Holding

The non‑obstante clause in Section 529A of the Companies Act, 1956 prevails over Section 29 of the State Financial Corporation Act, 1951, so the corporation’s right to sell assets is subject to the workmen’s pari‑passu charge, making the High Court’s conditions lawful.

Summary

The appellant, A.P. State Financial Corporation, had granted loans to two companies that later went into liquidation. To recover its dues, it filed applications under Section 446(1) of the Companies Act read with Sections 29 and 46 of the State Financial Corporation Act, 1951, seeking to stay outside the winding‑up proceedings and to sell the companies’ assets. The Company Judge allowed the applications but imposed three conditions: the corporation must discharge any liability to workmen under Section 529A, must give the Official Liquidator ten days’ notice of any sale, and must obtain court permission before finalising tenders. The High Court held that seeking such permission was unnecessary and dismissed the corporation’s appeal. The Supreme Court was asked whether the conditions were lawful and whether Section 29 of the 1951 Act could be exercised independently of the Companies Act provisions protecting workmen’s dues. Relying on the non‑obstante clause in Section 529A, the Court held that the Companies Act, being a later enactment, prevails and the corporation’s right to sell property is subject to the pari‑passu charge in favour of workmen. Consequently, the High Court’s conditions were upheld and the appeals were dismissed.

Issues considered

Whether the conditions imposed by the High Court on the State Financial Corporation’s exercise of power under Section 29 of the State Financial Corporation Act, 1951 are lawful.
Whether Section 29 of the State Financial Corporation Act can be exercised independently of the provisions of Sections 529 and 529A of the Companies Act, 1956, which create a pari‑passu charge for workmen’s dues.

Legislation cited

Companies Act, 1956s. 446(1), s. 529, s. 529A
State Financial Corporation Act, 1951s. 29, s. 46

Subjects

State Financial Corporation ActCompanies Actliquidationpari passuworkmen's duesnon obstante clausestatutory interpretationsecured creditorstay outside winding up

Judgment

A A.P. STATE FINANCIAL CORPORATION
v.
OFFICIAL LIQUIDATOR

AUGUST 9, 2000

B [S. RAJENDRA BABU AND S.N. PHUKAN, JJ.]

State Financial Corporation Act, 1951 :

Sections 29 and 46-Financial Corporation-Liquidation proceedings-
Staying outside of-Conditions-Imposing of-A company took loan from Fi-
c nancial Corporation and went into liquidation-Company Judge allowed Fi-
nancial Corporation to stay outside liquidation proceedings and imposed
certain conditions-Validity of-Held : Right to sell property of debtor com-
pany not absolute but is subject to S.529( I) proviso and non obstante clause in
S.529-A of Companies Act for pari passu charge of workmen-Hence, Com-
D pany Judge rightly imposed the conditions-Further, High Court erred in
holding that it is not necessary for Financial Corporation to seek permission
to stay outside liquidation proceedings.

Companies Act, 1956:

E Sections 529 and 529-A proviso-Objects of-To protect dues of the
workmen.

Interpretation of Statutes :

Non-obstante clause-Insertion of-Jn subsequent enactment-Effect of-
Held : Non obstante clause of a subsequent general Act prevails over prior
F
special Act.

The appellant was a Corporation established under the State Finan-
cial Corporation Act, 1951. Two companies, which had obtained loan from
the appellant-Corporation, were in liquidation and the liquidation pro·
G ceedings wei:e pending before the Company Judge of the High Court. In
order to realise the dues, the appellant filed two separate applications
under Section 446(1) of the Companies Act, 1956 read with Sections 29 and
46 of the Act of 1951 before the Company Judge for staying outside the
liquidation proceedings.

H The Company Judge allowed the applications subject to the follow·
288
A.P. STATE FINANCIALCORPN. v. OFFICIAL LIQUIDATOR 289
ing conditions : A

(a) The appellant would undertake to discharge its liability due to
the workers, if any, under Section 529-A of the Companies Act.

(b) The appellant would inform the Official Liquidator in advance
about the proposed sale of the properties of the company; and B
(c) The appellant would also obtain the permission of the Court
before finalising the tenders.

The Division Bench while dismissing the appeal held that it was not
at all necessary for the appellant-Corporation to have approached the c
High Court for permission to stay outside the winding up proceedings.
Hence this appeal.

On behalf of the appellant-Corporation it was contended that the
Act of 1951 being a special Act, the power of the appellant-Corporation to
invoke the provisions of Section 29 of the 1951 Act was absolute and D
cannot be restricted; and that this power was not subject to the provisions
of the Companies Act for a pari passu charge of the workmen.

Dismissing the appeal, this Court

HELD: 1. The State Financial Corporation Act, 1951 is a special Act E
for grant of financial assistance to industrial concerns with a view to
boosting up industrialisation and also for the recovery of such financial
assistance if it becomes bad and similarly the Companies Act, 1956 deals
with companies including winding up of such companies. The proviso to
Section 529(1) and Section 529 of the Companies Act being a subsequent F
enactment, the non-obstante clause in Section 529-A prevails over Section
29 of the Act of 1951. Therefore, the statutory right to sell the property
under Section 29 of the Act of 1951 has to be exercised with the rights of
pari passu charge to the workmen created by the proviso to Section 529 of
the Companies Act. Under the proviso to Section 529(1), the liquidator
shall be entitled to represent the workmen and enforce the above pari G
passu charge. Therefore, the Company Conrt was fully justified in impos-
ing the conditions in question to enable the Official Liquidator to dis-
charge his function properly under the supervision of the Company Court
as the new Section 529-A of the Companies Act confers upon a Company
Court a duty to ensure that the workmen's dues are paid in priority to ·an H
290 SUPREME COURT REPORTS [2000] SUPP. 2 S.C.R.

A other debts in accordance with the provisions of the above Section. The
legislature has amended the Companies Act in 1985 with a social purpose
viz. to protect dues of the workmen. [293-E-H]

2. The opinion of the High Court that it was not necessary for the
Financial Corporation to approach the Court for permission to stay out-
B side the winding up proceedings was uncalled for since the power under
Section 29 of the Act of 1951 can be exercised subject to the above provi-
sions of the Companies Act. Therefore, the imposition of the conditions In
question by the High Court was lawful. [294-D-E]

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 3439-3440 of
c 1997.

From the Judgment and Order dated 21.4.95 of the Andhra Pradesh High
Court in O.S.A. Nos. 18-19 of 1994.

Y. Prabhakara Rao for the Appellant.
D
A.D.N. Rao and A. Subba Rao for the Respondent.

The Judgment of the Court was delivered by

PHUKAN, J., The appellant is a Corporation established under The
E State Financial Corporations Act, 1951 (for short 'Act of 1951 '). Two compa-
nies viz. MIS Nagarjuna Paper Mills and MIS Chandra Pharmaceuticals Lim-
ited were in liquidation and the liquidation proceedings were pending before
the, learned company Judge of the High Court. The above two companies
obtained loans from the appellant and for realisation of dues, the appellant
F invoked the provisions of Section 29 of Act of 1951. As both the companies
were under liquidation, the appellant filed two separate applications under
Section 446(1) of the Companies Act read with Sections 29 and 46 of Act of
1951 before learned company Judge of the High Court for staying outside the
liquidation proceeding. The learned Judge passed two similar orders in respect
of both the companies and granted permission to the appellant to stay outside
G the liquidation proceedings subject to the following conditions:

"1. The petitioner will undertake to discharge its liability due to the
workers, if any, under Section 529 (A) of the Companies Act.

2. The petitioner shall inform at least.10 days in advance before
H a date fixed for receipt of tenders, to the Official Liquidator about
A.P. STATE FINANCIAL CORPN. v. OFFICIAL LIQUIDATOR [PHUKAN, J .] 291
the proposed sale of the properties of the company; and A

3. The petitioner shall also obtain the permission of the Court
before finalising the tenders."

The appeals filed were dismissed by the Division Bench of the High
Court by the impugned judgment and hence these appeals. B
We have heard Mr. Y. Prabhakara Rao, learned counsel for the appellant
and Mr. A.D.N. Rao, learned counsel for the respondent.

The short question to be decided in these appeals is whether the order
of the High Court imposing the above three conditions is lawful. C
To appreciate the above point we may quote below sub-section ( 1) of
Section 29 of Act of 1951 and-sub-Section (1) of Section 529 and Section
529 A of the Companies Act. It may be stated that the proviso to sub-Section
(1) of Section 529 and Section 529A were inserted by the Companies (Amend-
ment) Act, 1985. D
"29 (1 )- Where any industrial concern, which is under a liability to the
Financial Corporation under an agreement, makes any default in re-
payment of any loan or advance or any instalment thereof or in meeting
its obligations in relation to any guarantee given by the Corporation
or otherwise fails to comply with the terms of its agreement with the E
Financial Corporation, the Financial Corporation shall have the right
to take over the management or possession or both of the industrial
concerns, as well as the right to transfer by way of lease or sale and
realise the property pledged, mortgaged, hypothecated or assigned to
the Financial Corporation'."
F
"529 (l) - In the winding up of an insolvent company, the same rules
shall prevail and be observed with regard to-

(a) debts provable;

(b) the valuation of annuities and future and contingent liabilities; G
and

(c) the respective rights of secured and unsecured creditors;

as are in force for the time being under the Jaw of insolvency with
respect to the estates of persons adjudged insolvent; H
292 SUPREME COURT REPORTS (2000) SUPP. 2 S.C.R.
A Provided 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 workmen's portion therein, and, where a secured creditor;
instead of relinquishing his security and proving his debt, opts to
realise his security-

B (a) the liquidator shall be entitled to represent the workmen and
enforce such charge

(b)any amount realised by the liquidator by way of enforcement of
such charge shall be applied rateably for the discharge of workmen's
dues; and
c
(c) so much of the debt due to such secured creditor as could not be
realised by him by virtue of the foregoing provisions of this proviso
or the amount of the workmen's portion in his security, whichever is
less, shall rank pari passu with the workmen dues for the purposes of
section 529A."
D
"529A (1) - Notwithstanding anything contained in any other provi-
sion of this Act or any other law for the time being in force, in the
winding up of a company-

(;I) workmen's dues; and
E
(b) debts due to secured creditors to the extent such debts rank under
clause (c) of the proviso to sub-section ( I ) of Section 529 pari
passu with such dues, shall be paid in priority to all other debts."

The only contention of Mr. Y. Prabhakara Rao, learned counsel for the
F appellant was that the Act of 1951 being a special Act, power of the appellant-
corporation to invoke provisions of Section 29 of the Act of 1951 is absolute
and cannot be restricted.

By inserting the proviso of Section 529 of the Companies Act by the
amending Act of 1985 legislature has provided that the security of every
G secured creditor shall be deemed to be subject to a pari passu charge in favour
of the workmen to the extent of the workmen's portion therein, and, where a
secured creditor; instead of relinquishing the security and proving the debt,
opts to realise security-

(a) the liquidator shall be entitled to represent the workmen and
H enforce such charge;
A.P STATE FINANCIAL CORPN. v. OFFICIAL LIQUIDATOR [PHUKAN, J .] 293
(b) any amount realised by the liquidator by way of enforcement of A
such charge; and

(c) so much of the debt due to such secured creditor as could not be
realised by him by virtue of the foregoing provisions of the
proviso or the amount of the workmen's portion in the security,
whichever is less, shall rank pari passu with the workmen dues B
for the purposes of section 529A.

Section 529 A which was also inserted by the amending Act of 1985
starts with the non obstante clause and provides that in winding up of a
Company, 'workmen's' dues and debts due to secured creditors to the extent
of such debts rank under clause (c) of the proviso to sub-section ( l) of Section
c
529 pari passu with such dues shall be paid in priority with all other dues.

Now the question is whether Section 29 of the Act of 1951 can over ride
above provisions of the proviso to sub-section ( l) of Section 529 and Section
529 A of the Companies Act. In other words whether the Corporation can D
exercise its rights under above Section 29 ignoring a pari passu charge of the
workmen.

The Act of 1951 is a special Act for grant of financial assistance to
industrial concerns with a view to boost up industrialisation and also recovery
of such financial assistance if it becomes bad and similarly the Companies Act E
deals with companies including winding up of such companies. The proviso
to sub-section(!) of 529 and Section 529 A being a subsequent enactment, the
non obstanre clause in Section 529 A prevails over Section 29 of the Act of
1951 in view of the settled position of law. We are, therefore, of the opinion
that the above proviso to sub-section(!) of Section 529 and Section 529 A will
F
control Section 29 of the Act of 1951. In other words the statutory' right to sell
the property under Section 29 of the Act of 1951 has to be exercised with the
rights of pari passu charge to the workmen created by the prcviso to Section
529 of the Companies Act. Under the proviso to sub-section ( 1) of Section 529,
the liquidator shall be entitled to represent the workmen and force the above
pari passu charge. Therefore, the Company Court was fully justified in impos- G
. ing above conditions to enable the Official Liquidator to discharge his function-
properly under supervision of the Company Court as the new Section 529 A
of the Companies Act confers upon a Company Court a duty to ensure that the
workmen's dues are paid in priority to all other debts in accordance with
provisions of the above Section. The legislature has amended the Companies H
294 SUPREME COURT REPORTS [2000] SUPP. 2 S.C.R.
A Act in 1985 with a social pmpose viz. to protect dues of the workmen. If
conditions are not imposed to protect the right of the workmen there is every
possibility that secured creditor may frustrate the above pari passu right of the
workmen.

In the impugned judgment High Court expressed the views as follows;
B
"In our opinion, therefore, it was not at all necessary for the Financial
Corporation to approach this Court for permission to stay outside the
winding up proceedings. In spite of the same, the Financial Corpora-
tion did venture to make such application in view of the fact that pari
passu charge was created rn the assets of the company for payment
c of arrears to workmen of the company......... "

In view of the above opinion of the High Court that it was not necessary for
Financial Corporation to approach the Court for permission to stay outside the
winding up proceedings, the learned counsel for appellant has urged that High-
D Court-erred in imposing the above conditions. We are of the opinion that-
above observation of the High Court was uncalled for as we have stated that
power under Section 29 of the Act of 1951 can be exercised subject to the
above provisions of the Companies Act.

For what has been stated above, we hold that imposition of the above
E conditions by the High Court was lawful.

The present appeals have no merit and accordingly dismissed. Cost on
the parties.

v.s.s. Appeals dismissed.