2012 (11) TMI 529 - SC - Companies Law

Claim of secured creditors and the workmen to balance due - company became sick - BIFR recommended for winding up of the company - Held that - It is worthwhile to note that the proviso to Section 529 creates a deeming fiction in law and makes it clear that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen, to the extent of the workman s portion thereunder. Section 529A of the Act opens with non-obstante clause, giving the workmen s dues and secured creditors dues, as defined under the proviso to Section 529(1), an over-riding effect over the other provisions of the Act as well as any other law in the matter of priority of payment of dues. A secured creditor who has a charge over the assets of a company in winding up, merely by instituting an application before the DRT or any other special forum without effectively pursuing that remedy and taking effective steps to realize his security would not stand outside the winding up proceedings. If the sale of secured assets is effected by the Official Liquidator subject to control of the Company Court and such amounts are utilized for discharging the debts of the secured creditor as well as statutory charge of the workmen created under Sections 529 and 529A, then, in effect, the secured creditor would be deemed to have participated in the winding up proceedings and not stood outside the same. It is for the reason that a secured creditor has to take steps by filing petition before any other forum just to protect his legal right and to prevent the claim from getting barred by time. Thus one fact is clear that respondent No.8 has realized its security without prejudice to the proceedings taken by it before the Debts Recovery Tribunal. Furthermore, the security was realized strictly within the scope of Section 529(1) and its proviso. That has to be protected in terms of Section 529A(1)(b) because the secured creditor has not relinquished its security for the general benefit of the creditors but realized the same in terms of Section 47(1) of the Insolvency Act. Once the twin requirements stated in the proviso to Section 529(1) are satisfied, the scheme contemplated under clause (c) of the proviso to Section 529 read with Section 529A of the Act would come into play. The Court cannot overlook the reality & the scheme of these provisions, thus, has to be understood to make it practicable and in consonance with the accepted commercial principles. It is precisely for these reasons that it is to be accepted that workmen s charges as well as that of the secured creditors have to be paid in preference to all others, but with inter se pari passu charge on the amounts realized from the sale of the security or otherwise. As in the present case, the secured creditor has realized its security but without putting the security or the receipts thereof in the common hotch potch of the winding up proceedings for the general benefit of the creditors. Thus, in terms of Section 47(1) of the Insolvency Act, the secured creditor in the present case is entitled to the balance due to it, deducting the net amounts realized. If the secured creditor would have participated in the winding up proceedings in its entirety with the security being realized and/or relinquished for the general benefit of the creditors and not restricted to the compliance of Section 529 it would not be entitled to the benefit of Section 529A. As already discussed, it is not the case herein. It may also be noticed that the amounts, by the consent of the parties, have already been disbursed and utilized by the workmen as well as the secured creditors in terms of Section 529 which obviously are subject to adjustment as per the orders of the Court. Thus reiterating the view expressed in Andhra Bank Versus Official Liquidator (2005 (3) TMI 465 - SUPREME COURT OF INDIA) the High Court should re-compute the amounts payable pari passu between the secured creditors and the workmen in accordance with the principles stated above.

Issues Involved:
1. Interpretation of Sections 529 and 529A of the Companies Act, 1956.
2. Rights of secured creditors versus workmen's dues.
3. Application of insolvency rules in the winding up of insolvent companies.
4. Priority of payment between workmen's dues and secured creditors' dues.
5. Determination of pari passu charge and its implications.

Issue-Wise Detailed Analysis:

1. Interpretation of Sections 529 and 529A of the Companies Act, 1956:
The primary issue revolves around the interpretation of Sections 529 and 529A of the Companies Act, 1956. The appellant contends that the assets of the company sold, which were not mortgaged to the banks/financial institutions, should prioritize payment to the workmen before any disbursement to the secured creditors. The respondents argue that the claims of workmen and secured creditors stand pari passu, meaning they should be treated equally, irrespective of whether the property was mortgaged or not.

2. Rights of Secured Creditors versus Workmen's Dues:
The judgment clarifies that under Section 529(1)(c), the rights of secured and unsecured creditors in the winding up of an insolvent company are the same as under the law of insolvency. A secured creditor is defined as one holding a mortgage, charge, or lien on the property of the debtor. The court asserts that a secured creditor has rights only over the specific property offered as security, while unsecured creditors have rights over all other properties of the insolvent company. The proviso to Section 529(1) creates a statutory pari passu charge in favor of the workmen over the secured creditor's security.

3. Application of Insolvency Rules in Winding Up of Insolvent Companies:
The court refers to Sections 45 and 47 of the Provincial Insolvency Act, 1920, which outline the rights of unsecured and secured creditors. These provisions are applied to the winding up of insolvent companies as per Section 529 of the Companies Act. The court emphasizes that the secured creditor has the option to either realize their security or relinquish it for the general benefit of creditors. If they choose to realize their security, they must pay the liquidator for the preservation of the security.

4. Priority of Payment Between Workmen's Dues and Secured Creditors' Dues:
Section 529A of the Companies Act states that workmen's dues and debts due to secured creditors, to the extent they rank pari passu with workmen's dues, shall be paid in priority to all other debts. The court clarifies that only the debts of secured creditors that could not be realized due to the statutory charge in favor of workmen will rank pari passu with workmen's dues and receive priority in payment.

5. Determination of Pari Passu Charge and Its Implications:
The court concludes that a secured creditor has a charge over a specific property of the company and can either realize or relinquish their security. If they opt to realize their security, a statutory pari passu charge exists in favor of the workmen. The court also clarifies that the workmen's dues and the debts of secured creditors, to the extent they rank pari passu with workmen's dues, shall be paid in priority over all other debts. The judgment emphasizes that the High Court erred in holding that all debts due to secured creditors rank pari passu with workmen's dues.

Conclusion:
The Supreme Court allowed the appeal, setting aside the impugned order of the Division Bench of the High Court and the order of the learned Company Judge. The matter was remitted to the learned Company Judge to decide the application in accordance with the law as laid down in this judgment. The court reiterated that the workmen's dues and the debts of secured creditors, to the extent they rank pari passu with workmen's dues, shall be paid in priority over all other debts. The judgment provides a detailed interpretation of Sections 529 and 529A, emphasizing the statutory pari passu charge in favor of workmen and the priority of payment in the winding up of insolvent companies.

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