2013 (1) TMI 445 - HC - Companies Law

Winding up - Whether only the secured creditors having the first charge should be taken into consideration while determining ratio contemplated under sections 529 and 529A and not the secured creditors having the second charge - Held that - No classification of secured creditors on basis of charge as Section 529(1) provides for, the respective rights of secured and unsecured creditors . It does not classify the secured creditors on the basis of the first chargeholder or the second chargeholder or so on. Similarly, in proviso to clause (c) of sub-section (1) of section 529, the words used are, security of every secured creditor . Meaning thereby the law does not make any distinction between these secured creditors on the basis of their holding charge being the first charge or the second charge or so on. Similar is the position so far as section 529A is concerned as clause (b) of sub-section (1) of section 529A states that the words used debts due to secured creditors . mean that the law does not draw any distinction between the secured creditors. Thus law does not make any distinction between secured creditors on basis of their holding charge being first charge or second charge or so on for purpose of sections 529 and 529A.

Summary

Issues:
1. Interpretation of Sections 529 and 529A of the Companies Act, 1956 regarding the treatment of secured creditors in liquidation proceedings.
2. Determining the application of the pari passu principle in distributing assets between secured creditors and workmen.

Analysis:
1. The main issue in this case revolves around the interpretation of Sections 529 and 529A of the Companies Act, 1956 concerning the treatment of secured creditors in the context of liquidation proceedings. The appellant, Textile Labour Association, contended that while determining the ratio for distributing assets in a liquidation scenario, only the debts of secured creditors holding the first charge should be considered, excluding those with second or subsequent charges. However, the court examined the provisions of Sections 529 and 529A and found no basis for such a distinction. The law does not differentiate between secured creditors based on their charge priority, as both sections refer to "secured creditors" without specifying any hierarchy based on charge priority.

2. The application of the pari passu principle in distributing assets between secured creditors and workmen was also a crucial aspect of the case. The appellant argued that the debts of secured creditors with lower charge priority should not be considered while calculating the ratio for distribution, leading to a higher share for workmen. However, the court did not find merit in this argument and emphasized that the law treats all secured creditors equally in the distribution process. The court cited a previous decision and highlighted that the pari passu charge under Sections 529 and 529A applies to all secured creditors without differentiation based on charge priority. Therefore, the court dismissed the appeals, stating that the submissions made by the appellant lacked substance and did not align with the legal provisions governing the distribution of assets in liquidation proceedings.

In conclusion, the judgment clarifies that under the Companies Act, 1956, secured creditors in liquidation proceedings are treated equally without distinction based on their charge priority. The court's interpretation of Sections 529 and 529A emphasizes the uniform treatment of secured creditors in calculating the distribution ratio, thereby upholding the principle of pari passu charge in asset distribution.