1994 (3) TMI 330 - HC - Companies Law

Summary

Issues: Application under section 529(2) of the Companies Act, 1956 seeking direction to secured creditors to pay watch and ward staff salaries and arrears. Interpretation of section 529(2) regarding liability of secured creditors for expenses incurred by the official liquidator. Determining the proportion in which secured creditors must bear the expenses.

In this judgment by the High Court of Andhra Pradesh, an application was filed under section 529, sub-section (2) of the Companies Act, 1956, by the official liquidator seeking direction for the secured creditors, Bank of India and the A.P. Industrial Development Corporation (APIDC), to pay the salaries of watch and ward staff and arrears from February 1, 1992. The company in question had been wound up, and the bank and APIDC were secured creditors. The bank had paid salaries until January 1992 but stopped, citing inability to sell company assets for reimbursement. The APIDC had not informed the official liquidator of its actions regarding security. The bank and APIDC had filed counters stating their positions and amounts due to them from the company. The official liquidator argued that secured creditors are liable for expenses under section 529(2) of the Act.

The bank contended that the section applies only to insolvent companies and that the official liquidator should incur expenses first and seek reimbursement later. However, the court rejected this argument, citing precedents and the recommendation of the Companies Act Amendment Committee. The court also rejected the contention that the bank should not bear the entire expense, stating that both secured creditors should share the burden until the APIDC decides to relinquish its security. The court determined the amounts due to the bank and APIDC and directed them to pay salaries in a 2:5 ratio.

The court held that the APIDC, being a secured creditor, is also liable to contribute to the expenses along with the bank until it decides to relinquish its security. The court directed the APIDC to pay arrears of salaries from February 1992 to February 1994, while the bank and APIDC were instructed to pay salaries from March 1994 onwards in a specified ratio. The judgment clarified that the APIDC could seek exemption from the liability by opting out of the winding-up proceedings. The court allowed the company's application and directed the payments to be made accordingly.