Supreme Court of India
JITENDRA NATH SINGHversusTHE OFFICIAL LIQUIDATOR & ORS.
- Citation
- 2012 INSC 415
- Decided
- 21 September 2012
- Disposal
- Appeal(s) allowed
- Bench
- S H KAPADIA
Holding
A secured creditor’s right is limited to the specific security offered, and only the portion of its debt that corresponds to the statutory 'workmen's portion' ranks pari‑passu with workmen’s dues under Section 529A, not the entire debt.
Summary
The appellant workmen sought priority over the sale proceeds of unsecured assets of UMI Special Steels Ltd., arguing that under Sections 529 and 529A of the Companies Act, 1956, workmen's dues should rank ahead of secured creditors on those assets. The respondents, representing the secured creditors, contended that the secured creditors held a pari‑passu charge over both secured and unsecured assets after relinquishing part of their security for the workmen's portion. The Supreme Court examined the statutory scheme, interpreting the proviso to Section 529(1) as creating a statutory charge on the security of each secured creditor only to the extent of the workmen's portion, and that only that portion of the secured creditor's debt ranks pari‑passu with workmen's dues under Section 529A. The Court held that the High Court erred in applying a 50‑50 split and in failing to compute the workmen's portion as required by law. Consequently, the appeal was allowed and the matter remitted to the Company Court to recompute the distribution in accordance with the correct legal principles.
Issues considered
- The extent of the rights of secured creditors over secured and unsecured assets in a winding‑up under Sections 529 and 529A of the Companies Act, 1956.
- Whether the workmen's dues have a preferential claim over the proceeds of unsecured assets, and if secured creditors have a pari‑passu charge on those proceeds.
- The correct method of calculating the 'workmen's portion' and its impact on the priority of claims.
- The applicability of the Insolvency Act provisions in relation to the rights of secured and unsecured creditors in company liquidation.
Legislation cited
- Companies Act, 1956s. 442, s. 446, s. 529, s. 529A, s. 530, s. 537
- Industrial Disputes Act, 1947
- Insolvency Act (Provincial Insolvency Act, 1920) – Sections 45, 47s. 45, s. 47
- Provincial Insolvency Act, 1920
- Workmen's Compensation Act, 1923
Subjects
secured creditorworkmen's duespari passupreferential paymentcompany liquidationpriority of claimsCompanies Act 1956Section 529Section 529AInsolvency
Judgment
[2012] 13 S.C.R. 339
JITENDRA NATH SINGH A
v.
THE OFFICIAL LIQUIDATOR & ORS.
(Civil Appeal No. 6755 of 2012)
SEPTEMBER 21, 2012
B
[S.H. KAPADIA, CJI., A.K. PATNAIK AND
SWATANTER KUMAR, JJ.]
Companies Act, 1956 - s. 529 Proviso and s. 529A -
Company under liquidation - Right of secured creditors - Over C
the unsecured assets - Held: The secured creditors of a
company under liquidation have a right only over the secured
assets and not over all the assets - However, they will have
preferential claim even on the unsecured assets, on pari
passu basis with the workmen in respect of dues which could D
not be realized because of statutory charge created in favour
of workmen in the first limb of proviso to s. 529(1) and required
to be paid alongwith workmen's dues in priority to all other
debts u/s.529-A.
E
Words and Phrases:
'Creditor' and 'Secured Creditor' - Meaning of, in the
context of Companies Act, 1956.
The property and assets of the company under F
liquidation was sold by the Official Liquidator. The
secured and the unsecured assets were sold separately
and separate accounts were maintained for both. The
sale proceeds from the secured creditors was distributed
among the secured creditors and the workmen as per s. G
529 of the Companies Act, 1956. As regards the sale
proceeds of unsecured assets, the claim of the workmen
was that their entire remaining claim should be satisfied
in preference to all other claimants in terms of s. 529A of
339 H
340 SUPREME COURT REPORTS [2012] 13 S.C.R.
A the Companies Act. C>n the other hand the secured
creditors contended that they had pari passu charge
even on the sale proceeds of the unsecured assets in
terms of the statutory provision and also in view of the
fact that they had given up their security in favour of the
B workmen. The claim of the workmen was rejected by the
Company Court. The appeal against the order was
dismissed by the High Court. Hence the present appeal.
Allowing the appeal and remitting the matter to
Company Court, the Cc1urt
c
HELD:
PER MAJORITY: [By A.K. Patnaik, J. (For himself and S.H.
Kapadia, CJI)]
D 1. A plain reading of clause (c) of sub-section (1) of
Section 529 of Companies Act, 1956 makes it clear that
in the winding up of an insolvent company, the same
rules shall prevail and be observed with regard to the
respective rights of secured and unsecured creditors as
E are in force for the time being under the law of insolvency
with respect to the estates of persons adjudged
insolvent. This would mean that the respective rights of
secured and unsecur1ed creditors of an insolvent
company, which is being wound up, will be the same as
F the respective rights of secured and unsecured creditors
with respect to the estate!S of persons adjudged insolvent
as are in force under thEt law of insolvency. In the State
of Jharkhand, the Provincial Insolvency Act, 1920 is in
force and accordingly the respective rights of secured
G and unsecured creditors with respect to the assets of the
insolvent company being wound up will be the same as
in the Insolvency Act. Companies Act does not define a
~creditor' and a 'secured creditor'. Section 2(1)(a) and
Section 2(1 )(e) of the Insolvency Act define the words
H 'creditor' and 'secured creditor'. A secured creditor
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 341
ORS.
means a person holding a mortgage, charge or lien on A
the property of the debtor or any part thereof as a security
for a debt due to him from the debtor. The result is that
the expression 'secured creditor' in Section 529(1)(c)
would mean a person who holds a mortgage, charge or
lien on the property of the company or any part thereof B
as a security for a debt due to him from the company.
Where, therefore, a creditor, such as the bank or the
financial institution in this case, does not hold a
mortgage, charge or lien on the property of the company
or any part thereof as a security for a debt due to it from c
the company, it is not a secured creditor for the purposes
of Sections 529 and 529A of the Companies Act. [Para 5]
[390-D-H; C-F]
2. An unsecured creditor is entitled under Section 45
of the Insolvency Act to receive dividends equally with D
the other creditors, whereas the secured creditor has the
right under Section 47 of the Insolvency Act to realize the
security and to prove for the balance due to him in case
on realization of such security he is not able to recover
the entire amount due to him. If, however, the secured E
creditor does not opt to realize his security but
relinquishes it for the general benefit of the creditors,
then he may prove for his whole debt. Under the
Insolvency Act, therefore, the secured creditor has only
a right over the particular property offered to him as F
security and all the creditors have equal rights over the
other properties comprising the estate of the person
adjudged insolvent. [Para 6] [392-G-H; 393-A-B]
3. The first limb of the proviso to clause (c) of sub- G
section (1) of Section 529 of the Companies Act creates
a statutory charge over the security of every secured
creditor to the extent of the workmen's portion. In other
words, every property or asset of an insolvent company,
which is being wound up and which has been offered as H
342 SUPREME COURT REPORTS [2012] 13 S.C.R.
A a security to a secured c:reditor is subject statutorily to a
pari passu charge in favour of the workmen to the extent
of the workmen's portion by virtue of the proviso to sub-
section (1) of Section 529 of the Companies Act. Therefore,
the first limb of the proviso to sub-section (1) of Section
B 529 does not create an)r pari passu charge in favour of
secured creditor over p1roperty or asset of the company
which has not been give~n as security by the company to
the secured creditor. [Para 8] [393-G-H; 394-C]
4. The second limb of the proviso to sub-section (1)
C of Section 529 of the Companies Act states the
consequences which follow where a secured creditor,
instead of relinquishing his security and proving his debt,
opts to realize his security. These are: (a) the liquidator
1shall be entitled to repr1esent the workmen and enforce
D such charge; (b) any amount realized by the liquidator by
way of enforcement of such charge shall be applied
rateably for the discharge of workmen's dues; and (c) so
much of the debt due to such secured creditor as could
not be realized by him by virtue of the foregoing
E provisions of this provisc1 or the amount of the workmen's
portion in his security, whichever is less, shall rank pari
· passu with the workmen's dues for the purposes of
Section 529A of the Companies Act. Thus, clause (c) of
this proviso does not create a pari passu charge over
F properties or assets of the company which have not been
offered to the secured <:reditor as security, but to the
extent of the loss of security suffered by a particular
$ecured creditor because· of the statutory charge created
in favour of the workmen, the secured creditor is ranked
G pari passu with the workmen for overriding preferential
payment under Section 529A of the Companies Act. [Para
9] [394-D-F, H; 395-A-B]
5. Section 529A of the Companies Act states that
notwithstanding anything contained in any other
H
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 343
ORS.
provision of the Companies Act or any other law for the A
time being in force, in the winding up of a company - (a)
workmen's dues; and (b) debts due to secured creditors
to the extent such debts rank under clause (c) of the
proviso to sub-section (1) of Section 529 of the
Companies Act pari passu with such dues, shall be paid B
in priority to all other debts. The entire object of Section
529A of the Companies Act is to ensure overriding
preferential payment of (1) the workmen's dues and (2)
debts due to secured creditors to the extent such debts
rank under clause (c) of the proviso to sub-section (1) of c
Section 529 pari passu with the workmen's dues. The
effect of the non-obstante clause in the opening part of
Section 529A of the Companies Act, therefore, is that
notwithstanding anything in the Companies Act and any
other law including the Insolvency Act, workmen's dues
0
and dues of the secured creditor which could not be
realized because of the pari passu charge in favour of the
workmen under the proviso to sub-section (1) of Section
529 and only to the extent such dues rank pari passu
with the dues of the workmen under clause (c) of the said
proviso are paid in priority over all other dues. Only where E
under the second limb of the proviso to clause (c) of sub-
section (1) of Section 529 the secured creditor opts to
realize the security and is unable to realize a portion of
his dues because of the pari passu charge created in
favour of the workmen under the first limb of the proviso, F
he has pari passu charge to the extent indicated in clause
(c) of the proviso to sub-section (1) of Section 529 and
only such debts due to the secured creditor which rank
pari passu with dues of the workmen under clause (c) of
the proviso to sub-section (1) of Section 529 have to be G
paid in priority over all other debts of the company. The
High Court has clearly fallen in error by holding that all
debts due to secured creditors will rank pari passu with
the workmen's dues and have to be paid along with the
H
344 SUPREME COURT REPORTS [2012] 13 S.C.R.
A workmen's dues in priority to all other debts of the
company. [Paras 10 and 15) [395-B-G; 401-C-E]
6. The application filed by the appellant-workman
before Company Court praying for satisfaction of their
remaining claim from the sale proceeds of unsecured
8
assets of the Company, in preference to all other
claimants, including th•~ secured creditors, is set aslde
and the matter is remitted to Company Court to decide
the Application in accordance with the law laid down in
C the present judgment. [Para 16] [401-F-G]
Allahabad Bank v. Canara Bank and Anr. (2000) 4 SCC
406: 2000(2) SCR 1102 ; Andhra Bank v. Official Liquidator
and Anr. (2005) 5SCC 75: 2005 (2) SCR 776 - referred to
D PER MINORITY: [By Swatanter Kumar, J.)
1.1 In the present case, the judgment of the High
Court, to the extent it takes the view that the charges of
the workmen and secured creditors have to rank pari
passu, cannot be faulte~d with. [Para 32] [383-G]
E
1.2 By way of the Companies (Amendment) Act, 1985,
Section 529A, as well as the proviso to Section 529(1) of
the Companies Act, 19~56 were inserted. The purpose of
these provisions appears to be that the dues of the
F workmen may be made to rank pari passu with those of
the secured creditors and even above the dues of the
Government, in the event of winding up of the company.
The legislative intent appears to be that the dues of the
secured creditors and workmen should be paid in
G preference to others, however, would remain pari passu
to each other. It was not the intention of the framers of
law to take away or deprive a secured creditor of its dues
or charge of the workmen, unless, it was specifically
given up by the secure~d creditor. [Para 9) [358-D-F]
H
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 345
ORS.
1.3 The proviso to Section 529 of the Act creates a A
deeming fiction in law and makes it clear 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 workman's portion thereunder. This fiction
is intended to give the workmen a preferential right to B
recover their dues. The expression 'workmen's portion'
appearing in the proviso to Section 529(1) is explained
under clause (c) of Section 529(3) of the Act. The
workmen's portion in relation to the security of any
secured creditor of a company means the amount which c
bears to the value of the security the same proportion as
the amount of the workmen's dues bears to the
aggregate of the amount of the workmen's dues and the
amount of the debts due to the secured creditors. The
workmen's portion is to be computed in terms thereof 0
with the aid of the illustration given in that provision.
Thus, the security of every secured creditor, by fiction of
law, is subject to a pari passu charge in favour of the
workmen to the extent of the workmen's portion and
where the secured creditor, instead of relinquishing his
E
security and proving his debt, opts to realize his security,
in that event, so much of the debt due to such secured
creditor as could not be realized by him by virtue of the
pari passu charge in favour of the workmen or the
amount of the workmen's portion in his security,
whichever is less, shall rank pari passu with the F
workmen's dues for the purposes of Section 529A.
Section 529A of the Act opens with non-obstante clause,
giving the workmen's dues and secured creditors' dues,
as defined under the proviso to Section 529(1 ), an over-
riding effect over the other provisions of the Act as well G
as any other law in the matter of priority of payment of
dues. Application of Section 529A of the Act is not
dependent upon any other provision of the Act including
Section 529 except to the extent specified in Section 529,
proviso (c). So, it is not dependent upon the limitation H
346 SUPREME COUl~T REPORTS [2012] 13 S.G.~.
A imposed by any other llaw for the time being in force,
including Section 47 of the Insolvency Act. The non-
obstante opening words of Section 529A are intended to
give precedence to the 'overriding preferential payments'
in contrast to the 'preferential payments' as contemplated
B u/s. 530 of the Act. [Paras 12 and 13] (367-F-H; 368-A-F]
1.4 Once the contents of proviso to Section 529 and
its clauses (a) to (c) are satisfied, then the secured
creditor would be entitled to invoke the provisions and
C receive the benefits of Section 529A(i), subject to pari
passu charge and in terms of the priority stated therein.
The workmens' dues, hc>wever, have not been singularly
placed in the preferential clause. The expression used in
Section 529A is 'and' meaning thereby that the dues
stated under clauses (a) and (b) of the Section would
D remain pari passu. But it is not the entire dues of the
secured creditors that will get preference over other
dues and remain pari passu with the charges payable to
the workmen. Their dueis are limited only to the extent of
the debts which are due to the secured creditors under
E clause (c) of the proviso to sub-Section (1) of Section 529
which are pari passu with such dues. The term 'such
dues' here refers to the dues of the workmen. [Para 14]
[368-H; 369-B-D]
F 1.5 On a plain reading of the language of Sections 529
and 529A, it is clear that it is not the entire or unrealised
amount owed to secur1ed creditors which is protected
under the provisions of Section 529A and stands pari
passu with the workm,en's charges, but it is only the
G portion or amount relinquished under proviso to Section
529(1 ), whichever is less, that is protected. There is a
direct link in the application of both these provisions. In
a situation of the present kind, these provisions would
have to be applied collectively and that too, upon the
H correct appreciation of the legislative intent. [Para 14]
[369-E-F, G]
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 347
ORS.
1.6 From a cumulative reading of the relevant A
provisions under the Act as well as under the Insolvency
Act, it is clear that neither the legislature intended nor can
it be comprehended that where an act is done in
complete adherence to the relevant statutory provisions,
it can lead to two different results merely because such B
act is done before different forums/courts. That is to say
that if a secured creditor realises his security before a
forum other than the Company Court strictly in
compliance to the provisions of Section 529 of the Act,
then favourable consequences of Section 529A would c
follow but if he acts in identical terms before the
Company Court and without prejudice to his remedy
outside the winding up and without putting his sale
proceeds in the common hotch potch in the winding up
proceedings, he would not be entitled to the benefits of
0
Section 529A. It is more so since even the sale of a
security by a secured creditor before such other forum
cannot be completed without approval of the Company
Court. The Company Court has even been vested with
the jurisdiction to transfer such proceedings in exercise E
of its powers under Section 446 of the Act. Mere
pendency of proceeding before a Tribunal would not
deprive the secured creditor of the statutory benefits. Of
course, the situation will be entirely different where the
secured creditor does not follow the scheme of the
provisions of Section 47(1) of the Insolvency Act read in F
conjunction with Sections 529 and 529A of the Act but
puts the sale proceeds in the winding up proceedings in
a common hotch-potch or even relinquishes the security
for general benefit of the creditors at large, then the
creditor would not be entitled to the benefit of Section G
529A and would stand in line with the unsecured creditors
of the company. Further, Where the secured creditor has
been unable to fully realize his dues owing to the taking
of share from his security towards workmen's portion in
terms of the proviso to Section 529(1 ), then to the extent H
348 SUPREME COURT REPORTS (2012] 13 S.C.R.
A specified, the secured creditor is entitled to a charge pari
passu with the workmirn's dues for the purposes of
Section 529A. [Para 15] [370-C-G; 371-A-D]
1.7 Proviso to Sectio,n 529(1) has two contents which
B have to be read conjunctively. First, that creates a pari
passu charge by legal fiction on the security of a secured
creditor in favour of the workmen and, second, where the
secured creditor instead of relinquishing his security and
proving his debts opts to realize his security. The
expression 'and' used in the proviso has to be read and
C construed conjunctively and not disjunctively. The word
'and' specifies two specific conditions for the proviso and
sub-clauses (a) to (c) to become enforceable. Clauses (a)
and (b) to the proviso give right of representation to the
liquidator for enforcing the statutory right in favour of the
D workmen to the extent of the portion of the workmen's
dues. Clause (c) of proviso to Section 529(1) provides the
mode for recouping the shortfall in the amount which the
secured creditor loses upon sale of security and creation
of pari passu charge. Such recovery is again pari passu
E and limited to the extent of the amount of workmen's
dues. The realization of the security may be in the
proceedings outside th1e winding up, i.e., before a special
forum or otherwise or it may be in the winding up but not
for the benefit of the general creditors but strictly in
F compliance with the provisions of the proviso to Section
529(1) of the Act. In both such situations, the secured
creditor would be entitled to the protection and right of
preferential payment contemplated under Section 529A(1)
of the Act. [Para 16] [371-E-H; 372-A-C]
G
1.8 As per the scheme and the relevant provisions of
the Act, it is clear that a secured creditor can relinquish
his security, participate in winding up proceedings and
file his claim before the official liquidator, as and when
invited. The dues of the secured creditors and of the
H
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 349
ORS.
workmen would rank pari passu as regards the order of A
preference of their discharge. This is subject to satisfying
the conditions as stated in Sections 529 and 529A of the
Act. The proviso to sub-section (1) of Section 529, by a
deemed fiction, makes the dues of the workmen pari
passu with that of the secured creditors and creates a B
charge, in favour of the workmen upon the amounts
realized from the enforcement of such security, to the
extent of the workmen's portion therein. The 'workmen's
portion' has been explained under sub-section (3)(c) of
Section 529 which requires that in relation to the security c
of any secured creditor of the company, workmen's
portion would mean the amount which bears to the value
of the security the same proportion as the amount of the
workmen's dues bears to the aggregate of the amount of
workmen's dues and the amounts of the debts due to the 0
secured creditors. The illustration to this sub-section
provides the mode in which the workmen's portion is to
be calculated. Once the workmen's portion is computed,
then in terms of Section 529A, again it has to be treated
as a charge pari passu to the debts of the secured E
creditor. In the case of the latter, the charge will be limited
to the extent such debt ranks under clause (c) of the
proviso to sub-section (1) of Section 529 pari passu with
such dues for preferential payment. The dues payable to
· the workmen and the secured creditors have to be paid
in priority to all other debts. But the dues payable to the F
secured creditor will not be more than the amount that
remains unsatisfied after the security is relinquished in
favour of the workmen under Section 529 of the Act.
[Para 23) [378-A-G]
G
1.9 The relinquishment of security by a secured
creditor certainly requires some conscious act on his part
more than the mere filing of a claim in response to a public
notice issued by the official liquidator. Once the secured
creditor takes such further actions like sale of the secured H
350 SUPREME COURT REPORTS [2012] 13 S.C.R.
A assets through the liquidator and subject to the control
of the Company Court in that event, he would be part of
the scheme of payment as rationalized under Section 529
and 529A of the Act. (Para 24] [378-H; 379-A-B]
1.10 A secured creditor who has a charge over the
8
assets of a company in winding up, merely by instituting
an application before the ORT or any other special forum
without effectively pursuing that remedy and taking
effective steps to realize his security would not stand
outside the winding up proceedings. If the sale of
C secured assets is effected by the Official Liquidator
subject to control of the Company Court and such
amounts are utilized for discharging the debts of the
secured creditor as well as statutory charge of the
workmen created under Sections 529 and 529A, then, in
D effect, the secured creditor would be deemed to have
participated in the winding up proceedings and not
stood outside the same. It is for the reason that a secured
creditor has to take stE!ps by filing petition before any
other forum just to prot,ect his legal right and to prevent
E the claim from getting barred by time. On the contrary, if
he realizes his security within the four corners of the
company law, i.e., befo1re the Official Liquidator and the
Company Court, in that event it would not be possible to
hold that such secured creditor has given up his option
F to participate in the winding up proceedings. However,
the matter would be quite different where the secured
creditor elects not only to institute a petition before the
specialized forum but also takes effective steps to realize
his security and pursues the proceedings effectively, in
G which event, the conclusion has to be that such secured
creditor has stood 'outside the winding up' proceedings.
[Para 27] (379-H; 380-A-E]
1.11 A secured creditor who, after institution of a
H claim but without pursuing the remedy outside the
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 351
ORS.
provisions of this Act, files claim before the official A
liquidator, relinquishes his security and agrees to the
distribution of the sale proceeds through the official
liquidator, subject to jurisdiction of the Company Court,
could always be said to be not 'standing outside the
winding up' proceedings. However, where he institutes B
a petition, proceeds with it and seeks realisation of
security before a forum outside the Company Court, then
he obviously pursues the remedy beyond mere filing of
a claim and would be a person 'standing outside the
winding up' proceedings and shall be subject to the c
rights enforced by the official liquida.tor in terms of the
proviso to Section 529 of the Act. The secured creditor
has to take some positive steps to participate in the
winding up petition. [Para 28] (380-E-H; 381-A]
1.12 Once the twin requirements stated in the proviso D
to Section 529(1) are satisfied, the scheme contemplated
under clause (c) of the proviso to Section 529 read with
Section 529A of the Act would come into play. The Court
cannot overlook the reality that intention of the framers
of law could not have been that the public funds, for E
instance, the money of secured creditor (like banks),
should be completely ignored for the benefit of the
creditors in general, despite there being a definite
protection in law, more so, when the security may be
sufficient for recovery of dues of such secured creditors F
to a limited extent, if not in entirety. The scheme of these
provisions, thus, has to be understood to make it
practicable and in consonance with the accepted
commercial principles. The workmen's charges as well
as that of the secured creditors have to be paid in G
preference to all others, but with inter se pari passu
charge on the amounts realized from the sale of the
security or otherwise. (Para 30] [381-H; 382-A-D]
H
352 SUPREME COURT REPORTS [2012] 13 S.C.R.
A /CIC/ Bank Ltd. V. Sidco Leathers Ltd. and Ors. (2006)
10 SCC452: 2006 (1) Suppl. SCR 528 • relied on.
Allahabad Bank v. Canara Bank and Anr. (2000) 4 SCC
406: 2000 (2) SCR 1102 • held inapplicable.
B 2.1 The High Court has fallen in error of law in
respect of the computation and adjustment of the shares
between the workmen, on the one hand and the secured
creditors; on the other. Particularly, the Single Judge of
the High Court directed the amounts recovered from the
C secured creditors to be distributed between the workmen
and the secured creditors in equal proportion of 50 per
cent of their respective admitted claims. This order and
calculation is opposed to the very scheme of the above
provisions, particularly with respect to determination of
D the workmen's portion~ Another error in the calculation
that appears from the record is that though the total sale
proceeds from the secured assets were Rs.108.90 crore,
the Court directed the payment of only Rs.101 crore
which is the aggregate of the amount directed to be paid
E to the workmen and to the secured creditors. Thus, there
has been an error of law in applying the statutory
provisions in this regard. The High Court erred in not
noticing that the Company Court has not made
calculation and computation in accordance with law. The
F Company Court as well as the Appellate Court should
have considered the workmen's portion in terms of
,proviso to Section 529(1) and Section 529(3)(c) along with
the illustration appended thereto and thereafter, its over-
riding preferential payment vis-a-vis all other unsecured
G ,creditors in terms of Section 529A and 530 of the Act. The
amounts, thus, are required to be recalculated in terms
of t"e above provisions and the law stated herein. [Para
32] [383-H; 384-A·E]
2.2 In the present case, the secured creditor has
H realized !ts security but without putting the security or the
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 353
ORS.
receipts thereof in the common hotch potch of the A
winding up proceedings for the general benefit of the
creditors. Thus, in terms of Section 47(1) of the Insolvency
Act, the secured creditor in the present case is entitled to
the balance due to it, deducting the net amounts realized.
If the secured creditor would have participated in the B
winding up proceedings in its entirety with the security
being realised and/or relinquished for the general benefit
of the creditors and not restricted to the compliance of
Section 529 of the Act, it would not be entitled to the
benefit of Section 529A of the Act. The amounts, by the C
consent of the parties, have already been disbursed and
utilized by the workmen as well as the secured creditors
in terms of Section 529 of the Act which are subject to
adjustment as per the orders of the Court. [Para 33] (384-
F-H; 385-A-B]
D
2.3 The High Court should re-compute the amounts
payable pari passu between the secured creditors and the
workmen in accordance with the principles stated above.
Therefore, the matter is remitted to the Company Court to
apply the above-stated principles and calculate the E
amount payable to the respective parties afresh and in
accordance with law. [Paras 33 and 34] (385-C-D]
3. To satisfy the essentials of a binding precedent, the
Court should directly be concern~d with such issue. F
There should be an issue which should be concluded by
appropriate reasoning to give it colour of a binding
precedent. [Para 18] [374-D]
Andhra Bank v. Official Liquidator (2005) 5 SCC 75 : 2005
(2) SCR 776 - relied on. G
UCO Bank v. Official Liquidator, High Court, Bombay and
Anr. (1994) 5 SCC 1: 1994 (1) Suppl. SCR 294 A.P. Financial
Corporation v. Official liquidator (2000) 7 SCC 291: 2000 (2)
Suppl. SCR 288 - referred to. H
354 SUPREME COURT REPORTS [2012] 13 S.C.R.
A Case Law Reference:
In the Judgment of A.K. Patnaik, J:
2000 (2) SCR 1102 Referred to Para 13
2005 (2) SCR 776 Referred to Para 14
B
In the Judgment of Swatanter Kumar, J:
2005 (2) SCR 776 Relied on Para 14, 15, 19
2000 (2) SCR 1102 Held inapplicable Para 17
c
1994 (1) Suppl. SCR 294 Referred to Para 22
2000 (2) Suppl. SCR 288 Referred to Para 22
2006 (1) Suppl. SCR 52a Relied on Para 28
D
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
6755 of 2012.
From the Judgment andl Order dated 30.09.2010 of the
,E High Court of Jharkhand at Ranchi in Company Appeal No. 10
of 2008.
Shyam Divan, Harish N. Salve, Parag P. Tripathi, Ramji
Srinivasan Braj Kishore Mishra, V.K. Jha, Rajiv Goyal, Vikram
Patralekh, Siddharth Arya, Aparna Jha, Unwal K. Jha, Sweety
F Sqod, P.K. Verma, :Jyotika Kalra, Amit Anand Tiwari, Amit
Wadhwa, Vivek Paul, Sanjay Bhatt, Rabin Majumdar,
Annwesha Deb, Vivek Singh, Ashutosh Jha, Deepak Avasthi,
Anuj Bhandari for the Appearing Parties.
G The Judgments of the Court was delivered by
SWATANTER KUMAR, J. 1. Leave granted.
2. An important question 1of law as to the ambit, scope and
the legislative scheme of Sections 529, 529A and 530 of the
H
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 355
ORS. [SWATANTER KUMAR, J.]
Companies Act, 1956 (for short; 'the Act') arises in the present A
case.
3. According to the appellant, on the true construction of
these provisions, workmen have a preferential claim over all
others including the secured creditors, in the matter of payment B
of dues out of the funds realized from sale of assets of the
company in liquidation. It will particularly hold true when such
assets are not mortgaged in favour of secured creditors of the
company in liquidation. The secured creditors, therefore, have
no charge on such unsecured assets as also no consequential,
preferential or even pari passu claim over the sale proceeds C
derived from these assets of the company. To the contra, the
contention on behalf of the respondents is that the debts of the
secured creditors would rank pari passu with that of the
workmen as regards those dues of the secured creditors as
could not be realised from the sale of secured assets, for the D
reason that they have relinquished their security to the extent of
workmen's dues in terms of Section 529(1) of the Act. In support
of their respective contentions, the appellant has relied upon the
judgment of this Court in the case of Allahabad Bank v. Canara
Bank and Another [(2000) 4 SCC 406], while the respondents E
have placed heavy reliance upon the judgment of this Court in
the case of UCO Bank v. Official Liquidator, High Court,
Bombay & Anr. [(1994) 5 SCC 1]; Andhra Bank v. Official
Liquidator [(2005) 5 SCC 75]; and IC/Cl Bank Ltd. V. Sidco
Leathers Ltd. and Others [(2006) 10 SCC 452]. As both the F
parties to the present lis have relied upon the different decisions
of this Court, this Court is now called upon to state the correct
exposition of law in view of the divergent views stated in the
afore-referred judgments.
G
4. I may, at the very outset, refer in brief to the facts giving
rise to the present appeal. M/s. UMI Special Steels Ltd. (for
short, the UMI) is a company incorporated under the provisions
of the Act. It possesses assets at different places throughout
India. Out of these assets of the UMI, some were mortgaged to H
356 SUPREME COURT REPORTS [2012] 13 S.C.R.
A the banks and financial institutions while others were not,
particularly the assets located at Chennai, Pune, Faridabad and
Kolkata. Towards the end of the year 2001, the company
became sick. It, thereafter, approached the Board for Industrial
and Financial Reconstruction (for short, 'the BIFR') for being
B declared a sick unit. BIFR, vide its opinion dated 8th March,
2002, opined that UMI should be wound up. On consideration
of the opinion of the BIFR, the High Court, vide its order dated
5th August, 2003 passed an order of winding up of UMI and
appointed an official liquidator for conducting and completing
c the liquidation proceedings. This order of the High Court
attained finality. In pursuance of this order, the official liquidator
took over all the assets of the company. It is the undisputed
position before us that the SASF/IDBI, the main secured
creditor of UMI, filed an Original Application before the Debts
Recovery Tribunal (ORT) being OA No.72 of2004 for recovery
0
of its debts aggregating to Rs.63.34 crore as on 31st January,
2004. Upon this application, the ORT issued notice on 5th July,
2004 and since then, the matter is pending before the ORT
without any further proceedings.
E 5. In the meanwhile, the official liquidator invited claims
from all the secured creditors and amongst others, the IDBI also
filed its claim on 30th July, 2006. The admitted claim of the
secured creditors was Rs.1,60,08,43,739/- while that of the
workmen was Rs.16,38,44, 741.25. It is also not disputed
F before us that the secured assets of the company were sold
separately and a separate account thereof was maintained.
Similarly, the unsecured assets were sold separately by the
<l>fficial liquidator, for which again a separate account was
maintained. The total sale proceeds from the secured assets
G were Rs. 108.90 crore, out of which a sum of Rs.93,64,93,586/
- was distributed amongst the secured creditors and an amount
of Rs.8, 19,22,371.12 had been paid to the workmen. The
Ci)fficial Liquidator sold the unsecured properties of the
Company for a total sum of Rs.8.51 crores. This included the
H
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 357
ORS. [SWATANTER KUMAR, J.]
assets located at different places, which were not mortgaged A
to any bank or financial institution. The dispute between the
parties primarily relates to distribution of this sum of Rs. 8.51
crores. According to the workmen their entire remaining claim
of Rs. 8.19 crores and odd should be satisfied in preference
to all other claimants, in terms of Section 529A of the Act. B
However, it is contended on behalf of the secured creditors that
they have a pari passu charge even on the sale proceeds of
the unsecured assets in terms of the statutory provisions and
more particularly , in view of the fact that they had given up their
security in favour of the workmen to the extent of c
Rs.8, 19,22,371.12. It is only upon such satisfaction that the sale
proceeds can be distributed amongst ot-her creditors in
accordance with law. The notice of the O.A. filed by the secured
creditors was also issued to the Official Liquidator.
6. One of the workmen, Jitendra Nath Singh, the appellant D
in the present appeal, filed an application being I.A. No. 1511/
2008 in Company Petition No. 2/2002 praying that the sale
proceeds from the unsecured assets should first be distributed
to the workmen. This IA was rejected by the Company Court
vide order dated 28th November, 2008. Against this order, E
Company Appeal No.10 of 2008 was filed by the workmen
before the High Court. Three other workmen also filed an
application praying that 50 per cent of their verified claim. in
respect of wages be paid to them by the official liquidator. The
Company Court passed an interim order in Company Appeal F
No.10 of 2008 dated 24th April, 2009 directing that money be
distributed by the official liquidator only after obtaining
permission of the Court. In view of this order, the Company
Court rejected the claim of the three workmen vide its Order
dated 16th April, 2010. Being aggrieved, these three workmen G
filed Company Appeal No.1 of 2010 before the High Court.
7. Both these appeals were dismissed by the High Court
by a common judgment dated 30th September, 2010. Being
dissatisfied with the judgment of the High Court, the workman H
358 SUPREME COURT REPORTS [2012] 13 S.C.R.
A Jitendra Nath Singh has preferred the present appeal against
the decision in respect of Company Appeal No. 10/2008.
8. In light of the above faicts, the contention of the appellant
in the present appeal is that in respect of unsecured assets,
the claim of the workmen ranl<s higher than those of the secured
8
creditors and should be paid in preference to their claims. The
rule of distribution pro rata applies only for proceeds from sale
ot properties bearing a charne of a particular secured creditor.
To put it simply, the statutory charge would get priority over any
C contractual charge.
9. Let us now examine the relevant statutory provisions and
their scheme. By way of the Companies (Amendment) Act,
11985, Section 529A, as well as the proviso to Section 529(1)
of the Act, were inserted with effect from 24th May, 1985. The
D purpose of these provisions appears to be that the dues of the
workmen may be made to rank pari passu with those of the
secured creditors and even above the dues of the Government,
in the event of winding up of the company. The legislative intent
appears .to be that the dues of the secured creditors and
E workmen should be paid in preference to others, however,
would remain pari passu to 1each other. It was not the intention
of the framers of law to take away or deprive a secured creditor
of its dues or charge of the workmen, unless, it was specifically
given up by the secured creditor. At this stage, I may refer to
F the provisions of Sections 529, 529A and 530 of the Act which
read as follows :-
"529. Application of insolvency rules in winding up
of insolvent companies.--(1) In the winding up of an
insolvent company, the same rules shall prevail and be
G observed with regard to-
(a) debts provable;
(b) the valuation of annuities and future and contingent
liabilities; and
H
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 359
ORS. [SWATANTER KUMAR, J.]
(c) the respective rights of secured and unsecured A
creditors; as are in force for the time being under the law
of insolvency with respect to the estates of persons
adjudged insolvent:
Provided that the security of every secured creditor shall
8
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,-
c
(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 0
the discharge of workmen's dues; 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 this proviso or the amount of the workmen's
portion in his security, whichever is less, shall rank pari E
passu with the workmen's dues for the purposes of section
529A.
(2) All persons who in any such case would be entitled to
prove for and receive dividends out of the assets of the F
company, may come in under the winding up, and make
such claims against the company as they respectively are
entitled to make by virtue of this section:
Provided that if a secured creditor instead of relinquishing G
his security and proving for his debt proceeds to realise
his security, he shall be liable to 2[pay his portion of the
expenses] incurred by the liquidator (including a provisional
liquidator, if any) for the preservation of the security before
its realization by the secured creditor.
H
360 SUPREME COURT REPORTS [2012] 13 S.C.R.
A Explanation.-For the purposes of this proviso, the portion
of expenses incurred by the liquidator for the preservation
of a security which the secured creditor shall be liable to
pay shall be the whole of the expenses less an amount
which bears to such expenses the same proportion as the
B workmen's portion in relation to the security bears to the
value of the security.
(3) For the purposes of this section, section 529A and
section 530,-
c (a) "workmen", in relation to a company, means the
employees of the company, being workmen within the
meaning of the Industrial Disputes Act, 1947 (14 of 1947);
(b) ''workmen's dueis", in relation to a company, means the
aggregate of the following sums due from the company to
0 its workmen, namely:-
(i) all wages or salary including wages payable for time or
piece work and salary earned wholly or in part by way of
commission of any workman, in respect of services
rendered to the company and any compensation payable
to any workman under any of the provisions of the Industrial
Disputes Act, 1947 (14 of 1947);
(ii) all accrued holiday remuneration becoming payable to
F any workman, or in the case of his death to any other
person in his right, on the termination of his employment
before, or by the effect of, the winding up order or
resolution;
(iii) unless the company is being wound up voluntarily
G merely for the purposes of reconstruction or of
amalgamation with another company, or unless the
company has, at the commencement of the winding up,
under such a contract with insurers as is mentioned in
section 14 of the Workmen's Compensation Act, 1923 (8
H
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 361
ORS. [SWATANTER KUMAR, J.]
of 1923) rights capable of being transferred to and vested A
in the workman, all amounts due in respect of any
compensation or liability for compensation under the said
Act in respect of the death or disablement of any workman
of the company;
8
(iv) all sums due to any workman from a provident fund, a
pension fund, a gratuity fund or any other fund for the
welfare of the workmen, maintained by the company;
(c) "workmen's portion", in relation to the security of any
secured creditor of a company, means the amount which C
bears to the value of the security the same proportion as
the amount of the workmen's dues bears to the aggregate
of-
(i) the amount of workmen's dues; and D
(ii) the amounts of the debts due to the secured creditors.
Illustration
529A. Overriding preferential payment.- E
Notwithstanding anything contained in any other provision
of this Act, or any other law for the time being in force, in
the winding up of a cotnpany-
(a) workmen's dues; and
F
(b) debts due to secured creditors to the extent such debts
rank under clause (c) of the proviso to sub-section (1) of
section 529 pari passu with such dues,
shall be paid in priority to all other debts. G
(2) The debts payable under clause (a) and clause (b) of
sub-section (1) shall be paid in full, unless the assets are
insufficient to meet them in which case they shall abate in
equal proportions.
H
362 SUPREME COURT REPORTS [2012] 13 S.C.R.
A 530. Preferential pa~·ments. - (1) In a winding up subject
to the provisions of section 529A, there shall be paid] in
priority to all other debts-
(a) all revenues taxes, cesses and rates due from the
company to the Central or a State Government or to a
8
local authority at the relevant date as defined in clause (c)
of sub-section (8), and having become due and payable
within the twelve months next before that date;
(b) all wages or salary (including wages payable for time
c or piece work and salary earned wholly or in part by way
of commission) of ainy employee, in respect of services
rendered to the company and due for a period not
exceeding four months within the twelve months next
before the relevant date subject to the limit specified in
D sub-section (2);
(c) all accrued holiday remuneration becoming payable to
any employee, or in the case of his death to any other
person in his right, on the termination of his employment
before, or by the t~ffect of, the winding up order or
E
resolution;
(d) unless the company is being wound up voluntarily
merely for the purposes of reconstruction or of
amalgamation with another company, all amounts due, in
F respect of contributions payable during the twelve months
next before the rel1evant date, by the company as the
employer of any persons, under the Employees' State
Insurance Act, 1948 (34 of 1948), or any other law for the
time being in force;
G
(e) unless the company is being wound up voluntarily
merely for the purposes of reconstruction or of
amalgamation witln another company, or unless the
company has, at the commencement of the winding up,
under such a contract with insurers as is mentioned in
H
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 363
ORS. [SWATANTER KUMAR, J.]
section 14 of the Workmen's Compensation Act, 1923 (8 A
of 1923), rights capable of being transferred to and vested
in the workman, all amounts due in respect of any
compensation or liability for compensation under the said
Act in respect of the death or disablement of any employee
of the company; B
(f) all sums due to any employee from a provident fund, a
pension fund, a gratuity fund or any other fund for the
welfare of the employees maintained by the company; and
(g) the expenses of any investigation held in pursuance of C
section 235 or 237, in so far as they are payable by the
company.
(2) The sum to which priority is to be given under clause
(b) of sub-section (1), shall not, in the case of any one 0
claimant, 2[exceed such sum as may be notified by the
Central Government in the Official Gazette].
(3) Where any compensation under the Workmen's
Compensation Act, 1923 (8of1923), is a weekly payment,
the amount due in respect thereof shall, for the purposes E
of clause (e) of sub-section (1 ), be taken to be the amount
of the lump sum for which the weekly payment could, if
redeemable, be redeemed if the employer made an
application for that purpose under the said Act.
F
(4) Where any payment has been made to any employe·e
of a company,-
(i) on account of wages or salary; or
(ii) to him, or in the case of his death, to any other person G
in his right, on account of accrued holiday remuneration,
out of money advanced by some person for that purpose,
the person by whom the money was advanced shall, in a
winding up, have a right of priority in respect of the money H
364 SUPREME COURT REPORTS [2012] 13 S.C.R.
A so advanced and paid, up to the amount by which the sum
in respect of which thei employee or other person in his
right would have been entitled to priority in the winding up
has been diminished by reason of the payment having
been made.
B
(5) The foregoing debts shall-
(a) rank equally among themselves and be paid in full,
unless the assets are insufficient to meet them, in which
case they shall abate in equal proportions; and
c
(b) so far as the assets of the company available for
payment of general creditors are insufficient to meet them,
have priority over the claims of holders of debentures under
any floating charge cn~ated by the company, and be paid
D accordingly out of any property comprised in or subject to
that charge.
(6) Subject to the re,tention of such sums as may be
necessary for the costs and expenses of the winding up,
the foregoing debts shall be discharged forthwith so far as
E the assets are sufficient to meet them, and in the case of
the debts to which priority is given by clause (d) of sub-
section (1 ), formal proof thereof shall not be required
except in so far as may be otherwise prescribed.
F (7) In the event of a landlord or other person distraining or
having distrained on any goods or effects of the company
within three months next before the date of a winding up
order, the debts to which priority is given by this section
shall be a first chargei on the goods or effect so distrained
G on, or the proceeds of the sale thereof:
Provided that, in respect of any money paid under any such
charge, the landlord or other person shall have the same
rights of priority as the person to whom the payment is
made.
H
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 365
ORS. [SWATANTER KUMAR, J.]
(8) For the purposes of this section- A
(a) any remuneration in respect of a period of holiday or
of absence from work through sickness or other good
cause shall be deemed to be wages in respect of services
rendered to the company during that period;
8
(b) the expression "accrued holiday remuneration"
includes, in relation to any person, all sums which, by virtue
either of his contract of employment or of any enactment
(including any order made or direction given under any
enactment), are payable on account of the remuneration C
which would, in the ordinary course, have become payable
to him in respect of a period of holiday, had his
employment with the company continued until he became
entitled to be allowed the holiday;
D
(bb) the expression "employees" does not include a
workman; and
(c) the expression "the relevant date" means-
(i) in the case of a company ordered to be wound up E
compulsorily, the date of the appointment (or first
appointment) of a provisional liquidator, or if no such
appointment was made, the date of the winding up order,
unless in either case the company had commenced to be
wound up voluntarily before that date; and F
(ii) in any case where sub-clause (i) does not apply, the
date of the passing of the resolution for the voluntary
winding up of the company.
(9) This section shall not apply in the case of a winding up G
where the date referred to in sub-section (5) of section 230
of the Indian Companies Act, 1913 (7 of 1913), occurred
before the commencement of this Act, and in such a case,
the provisions relating to preferential payments which would
H
366 SUPREME COURT REPORTS [2012] 13 S.C.R.
A have applied if this Act had not been passed, shall be
deemed to remain in full force."
10. Chapter V of the Act deals with provisions that are
applicable to every mode of winding up and in particular, the
above provisions deal with the proof and ranking of claims.
8
Section 529 is concerned with the application of insolvency
rules to winding up of an insolvent company. The opening
language of Section 529 contemplates that in winding up of an
insolvent company, the Ftules prevalent under the law of
C insolvency shall be applicable. Thus, the Provincial Insolvency
Act, 1920 (for short the "Insolvency Act"), to the extent
permissible, would be applicable in regard to the winding up
of a company. Section 47 of the Insolvency Act reads as under:
"47. Secured creditors.-
D
(1) Where a secured creditor realizes his security, he
may prove for the balance due to him, after
deducting the net amount realized.
E (2) Where a secured creditor relinquishes his security
for the general benefit of the creditors, he may prove
for his whole dlebt.
(3) Where a secured creditor does not either realize
or relinquish his security, he shall, before being
F
entitled to have his debt entered in the schedule,
state in his proof the particulars of his security, and
the value at which he assesses it, and shall be
entitled to receive a dividend only in respect of the
balance due to him after deducting the value so
G assessed.
(4) Where a security is so valued, the Court may at any
time before realization redeem it on payment to the
creditor of the assessed value.
H
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 367
ORS. [SWATANTER KUMAR, J.]
(5) Where a creditor, after having valued his security, A
subsequently realizes it, the net amount realized
shall be substituted for the amount of any valuation
previously made by the creditor, and shall be
treated in all respects as an amended valuation
made by the creditor. B
(6) Where a secured creditor does not comply with the
provisions of this section, he shall be excluded from
all share in any dividend."
11. The above provision gives different options that are C
available and can be exercised by a secured creditor. It,
however, has to be kept in mind that in terms of section 529
the rules of insolvency shall prevail and be observed but only
with regard to debts provable, the valuation of annuities and
future and contingent liabilities and the respective rights of D
secured and unsecured creditors. Where a secured creditor
realizes his security, he may prove the balance due to him after
deducting the net amount realized; or where a secured creditor
relinquishes his security for the general benefit of the creditors,
he may prove for whole of his debt. Still, where a secured E
creditor does not exercise either of these options, he is entitled
to have his debt entered in the schedule and would be entitled
to receive the dividend in terms of Section 47(3).
12. It is worthwhile to note that the proviso to Section 529
F
of the Act creates a deeming fiction in law and makes it clear
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 workman's portion thereunder. This fiction is
intended to give the workmen a preferential right to recover their
dues. The expression 'workmen's portion' appearing in the G
proviso to Section 529(1) is explained under clause (c) of
Section 529(3) of the Act. The workmen's portion in relation to
the security of any secured creditor of a company means the
amount which bears to the value of the security the same
proportion as the amount of the workmen's dues bears to the H
36:8 SUPREME COURT REPORTS [2012] 13 S.C.R.
A aggregate of the amount of the workmen's dues and the amount
of the debts due to the secured creditors. The workmen's
portion is to be computed in terms thereof with the aid of the
illustration given in that provision. Thus, the security of every
secured creditor, by fiction of law, is subject to a pari passu
B charge in favour of the workmen to the extent of the workmen's
portion and where the secured creditor, instead of relinquishing
his security and proving his debt, opts to realize his security,
in that event, so much of the debt due to such secured creditor
as could not be realized by him by virtue of the pari passu
c charge in favour of the workmen or the amount of the workmen's
portion in his security, whichever is less, shall rank pari passu
witlil the workmen's dues for tile purposes of Section 529A.
13. Section 529A of the Act opens with non-obstante
clause, giving the workmen's dues and secured creditors' dues,
D as defined under the proviso to Section 529(1 ), an over-riding
effect over the other provisions of the Act as well as any other
law in the matter of priority of payment of dues. Application of
Section 529A of the Act is not dependent upon any other
provision of the Act including Section 529 except to the extent
E specified in Section 529, proviso (c). So, it is not dependent
upon the limitation imposed by any other law for the time being
in force, including Section 47 of the Insolvency Act. The non-
obstante opening words of Section 529(A) are intended to give
precedence to the 'overriding preferential payments' in contrast
F to the 'preferential payments' as contemplated under Section
530 of the Act. This non-obstante language attains even greater
significance as it, in no uncertain terms, provides that Section
529(A) shall have effect notwithstanding anything contained in
any other provision of the Act or any other law for the time being
G in force. No law, including the insolvency law can undermine the
appliication and effect of Section 529 read with Section 529A
of the Act. Thus, the provisions are exceptions to all other laws
in force.
14. Once the contents of proviso to Section 529 and its
H
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 369
ORS. [SWATANTER KUMAR, J.]
clauses (a) to (c) are satisfied, then the secured creditor would A
be entitled to invoke the provisions and receive the benefits of
Section 529A(i), subject to pari passu charge and in terms of
the priority stated therein. The workmens' dues are to get
preference in the winding up of a company under Section 529A
of the Act. The workmens' dues, however, have not been B
singularly placed in the preferential clause. The expression
used in Section 529A is 'and' meaning thereby that the dues
stated under clauses (a) and (b) of the section would remain
pari passu. But it is not the entire dues of the secured creditors
that will get preference over other dues and remain pari passu c
with the charges payable to the workmen. Their dues are limited
only to the extent of the debts which are due to the secured
creditors under clause (c) of the proviso to sub-Section (1) of
Section 529 which are pari passu with such dues. The term
'such dues' here refers to the dues of the workmen. The Andhra
0
Bank case has clearly stated that not only the dues of the
workmen would be paid in terms of Section 529A in
precedence to all others but are pari passu to the amounts due
to the secured creditors in terms of Section 529(1) proviso (c).
On a plain reading of the language of these two Sections, i.e.,
529 and 529A, it is clear that it is not the entire or unrealised E
amount owed to secured creditors which is protected under the
provisions of Section 529A and stands pari passu with the
workmen's charges, but it is only the portion or amount
relinquished under proviso to Section 529(1 ), whichever is less
that is protected. In other words, the amount which is due to F
the secured creditors and remains unpaid due to enforcement
of the pari passu charge of the workmen under Section 529(1)
is the portion of dues of secured creditors that are protected
in terms of Section 529A. There is a direct link in the application
of both these provisions. In a situation of the present kind, these G
provisions would have to be applied collectively and that too,
upon the correct appreciation of the legislative intent. As far as
Section 530 of the Act is concerned, it simpliciter provides for
preferential payments with regard to persons other than those
covered under Sections 529 and 529A of the Act. However, in H
370 SUPREME COURT REPORTS [2012) 13 S.C.R.
A the present case, we are primarily concerned with the
application of Sections 529 and 529A.
15. If one analyses the scheme of the above-stated
prct>visions, it is clear that in a winding up petition of an insolvent
B company, Rules of insolvency would apply to the stated extent.
In terms of the proviso to Section 529(1), there is a deemed
fiction created in law on the security of every secured creditor
to the extent of the workmen's portion therein. The second part
of the proviso states that wh1ere the secured creditor instead
of relinquishing his security and proving his debts opts to realize
C his security, there the liquidator is entitled to represent the
workmen and enforce the said charge in favour of the workmen
to the extent of the workmen's dues. From a cumulative reading
of the relevant provisions under the Act as well as under the
Insolvency Act, it is clear that neither the legislature intended
D nor can it be comprehended that where an act is done in
complete adherence to the relevant statutory provisions, it can
lead to two different results merely because such act is done
before different forums/courts. That is to say that if a secured
creditor realises his security before a forum other than the
E Company Court strictly in compliance to the provisions of
Section 529 of the Act, then favourable consequences of
Section 529A would follow but if he acts in identical terms
before the Company Court and without prejudice to his remedy
outside the winding up and without putting his sale proceeds
F in the common hotch potch in the winding up proceedings, he
would not be entitled to the benefits of Section 529A. It is more
so since even the sale of a security by a secured creditor
before such other forum cannot be completed without approval
of the Company Court. The Company Court has even been
G vested with the jurisdiction tcJ transfer such proceedings in
exercise of its powers under Section 446 of the Act. At this
stage, it will be useful to refer to the dictum of this Court in
Andhra Bank (supra) where the Court noticed, "where the
matter is not pending before the Tribunal under the Recovery
H of C>ebts Due to Banks and Financial Institutions Act, 1993 ("the
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 371
ORS. [SWATANTER KUMAR, J.]
ROB Act"), in terms of Section 19(19) thereof, the secured A
creditors would not get priority per se ...... " to show that mere
pendency of proceeding before a Tribunal would not deprive
the secured creditor of the statutory benefits. Of course, the
situation will be entirely different where the secured creditor
does not follow the scheme of the provisions of Section 47(1) B
of the Insolvency Act read in conjunction with Sections 529 and
529A of the Act but puts the sale proceeds in the winding up
proceedings in a common hotch-potch or even relinquishes the
security for general benefit of the creditors at large, then the
creditor would not be entitled to the benefit of Section 529A c
and would stand in line with the unsecured creditors of the
company. Further, where the secured creditor has been unable
to fully realize his dues owing to the taking of share from his
security towards workmen's portion in terms of the proviso to
Section 529(1 ), then to the extent specified, the secured
0
creditor is entitled to a charge pari passu with the workmen's
dues for the purposes of Section 529A.
16. The situation may be different where the secured
creditor relinquishes his security in favour of or upon realization
submits the proceeds in the common hotch-potch in winding E
up proceedings and for the benefit of the creditors in general.
Proviso to Section 529(1) has a very significant role in this entire
process for recovery. It has two contents which have to be read
conjunctively. First, that creates a pari passu charge by legal
fiction on the security of a secured creditor in favour of the F
workmen and, second, where the secured creditor instead of
relinquishing his security and proving his debts opts to realize
his security. The expression 'and' used in the proviso has to
be read and construed conjunctively and not disjunctively. The
word 'and' specifies two specific conditions aforenoticed for the G
proviso and sub-clauses (a) to (c) to become enforceable.
Clauses (a) and (b) to the proviso give right of representation
to the liquidator for enforcing the statutory right in favour of the
workmen to the extent of the portion of the workmen's dues.
Clause (c) of proviso to Section 529(1) provides the mode for H
372 SUPREME COURT REPORTS [2012] 13 S.C.R.
A recouping the shortfall in the amount which the secured creditor
loses upon sale of security and creation of pari passu charge.
Of course, as already noticed, such recovery is again pari
passu and limited to the exltent of the amount of workmen's
dues. The realization of the security may be in the proceedings
B outside the winding up, i.e., before a special forum or otherwise
or it may be in the winding up but not fer the benefit of the
general creditors but strictly in compliance with the provisions
of the proviso to Section 529(1) of the Act. In both such
situations, the secured creditor would be entitled to the
C protection and right of preferential payment contemplated under
Section 529A(1) of the Act.
17. Now, I may refer to the judgments of this Court relied
upon by the respective parties. In the case of Allahabad Bank
(supra) the Allahabad Bank was an unsecured creditor of the
D company in liquidation in that case aod had obtained a simple
money decree from the Debts Recovery Tribunal (for short 'the
ORT') at Delhi against the debtor-company. The Canara Bank
was a secured creditor of the debtor-company but its claim was
pending before the same Tribunal. The Allahabad Bank had
E taken out the sale proceedings before the Recovery Officer
under the ROB Act. The Company Court, however, stayed these
sale proceedings under Sections 442 and 537 of the Act, in a
winding up petition by Ranbaxy Ltd. Dissatisfied, the Allahabad
Bank had challenged the order of the Company Court before
F this Court. This Court in that case was primarily dealing with
the question whether the amoiunt directed to be realized by sale
of assets of the debtor company by the DRT, at the instance
of Allahabad Bank, may straightaway be released in its favour,
or whether, keeping in view the provisions of Section 19(19)
G of the ROB Act read with Section 529A of the Act, the other
parties such as secured creditors, would still have a charge
over the monies so realized. Thus, the question primarily before
the Court in that case was the order of priority of discharging
debts between a secured and an unsecured creditor, with
H respect to funds realized from sale of assets of the debtor
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 373
ORS. [SWATANTER KUMAR, J.)
company. While dealing with this question, the Court made an A
observation that the workmen's dues have priority over all other
creditors, secured or unsecured, because of Section
529A(1 )(a) of the Act. The following paragraphs of this
judgment can usefully be referred to at this stage:
B
"62. Secured creditors fall under two categories. Those
who desire to go before the Company Court and those who
like to stand outside the winding-up.
xxxx xxxx xxxx xxxx
c
68. In our opinion, the words "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" obviously
mean the amount taken away from the private realisation
of the secured creditor by the liquidator by way of enforcing o
the charge for workmen's dues under clause (c) of the
proviso to Section 529(1) "rateably" against each secured
creditor. To that extent, the secured creditor - who has
stood outside the winding-up and who has lost a part of
the monies otherwise covered by security - can come E
before the Tribunal to reimburse himself from out of other
monies available in the Tribunal, claiming priority over all
creditors, by virtue of Section 529A(1 )(b).
xxxx xxxx xxxx xxxx
F
76. The next question is whether the amounts realised
under the ROB Act at the instance of the appellant can be
straight away released in its favour. Now, even if Section
19(19) read with Section 529A of the Companies Act
does not help the respondent Canara Bank, the said G
provisions can still have an impact on the appellant
Allahabad Bank which has no doubt a decree in its favour
passed by the Tribunal. Its dues are unsecured. The
"workmen's dues" have priority over all other creditors,
secured and unsecured because of Section 529-A(1)(a).
H
374 SUPREME COURT REPORTS [2012] 13 S.C.R.
A There is no material before us to hold that the workmen's
dues of the defendant Company have all been paid. In view
of the general principles laid down in National Textile
Workers' Union v. P.R. Ramakrishnan (1983) 1 SCC 228
there is an obligation resting on this Court to see that no
B secured or unsecured creditors including banks or financial
institutions, are paid before the workmen's dues are paid.
We are, therefore, unable to release any amounts in favour
of the appellant Bank straight away."
18. Firstly, the question now before this Court was not
C raised on the facts of that case. Secondly, the Court recorded
no reasons for making such an observation. It, therefore, was
a. mere obiter and would not satisfy the essentials of a binding
precedent. For it to be a bindi1ng precedent, the Court should
directly be concerned with such issue. There should be an issue
D which should be concluded by appropriate reasoning to give it
colour of a binding precedent.
19. However, this very question came up for consideration
before a three-Judge Bench of this Court in the case of Andhra
E Bank (supra). The facts of that case were that under the scheme
of amalgamation the assets and properties of the Tobacco
Division of Duncan Agro Industries Ltd. were transferred to its
subsidiary New Tobacco Ltd. The subsidiary had been enjoying
diverse financial credit facilities from Andhra Bank which was
F its secured creditor. Andhra Bank had filed a suit for recovery
of its dues. A winding up petition was also filed. Finally, the
subsidiary company was ordered to be wound up and the
assets of the company were ordered to be taken over by the
Official Liquidator. Some assets had been sold by Receivers
G appointed in the said separate suit, but in view of approval of
a soheme of revival of the company, the winding up order was
stayed. This scheme of revival, however, failed. Thus, the
assets and properties of the company were directed to be sold.
The Company Court passed an order directing that out of the
sale proceeds of the assets of the company, the wages of the
H
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 375
ORS. [SWATANTER KUMAR, J.]
employees and the workmen be paid. Therein, the Andhra Bank A
was a secured creditor, the dues of the workmen were payable
under Sections 529 and 529A of the Act and there were also
other creditors of the company. The larger Bench considered
various judgments and finally, while commenting upon the
observations made by the two-Judge Bench of this Court in the B
case of Allahabad Bank (supra), this Court held as under:
"26. Such an observation was, thus, neither required to be
made keeping in view the fact situation obtaining therein
nor does it find support from the clear and unambiguous
language contained in Section 529A(1 )(a). We have. C
therefore. no hesitation in holding that finding of this Court
in Allahabad Bank to the aforementioned extent does not
lay down the correct law.
27. The Court also wrongly placed reliance on National D
Textile Workers' Union v. P.R. Ramakrishnan. The
question which arose therein was only as regards the right
of the workers to be heard in the winding-up proceeding.
The said decision was, therefore, not applicable.
E
Determination
28. By reason of the order dated 12-10-1993, the learned
Single Judge while issuing various directions, directed:
"Andhra Bank is directed to pay a sum of Rs 38 F
lakhs to the Official Liquidator for the purpose of
disbursing forthwith the salary to the officers, staff
and workers of New Tobacco Co. Ltd., both at
Calcutta and Durgapur, before the ensuing Puja.
The Official Liquidator will disburse such salary to G
the officers, staff and workers of New Tobacco Co.
Ltd., as aforesaid, before the ensuing Puja."
29. No reason has been assigned in support of the said
direction. The contentions of the parties had not been
H
376 SUPREME COURT REPORTS [2012) 13 S.C.R.
A noticed. What impelled the learned Judge in issuing the
said directions is not discernible. -The jurisdictional
question had also not been addressed.
30. Whether the workmen could be directed to be paid on
an ad hoc basis having regard to their claim of past dues
B
vis-a-vis the claim of the appellants had not been
deliberated upon. When a matter is not pending before the
Tribunal under the ROB Act, in terms of Section 19(19)
thereof, the secured creditors would not get priority per se
as it is qualified by the words "in accordance with the
c provisions of Section 529A". The claims of the secured
creditors are, thus, required to be considered giving priority
over unsecured creditors but their claim would be pari
passu with the workmen."
D (Emphasis supplied)
20. The principles enunciated by this Court in the case of
Andhra Bank (supra) clearly establish the fact that out of the
dues payable, the workmen have a preferential charge, ~ut the
E dues of the secured creditors, as protected under Section 529A
of the Act, have to rank pari passu with the dues of the
workmen, without any preference to the latter.
21. Firstly, this being a Bench of equi-strength, I see no
reason for not following the view expressed by this Court in the
F case of Andhra Bank (supra) and secondly, any other
interpretation is likely to def1eat the legislative balance in the
underlying genesis of the amended provisions of Sections 529
and 529A of the Act.
G 22. It may also be noticed that prior to the pronouncement
of the judgment of this Court in the case of Allahabad Bank
(supra), the settled view of this Court was that the charge of
the secured creditors and that of the workmen would rank pari
passu within the ambit of Section 529A of the Act. [refer UCO
H Bank (supra)]. Usefully, reference can also be made to the
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 377
ORS. [SWATANTER KUMAR, J.]
judgment of this Court in the case of A.P. flnancial Corporation A
v. Official Liquidator [(2000) 7 SCC 291] wherein this Court
was dealing with the provisions of Section 29 of the State
Financial Corporations Act, 1951 and the question as to
whether these provisions could be implemented, ignoring the
pari passu charge of the workmen as contemplated under 8
Sections 529 and 529A of the Act. The High Court, in that case,
had imposed certain conditions in regard to sale of the property
under Section 29 of the State Financial Corporations Act to
protect the pari passu charge contemplated under the
provisions of Section 529A of the Act. Besides holding that the C
provisions of the Act shall prevail, this Court held that the pari
passu charge has to be maintained and also held as under :
"We are, therefore, of the opinion that the above proviso
to sub-section (1) of Section 529 and Section 529A will
control Section 29 of the Act of 1951. In other words the D
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
sub-section (1) of Section 529, the liquidator shall be E
entitled to represent the workmen and force (sic enforce)
the above pari passu charge. Therefore, the Company
Court was fully justified in imposing the above conditions
to enable the Official Liquidator to discharge his function
properly under the supervision of the Company Court as F
the new Section 529A of the Companies Act confers upon
a Company Court the duty to ensure that the workmen's
dues are paid in priority to all other debts in accordance
with the provisions of the above section. The legislature
has amended the Companies Act in 1985 with a social G
purpose viz. to protect dues of the workmen. If conditions
are not imposed to protect the right of the workmen there
is every possibility that the secured creditor may frustrate
the above pari passu right of the workmen."
H
378 SUPREME COURT REPORTS [2012) 13 S.C.R.
A 23. As per the scheme and the relevant provisions of the
Act, it is clear that a secured creditor can relinquish his security,
participate in winding up proceedings and file his claim before
the official liquidator, as and when invited. In the case of Andhra
Bank (supra), this Court has clearly stated the principle that the
8 dues of the secured creditors and of the workmen would rank
pari passu as regards the order of preference of their
discharge. This, of course, is. subject to satisfying the conditions
as stated in Sections 529 and 529A of the Act. The proviso to
sub-section (1) of Section 529, by a deemed fiction, makes the
C dues of the workmen pari passu with that of the secured
creditors and creates a charge in favour of the workmen upon
the amounts realized from the enforcement of such security, to
the extent of the workmen's portion therein. As already noticed,
the 'workmen's portion' has been explained under sub-section
(3)(c) of Section 529 which requires that in relation to the
0 security of any secured creditor of the company, workmen's
portion would mean the amount which bears to the value of the
security the same proportion as the amount of the workmen's
dues bears to the aggregate of the amount of workmen's dues
and the amounts of the debts due to the secured creditors. The
E illustration to this sub-section provides the mode in which the
workmen's portion is to be calculated. Once the workmen's
portion is computed, then in terms of Section 529A, again it
has to be treated as a charge pari passu to the debts of the
secured creditor. In the case of the latter, the charge will be
F limited to the extent such debt ranks under clause (c) of the
proviso to sub-section (1) of Section 529 pari passu with such
dues for preferential payment. The dues payable to the
workmen and the secured creditors have to be paid in priority
to all other debts. But the dues payable to the secured creditor
G will not be more than the amount that remains unsatisfied after
the security is relinquished in favour of the workmen under
Section 529 of the Act.
24. The relinquishment of security by a secured creditor
H certainly requires some conscious act on his part more than
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 379
ORS. [SWATANTER KUMAR, J.]
the mere filing of a claim in response to a public notice issued A
by the official liquidator. Once the secured creditor takes such
further actions like sale of the secured assets through the
liquidator and subject to the control of the Company Court in
that event, he would be part of the scheme of payment as
rationalized under Section 529 and 529A of the Act. 8
25. In the case of Andhra Bank (supra), this Court, after
discussing the law in paragraphs 25 and 26, clearly held in
paragraph 30 of the judgment that claims of the secured
creditors are, thus, to be considered giving priority over the C
unsecured creditors but their claim would be pari passu with
the workmen. In my view, this is the correct exposition of law.
26. The learned counsel appearing for the appellant also
raised an issue with regard to the secured creditors having
stood outside the winding up and, therefore, not entitled to the D
benefit of pari passu charge in terms of Section 529A of the
Act. According to respondent No.8, they had taken steps for
realizing the security without prejudice to the proceedings
initiated by them before the Debts Recovery Tribunal and they
had never given up their claim. According to this respondent, E
they have not been able to realize their entire dues as a result
of taking out of the workmen's portion out of their security. It is
also their contention that once having obtained the benefit under
the Proviso to Section 529(1) of the Act, it is not open to the
workmen to disregard the rest of the provisions and deny the F
benefit to respondent No.8 of the provisions of Section 529A.
To the contra, as already noticed, the submission of the
appellant is that the secured creditors have given up their
security and joined the winding up proceedings and are
covered under Section 47(2) of the Insolvency Act. Resultantly G
the provisions of Section 529A(1)(b) are not applicable.
27. A secured creditor who has a charge over the assets
of a company in winding up, merely by instituting an application
before the ORT or any other special forum without effectively
pursuing that remedy and taking effective steps to realize his H
380 SUPREME COURT REPORTS [2012] 13 S.C.R.
A security would not stand outside the winding up proceedings.
If the sale of s_ecured assets is effected by the Official
Liquidator subject to control of the Company Court and such
amounts are utilized for discharging the debts of the secured
creditor as well as statutory charge of the workmen created
B under Sections 529 and 529A, then, in effect, the secured
creditor would be deemed to have participated in the winding
up proceedings and not stood outside the same. It is for the
reason that a secured creditor has to take steps by filing petition
before any other forum just to protect his legal right and to
c prevent the claim from getting barred by time. On the contrary,
if he realizes his security within the four corners of the company
law, i.e., before the Official Liquidator and the Company Court,
in that event it would not be possible to hold that such secured
creditor has given up his option to participate in the winding
up proceedings. However, the matter would be quite different
0
where the secured creditor elects not only to institute a petition
before the specialized forum but also takes effective steps to
realize his security and pursues the proceedings effectively, in
which event, the conclusion has to be that such secured
E creditor has stood 'outside tine winding up' proceedings.
28. Equally, it can be stated that a secured creditor who,
after institution of a claim but without pursuing the remedy
outside the provisions of this Act, files claim before the official
liquidator, relinquishes his security and agrees to the
F distribution of the sale proceeds through the official liquidator,
subject to jurisdiction of the Company Court, could always be
said to be not 'standing outside the winding up' proceedings.
However, where he institutes a petition, proceeds with it and
seeks realisation of security before a forum outside the
G Company Court, then he obviously pursues the remedy beyond
mere filing of a claim and would be a person 'standing outside
the winding up' proceedings and shall be subject to the rights
enforced by the official liquidator in terms of the proviso to
Section 529 of the Act. As it has also been held by this Court
H in the case of /CIC/ Bank (supra), the secured creditor has to
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 381
ORS. [SWATANTER KUMAR, J.]
take some positive steps to participate in the winding up A
petition.
29. In the case of /CIC/ Bank (supra), this Court had taken
the view that filing an affidavit or proof of claim with the official
liquidator pursuant to notice issued by him does not amount to B
the relinquishment of his security by a secured creditor in terms
of Section 47(2) of the Insolvency Act. In this very judgment, the
Court also stated that 'only because the dues of the workmen
and the debts due to the secured creditor are treated pari passu
with each other, the same by itself, would not lead to the C
conclusion that the concept of inter se priorities amongst the
secured creditors had thereby been intended to be given a total
goby'. The Court also explained that relinquishment has to be
by virtue of a specific act and a conscious decision on behalf
of the secured creditor. Similarly, merely filing a proceedings
before a special forum to save limitation without taking any D
effective steps to realize the security there, would not
necessarily mean that the secured creditor has stood outside
the winding up proceedings.
30. From the respective contentions raised by the parties, E
one fact is clear that respondent No.8 has realized its security
without prejudice to the proceedings taken by it before the
Debts Recovery Tribunal. Furthermore, the security was
realized strictly within the scope of Section 529(1) and its
proviso. That has to be protected in terms of Section 529A(1)(b) F
because the secured creditor has not relinquished its security
for the general benefit of the creditors but realized the same in
terms of Section 47(1) of the Insolvency Act. The argument
raised on behalf of the appellant in this regard is not well-
founded. If this contention is accepted in the facts of the present G
case, then it would run contra to the principles stated by this
Court in the case of Andhra Bank (supra) and /CIC/ Bank
(supra). It has already been noticed that the provisions of
Section 529A are not controlled and/or subservient to any other
provision of the Act or any other law. Once the twin
H
382 SUPREME COURT REPORTS [2012] 13 S.C.R.
A requirements stated in the proviso to Section 529(1) are
satisfied, the scheme contemplated under clause (c) of the
proviso to Section 529 read with Section 529A of the Act would
come into play. The Court cannot overlook the reality that
intention of the framers of law could not have been that the
8 public funds, for instance, the money of secured creditor (like
banks), should be completely ignored for the benefit of the
areditors in general, despite there being a definite protection
in law, more so, when the security may be sufficient for recovery
of dues of such secured creditors to a limited extent, if not in
C entirety. The scheme of these provisions, thus, has to be
understood to make it practicable and in consonance with the
accepted commercial principles. It is precisely for these
reasons that I am taking the view that the workmen's charges
as well as that of the secured creditors have to be paid in
preference to all others, but with inter se pari passu charge on
0 the amounts realized from the sale of the security or otherwise.
31. From the above discussion on law and the judgments
of this Court, the following principles can be safely deduced :
E 1. The rules of ins1olvency or the provisions of the
Provincial Insolvency Act, 1920 would apply in the
winding up of an insolvent company under the
provisions of Section 529 of the Act but it has a
limited application as per terms of clauses (a) to
(c) of Section 529(1) of the Act.
F
2. The provisions of the Insolvency Act and even
Section 529 of the Act cannot control the scope
and application of Section 529A of the Act.
G 3. Merely submitting of an affidavit or demand by the
secured creditor in response to the notice issued
by the Official Liquidator inviting claims would not
tantamount to effective participation in the winding
up proceedings (Hef. /CIC/ Bank (supra)).
H
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 383
ORS. [SWATANTER KUMAR, J.]
4. Mere institution of a petition by a secured creditor A
before a court or forum of competent jurisdiction per
se will not lead to an inference that the secured
creditor has stood outside the winding up
proceedings unless it takes some effective steps
to pursue those proceedings and realizes its B
security de hors the specific procedure under the
Act.
5. The proviso to Section 529(1) has two prescribed
contents which have to be satisfied cumulatively. C
The expression 'and' appearing therein will have to
be read as 'conjunctive' and not 'disjunctive'.
The contents are, firstly, that the provision creates a legal
fiction of pari passu charge in favour of the workmen on the
security of a secured creditor and, secondly, that the secured D
creditor should realise its security in contradistinction to
relinquishment of his security for recovery of its dues in
accordance with law.
6. Relinquishment has to be a conscious act on the E
part of the secured creditor and is incapable of
being construed by implication.
7. The secured creditor and dues of the workmen in
the proportion calculated in terms of Section 529A
are liable to be paid in preference to all other dues F
but are pari passu inter se. (Ref. Andhra Bank
(supra)
32. Reverting to the facts of the present case, the judgment
of the High Court, to the extent it takes the view that the charges G
of the workmen and secured creditors have to rank pari passu,
cannot be faulted with. However, where the learned Single
Judge as well as the Division Bench of the High Court have
fallen in error of law, is the computation and adjustment of the
shares between the workmen, on the one hand and the secured H
384 SUPREME COURT REPORTS [2012) 13 S.C.R.
A creditors, on the other. Particularly, the learned Single Judge
directed the amounts recovered from the secured creditors to
be distributed between the workmen and the secured creditors
in equal proportion of 50 per cent of their respective admitted
claims. This order and calculation is opposed to the very
B scheme of the above provisions, particularly with respect to
determination of the workmen's portion. Another error in the
calculation that appears from the record is that though the total
sale proceeds from the secured assets were Rs.108.90 crore,
the Court directed the payment of only Rs.101 crore which is
c the aggregate of the amount directed to be paid to the
workmen and to the secured creditors. Thus, there has been
an error of law in applying the statutory provisions in this regard.
The High Court erred in not noticing that the Company Court
has not made calculation and computation in accordance with
law. The Company Court as well as the Appellate Court should
0
have considered the workmen's portion in terms of proviso to
Section 529(1) and Section 529(3)(c) along with the illustration
appended thereto and thereafter, its over-riding preferential
p<1yment vis-a-vis all other unsecured creditors in terms of
Section 529A and 530 of the Act. Once that is done, the Court
E co uld then have settled the payment received by the Official
1
Liquidator from the sale of the unsecured assets of UMI. The
amounts, thus, are required to be recalculated in terms of the
above provisions and the law stated herein.
F 33. In the present case, the secured creditor has realized
its security but without putting the security or the receipts thereof
in the common hotch potch of the winding up proceedings for
the general benefit of the creditors. Thus, in terms of Section
47(1) of the Insolvency Act, the secured creditor in the present
G case is entitled to the balance due to it, deducting the net
amounts realized. If the secured creditor would have
participated in the winding up proceedings in its entirety with
the security being realised and/or relinquished for the general
benefit of the creditors and not restricted to the compliance of
H Se¢tion 529 of the Act, it would not be entitled to the benefit of
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 385
ORS.
Section 529A of the Act. As already discussed, it is not the A
case herein. It may also be noticed that the amounts, by the
consent of the parties, have already been disbursed and utilized
by the workmen as well as the secured creditors in terms of
Section 529 of the Act which obviously, in my view, are subject
to adjustment as per the orders of the Court. B
34. For the reasons afore-recorded, while reiterating the
view expressed in Andhra Bank (supra), I am of the considered
view that the High Court should re-compute the amounts
payable pari passu between the secured creditors and the
workmen in accordance with the principles stated above. C
35. Therefore, I remand the matter to the Company Court
to apply the above-stated principles and calculate the amount
payable to the respective parties afresh and in accordance with
I~ D
A.K. PATNAIK, J. 1. Leave granted.
2. We have carefully read the learned opinion of our
esteemed brother Swatanter Kumar, J. in this case but with
great respect we are unable to persuade ourselves to agree E
with his interpretation of Sections 529 and 529A of the
Companies Act, 1956 (for short 'the Companies Act').
3. Before we give our interpretation of Sections 529 and
529A of the Companies Act, we may very briefly state the
relevant facts as stated by the appellant. U.M.I. Special Steel F
Limited (for short 'the company') is a company registered under
the Companies Act. The company became sick and went
before the BIFR but the BIFR in its opinion dated 08.03.2002
recommended for winding up of the company. On 05.08.2003,
the learned Company Judge of the High Court of Jharkhand G
passed orders for winding up of the company and appointed
the official liquidator as liquidator to conduct the liquidation
proceedings in relation to the company and to take over the
assets, books and documents of the company. The liquidator
then took over the assets of the company and sold some of the H
386 SUPREME COURT REPORTS [2012] 13 S.C.R.
A assets of the company and paid Rs.93,64,93,586/- to the
secured creditors and Rs.8, 19,22,371.12p to the workmen
representing 50% of their verifiied claims towards wages. When
the liquidator sold some more assets and received
Rs.8,51,01,000/-, the appellant filed I.A. No.1511 of 2008
B before the learned Company Judge of the High Court
contending that the assets of the company situated at Chennai,
Puhe, Faridabad and Kolkata which have been sold are not
properties over which the banks/financial institutions have any
charge and therefore, they cannot be treated as secured
c creditors in respect of these properties and the sale proceeds
from these properties should be kept separately and be paid
to the workmen first before disbursing any amount to the banks/
financial institutions. The banks/financial institutions, which had
given loans and advances to the company, on the other hand,
D contended before the learned Company Judge that claim of the
workmen and secured creditors stand pari passu and the
Companies Act does not make any difference between the
mortgaged property and other properties of the company and,
therefore, the entire sale proceeds obtained from the properties
of the company should be distributed among the secured
E creditors and workers on pro rata basis. The learned Company
Judge in his order dated 28.11.2008 held that the workmen and
secured creditors have pari passu charge over the properties
of the company as would be clear from Sections 529 and 529A
of the Companies Act and the decision of this Court in Andhra
F Bank v. Official Liquidator & Anr. [(2005) 5 SCC 75].
Aggrieved, the appellant filed Company Appeal No.10 of 2008
before the Division Bench of the High Court and contended that
the secured creditors have pari passu charge with the workmen
only on the properties which have been offered by the company
G to the secured creditors as security. In its order dated
30.09.2010, the Division Bench of the High Court, however,
held that the secured creditors have pari passu charge with the
workmen over all the properties of the company under sections
529 and 529A and dismissed the appeal. It is this order dated
H 30.09.2010 of the Division Bench of the High Court of
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 387
ORS. [A.K. PATNAIK, J.]
Jharkhand that is challenged in this appeal by way of special A
leave under Article 136 of the Constitution.
4. We have heard learned counsel for the appellant and
the respondents and we are of the considered opinion that the
learned Company Judge and the Division Bench of the High
8
Court have not correctly interpreted the provisions of Sections
529 and 529A of the Companies Act. For easy reference,
Sections 529 and 529A of the Companies Act, which have to
be read together, are extracted hereinbelow:
"529. Application of insolvency rules in winding up c
of insolvent companies.- (1) In the winding up of an
insolvent company, the same rules shall prevail and be
observed with regard to-
(a) debts provable;
D
(b) the valuation of annuities and future and
contingent liabilities; and
(c) the respective rights of secured and unsecured
creditors; as are in force for the time being under
the law of insolvency with respect to the estates of E
persons adjudged insolvent:
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 F
therein, and, where a secured creditor, instead of
relinquishing his security and proving his debt, opts to
realise his security,-
(a) the liquidator shall be entitled to represent the
workmen and enforce such charge; G
(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) so much of the debt due to such secured creditor H
388 SUPREME COURT REPORTS [2012] 13 S.C.R.
A 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's
dues for the purposes of section 529A.
B (2) All persons who in any such case would be entitled to
prove for and receive dividends out of the assets of the
company, may come in under the winding up, and make
such claims against the company as they respectively are
entitled to make by virtue of this section:
c
Provided that if a secured creditor instead of relinquishing
his security and proving for his debt proceeds to realise
his security, he shall be liable to pay his portion of the
expenses incurred by the liquidator (including a provisional
D liquidator, if any) for the preservation of the security before
its realization by the secured creditor.
Explanation.-For the purpioses of this proviso, the portion
of expenses incurred by the liquidator for the preservation
of a security which the seicured creditor shall be liable to
E pay shall be the whole of the expenses less an amount
which bears to such expenses the same proportion as the
workmen's portion in rela1tion to the security bears to the
value of the security.
(3) For the purposes of this section, section 529A and
F
section 530,-
(a) "workmen", in relation to a company, means the
employees of the company, being workmen within the
meaning of the Industrial Disputes Act, 1947 (14of1947);
G
(b) "workmen's dues", in relation to a company, means the
aggregate of the following sums due from the company to
its workmen, namely:-
(i) all wages or salary including wages payable for
H time or piece work and salary earned wholly or in
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 389
ORS. [A.K. PATNAIK, J.]
part by way of commission of any workman, in A
respect of services rendered to the company and
any compensation payable to any workman under
any of the provisions of the Industrial Disputes Act,
1947 (14 of 1947);
8
(ii) all accrued holiday remuneration becoming
payable to any workman, or in the case of his death
to any other person in his right, on the termination
of his employment before, or by the effect of, the
winding up order or resolution;
c
(iii} unless the company is being wound up
voluntarily merely for the purposes of reconstruction
or of amalgamation with another company, or unless
the company has, at the commencement of the
winding up, under such a contract with insurers as D
is mentioned in section 14 of the Workmen's
Compensation Act, 1923 (8 of 1923) rights
capable of being transferred to and vested in the
workman, all amounts due in respect of any
compensation or liability for compensation under E
the said Act in respect of the death or disablement
of any workman of the company;
(iv) all sums due to any workman from a provident
fund, a pension fund, a gratuity fund or any other
fund for the welfare of the workmen, maintained by F
the company;
(c) "workmen's portion", in relation to the security of any
secured creditor of a company, means the amount which
bears to the value of the security the same proportion as G
the amount of the workmen's dues bears to the aggregate
of-
(i) the amount of workmen's dues; and
(ii) the amounts of the debts due to the secured creditors." H
390 SUPREME COURT REPORTS [2012) 13 S.C.R.
A "529A. Overriding preferential payment.-
Notwithstanding anything contained in any other provision
of this Act or any other law for the time being in force, in
the winding up of a company-
(a) workmen's dues; and
B
(b) debts due to secured creditors to the extent such
debts rank under clause (c) of the proviso to sub-
section (1) of section 529 pari passu with such
dues,
c shall be paid in priority to all other debts.
(2) The debts payable under clause (a) and clause (b) of
sub-section (1) shall be paid in full, unless the assets are
insufficient to meet them, in which case they shall abate
D in equal proportions."
5. A plain reading of clause (c) of sub-section (1) of
Section 529 makes it clear that in the winding up of an insolvent
company, the same rules shall prevail and be observed with
regard to the respective rights of secured and unsecured
E creditors as are in force for the time being under the law of
insolvency with respect to the estates of persons adjudged
insolvent. This would mean that the respective rights of secured
and unsecured creditors of an insolvent company, which is being
wound up, will be the same as the respective rights of secured
F and unsecured creditors with respect to the estates of persons
adjudged insolvent as are in force under the law of insolvency.
In the State of Jharkhand, the Provincial Insolvency Act, 1920
(for short 'the Insolvency Act') is in force and accordingly the
respective rights of secured and unsecured creditors with
G respect to the assets of the insolvent company being wound
up will be the same as in the Insolvency Act. The Companies
Act does not define a "creditor'' and a "secured creditor'' and
hence, we have to refer to the Insolvency Act for the definitions
of these two words. Sectio1n 2(1 )(a) and Section 2(1 )(e) of the
H Insolvency Act define the words 'creditor' and 'unsecured
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 391
ORS. [A.K. PATNAIK, J.]
creditor' and are extracted hereinbelow: A
"2(1 )(a) "creditor" includes a decree-holder, "debt"
includes a judgment-debt, and "debtor" includes a
judgment-debtor."
"2(1)(e) "secured creditor" means a person holding a B
mortgage, charge or lien on the property of the debtor or
any part thereof as a security for a debt due to him from
the debtor."
It will be clear from the definition of 'creditor' in Section 2(1)(a) C
of the Insolvency Act that it is an inclusive and not an exhaustive
definition, whereas it will be clear from the definition of 'secured
creditor' in Section 2(1 )(e) of the Insolvency Act that it is an
exhaustive definition and that a secured creditor means a
person holding a mortgage, charge or lien on the property of
the debtor or any part thereof as a security for a debt due to D
him from the debtor. The result is that the expression 'secured
creditor' in Section 529(1)(c) would mean a person who holds
a mortgage, charge or lien on the property of the company or
any part thereof as a security for a debt due to him from the
company. Where, therefore, a creditor, such as the bank or the E
financial institution in this case, does not hold a mortgage,
charge or lien on the property of the company or any part
thereof as a security for a debt due to it from the company, it
is not a secured creditor for the purposes of Sections 529 and
529A of the Companies Act. F
6. Sections 45 and 47 of the Insolvency Act, which
enumerate the rights of unsecured creditors and secured
creditors respectively are extracted hereinbelow:
"45. Debt payable at a future time.- A creditor may G
prove for a debt not payable when the debtor is adjudged
an insolvent as if it were payable presently, and may
receive dividends equally with the other creditors,
deducting therefrom only a rebate of interest at the rate of
six per centum per annum computed from the declaration H
392 SUPREME COURT REPORTS [2012) 13 S.C.R.
A of a dividend to the time when the debt would have
become payable, according to the terms on which it was
contracted."
"47. Secured creditors.- (1) Where a secured creditor
realises his security, he may prove for the balance due to
B him, after deducting the net amount realised.
(2) Where a secured creditor relinquishes his security for
the general benefit of the creditors, he may prove for his
whole debt.
c (3) Where a secured creditor does not either realise or
relinquish his security, he shall, before being entitled to
have his debt entered in the schedule, state in his proof
the particulars of his security, and the value at which he
assesses it, and shall be entitled to receive a dividend only
D in respect of the balance due to him after deducting the
value so assessed.
(4) Where a security is so valued, the Court may at any
time before realisation redeem it on payment to the
E creditor of the assessed value.
(5) Where a creditor, after having valued his security,
subsequently realises it, the net amount realised shall be
substituted for the amount of any valuation previously made
by the creditor, and :shall be treated in all respects as an
F amended valuation made by the creditor.
(6) Where a secured creditor does not comply with the
provisions of this seii:;tion, he shall be excluded from all
shares in any dividend."
G On a reading of the two provisions quoted above, we find that
an unsecured creditor is entitled under Section 45 of the
Insolvency Act to receive dividends equally with the other
creditors, whereas the secured creditor has the right under
Section 47 of the Insolvency Act to realize the security and to
H prove for the balance due to him in case on realization of such
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 393
ORS. [A.K. PATNAIK, J.)
security he is not able to recover the entire amount due to him. A
If, however, the secured creditor does not opt to realize his
security but relinquishes it for the general benefit of the
creditors, then he may prove for his whole debt. Under the
Insolvency Act, therefore, the secured creditor has only a right
over the particular property offered to him as security and all B
the creditors have equal rights over the other properties
comprising the estate of the person adjudged insolvent.
7. In our considered opinion, therefore, on a reading of the
provisions of clause (c) of sub-section (1) of Section 529 of the
Companies Act along with the provisions of the Insolvency Act C
relating to the respective rights of secured and unsecured
creditors, a secured creditor of an insolvent company which is
being wound up has only a right over the particular property or
asset of the company offered to the secured creditor as a
security and the unsecured creditors have rights over all other D
properties or assets of the insolvent company. We may now
examine whether the proviso to sub-section (1) of Section 529
of the Companies Act makes any difference to these rights of
secured creditors and unsecured creditors of an insolvent
company. E
8. The first limb of the proviso to sub-section (1) of Section
529 of the Companies Act states 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. Clause (c) of sub-section (3) of Section 529 of F
the Companies Act states that the "workmen's portion", in
relation to the security of any secured creditor of a company,
means the amount which bears to the value of the security the
same proportion as the amount of the workmen's dues bears
to the aggregate of - (i) the amount of workmen's dues; and (ii} G
the amounts of the debts due to the secured creditors. Thus,
the first limb of the proviso to clause (c) of sub-section (1) of
Section 529 of the Companies Act creates a statutory charge
over the security of every secured creditor to the extent of the
workmen's portion. In other words, every property or asset of H
394 SUPREME COURT REPORTS [2012] 13 S.C.R.
A an insolvent company, which is being wound up and which has
been offered as a security to a secured creditor is subject
statutorily to a pari passu charge in favour of the workmen to
the extent of the workmen's portion by virtue of the proviso to
sub-·section (1) of Section 529 of the Companies Act.
B Therefore, the first limb of the proviso to sub-section (1) of
Section 529 does not create any pari passu charge in favour
of secured creditor over property or asset of the company which
has not been given as security by the company to the secured
creditor. Rather, the language of the first limb of this proviso
c makes it crystal clear that the security of every secured creditor
created dehors the proviso to sub-section (1) of Section 529
of the Companies Act is statutorily subjected to a pari passu
charge in favour of the workmen by the first limb of the proviso
to sub-section (1) of Section 529 of the Companies Act.
D 9. The second limb of the proviso to sub-section (1) of
Section 529 of the Companies Act states the consequences
which follow where a secured creditor, instead of relinquishing
his security and proving his debt, opts to realize his security.
These are: (a) the liquidator shall be entitled to represent the
E workmen and enforce such charge; (b) any amount realized by
the liquidator by way of enforcement of such charge shall be
applied rateably for the discharge of workmen's dues; and (c)
so much of the debt due to such secured creditor as could not
be realized by him by virtue of the foregoing provisions of this
F proviso or the amount of the workmen's portion in his security,
whichever is less, shall rank pari passu with the workmen's dues
for the purposes of Section 529A of the Companies Act. What
is relevant in this case is the consequence in clause (c) which
provides that the portion of the debt due to the secured creditor
G as could not be realized because of the statutory charge
created in favour of the workmen on the security of the creditor
shall to the extent stated therein rank pari passu with the
workmen's portion for the purposes of Section 529A of the
Companies Act. Hence, clause (c) of this proviso does not
H create a pari passu charge over properties or assets of the
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 395
ORS. [A.K. PATNAIK, J.]
company which have not been offered to the secured creditor A
as security, but to the extent of the loss of security suffered by
a particular secured creditor because of the statutory charge
created in favour of the workmen, the secured creditor is
ranked pari passu with the workmen for overriding preferential
payment under Section 529A of the Companies Act. B
10. Section 529A of the Companies Act states that
notwithstanding anything contained in any other provision of the
Companies Act or any other law for the time being in force, in
the winding up of a company - (a) workmen's dues; and (b)
debts due to secured creditors to the extent such debts rank C
under clause (c) of the proviso to sub-section (1) of Section 529
of the Companies Act pari passu with such dues, shall be paid
in priority to all other debts. This would mean that the
workmen's dues and only the debts due to the secured creditors
to the extent such debts rank pari passu with workmen's dues D
under clause (c) of the proviso to sub-section (1) of Section 529
will have priority over all other debts of the company. The entire
object of Section 529A of the Companies Act is to ensure
overriding preferential payment of (a) the workmen's dues and
(2) debts due to secured creditors to the extent such debts rank E
under clause (c) of the proviso to sub-section (1) of Section 529
pari passu with the workmen's dues. The effect of the non-
obstante clause in the opening part of Section 529A of the
Companies Act, therefore, is that notwithstanding anything in
the Companies Act and any other law including the Insolvency F
Act, workmen's dues and dues of the secured creditor which
could not be realized because of the pari passu charge in
favour of the workmen under the proviso to sub-section (1) of
Section 529 and only to the extent such dues rank pari passu
with the dues of the workmen under clause (c) of the said G
proviso are paid in priority over all other dues.
11. We may now refer to sub-section (2) of Section 529
of the Companies Act which states that all persons who in any
such case would be entitled to prove for and receive dividends
out of the assets of the company, may come in under the H
396 SUPREME COURT REPORTS (2012] 13 S.C.R:
A winding up, and make such claims against the company as
they respectively are entitled to make by virtue of Section 529
of the Companies Act The proviso to sub-section (2), however,
states that if a secured creditor instead of relinquishing his
security and proving for his debt proceeds to realize his security,
B he shall be liable to pay his portion of the expenses incurred
by the liquidator (including a provisional liquidator, if any) for
the preservation of the security before its realization by the
secured creditor. This provision in sub-section (2) of Section
529 of the Companies Act makes it amply clear that all
c creditors, secured and unsecured, of the insolvent company are
entitled to prove for and receive dividends out of the assets of
the company but so far as secured creditors are concerned,
they have the option either to relinquish their security in which
case they like any unsecured creditor would only be entitled to
prove for and receive the dividends out of the assets of the
0
company or to realize the security instead of relinquishing the
security in which case they have to pay to the liquidator only
expenses for the preservation of the security until they realize
the security by appropriate proceedings other than the winding
up proceedings.
E
12. Our conclusions on interpretation of the provisions of
Sections 529 and 529A of the Companies Act, therefore, are:
(i) a secured creditor has only a charge over a
particular property or asset of the company. The
F secured creditor has the option to either realize his
security or relinquish his security. If the secured
creditor relinquishes his security, like any other
unsecured creditor, he is entitled to prove the debt
due to him and receive dividends out of the assets
G of the company in the winding up proceedings. If
the secured creditor opts to realize his security, he
is entitled to realize his security in a proceeding
other than the winding up proceeding but has to pay
to the liquidator the costs of preservation of the
H security till he realizes the security.
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 397
ORS. [A.K. PATNAIK, J.]
(ii) over the security of every secured creditor, a A
statutory charge has been created in the first limb
of the proviso to clause (c) of sub-section (1) of
Section 529 of the Companies Act in favour of the
workmen in respect of their dues from the company
and this charge is pari passu with that of the B
secured creditor and is to the extent of the
workmen's portion in relation to the security of any
secured creditor of the company as stated in clause
(c) of sub-section (3) of Section 529 of the
Companies Act. c
(iii) where a secured creditor opts to realize the security
then so much of the debt due to such secured
creditor as could not be realized by him by virtue
of the statutory charge created in favour of the
workmen shall to the extent indicated in clause (c) D
of the proviso to sub-section (1) of Section 529 of
the Companies Act rank pari passu with the
workmen's dues for the purposes of Section 529A
of the Companies Act.
E
(iv) the workmen's dues and where the secured creditor
opts to realize his security, the debt to the secured
creditor to the extent it ranks pari passu with the
workmen's dues under clause (c) of the proviso to
sub-section (1) of Section 529 of the Companies
F
Act shall be paid in priority over all other dues of
the company.
13. In support of our aforesaid conclusions, we may now
cite some authorities. In Allahabad Bank v. Canara Bank &
Anr. [(2000) 4 SCC 406], a two-Judge Bench of this Court G
speaking through M. Jagannadha Rao, J. discussed these
rights of the secured creditors in paragraphs 62, 63, 64 and
65 of the judgment as reported in the sec, which are extracted
hereinbelow:
H
398 SUPREME COURT REPORTS [2012] 13 S.C.R.
A "62. Secured creditors fall under two categories. Those
who desire to go before the Company Court and those who
like to stand outside the winding- up.
63. The first category of secured creditors mentioned
above are those who go before the Company Court for
B dividend by relinquishing their security in accordance with
the insolvency rules mentioned in Section 529. The
insolvency rules me those contained in Sections 45 to 50
of the Provincial Insolvency Act. Section 47(2) of that Act
states that a secured creditor who wishes to come before
c the official liquidator has to prove his debt and he can
prove his debt only if he relinquishes his security for the
benefit of the general body of creditors. In that event, he
will rank with the unsecured creditors and has to take his
dividend as provided in Section 529(2). Till today, Canara
D Bank has not made it clear whether it wants to come under
this category.
64. The second class of secured creditors referred to
above are those who come under Section 529-A(1 )(b)
read with proviso (c) to Section 529(1). These are those
E
who opt to stand outside the winding-up to realise their
security. Inasmuch as Section 19(19) permits distribution
to secured creditors only in accordance with Section 529-
A, the said category is the one consisting of creditors who
stand outside the winding up. These secured creditors in
F certain circumstances can come before the Company
Court (here, the Tribunal) and claim priority over all other
creditors for releai;e of amounts out of the other monies
lying in the Company Court (here, the Tribunal). This limited
priority is declared in Section 529-A(1) but it is restricted
G only to the extent specified in clause (b) of Section 529-
A(1 ). The said provision refers to clause (c) of the proviso
to Section 529(1) and it is necessary to understand the
scope of the said provision.
H 65. Under clause (c) of the proviso to Section 529(1 ), the
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 399
ORS. [AK. PATNAIK, J.]
priority of the secured creditor who stands outside the A
winding-up is confined to the "workmen's portion" as
defined in Section 529(3)(c). "Workmen's portion" means
the amount which bears to the value of the security, the
same proportion which the amount of the workmen's dues
bears to the aggregate of (a) workmen's dues, and (b) the B
amounts of the debts due to all the creditors. This is
explained in the illustration under the said provision. If the
workmen's dues in all are, say, Rs.1 lakh and the debt due
to all secured creditors is Rs.3 lakhs, the total amount due
to all of them comes to Rs.4 lakhs. Therefore, the C
workmen's share comes to 25% (Rs 1 lakh out of Rs 4
lakhs). Now if the value of the security of a secured creditor
(like Canara Bank) is Rs.1 lakh, the "workmen's portion"
will be Rs.25,000 which is the pro-rata amount to be
shared by the said secured creditor. By virtue of Section
529-A(1 )(b) his priority over all others out of other monies D
available in the Tribunal is restricted to Rs.25,000 only."
14. In Andhra Bank v. Official Liquidator & Anr. (supra),
a three-Judge Bench speaking through S.B. Sinha, J. has also
discussed in paragraphs 22 and 23 the rights of secured E
creditors, relevant extracts from which are quoted hereinbelow:
"22. In terms of the aforementioned provisions, the
secured creditors have two options (i) they may desire to
go before the Company Judge; or (ii) they may stand
outside the winding-up proceedings. The secured F
creditors of the second category, however, would come
within the purview of Section 529-A(1 )(b) read with proviso
(c) appended to Section 529(1). The "workmen's portion"
as contained in proviso (c) of sub-section (3) of Section
529 in relation to the security of any secured creditor G
means the amount which bears to the value of the security
the same proportion as the amount of the workmen's dues
bears to the aggregate of (a) workmen's due, and (b) the
amount of the debts due to all the (sic secured) creditors.
" H
400 SUPREME COURT REPORTS (2012] 13 S.C.R.
A "23. The language of Section 529-A is also clear and
unequivocal, in terms whereof the workmen's dues or the
debts due to the secured creditors, to the extent such
debts rank under clause (c) of the proviso to sub-section
(1) of Section 529 pari passu with such dues, shall have
B priority over all othier debts. Once the workmen's portion
is worked out in terms of proviso (c) of sub-section (1) of
Section 529, indisputably the claims of the workmen as
also the secured creditors will have to be paid in terms of
Section 529-A. ...... "
C 15. In the present case, the learned Company Judge and
the Division Bench of the High Court have held that all secured
creditors along with the workmen have pari passu charge over
all the properties or assets of the company and would be entitled
to the dues as secured creditors along with the workmen's
D dues by way of overriding preferential payments over all other
dues under Section 529A of the Companies Act. The learned
Company Judge of the High Court has also relied on some
observations of this Court in Andhra Bank v. Official Liquidator
& Anr. (supra) in support of his order. These observations of
E this Court in Andhra Bank v. Official Liquidator & Anr. (supra)
were in the context of the observations of this Court in
Allahabad Bank v. Canara Bank & Anr. (supra) and are
quoted as under:
"25. While determining Point (6), however, a stray
F observation was made to the effect that the "workmen's
dues" have priority over all other creditors, secured and
unsecured because of Section 529-A(1 )(a). Such a
question did not arise in the case as Allahabad Bank was
indisputably an unsecured creditor.
G
"26. Such an observation was, thus, neither required to be
made keeping in view the fact situation obtaining therein
nor does it find support from the clear and unambiguous
language contained in Section 529-A(1)(a). We have,
therefore, no hesitation in holding that finding of this Court
H
JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 401
ORS. [A.K. PATNAIK, J.]
in Allahabad Bank to the aforementioned extent does not A
lay down the correct law."
The aforesaid observations of this Court in Andhra Bank v.
Official Liquidator & Anr. (supra) are, thus, to the effect that
workmen will not have priority over the dues of the secured
creditor and this is because of the unambiguous language of B
Section 529A (1) that the workmen's dues and the dues of the
secured creditor to the extent such debts rank under clause (c)
of sub-section (1) of Section 529 pari passu with such dues
will have to be paid in priority to all other debts. But as we have
held, only where under the second limb of the proviso to clause C
(c) of sub-section (1) of Section 529 the secured creditor opts
to realize the security and is unable to realize a portion of his
dues because of the pari passu charge created in favour of the
workmen under the first limb of the proviso, he has pari passu
charge to the extent indicated in clause (c) of the proviso to sub- D
section (1) of Section 529 and only such debts due to the
secured creditor which rank pari passu with dues of the
workmen under clause (c) of the proviso to sub-section (1) of
Section 529 have to be paid in priority over all other debts of
the company. The High Court has clearly fallen in error by E
holding that all debts due to secured creditors will rank pari
passu with the workmen's dues and have to be paid along with
the workmen's dues in priority to all other debts of the company.
16. In the result, the appeal is allowed. The impugned order F
of the Division Bench of the High Court and the order dated
28.11.2008 of the learned Company Judge in I.A. No.1511 of
2008 are set aside and the matter is remitted to the learned
Company Judge to decide the I.A. in accordance with law as
laid down in this judgment. There will be no order as to costs.
G
K.K.T. Appeal allowed & Matter remitted
back to Company Court.
Search Indian case law
Ask in plain English, not just keywords. 25,000 AI words free, no card.
Try "secured creditor"Sign in to search