SCA/7150/2008 1/27 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 7150 of 2008 For Approval and Signature: HONOURABLE MR.JUSTICE JAYANT PATEL ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================================= UNION BANK OF INDIA - Petitioner(s) Versus GENERAL WORKERS UNION & 1 - Respondent(s) ========================================================= Appearance : MR CZ SANKHLA for Petitioner(s) : 1, MR DS VASAVADA for Respondent(s) : 1, MR SS PANESAR for Respondent(s) : 2, ========================================================= CORAM : HONOURABLE MR.JUSTICE JAYANT PATEL Date : 04/12/2008 ORAL JUDGMENT 1. The interesting question arises for consideration in the present petition is the SCA/7150/2008 2/27 JUDGMENT status of the workers of a company whose properties are taken over by secured creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as “Securitisation Act”) and the unit of the Company is closed. Incidentally, the question also deserves to be considered about the presence of such secured creditor in the proceedings initiated by the workers where the unit is closed for recovery of their wages or the protection of the rights before the appropriate forum. 2. The short facts of the case appear to be that the the petitioner is a nationalised Bank having security interest over the mortgaged properties of the respondent No.2 Company. As the loan amount for the mortgaged properties was not paid, as per the petitioner Bank, the debt was classified as Non-Performing Assets (NPA). Consequently on 29.10.2007 notice under Section 13(2) of the Securitisation Act was issued. Thereafter, as per the petitioner, the SCA/7150/2008 3/27 JUDGMENT respondent No.2 Company did not pay the amount and, therefore, the possession of the properties by way of a measure under Section 13(4) of the Securitisation Act was taken over. It is the case of the petitioner that the possession is taken over of the properties, which were mortgaged with the petitioner and there are other properties of the company also. Respondent No.2 company, which was the borrower approached the Debts Recovery Tribunal for challenging the action of the petitioner under the Securitisation Act by preferring appeal under Section 17 of the Act. No injunction was granted by DRT in such proceedings against the disposal of the properties by the petitioner in capacity as the secured creditor. At that stage, respondent No.1, claiming as the status of the representative of the Union, invoked the power of the Labour Court under Sections 79 and 79 of the Bombay Industrial Relations Act, 1946 (hereinafter referred to as “BIR Act”) and prayed for the relief, inter alia, that until prior permission is obtained under Section 25 O SCA/7150/2008 4/27 JUDGMENT of the Industrial Disputes Act, 1946 (hereinafter referred to as “ID Act”), the factory may not be closed or illegal closure may not be enforced. In such proceedings, incidentally prayers were also made, but the pertinent aspect is that the petitioner herein, who is secured creditor was impleaded as Opponent No.2 in such proceedings before the Labour Court being No.13 of 2008. The petitioner appeared in such proceedings and submitted an application Ex. 8 for deletion as Opponent No.2. It may also be recorded that in the proceedings before the Labour Court, Respondent No.1 Union also submitted an application for temporary injunction under Section 119(d) of BIR Act for interim relief, contending inter alia, that the workers have to recover about Rs.95,96,000/- from the company and, therefore, until such amount is deposited with the Labour Court, the properties of the Company may not be transferred or alienated. The Labour Court heard the application Ex. 8 of the petitioner for deletion as party and after SCA/7150/2008 5/27 JUDGMENT hearing both the sides, was pleased to pass the order on 3.5.2008, whereby the application of the petitioner herein has been rejected. The petitioner apprehended that the Labour Court may pass the order below the application for temporary injunction prohibiting it from exercising the power under Securitisation Act as the secured creditor and at that stage, the petitioner has approached this Court by the present petition for challenging the order dated 3.5.2008 passed by the Labour Court and it is also prayed by the petitioner to direct the Labour Court to delete the name of the petitioner from the proceedings of application No.13 of 2008. The petitioner has also prayed for appropriate writ to direct the Labour Court not to interfere in the proceedings under Securitisation Act by the petitioner. 3. I have heard Mr.Khare with Mr.Sankhla, learned Counsel for the petitioner, Mr.Vasavada, learned Counsel for respondent No.1 Union and Mr.Sushil Singh with Mr.Panesar, learned Counsel for respondent No.2. SCA/7150/2008 6/27 JUDGMENT 4. Before this Court proceeds to examine th legal aspects, two factual aspects deserve to be recorded and one is that after the interim order passed by this Court in the present petition, the petitioner proceeded for disposal of the property by realisation of the security interest, however, in the auction no buyer came forward. Therefore, sale of the properties has not taken place. The second is that as stated by the learned Counsel for the respondent No.2, the Debts Recovery Appellate Tribunal (DRAT), vide order dated 4.6.2008 has granted stay against further action by the petitioner under the Securitisation Act, pending the final disposal of the application before DRT. 5. In order to appreciate the controversy to be considered in light of the question, which may arise for consideration by this Court in the present proceedings, it may be appropriate to refer to certain relevant provisions of the Securitisation Act as stated hereinafter. 6. Section 13 of the Securitisation Act does provide the power with the secured creditor to SCA/7150/2008 7/27 JUDGMENT realise security interest as per the provisions of various sub-sections. However, Subsection (7) and Sub-section (9) of Section 13, which may have relevance to the present case read as under:- “Section 13 (7).- Where any action has been taken against a borrower under the provisions of sub-section (4), all costs, charges and expenses which, in the opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, shall be recoverable from the borrower and the money which is received by the secured creditor shall, in the absence of any contract to the contrary, be held by him in trust, to be applied, firstly, in payment of such costs, charges and expenses and secondly, in charge of the dues of the secured creditor and the residue of the money so received shall be paid to the person entitled thereto in accordance with his rights and interests. SCA/7150/2008 8/27 JUDGMENT Section 13(8) XXX Section 13(9).- In the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuit to sub-section (4) unless exercise of such right is agreed upon by the secured creditors representing not less than three-fourth in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors: Provided that in the case of a company in liquidation, the amount realised from the sale of secured assets shall be distributed in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of 1956): Provided further that in the case of a company being wound up on or after the commencement of this Act, the secured creditor of such company, who opts to realise his security instead of relinquishing his security and proving his debt under proviso to sub -section (1) of section 529 of the Companies Act, 1956 (1 of 1956), may retain the sale proceeds SCA/7150/2008 9/27 JUDGMENT of his secured assets after depositing the workmen's dues with the liquidator in accordance with the provisions of section 529A of that Act: Provided also that liquidator referred to in the second proviso shall intimate the secured creditor the workmen's dues in accordance with the provisions of section 529A of the Companies Act, 1956 and in case such workmen's dues cannot be ascertained, the liquidator shall intimate the estimated amount of workmen's dues under that section to the secured creditor and in such case the secured creditor may retain the sale proceeds of the secured assets after depositing the amount of such estimate dues with the liquidator: Provided also that in case the secured creditor deposits the estimated amount of workmen's dues, such creditor shall be liable to pay the balance of the workmen's dues or entitled to receive the excess amount, if any, deposited by the secured creditor with the liquidator: Provided also that the secured creditor shall furnish an undertaking to the liquidator to pay the balance of the workmen's dues, if any.” SCA/7150/2008 10/27 JUDGMENT 7. Section 13(7) provides for an obligation upon the secured creditor to hold the money, which may be realised by him as Trustees and to be applied firstly for payment of the cost, charges, and expenses and secondly in discharge of the dues of the secured creditor with an application to return the residue of the money so received to the person entitled thereto in accordance with his rights and interests in such money. 8. Reference may be made to the decision of this Court in the case of GAURANGBHAI BIPINBHAI PANDYA Versus BANK OF BARODA, reported in 2008(2) GLR, 1513. The relevant observations of the aforesaid decision at paragraphs 13, 14, and 15, for ready reference, can be extracted as under:- “13. It deserves to be recorded that when the bank enforces its security interest under the Securitisation Act, it is clothed with the statutory power under the Securitisation Act. Therefore, the power so vested with the bank SCA/7150/2008 11/27 JUDGMENT under the Securitisation Act, can be construed within the scope of ambit of such power only, and it cannot be mixed up with the rights, if any, with the bank pertaining to the different loan transaction, in different capacity based on separate agreement entered into for such purpose. If the language of section 13 (7) of the Act is considered, it provides that the secured creditor shall hold the amount in trust, to be applied, firstly, in payment of such costs, charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue of the money so received is required to be paid to the person entitled thereto in accordance with his rights and interests. Therefore, the secured creditor holding the money in trust, after recovery of the amount of costs, charges, expenses and the dues of the secured creditors and his dues, is required to return the residue of the money to the person concerned (the person whose property is sold or disposed of by the secured creditors). The use of the word in section 13 SCA/7150/2008 12/27 JUDGMENT (7) in absence of any contract to the contrary” would be applicable to the contract, if any, pertaining to such property or realisation of the security interest of such property, or to such contract incidental to the principal transaction of creation of security interest or realisation of security interest. Therefore under the act, such word “in absence of any contract to the contrary” cannot be related to any contract, which is not directly or indirectly concerned with such loan transaction, or a different contract all together pertaining to a different loan transaction, and the creation of separate security interest on account of such separate loan transaction. It is by now well settled that when any statutory powers are to be exercised by any authority or persons, clothed to exercise the power, such power can be exercised within four corners of conferment of such power. Any action beyond the scope of conferment of such power would be without jurisdiction or without any competence or authority. It further deserves to be recorded SCA/7150/2008 13/27 JUDGMENT that when any power is conferred, such power can be read for taking any action, which may be incidentally required to be taken for exercise of such power, but it cannot be co-related or permitted to be transgressed beyond the scope and ambit of the very loan transaction, for which the security interest was created. 14. Therefore, it appears that on a true construction of section 13(7), the bank can exercise the right under the contract, if it is so conferred upon it by the loan transaction or the agreement pertaining thereto through which, the security interest is created or any incidental thereto. Such use of the language “in absence of any contract to the contrary” cannot be related to altogether different contract of different loan transaction or different property altogether. 15. There are two additional circumstances, as expressly made clear by the legislature under section 13 (7) of the Act, one is that such amount is to be held by the secured creditors in trust, therefore, capacity to hold the amount is like the trustees, and the second is that it is mandated by the legislature by using word “shall be paid to the person entitled thereto” for payment of the residue of the amount. Therefore, in view of the specific word used by the SCA/7150/2008 14/27 JUDGMENT legislature in the later part of the section 13 (7) so far as return of the money is concerned, the strict interpretation is called for and it cannot be inter mixed with the other rights of the secured creditors, pertaining to other contract of different loan transaction. It is hardly required to be stated that the person holding money in fiduciary capacity owes more responsibility and accountability, and he cannot inter mixed his personal rights to the money held by him in fiduciary capacity. Therefore, if the secured creditor who is holding the position of the trustee is required to retain money of the surplus amount, he cannot be permitted to retain money or appropriate money or permitted to exercise any so-called right based on separate transaction of loan of separate property, which is not concerned with the loan transaction in question for which the security interest was created, and is enforced by exercising power under Securitisation Act.” 9. All proviso to Section 13(9) of the Securitisation Act provide for distribution of the amount as may be realised from the sale of the secured assets. Proviso (1) of the aforesaid Sub-section provides that if the company is in liquidation, the amount realised from the sale of secured assets shall be SCA/7150/2008 15/27 JUDGMENT distributed in accordance with the provisions of section 529A of the Companies Act, 1956. Proviso (2) provides that in a case where a company being wound up, the secured creditor of such company, who opts to realise his security instead of relinquishing his security may return the sale proceeds of the secured assets after depositing the workmen's dues with the liquidator in accordance with the provisions of section 529A of Companies Act. Proviso (3) provides that in the case of contingency under the Proviso (2), the liquidator shall intimate the estimated amount of workmen's dues to the secured creditor in accordance with the provisions of Section 529A of the Companies Act and in case the workmen's dues cannot be ascertained, the secured creditor may retain the sale proceeds of the secured assets after depositing the amount of such estimate dues with the liquidator. Proviso (4) provides that in case the secured creditor deposits the estimated amount of workmen's dues, such creditor shall be liable to pay the balance of the SCA/7150/2008 16/27 JUDGMENT workmen's dues or entitled to receive the excess amount, if any, deposited by the secured creditor with the liquidator. 10.The aforesaid proviso's to Section 13(9) of the Securitisation Act make it abundantly clear that the secured creditor, who is to realise secured interest by sale of the properties is to retain the money, keeping in view the claims of the workers and workmen's dues and it is only after taking care of the provisions of Section 529A of the Companies Act the remaining amount of sale proceeds may be retained or appropriated by the secured creditor. It is true that Section 13(9) and more particularly the aforesaid proviso's speak in respect of the contingency of a company in liquidation. In the present case, it is also an admitted position that the company is not ordered to be liquidated or is not in liquidation. Therefore, the company cannot be said as being wound up. However, the question does not end there. The Securitisation Act as per the aforesaid provisions expressly takes care of the workmen's dues recoverable under SCA/7150/2008 17/27 JUDGMENT Section 529A of the Companies Act. Therefore, had it been a case, where the company is a going on concern and the workers are to continue with the employment, possibly there may not be any question of recovering the workers' dues on account of the closure of the manufacturing activities of the company or the regular activities of the company, since the same is not to result into unemployment or the loss of regular wages to all the workers generally. It also deserves to be recorded that if it is an individual case of any worker, may be of termination from service or retrenchment, etc., against the company, whose regular activities are going on, it may not attract the consequence as it has happened in the present case. In the present case the company is closed and even if it is considered for the sake of examination as sought to be canvassed on behalf of the petitioner Bank that at the later stage the possession of the secured assets is taken over by the petitioner as a secured creditor, then also the regular activities of the company SCA/7150/2008 18/27 JUDGMENT namely; the unit is closed and as a result thereof, all its workmen are rendered unemployment. Whether the permission is obtained of the competent authority for such closure or not is a separate aspect, but the factum of closure of the unit does result into unemployment of all the workers of the unit of the company and the resultant effect is the loss of regular wages on permanent basis and consequently the right to recover the dues by the workers in accordance with law. 11.In a case where the permission is obtained for closure on permanent basis after payment of the retrenchment compensation or otherwise, it may stand on a different footing, but in the case where a unit is closed and the possession of the security assets are taken over by the secured creditor after closure of the unit or in a case where on account of the possession taken over by the secured creditor, the unit is closed and it has resulted into unemployment of all the workers and the staff of the company, it would require the legitimate right of recovery with SCA/7150/2008 19/27 JUDGMENT the workers to recover their dues in accordance with law due to such contingency of closure of the unit. It may also be recorded that as per the Scheme of the Securitisation Act read with the relevant Rules, it is not necessary that after taking the possession of a company or its properties are taken over as a whole or in part by the secured creditor, there would be closure of the unit in every case. In a given case the secured creditor may opt to continue the regular activities of the borrower by taking over the possession of the properties, either by itself or through the managing agent. 12.However, in a case where either the unit of the company is closed or on account of the measures undertaken by the secured creditor under Section 13(4) of the Act, it has resulted into closure of the unit, consequentially resulting into unemployment of all the workers working in the unit, then in that case the workmen dues cannot be totally ignored even if the mechanism as provided under the Act enabling the secured creditor to realise the secured interest is SCA/7150/2008 20/27 JUDGMENT considered. As observed earlier, the workmen dues are identified by the legislature also for the purpose of giving treatment on pari passu priority in the event the company is ordered to be wound up or is being wound up, keeping in view the scheme of Section 529A of the Companies Act. Therefore, there is no reason to read the powers of secured creditor under Section 13(7) read with Section 13(9) to appropriate full amount of the sale proceeds towards secured interest by totally ignoring the claim of the workers' dues in a case where the workers are unable to recover dues from the company – employer. 13.If it is a case of a borrower, which is not a company under the Companies Act, 1956, different consideration may prevail for considering the priority of pari passu charge of workmen dues, but in a case where the borrower is a company under the Companies Act, as per the Scheme of the Companies Act, the workers' dues are to stand on pari passu charge with the secured creditor. Therefore, the same analogy can be SCA/7150/2008 21/27 JUDGMENT abstracted for giving treatment to the workers' dues in a case where the unit is already closed and thereafter the measure is taken under Section 13(4) of the Securitisation Act by the secured creditor to take over the properties or in a case where on account of the measures taken by the secured creditor under Section 13(4) of the Securitisation Act, which has resulted into closure of the unit, consequently unemployment of all the workmen and the workmen are unable to recover their dues from the company - employer. Under such circumstances, it appears that it would be reasonable to hold that the workers' dues if the borrower is a company have to stand on pari passu charge with the dues of the secured creditor. The secured creditor, under such circumstances, may be in a position to appropriate the sale proceeds of the secured assets of the company after disposal thereof, keeping in view the aspects that the amount which is realised of the sale proceeds of the borrower company as on the date when it has resulted into closure of the unit, may be SCA/7150/2008 22/27 JUDGMENT required to be shared with workmen dues on pari passu charge basis in the event the workmen are unable to recover their dues from their employer company. 14.If the exact figures of the workmen dues is available on record, it would be for the secured creditor to consider the quantum thereof and keeping in view the pari passu charge, the proportionate share, as it goes to the secured creditor, may be appropriated and the remaining share of the workmen's dues may be reserved by the secured creditor, either for payment to the workers or to the representative Union after the ascertainment of the claims of the workers' dues and in the event it is established that the workers are unable to recover dues from their employer company. But in a case where the amount is not ascertained of the workmen's dues or on the one hand, workmen are claiming their dues from the borrower company and the quantification of the amount or the liability of such amount is yet to be finalized, it may be required to be ascertained in presence of the SCA/7150/2008 23/27 JUDGMENT secured creditor, since the same is ultimately likely to affect indirectly the rights of the secured creditor inasmuch as since the workmen themselves are to stand at pari passu