1994 (7) TMI 229 - SC - Companies Law

Winding up of insolvent companies - Held that - Appeal dismissed. A debt due to a secured creditor, when recovered by realisation of the security after commencement of the winding up proceedings, results in depletion of the assets in the hands of the Official Liquidator. This provision is intended to protect the interests of the workmen in proceed- ings for winding-up. In view of the nature of workmen s dues being similar to those of secured creditors, the purpose of this provision is to place the workmen at par with the secured creditors and create a statutory charge in their favour on all available securities forming part of the assets of the company in liquidation so that the workmen also share the securities pari passu with the secured creditors. The workmen contribute to the growth of the capital and must get their legitimate share in the assets of the company when the situation arises for its closure and distribution of its assets first among the secured creditors due to winding up of the company. The aforesaid amendment made in the Act is a statutory recognition of this principle equating the legitimate dues of the workmen with the debts of the secured creditors of the company. To achieve this purpose, it is necessary that the amended provision must apply to all available securities which form part of the assets of the company in liquidation on the date of the amendment. The conclusion reached by the Division Bench of the High Court is supported by this reason.

Summary

Issues:
Interpretation of the proviso to sub-section(1) of section 529 of the Companies Act, 1956 after the amendment in 1985.

Analysis:
In Company Petition No. 27 of 1971, a winding-up order was made on the ground that the company was unable to pay its debts. The appellant UCO Bank, a secured creditor, obtained a decree in 1976 to recover its debt and chose to stand outside the winding-up proceedings. The Companies Act was amended in 1985 to prioritize workers' dues in case of company closure. The main issue in this appeal was the interpretation of the proviso to section 529(1) inserted by the amendment. The appellant argued that the amendment does not apply to a secured creditor's claim based on a decree obtained before the amendment. However, the Court rejected this contention.

The proviso to section 529(1) creates a charge in favor of workmen on every security available to secured creditors at the time of the amendment. This charge applies even if the security remained unrealized when the amendment came into force. The objective is to ensure that workers' dues rank equally with secured creditors and above government dues. The Court emphasized that the literal construction of the proviso aligns with the legislative intent and promotes the objective of the amendment.

The provision aims to protect workmen's interests in winding-up proceedings by placing them at par with secured creditors. It ensures that workmen share securities equally with secured creditors when a company is liquidated. The amendment recognizes the principle of equating workmen's legitimate dues with secured creditors' debts. Therefore, the amended provision must apply to all available securities forming part of the company's assets in liquidation. The Court upheld the Division Bench's decision based on these reasons.

The Court dismissed the appeal and awarded costs to the respondent.