2007 (8) TMI 445 - HC - Companies Law

Winding up Overriding preferential payments - Held that - Provident fund dues of workmen, thus, rank alongside the debts of the secured creditors of a company in liquidation to the extent that the same are covered by the securities. Provident fund dues of other employees stand below the workmen s dues on account of provident fund and the secured creditors dues on a construction of section 529A and section 530 of the Companies Act. In the instant case, the Provident Fund Commissioner has an equal claim, along with the secured creditors of the company in liquidation in so far as such debts are covered by the securities, for the sum of ₹ 1323.80. The quantum of the secured creditors dues and the provident fund dues of the workmen have to be ascertained and the sum of ₹ 1323.80 has to be paid out by the official liquidator to the secured creditors and the provident fund authorities on a pro rata basis. Since, it appears that the claim of the provident fund authorities on account of workmen s provident fund is an excess of the sum available, without taking into account the secured creditors debts, the sums due on account of other employees provident fund cannot be met out of the money available for disbursement.

Issues Involved:
1. Whether provident fund dues of all employees of a company in liquidation should stand on the same footing as workmen's dues.
2. Interpretation of Sections 529, 529A, and 530 of the Companies Act, 1956.
3. Interaction between the Companies Act, 1956, and the Employees' Provident Funds and Miscellaneous Provisions Act, 1952.
4. Priority of payment of provident fund dues in the context of a company in liquidation.

Detailed Analysis:

1. Provident Fund Dues and Workmen's Dues:
The core issue is whether provident fund dues of all employees of a company in liquidation should be treated equally with workmen's dues. The judgment clarifies that provident fund dues of workmen are included within the definition of "workmen's dues" as per Section 529(3)(b)(iv) of the Companies Act, 1956. Consequently, these dues stand at par with the dues of secured creditors to the extent covered by the security.

2. Interpretation of Sections 529, 529A, and 530 of the Companies Act, 1956:
- Section 529: This section incorporates insolvency rules into the winding up of insolvent companies, detailing the treatment of debts, valuation of liabilities, and rights of creditors. The proviso to Section 529(1) establishes a pari passu charge in favor of workmen over secured creditors' securities.
- Section 529A: Introduced in 1985, this section gives overriding preferential payments to workmen's dues and debts due to secured creditors, to be paid in priority to all other debts.
- Section 530: This section outlines the preferential payments in a winding-up scenario, subject to Section 529A. It includes payments due to employees from provident funds but explicitly excludes workmen from the definition of "employee" for this section.

3. Interaction between the Companies Act, 1956, and the Employees' Provident Funds and Miscellaneous Provisions Act, 1952:
- Section 11 of the 1952 Act: This section prioritizes the payment of provident fund contributions over other debts. Sub-section (2) of Section 11 states that such dues shall be the first charge on the assets of the establishment, to be paid in priority to all other debts.
- The judgment emphasizes that Section 11(2) cannot derogate from Section 11(1) and must be read in harmony. Section 11(1) aligns with Section 530 of the Companies Act, which is subservient to Section 529A. Consequently, the provident fund dues of workmen are prioritized over those of other employees.

4. Priority of Payment of Provident Fund Dues:
The judgment concludes that provident fund dues of workmen rank alongside the debts of secured creditors to the extent covered by the securities. Other employees' provident fund dues are ranked below workmen's dues and secured creditors' dues. The official liquidator must ascertain the quantum of secured creditors' dues and workmen's provident fund dues and disburse the available sum on a pro-rata basis. In this case, the provident fund authorities have a claim of Rs. 1323.80, which must be paid out proportionally.

Conclusion:
The provident fund dues of workmen are given equal priority with secured creditors' dues under Section 529A of the Companies Act, 1956. The provident fund dues of other employees are ranked lower. The judgment mandates that the official liquidator disburse the available funds on a pro-rata basis, prioritizing workmen's dues and secured creditors' dues. The application is disposed of accordingly, with no order as to costs.

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