2013 (2) TMI 596 - HC - Companies Law

Overriding preferential payments - Whether the petitioners are entitled to restrain the proceedings initiated under the SARFAESI Act or to claim priority in distribution with respect to amounts realised in proceedings under the SARFAESI Act or under the RDBFI Act. The fourth respondent-company availed financial assistance from the first respondent-bank by mortgaging its assets, including the factory building and land appurtenant thereto directors of the company are co obligants in the loan transaction and properties belonging to them were also mortgaged Consequent to default committed by the fourth respondent in repayment, respondents Nos. 1 and 2 initiated proceedings under SARFAESI Act and the assets of the fourth respondent-company were put to auction petitioners are seeking to quash the proceedings under the SARFAESI Act as well as the proceedings initiated by the first respondent-bank before the Debts Recovery Tribunal, Chennai On the alternative the petitioners are seeking directions for payment of benefits due to them, in case of closure of the company. Held that - Section 13(9) clears that the workmen of a company, who claim priority in distribution of assets by virtue of section 529A of the Companies Act, are not entitled to raise any objection against proceedings initiated by the secured creditor against the secured assets of the company, unless the company is ordered to be wound up or any proceedings for winding up of the company is pending Further in Allahabad Bank v. Canara Bank 2000 (4) TMI 757 - SUPREME COURT OF INDIA held that if a company, which is implicated as a defendant in a proceedings under the RDBFI Act, against which no order of winding up has been issued, is only like any other defendant, and priority in distribution should be decided bearing in mind only the principles underlying in section 73 of the Code of Civil Procedure, 1908. Further section 22 of the RDBFI Act confers wider powers on the Tribunals to decide such questions of priorities, subject only to principles of natural justice In a case where there is no proceedings pending before the company court or in case where the company is not under liquidation, any claimant or the workmen, that too with respect to un-liquidated amounts, are not entitled to cause any hindrance against proceedings under the SARFAESI Act or under the RDBFI Act - Therefore the writ petition deserves no merit and the same is accordingly dismissed.

Summary

Issues:
1. Claim of workmen for dues and benefits in a company facing financial distress and asset auction.
2. Interpretation of provisions under the SARFAESI Act and Companies Act regarding workmen's rights in asset distribution.
3. Maintainability of writ petition against proceedings under SARFAESI Act and RDBFI Act.

Issue 1:
The petitioners, claiming to be workmen of a company facing financial difficulties, argued that if the company's factory is closed due to asset auction, they would lose their jobs and face financial hardship. They contended that the company and its directors, who availed a loan from a bank, were obligated to settle all dues of the workmen, including gratuity and EPF contributions, as per section 13(9) of the SARFAESI Act. The petitioners highlighted that significant amounts were owed to them by the company for various benefits, and they feared collusion between the company and the bank to evade these liabilities. They sought to quash proceedings under the SARFAESI Act and the Debts Recovery Tribunal initiated by the bank, or alternatively, requested directions for payment of due benefits if the company closed down.

Issue 2:
The court analyzed the petitioners' reliance on section 13(9) of the SARFAESI Act and section 529A of the Companies Act to support their claims. Section 13(9) deals with rights of secured creditors in cases involving multiple creditors, specifying procedures for asset sale and distribution. The court noted that the company in question was not under liquidation, rendering the provisos to section 13(9) inapplicable. Reference was made to legal precedents emphasizing the hierarchy of creditor priorities and the limited entitlement of workmen to obstruct proceedings under the SARFAESI Act or the RDBFI Act unless the company is being wound up or facing winding-up proceedings.

Issue 3:
While acknowledging the respondent's objection to the maintainability of the writ petition, the court decided to address the legal question raised regarding the provisos to section 13(9) of the SARFAESI Act. It concluded that workmen claiming priority in asset distribution under the Companies Act cannot impede secured creditor proceedings unless the company is being wound up or facing winding-up proceedings. The court dismissed the writ petition, stating that the workmen were not entitled to quash the ongoing proceedings or demand priority in asset distribution unless the company faced liquidation. However, it clarified that the workmen could seek remedies under the Companies Act if the company were to be wound up in the future.

In conclusion, the court dismissed the writ petition but allowed the workmen to seek appropriate reliefs if the company faced winding up. The judgment clarified the limited entitlement of workmen in asset distribution proceedings under the SARFAESI Act and the RDBFI Act, emphasizing the need for company liquidation to trigger workmen's priority rights.