2023 (11) TMI 1345 - HC - Companies Law

Recovery of dues - priority of dues - whether the payment of Government Commission under Section 451(2) of the Companies Act 1956 falls lower in order of priority than the dues of workmen and secured creditors? - HELD THAT - It is material to note that Sub-section (2) of Section 451 of the Act mandates that the Official Liquidator shall be paid fees out of the assets of the company in respect of which the Official Liquidator becomes or acts as a Liquidator. It is clear that the said fee is payable to the Official Liquidator for discharge of the function of liquidating the company. It is obvious that funds from liquidating the assets of the company would be available only on liquidation of such assets. Thus the expenses and charges for liquidating the assets would necessarily have to be incurred in order to make available the funds which may be utilised for the payment of dividends. Sections 529A and 530 of the Act set out the priority for the payment of debts. The proviso to Clause (c) of Section 529(1) of the Act provides that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen. Section 529A(1) of the Act expressly provides that the workmen s dues and debts due to secured creditor to the extent that such debts rank pari passu with the workmen s dues by virtue of proviso to Clause (c) of Section 529(1) of the Act shall be paid in priority to other debts. Section 530 of the Act also contains provisions regarding preferential payments and sets out the order in which the payments are required to be made. However as stated above the order of preference as set out in Sections 529 529A and 530 of the Act relate to the order in which funds of a company in liquidation are to be disbursed. However the funds available for distribution are funds that would be available on liquidation of the assets. In IISCO Ujjain Pipe and Foundry Company Limited. v. Ujjain Nagar Palika Nigam Ors 2023 (5) TMI 257 - SUPREME COURT the Supreme Court held that Sections 529A and 530 of the Act would have no relevance in the context of a claim of an auction purchaser regarding the arears of tax under the Madhya Pradesh Municipal Corporation Act 1956. Conclusion - It cannot be accepted that the fee paid to the Government in terms of Section 451(2) of the Act is required to be accorded a lower priority than the debts payable to the workmen. Appeal dismissed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the payment of Government Commission (Official Liquidator's fees) under Section 451(2) of the Companies Act, 1956, falls lower in the order of priority than the dues of workmen and secured creditors under Section 529A of the Act.
Whether the amounts disbursed as Government Commission and to the Establishment Account should be recovered and disbursed to the workmen, given the priority set out in Section 529A of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Priority of Government Commission Payments

Relevant legal framework and precedents: The relevant sections of the Companies Act, 1956 include Section 451, which mandates payment of fees to the Central Government out of the assets of the company when the Official Liquidator acts as a liquidator, and Section 529A, which provides priority for the payment of workmen's dues and secured creditors. Rule 338 of the Companies (Court) Rules, 1959, also outlines the order of priority for payments from the assets of a company in liquidation.
Court's interpretation and reasoning: The court held that the payment of the Government Commission is not a "debt obligation" of the company in liquidation, but rather an expense incurred in the process of liquidating the company. Therefore, it does not fall within the order of priority for debt payments as outlined in Sections 529A and 530.
Key evidence and findings: The court noted that the fee payable to the Official Liquidator is triggered upon their appointment, and is necessary for the process of liquidating the company's assets. This is distinct from the debts covered under Section 529A.
Application of law to facts: The court applied the legal principle that expenses incurred in liquidating the assets must be paid before the distribution of net funds to creditors and workmen. The Government Commission was deemed an essential expense for this process.
Treatment of competing arguments: The appellant argued that the dues of workmen and secured creditors should override the liability to pay the Government Commission. However, the court found that the Rules must yield to the provisions of the Act, emphasizing that the Government Commission is a necessary expense for liquidation.
Conclusions: The court concluded that the fee paid to the Government as per Section 451(2) should not be accorded a lower priority than the debts payable to workmen.

Issue 2: Recovery and Redistribution of Disbursed Amounts

Relevant legal framework and precedents: Section 529A of the Companies Act, 1956, provides for the priority of payment of workmen's dues and debts to secured creditors. The court referenced the Supreme Court decision in IISCO Ujjain Pipe and Foundry Company Limited v. Ujjain Nagar Palika Nigam & Ors., which clarified the priority of post-liquidation expenses.
Court's interpretation and reasoning: The court reasoned that the amounts disbursed as Government Commission were necessary expenses for the liquidation process and not subject to the order of priority for debt payments under Section 529A.
Key evidence and findings: The court found that the appellant did not press any objection regarding the payment to the Establishment Account, focusing solely on the Government Commission. The court emphasized that the Official Liquidator's fees are essential for the liquidation process.
Application of law to facts: The court applied the legal principles from Rule 338, which prioritizes the payment of costs and expenses incurred in preserving and realizing the assets of the company over other debts.
Treatment of competing arguments: The appellant's argument that the amounts disbursed should be recovered and redistributed was rejected, as the court found these were necessary expenses for liquidation.
Conclusions: The court dismissed the appeal, affirming that the disbursed amounts as Government Commission were justified and not subject to redistribution under Section 529A.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: The court stated, "The commission to be paid to the Government under Section 451(2) of the Act is, essentially, the fee payable on the Official Liquidator being appointed. Thus, clearly the said payment refers to the amount payable for an Official Liquidator to act as such."
Core principles established: The judgment reinforces the principle that expenses incurred in the liquidation process, such as the Official Liquidator's fees, must be prioritized over the distribution of net funds to creditors and workmen.
Final determinations on each issue: The court determined that the Government Commission is a necessary expense and not subject to the order of priority under Section 529A. The appeal was dismissed, and the pending application was disposed of.

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