529 and 529A of the Act. 22. It may also be noticed that prior to the pronouncement of the judgment of this Court in the case of Allahabad Bank (supra), the settled view of this Court was that the charge of the secured creditors and that of the workmen would rank pari passu within the ambit of Section 529A of the Act. [refer UCO Bank (supra)]. Usefully, reference can also be made to the judgment of this Court in the case of A.P. Financial Corporation v. Official Liquidator [2000] 7 SCC 291 wherein this Court was dealing with the provisions of Section 29 of the State Financial Corporations Act, 1951 and the question as to whether these provisions could be implemented, ignoring the pari passu charge of the workmen as contemplated under Sections 529 and 529A of the Act. The High Court, in t....
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....nforcement of such security, to the extent of the workmen's portion therein. As already noticed, the 'workmen's portion' has been explained under sub-section (3)(c) of Section 529 which requires that in relation to the security of any secured creditor of the company, workmen's portion would mean the amount which bears to the value of the security the same proportion as the amount of the workmen's dues bears to the aggregate of the amount of workmen's dues and the amounts of the debts due to the secured creditors. The illustration to this sub-section provides the mode in which the workmen's portion is to be calculated. Once the workmen's portion is computed, then in terms of Section 529A, again it has to be treated as a charge pari passu to the debts of the secured creditor. In the case of the latter, the charge will be limited to the extent such debt ranks under clause (c) of the proviso to sub-section (1) of Section 529 pari passu with such dues for preferential payment. The dues payable to the workmen and the secured creditors have to be paid in priority to all other debts. But the dues payable to the secured creditor will not be more than the amount that remains unsatisfied afte....
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..... If the sale of secured assets is effected by the Official Liquidator subject to control of the Company Court and such amounts are utilized for discharging the debts of the secured creditor as well as statutory charge of the workmen created under Sections 529 and 529A, then, in effect, the secured creditor would be deemed to have participated in the winding up proceedings and not stood outside the same. It is for the reason that a secured creditor has to take steps by filing petition before any other forum just to protect his legal right and to prevent the claim from getting barred by time. On the contrary, if he realizes his security within the four corners of the company law, i.e., before the Official Liquidator and the Company Court, in that event it would not be possible to hold that such secured creditor has given up his option to participate in the winding up proceedings. However, the matter would be quite different where the secured creditor elects not only to institute a petition before the specialized forum but also takes effective steps to realize his security and pursues the proceedings effectively, in which event, the conclusion has to be that such secured creditor has....
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....e protected in terms of Section 529A(1)(b) because the secured creditor has not relinquished its security for the general benefit of the creditors but realized the same in terms of Section 47(1) of the Insolvency Act. The argument raised on behalf of the appellant in this regard is not well-founded. If this contention is accepted in the facts of the present case, then it would run contra to the principles stated by this Court in the case of Andhra Bank (supra) and ICICI Bank (supra). It has already been noticed that the provisions of Section 529A are not controlled and/or subservient to any other provision of the Act or any other law. Once the twin requirements stated in the proviso to Section 529(1) are satisfied, the scheme contemplated under clause (c) of the proviso to Section 529 read with Section 529A of the Act would come into play. The Court cannot overlook the reality that intention of the framers of law could not have been that the public funds, for instance, the money of secured creditor (like banks), should be completely ignored for the benefit of the creditors in general, despite there being a definite protection in law, more so, when the security may be sufficient for....
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....nbsp; The secured creditor and dues of the workmen in the proportion calculated in terms of Section 529A are liable to be paid in preference to all other dues but are pari passu inter se. (Ref. Andhra Bank (supra) 32. Reverting to the facts of the present case, the judgment of the High Court, to the extent it takes the view that the charges of the workmen and secured creditors have to rank pari passu, cannot be faulted with. However, where the learned Single Judge as well as the Division Bench of the High Court have fallen in error of law, is the computation and adjustment of the shares between the workmen, on the one hand and the secured creditors, on the other. Particularly, the learned Single Judge directed the amounts recovered from the secured creditors to be distributed between the workmen and the secured creditors in equal proportion of 50 per cent of their respective admitted claims. This order and calculation is opposed to the very scheme of the above provisions, particularly with respect to determination of the workmen's portion. Another error in the calculation that appears from the record is that though the total sale proceeds from the secured assets were Rs.108.90 cro....