2007 (12) TMI 290 - HC - Companies Law

Overriding preferential payments - Whether secured creditor as of right is entitled to be paid any amount due even before adjudication claim by liquidator? Held that - In view of the legal position payment of moneys to secured creditors by way of interim disbursement ignoring section 529A of the Act does not arise. Furthermore admittedly the claims made by the secured creditors as well as workers are under adjudication and in such a situation even if interim order is passed in exercise of inherent jurisdiction the same would result in denying the right of workers to claim their dues and also renders section 529A of the Act ineffective. Such an interpretation is neither permissible nor proper. Reason for this Court in allowing interim payment is that by paying at least a part of loan amount to the secured creditors financial damage already done can be ameliorated to certain extent. Rule of practice as is in vogue cannot however ignore sections 529 529A and 530 of the Act. When the liquidator is adjudicating the claim made by the secured creditors other creditors and also workmen this Court by resorting to such practice cannot and should not make orders directing OL to make interim payment. Application dismissed.

Summary

Issues:
1. Interim payment to secured creditors before adjudication of claims by the Official Liquidator.
2. Interpretation of sections 457 and 529A of the Companies Act, 1956 regarding the right of secured creditors to receive payment.
3. Legal position on the treatment of workmen dues and secured creditors' dues in liquidation proceedings.

Analysis:
1. The judgment dealt with an application by three secured creditors seeking interim payment from the Official Liquidator (OL) before the adjudication of their claims. The creditors argued for the disbursement of 50% of the sale proceeds, citing the amount lying to the credit of the company. However, the OL opposed the application, emphasizing the pending claims of workmen and the need for adjudication under sections 529, 529A, and 530 of the Act.

2. The Court analyzed the provisions of sections 457 and 529A of the Companies Act, 1956. It concluded that there was no inherent power for the Court or OL to make interim payments to secured creditors before the adjudication of their claims. The judgment highlighted that a similar application by the creditors had been rejected previously, indicating the lack of legal basis for such payments.

3. Referring to the legal position established in Textile Labour Association v. Official Liquidator, the Court emphasized the equal treatment of workmen dues and secured creditors' dues in liquidation proceedings. It underscored that workmen dues are to be treated as prior to other dues, and the assets of the company remain charged for the payment of workers' dues pari passu with secured creditors.

4. The Court dismissed the application, emphasizing that the practice of allowing interim payments to secured creditors after asset realization should not override statutory provisions. It highlighted that such practices could undermine the rights of workmen and the effectiveness of section 529A of the Act. The judgment concluded that the application lacked merit and was therefore dismissed.