2013 (5) TMI 269 - SC - Companies Law

Winding up proceedings - Claims of the workmen who claimed to be entitled to payment pari passu - whether be considered by the official liquidator or be adjudicated upon by the Debts Recovery Tribunal - Held that - A cumulative reading of Sections 529A and 529(1)(c) proviso leads to an irresistible conclusion that where a company is in liquidation a statutory charge is created in favour of workmen in respect of their dues over the security of every secured creditor and this charge is pari passu with that of the secured creditor. Such statutory charge is to the extent of workmen s portion in relation to the security held by the secured creditor of the company. The workmen of the company in winding up acquire the standing of secured creditors on and from the date of the winding up order (or where provisional liquidator has been appointed from the date of such appointment) and they become entitled to distribution of sale proceeds in the ratio as explained in the illustration appended to Section 529(3)(c) of the Companies Act. If the debtor company is not in liquidation nor any provisional liquidator has been appointed and merely winding up proceedings are pending there is no question of distribution of sale proceeds among secured creditors in the manner prescribed in Section 19(19) of the 1993 Act. Where a company is in liquidation a statutory charge is created in favour of workmen in respect of their dues over the security of every secured creditor and this charge is pari passu with that of the secured creditor. Such statutory charge is to the extent of workmen s portion in relation to the security held by the secured creditor of the debtor company. The above position is equally applicable where the assets of the debtor company have been sold in execution of the recovery certificate obtained by the bank or financial institution against the debtor company when it was not in liquidation but before the proceeds realized from such sale could be fully and finally disbursed the company had gone into liquidation. The relevant date for arriving at the ratio at which the sale proceeds are to be distributed amongst workmen and secured creditors of the debtor company is the date of the winding up order and not the date of sale. However before full and final disbursement of sale proceeds if the debtor company has gone into liquidation and a liquidator is appointed disbursement of undisbursed proceeds by DRT can only be done after notice to the liquidator and after hearing him. In that situation if there is claim of workmen s dues the DRT has two options available with it. One the bank or financial institution which made an application before DRT for recovery of debt from the debtor company may be paid the undisbursed amount against due debt as per the recovery certificate after securing an indemnity bond of restitution The other DRT may set apart tentatively portion of the undisbursed amount towards workmen s dues in the ratio as per the illustration following Section 529(3)(c) and disburse the balance amount to the applicant bank or financial institution subject to an undertaking to restitute the amount to the extent workmen s dues as may be finally determined by the liquidator Section 19(19) of the 1993 Act does not clothe DRT with jurisdiction to determine the workmen s claim against the debtor company. The adjudication of workmen s dues against the debtor company in liquidation has to be made by the liquidator. Section 19 (19) is attracted only where a debtor company is in winding up or a provisional liquidator has been appointed in respect of such company. If the debtor company is not in liquidation or if in respect of such company no order of appointment of provisional liquidator has been made and merely winding up proceedings are pending the question of distribution of sale proceeds among secured creditors in the manner prescribed in Section19(19) of the 1993 Act does not arise. Thus it must be held that the claims of the workmen who claim to be entitled to payment pari passu have to be considered and adjudicated by the liquidator of the debtor company and not by the DRT. The impugned judgment is set aside. The Debt Recovery Tribunal Mumbai III and the official liquidator of the Company shall proceed further now concerning workmen s dues as indicated in this judgment. The appeals are allowed with no order as to costs.

Issues Involved:
1. Jurisdiction of the Debt Recovery Tribunal (DRT) vs. Official Liquidator in adjudicating workmen's claims.
2. Distribution of sale proceeds between secured creditors and workmen.
3. Applicability of Sections 529 and 529A of the Companies Act in cases handled by DRT.
4. Impact of winding up proceedings on the distribution of assets.
5. Role of the Official Liquidator and Company Court in liquidation proceedings.

Detailed Analysis:

1. Jurisdiction of the Debt Recovery Tribunal (DRT) vs. Official Liquidator in adjudicating workmen's claims:
The Supreme Court addressed whether the DRT has the jurisdiction to adjudicate the claims of workmen or if such claims should be considered by the official liquidator. The Court concluded that the claims of the workmen who claim to be entitled to payment pari passu have to be considered and adjudicated by the liquidator of the debtor company and not by the DRT. This is because the DRT's jurisdiction is limited to the recovery of debts due to banks and financial institutions and does not extend to adjudicating the dues of workmen.

2. Distribution of sale proceeds between secured creditors and workmen:
The Court held that where a company is in liquidation, a statutory charge is created in favor of workmen in respect of their dues over the security of every secured creditor, and this charge is pari passu with that of the secured creditor. This means that the workmen's dues and the secured creditors' dues are to be paid in equal proportions. The relevant date for arriving at the ratio at which the sale proceeds are to be distributed is the date of the winding-up order and not the date of sale.

3. Applicability of Sections 529 and 529A of the Companies Act in cases handled by DRT:
The Supreme Court clarified that Sections 529 and 529A of the Companies Act come into operation immediately when a company goes into liquidation, creating a statutory charge in favor of workmen over the proceeds realized from the sale of security. The distribution of sale proceeds must be done by the DRT in accordance with Section 529A of the Companies Act. However, the DRT does not have the jurisdiction to determine the workmen's claims against the debtor company; this is the responsibility of the liquidator.

4. Impact of winding up proceedings on the distribution of assets:
The Court emphasized that if the debtor company goes into liquidation before the final disbursement of sale proceeds, the distribution of undisbursed proceeds must be done after notice to the liquidator and after hearing him. The DRT has two options: either secure an indemnity bond from the bank or financial institution for restitution of the amount to the extent of workmen's dues or set apart a portion of the undisbursed amount towards workmen's dues and disburse the balance to the applicant bank or financial institution.

5. Role of the Official Liquidator and Company Court in liquidation proceedings:
The Court reiterated that once a company is in winding up, the only competent authority to determine the workmen's dues is the liquidator, who acts under the supervision of the Company Court. The DRT must distribute the sale proceeds in accordance with the directions of the liquidator and the Company Court.

Conclusion:
The Supreme Court set aside the impugned judgment and directed that the claims of the workmen be adjudicated by the liquidator of the debtor company. The DRT and the official liquidator are to proceed further concerning workmen's dues as indicated in the judgment. The appeals were allowed with no order as to costs.

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