2008 (5) TMI 399 - HC - Companies Law

Whether the sum available, from the sale proceeds of the security of a secured creditor, after meeting the principal dues of the secured creditor with interest at the contracted rate till the date of winding up, and the dues of the workmen, can be utilised to pay the secured creditor interest at the contracted rate from the date of winding up till the date of sale of the secured assets or should it be applied for repayment of the principal dues of the unsecured creditors and, only thereafter, for payment of interest at 4 per cent, per annum to all creditors, both secured and unsecured ? Whether the rate of interest payable to the workmen, along with their principal dues, in the absence of an agreement for payment of interest ? Held that - The plant and machinery of the company under liquidation was hypothecated in favour of the Industrial Development Bank of India. They assigned their debt later to Stressed Assets Stabilization Fund. ₹ 83.35 lakhs, realised from the sale of plant and machinery, has been paid to them in its entirety. The balance due to them, which is in excess of ₹ 350 lakhs, has necessarily to be treated as unsecured debt and, in accordance with sections 47(3), 48 and 61(6) of the Provincial Insolvency Act, 1920, read with rule 179 of the Companies (Court) Rules, 1959, the Industrial Development Bank of India would be entitled for payment of interest at 6 per cent, per annum, or 4 per cent, per annum, as the case may be, from the date of winding up, in case any surplus is available after payment in full of the principal due to both the secured and the unsecured creditors. The official liquidator s request that he be permitted to pay 86.56 per cent, to the unsecured creditors, without paying interest at the contracted rate of 15 per cent, per annum to the State Bank of India (the sole charge holder of the fixed assets of the company under liquidation and buildings), from the date of winding up till the date of sale of assets must, therefore, be rejected. In view of the proviso to section 529(1), the security of the secured creditor is deemed to be subject to a pari passu charge in favour of the workmen also. For all practical purposes, a workman is treated as a co-chargeholder along with the secured creditor and would, therefore, be entitled to claim same rate of interest from the assets of the company under liquidation as has been contracted to by the secured creditor which, in the present case, is 15 per cent, per annum. The amount liable to be paid as interest to the State Bank of India is required to be computed by the official liquidator. It is only thereafter, and after the amount required to be set apart to the State Bank of India, the workmen and other dues as detailed hereinabove, are determined, would the official liquidator be in a position to arrive at the sum still available with him which can, in turn, be utilised for payment of other dues.

Summary

Issues Involved:
1. Utilization of sale proceeds for secured creditor's interest post-winding up.
2. Rate of interest payable to workmen in absence of an agreement.

Issue-wise Detailed Analysis:

1. Utilization of Sale Proceeds for Secured Creditor's Interest Post-Winding Up:

The primary issue was whether the sale proceeds of a secured creditor's security, after settling the principal and interest up to the winding-up date and the workmen's dues, should be used to pay the secured creditor's interest at the contracted rate from the winding-up date until the sale date or to repay unsecured creditors' principal dues first. The court held that the secured creditor, in this case, the State Bank of India (SBI), is entitled to interest at the contracted rate of 15% per annum from the winding-up date until the sale date from the sale proceeds of the secured assets. The court emphasized that the security of the secured creditor should be used in its entirety to repay their debt, including interest at the contracted rate, before any surplus is applied to unsecured creditors. This decision was based on a conjoint reading of section 529(1)(c) of the Companies Act and sections 47(3) and 48 of the Provincial Insolvency Act, 1920, which stipulate that the secured creditor can claim interest at the contracted rate until the sale of assets if the security is sufficient to cover the debt.

2. Rate of Interest Payable to Workmen in Absence of an Agreement:

The court addressed the rate of interest payable to workmen, whose dues are to be paid pari passu with the secured creditor's dues. It was held that workmen are entitled to the same rate of interest as the secured creditor, which in this case is 15% per annum, from the date of winding up until the sale of the assets. This interpretation aligns with the objective of section 529A of the Companies Act, which ensures that workmen's dues are treated on par with secured creditors. The court noted that the purpose of section 529A is to protect workmen's interests by ensuring their dues are paid in priority and proportionately with secured creditors' dues. Consequently, the workmen are entitled to the same rate of interest on their dues as the secured creditor from the sale proceeds of the assets.

Additional Observations:

- The court rejected the official liquidator's contention that SBI had waived its right to claim interest post-winding up by not including it in the initial claim. The court found no merit in the argument of estoppel or waiver, emphasizing that the secured creditor's entitlement to interest at the contracted rate from the sale proceeds cannot be denied.
- The court also addressed the claims of the Industrial Development Bank of India (IDBI), which had a charge over the plant and machinery. Since the sale proceeds of the plant and machinery were insufficient to cover IDBI's debt, the remaining debt was treated as unsecured. IDBI was entitled to interest at 6% per annum or 4% per annum, as applicable, from the date of winding up, only if a surplus remained after paying all principal dues to secured and unsecured creditors.
- The court directed the official liquidator to set aside Rs. 1,08,196, along with interest at 15% per annum, for the employees union's claim pending adjudication in W.P. No. 5351 of 2002, before paying interest to SBI.

Conclusion:

The court concluded that SBI is entitled to interest at the contracted rate of 15% per annum from the winding-up date until the sale date from the sale proceeds of the secured assets. The workmen are also entitled to the same rate of interest on their dues. The official liquidator was instructed to compute the interest payable to SBI and set aside the amount claimed by the employees union before distributing any surplus to unsecured creditors.