TaxTMI 
TaxTMI 
2013 (5) TMI 269
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.... a matter of fact, the main appeal is by Bank of Maharashtra. The Indian Banks Association was not a party to the proceedings before the High Court or before the DRT but it has preferred appeal, after permission was granted, as in its view the impugned judgment if implemented would have far reaching implications on the banking industry as a whole. 3. As will appear, the High Court was concerned with the writ petition filed by the workmen/employees of Paper and Pulp Conversions Ltd. (for short, 'Company') praying therein that direction be issued to the Recovery Officer, Debt Recovery Tribunal, Mumbai III (for short 'DRT III') to recover the amount of Rs. 3 crores from Bank of Maharashtra ('the Bank') which was allowed to be withdrawn being the money realised from the sale of movables of the Company and for issuance of further direction to the Recovery Officer to adjudicate the claims/dues of the workmen/employees as per the list annexed with the writ petition and after adjudication, in priority over all the claims, release the amount due to them. The workmen/employees also prayed in the writ petition for direction to the Central Government to make rules laying down procedure to be ....
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....ectors, it was directed that they would be liable only to the extent they inherited the property from their predecessor in interest. 9. In the recovery proceedings, the workmen/employees of the Company through their Association made an application on 17.9.2003 and prayed that they be allowed to intervene in the matter and their claims be registered before any auction takes place. The workmen also sent a notice to the Company and its Managing Director requesting them to pay their dues. The Company, however, disputed their claim. 10. On 22.01.2004, the Recovery Officer auctioned the movable properties of the Company and received an amount of Rs. 4,70,55,000/- by way of sale proceeds. Of that amount, Rs. 3 crores were disbursed to the Bank on 10.03.2004 and remaining amount of Rs. 1,70,55,000/- was kept aside towards the likely claim of the workmen of the Company. 11. The workmen made an application in the company petition No. 604/1986 before the Bombay High Court on 19.03.2004 for appointment of Provisional Liquidator and for staying further proceedings before the DRT III arising out of the above recovery proceedings. The Bank opposed the application of the workmen before the Comp....
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.... 15. The main submission on behalf of the Bank in laying challenge to the impugned judgment is two fold, (one) the workmen have no claim or right over the security held by a bank or financial institution. Their dues can only be adjudicated in an appropriate court (e.g. Industrial Tribunal) when the company is not in liquidation and DRT has no competence in this regard and (two) if the debtor company is in liquidation and the security is sold in proceedings before DRT and Recovery Officer, the sale proceeds will be distributed by taking into account the pari passu charge to a limited extent of the "workmen's portion" as laid down in Section 529(1)(c) proviso read with Section 529A of the Companies Act, 1956 (for short, 'Companies Act'). 16. Elaborating the above grounds, Mr. Bhaskar P. Gupta, learned senior counsel for the Bank, submitted that under the 1993 Act, DRT has exclusive jurisdiction to entertain and decide applications only from banks and financial institutions for adjudication and recovery of debts due to such banks and financial institutions. The principal purpose of the DRT is adjudication and recovery of dues of the banks and financial institutions. It also has cert....
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....n conferred on DRT, no leave of the Company Court needs to be taken by DRT for adjudication under Section 17 and execution of the recovery certificate issued under the 1993 Act. In support of his submissions, learned senior counsel placed reliance upon paragraphs 50, 63, 64 to 70 of the decision of this Court in Allahabad Bank v. Canara Bank & Anr.[ (2000) 4 SCC 406] . He also referred to Jitendra Nath Singh v. Official Liquidator & Ors.[ (2013) 1 SCC 462] which has followed Allahabad Bank (2000) 4 SCC 406. 18. Learned senior counsel for the Bank submitted that by virtue of a legal fiction contained in the proviso to Section 529(1)(c) read with Section 529(3)(c), the workmen are entitled to participate along with the concerned creditor to a limited extent in the distribution of the sale proceeds by the DRT under Section 19(19). Otherwise, they can have no claim at all. He would submit that Section 529(1)(c) proviso and Section 529A of the Companies Act form part of a composite scheme and can be brought into play only in the case of a company which is being wound up. In a running company, the dues of workmen are not quantified or determined and, therefore, workmen's portion also ca....
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....ion(2005) 8 SCC 190, Mr. L. Nageshwar Rao argued that the workmen's claim can only be considered under Section 19(19) of the 1993 Act where winding up order has been made and the liquidator is in the custody of company's assets. 22. Mr. L. Nageshwar Rao argued that the view of the High Court was clearly in error as DRT is a limited Tribunal created by a statute for adjudication of specific disputes for the benefit of banks and financial institutions and not all kinds of persons. DRT is not a civil court of unlimited jurisdiction or a Company Court with elaborate statutory powers to address all disputes that may arise in adjudicating workmen's claims in winding up proceedings. In this regard, he relied upon a decision of this Court in Nahar Industrial Enterprises Ltd. v. Hong Kong And Shanghai Banking Corporation[(2009) 8 SCC 646] and submitted that it would be jurisdictionally improper and entirely incongruous for a DRT to itself examine, determine and decide upon workmen's claims under Section 529A. 23. It may be noted here that General Industries Kamgar Union (for short, 'Kamgar Union') has made an application being I.A. No. 3 of 2005 in one of the appeals praying therein that ....
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....dation to attract the provisions of Section 19(19). 26. Mr. Colin Gonsalves heavily relied upon a decision of this Court in Rajasthan State Financial Corporation5 and submitted that the issue of jurisdiction of the Company Court and the DRT in respect of companies in liquidation was referred to a three-Judge Bench in view of the apparent conflict between the decisions in Allahabad Bank (2000) 4 SCC 406 and International Coach Builders6. He particularly referred to paragraphs 16 and 17 of the Report in Rajasthan State Financial Corporation5 and submitted that the official liquidator represents the entire body of creditors and also holds a right on behalf of the workmen to have a distribution pari passu with the secured creditors. The official liquidator has the duty for further distribution of the proceeds on the basis of the preference contained in Section 530 of the Companies Act under the directions of the Company Court and, therefore, to ensure the proper working out of the scheme of distribution, it is necessary to associate the official liquidator with the process of sale so that he can ensure in the light of the directions of the Company Court that a proper price is fetched ....
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....eniently answered in light of the statutory provisions. 31. Section 2(d) of the 1993 Act, defines 'bank', which, inter alia, means a banking company. Under Section 2(e) 'banking company' has the meaning assigned to it in clause (c) of Section 5 of the Banking Regulation Act, 1949. 'Financial institution' is defined in Section 2(h). The 'tribunal' established under Section 3 is known as Debts Recovery Tribunal. Under Section 17, the tribunal (DRT) has been conferred jurisdiction, powers and authority to entertain and decide applications from the banks and financial institutions for recovery of debts due to such banks and financial institutions. Section 18 bars the jurisdiction of all other courts and other authorities except the Supreme Court and High Court exercising jurisdiction under Articles 226 and 227 of the Constitution in relation to the matters specified in Section 17. 32. Section 19 provides a comprehensive procedure before the DRT for making an application where a bank or a financial institution has to recover any debt from any person. It also enables DRT to issue certificate of recovery, its execution and all such orders and directions as may be necessary to give effec....
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....he entire amount of such money, or if it is more than the amount of debt due an amount sufficient to discharge the amount of debt so due. 35. Section 34 gives the 1993 Act overriding effect. Sub-section (1) thereof provides that the provisions of the 1993 Act shall have the effect notwithstanding anything inconsistent therewith contained in any other law or in any instrument having effect by virtue of any law. Sub- section (2) of Section 34 provides that the provisions of the 1993 Act or the rules made thereunder shall be in addition to and not in derogation of the enactments stated therein. 36. Section 36 empowers the central government to make rules to carry out the provisions of the 1993 Act. In exercise of the powers conferred under Section 36, the central government has framed the Debts Recovery Tribunal (Procedure) Rules, 1993. 37. The Companies Act has undergone substantial amendments by the Companies (Second Amendment) Act 2002 (11 of 2003) but no notification has been issued so far bringing Act 11 of 2003 into effect. Though Section 441 has been substituted by Section 56 of the above Amendment Act but since it has not come into force, we reproduce Section 441 as it stoo....
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....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) . . . . . . . . (3) For the purposes of this section, section 529A and section 530,- (a) "workmen", in relation to a company, means the employees of the company, being workmen within the meaning ....
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.... 46. DRT has also been vested with power, on adjudication of the application for recovery of debts due to banks or financial institutions, to issue certificate of recovery. On issuance of certificate of recovery, the exclusive jurisdiction has been conferred upon the Recovery Officer in regard to its execution. A complete procedure has been laid down in the 1993 Act for recovery of the debt as per the recovery certificate issued by DRT. Accordingly, adjudication of liability and the recovery of the amount by execution of the certificate are respectively within the exclusive jurisdiction of DRT and the Recovery Officer and no other court or authority can go into the said questions, except as provided in 1993 Act. 47. In Allahabad Bank (2000) 4 SCC 406, the issues relating to the impact of the 1993 Act on the provisions of the Companies Act fell for consideration before this Court. In that case, the following six points were framed for determination: (1) Whether in respect of proceedings under the RDB Act at the stage of adjudication for the money due to the banks or financial institutions and at the stage of execution for recovery of monies under the RDB Act, the Tribunal and the....
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....ating to the liability and the recovery, except as provided in the 1993 Act. On second and third point, it was held that at the stage of adjudication under Section 17 and execution of the certificate under Section 25, the provisions of 1993 Act confer exclusive jurisdiction on the DRT and the Recovery Officer in respect of debts payable to banks and financial institutions and there can be no interference by the company court under Section 442 read with Section 537 or under Section 446 of the Companies Act. In respect of the moneys realized under the 1993 Act, the question of priorities among the banks and financial institutions and other creditors can be decided only by DRT and in accordance with Section 19(19) read with Section 529A of the Companies Act and in no other manner. To this extent, the Companies Act must yield to the provisions of the 1993 Act. The Court held that this position holds good during the pendency of the winding up petition against the debtor company and also after a winding up order is passed. No leave of the company court was necessary for initiating or continuing the proceedings under the 1993 Act. 49. As regards fourth and fifth point, this Court stated ....
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.... bad; similarly, the Companies Act deals with companies including winding up of such companies. The proviso to sub-section (1) of Section 529 and Section 529A being a subsequent enactment, the non obstante clause in Section 529A must prevail over Section 29 of the 1951 Act. This Court further said that the statutory right to sell the property by Corporation under Section 29 of the 1951 Act has to be exercised with the rights of pari passu charge of the workmen created by the proviso to Section 529 of the Companies Act. Under the proviso to sub-section (1) of Section 529, the liquidator shall be entitled to represent the workmen and enforce the above pari passu charge and, therefore, the conditions imposed by the Company Court were justified. If such conditions were not imposed to protect the rights of the workmen, there was every possibility that the secured creditor might frustrate the pari passu right of the workmen. 53. In International Coach Builders (2003) 10 SCC 482, the question under consideration before this Court was whether the rights of the State Financial Corporation under Section 29 of the 1951 Act to sell and realize the security could be exercised without reference....
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....d in para 76 of the Judgment of this Court in Allahabad Bank1 was a good law, this Court answered the question in the negative. Dealing with the question whether the workmen could be directed to be paid on an adhoc basis having regard to their claim of past dues vis- à-vis the claim of Andhra Bank, this Court observed that when a matter was not pending before the DRT under the 1993 Act, in terms of Section 19(19) thereof, the secured creditors would not get priority per se as language in Section 19(19) is qualified by the words "in accordance with the provisions of Section 529A". The claims of the secured creditors are thus required to be considered giving priority over unsecured creditors but their claim would be pari passu with the workmen. While dealing with Section 446 of the Companies Act, this Court held in para 31 (pg. 88) of the Report as follows: "31. Section 446 of the Companies Act indisputably confers a wide power upon the Company Judge, but such a power can be exercised only upon consideration of the respective contentions of the parties raised in a suit or a proceeding or any claim made by or against the company. A question of determining the priorities would ....
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....ining the appropriate permission from the Company Court and acting in terms of the directions issued by that court as regards associating the Official Liquidator with the sale, the fixing of the upset price or the reserve price, confirmation of the sale, holding of the sale proceeds and the distribution thereof among the creditors in terms of Section 529- A and Section 529 of the Companies Act. (iv) In a case where proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 or the SFC Act are not set in motion, the creditor concerned is to approach the Company Court for appropriate directions regarding the realization of its securities consistent with the relevant provisions of the Companies Act regarding distribution of the assets of the company-in-liquidation. 56. What is important to be noticed is that in Rajasthan State Financial Corporation5 the three-Judge Bench stated in no unambiguous terms that once a winding up proceeding has commenced and the Liquidator is put in charge of the assets of the company being wound up, the distribution of the proceeds of the sale of the assets held at the instance of the banks or financial institutions coming u....
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.... "the Securitisation Act") for enforcement of security and whether by virtue of non obstante clauses contained in Section 34(1) of the 1993 Act and Section 35 of the Securitisation Act, the two Central legislations will have primacy over the State legislations. The scheme of 1993 Act was highlighted and it was stated that the said Act facilitated creation of specialized fora i.e. Debts Recovery Tribunals and the Debts Recovery Appellate Tribunals for expeditious adjudication of disputes relating to recovery of the debts due to banks and financial institutions. It was noted that there was no provision either in 1993 Act or the Securitisation Act by which the first charge has been created in favour of banks, financial institutions or secured creditors qua the property of the borrower. With reference to Section 13(9) of the Securitisation Act, this Court said that the legislature has ensured that priority given to the claim of the workmen of a company in liquidation under Section 529A of the Companies Act vis-a-vis the secured creditors like banks was duly respected; the provisions are only part of the distribution mechanism evolved by the legislature and are intended to protect and p....
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....se may be. 131. The Court could have given effect to the non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act vis-à-vis Section 38-C of the Bombay Act and Section 26-B of the Kerala Act and similar other State legislations only if there was a specific provision in the two enactments creating first charge in favour of the banks, financial institutions and other secured creditors but as Parliament has not made any such provision in either of the enactments, the first charge created by the State legislations on the property of the dealer or any other person, liable to pay sales tax, etc., cannot be destroyed by implication or inference, notwithstanding the fact that banks, etc. fall in the category of secured creditors. 60. In Jitendra Nath Singh2 again interpretation of Sections 529 and 529A of the Companies Act came up for consideration. There was a divergence of opinion among the Judges hearing the matter. The majority view gave the following interpretation to Sections 529 and 529A of the Companies Act: 16.1. A secured creditor has only a charge over a particular property or asset of the company. The secured creditor has ....
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.... of secured creditors. Pertinently, while inserting Section 529A in the Companies Act by the Companies (Amendment) Act, 1985, the proviso to sub-section (1) of Section 529 was also inserted which provides 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. 63. A cumulative reading of Sections 529A and 529(1)(c) proviso leads to an irresistible conclusion that where a company is in liquidation, a statutory charge is created in favour of workmen in respect of their dues over the security of every secured creditor and this charge is pari passu with that of the secured creditor. Such statutory charge is to the extent of workmen's portion in relation to the security held by the secured creditor of the company. This position, in our opinion, is equally applicable where the assets of the company have been sold in execution of the recovery certificate obtained by the bank or financial institution against the debtor company when it was not in liquidation but before the proceeds realised from such sale could be fully and finally disbursed, the company had gone into liquidation. Stat....
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....nnot be read in a manner that allows such exercise to be undertaken by the DRT. DRT does not possess necessary statutory powers to address all disputes that may arise in adjudicating workmen's claims in winding up proceedings. The adjudication of workmen's claims against the debtor company is a substantive matter and DRT has neither competence nor machinery for that. Certain incidental and ancillary powers given to DRT do not encompass power to adjudicate upon or decide dues of the workmen of the debtor company. 67. Secondly, Section 19(19) of the 1993 Act is a provision of distribution mechanism and not an independent adjudicatory provision. This provision follows adjudication of claim made by a bank or financial institution. It comes into play where a certificate of recovery is issued against a company registered under the Companies Act which is in winding up. Where the debtor company is not in liquidation, Section 19(19) does not come into operation at all. Following Tiwari Committee Report and Narasimham Committee Report, the present Section 19(19) was incorporated in 1993 Act for protection of pari passu charge of secured creditors, including workmen's dues at the time of dis....
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....realized under the 1993 Act, the DRT has power, competence or authority to determine the workmen's dues of the debtor company. The manner of distribution among secured creditors of the monies realized under the 1993 Act does not clothe DRT to adjudicate the claims of secured creditors other than the banks and financial institutions against the company under Section 19(19). Any statement of law to the contrary in Allahabad Bank1 must be held to be not a good law. 71. In Rajasthan State Financial Corporation (2005) 8 SCC 190, this Court propounded the proposition that a DRT acting under the 1993 Act would be entitled to order the sale of the properties of the debtor, even if a company is in liquidation, through its Recovery Officer but only after notice to the official liquidator or the liquidator appointed by the Company Court and after hearing him. We are in agreement with the above view. Where the winding up petition against the debtor company is pending but no order of winding up has been passed nor any provisional liquidator has been appointed in respect of such company at the time of order of sale by DRT and the properties of the debtor company have been sold in execution of t....
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....is in liquidation, a statutory charge is created in favour of workmen in respect of their dues over the security of every secured creditor and this charge is pari passu with that of the secured creditor. Such statutory charge is to the extent of workmen's portion in relation to the security held by the secured creditor of the debtor company. (iii) The above position is equally applicable where the assets of the debtor company have been sold in execution of the recovery certificate obtained by the bank or financial institution against the debtor company when it was not in liquidation but before the proceeds realized from such sale could be fully and finally disbursed, the company had gone into liquidation. In other words, pending final disbursement of the proceeds realized from the sale of security in execution of the recovery certificate issued by the debt recovery tribunal, if debtor company becomes company in winding up, Section 529A read with Section 529(1)(c) proviso come into operation and statutory charge is created in favour of workmen in respect of their dues over such proceeds. (iv) The relevant date for arriving at the ratio at which the sale proceeds are to be distribu....
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....(viii) The first option must be exercised by DRT only in a situation where no application for distribution towards workmen's dues against the debtor company has been made by the liquidator or the workmen before the DRT. (ix) Where the sale of security has been effected in execution of recovery certificate issued by the DRT under the 1993 Act, the distribution of sale proceeds has to be made by the DRT alone in accordance with Section 529A of the Companies Act and by no other forum or authority. (x) The workmen of the company in winding up acquire the standing of the secured creditors on and from the date of winding up order (or where provisional liquidator has been appointed, from the date of such appointment) and they become entitled to the distribution of sale proceeds in the ratio as explained in the illustration appended to Section 529(3)(c) of the Companies Act. (xi) Section 19(19) of the 1993 Act does not clothe DRT with jurisdiction to determine the workmen's claim against the debtor company. The adjudication of workmen's dues against the debtor company in liquidation has to be made by the liquidator. In other words, once the company is in winding up the only competent au....