COMA/362/2004 1/55 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY APPLICATION No. 362 of 2004 In COMPANY PETITION No. 7 of 2001 With COMPANY APPLICATION No. 232 of 2005 In COMPANY PETITION No. 7 of 2001 With COMPANY APPLICATION No. 375 of 2004 In COMPANY PETITION No. 7 of 2001 With COMPANY APPLICATION No. 167 of 2005 In COMPANY PETITION No. 127 of 1995 With COMPANY APPLICATION No. 219 of 1999 With COMPANY APPLICATION No. 233 of 2005 In COMPANY PETITION No. 7 of 2001 With COMPANY APPLICATION No. 225 of 2002 With COMPANY APPLICATION No. 362 of 1998 With COMPANY APPLICATION No. 356 of 1998 With COMPANY APPLICATION No. 316 of 1999 With COMPANY APPLICATION No. 174 of 2005 In COMPANY PETITION No. 7 of 2001 For Approval and Signature: COMA/362/2004 2/55 JUDGMENT HONOURABLE MR.JUSTICE K.A.PUJ ================================================= 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 ? ================================================= GUJARAT STEEL TUBE EMPLOYEES UNION & 1 - Applicant Versus O.L.OF GUJARAT STEEL TUBES LTD & 5 - Respondents ================================================= Appearance : 1. Company Application Nos. 362/2004 & 232/2005 MR MUKUL SINHA for Applicant. OFFICIAL LIQUIDATOR for Respondent(s) : 1, NOTICE SERVED BY DS for Respondent(s) : 2, 5, MS NALINI S LODHA for Respondent(s) : 3, 6, MR UDAY R BHATT for Respondent(s) : 4. 2. Company Application Nos. 375/2004 & 233/2005 MR LN MEDIPALLY for Applicant. OFFICIAL LIQUIDATOR for respondent No. 1. COMA/362/2004 3/55 JUDGMENT Ms. Nalini Lodha for respondent No. 3. Mr. Uday R. Bhatt for respondent No. 4. 3. Company Application No. 167 of 2005 Dr. MUKUL SINHA for Applicants. OFFICLAL LIQUIDATOR for respondent No. 1. 4. Company Application Nos. 356 & 362 of 1998 MR DS VASAVADA for Applicants. OFFICIAL LIQUIDATOR for respondent No. 1. MR RM DESAI for respondent No. 2. MR HM BHAGAT for respondent No. 3. MR AC GANDHI for respondent No. 4. 5. Company Application No. 316 of 1999 MR RM DESAI for Applicant. OFFICIAL LIQUIDATOR for respondent No. 1. 6. Company Application No. 219 of 1999 MR DS VASAVADA for Applicant. OFFICIAL LIQUIDATOR for respondent No. 1. MR RM DESAI for respondent No. 2-4. MR AC GANDHI for respondent No. 3. 7. Company Application No. 225 of 2002 MR AC GANDHI for Applicant. OFFICIAL LIQUIDATOR for respondent No. 1. 8. Company Application No. 174 of 2005 MR KM PAUL for Applicant. OFFICIAL LIQUIDATOR for respondent No. 1. ================================================= CORAM : HONOURABLE MR.JUSTICE K.A.PUJ Date : 09/01/2006 COMA/362/2004 4/55 JUDGMENT COMMON ORAL JUDGMENT 1.Since common issue is raised by the learned advocates appearing for the workmen with regard to their exclusive right under Section 529-A of the Companies Act, 1956 of satisfaction of their dues prior to the right of any other Creditors either Secured or Unsecured, all these applications are heard together and the said issue is decided by this common judgment and order. 2.Company Application Nos. 362 of 2004 and 232 of 2005 are filed by Gujarat Steel Tubes Employees Union and Gujarat Mazdoor Sabha, Ahmedabad. In Company Application No. 362 of 2004, the applicants have sought for the direction to the Official Liquidator of Gujarat Steel Tubes Limited (In Liquidation) to disburse an amount of Rs. 12 Crores realized from the sale of plant and machinery amongst the employees as a COMA/362/2004 5/55 JUDGMENT part payment towards their legal dues, claim for which is pending with the Official Liquidator. 3.In Company Application No. 232 of 2005, a declaration was sought for from this Court to the effect that the members of the applicant – Union are entitled to the entire amount of Rs. 58,37,77,872/- as admissible claims and have priority above all other creditors including secured creditors. The applicants have also sought for the direction to the Official Liquidator to disburse an amount of Rs. 58,37,77,872/- amongst the workers, claim for which is pending with the Official Liquidator, from the amount realized from the sale of plant and machinery and building and land. The applicants have also sought for the direction to the secured creditors / banks to return the amount which they have received under order dated 04.11.2004 passed by this Court with COMA/362/2004 6/55 JUDGMENT interest. 4.Company Application No. 375 of 2004 is filed by Gujarat Steel Tube Kamdar Suraksha Samiti seeking direction from this Court to the Official Liquidator of Gujarat Steel Tubes Limited (In Liquidation) to make available the amount of Rs. 75,000/- to each workman of the applicant union towards their legal dues out of the amount of Rs. 12.31 crores and interest thereon till date accrued from the sale of plant and machinery. 5.Company Application No. 233 of 2005 is filed by Gujarat Steel Tube Kamdar Suraksha Samiti seeking direction from this Court to the Official Liquidator to make available the amount of Rs. 1,50,000/- to each workmen of the applicant union towards their legal dues out of the amount of Rs. 29 crores and odd and interest thereon till date accrued from the COMA/362/2004 7/55 JUDGMENT sale of plant and machinery. 6.Company Application No. 167 of 2005 is filed by Gujarat Mazdoor Sabha seeking direction to the Official Liquidator of M/s. Neeka Tubes Limited to disburse an amount of Rs. 4.50 Crores realized from the sale of plant and machinery and land and building amongst the employees as a part payment towards their legal dues, claim for which is pending with the Official Liquidator. 7.Company Application No. 219 of 1999 is filed by Textile Labour Association and Company Application No. 225 of 2002 is filed by Industrial Investment Bank of India Limited seeking direction inter alia to the Official Liquidator of Omex Investors Limited to disburse an amount amongst the secured creditors as well as workers, realized on sale of assets of the Company in liquidation. COMA/362/2004 8/55 JUDGMENT 8.Company Application Nos. 362 of 1998 and 356 of 1998 are filed by Textile Labour Association and Company Application No. 316 of 1999 is filed by Industrial Development Bank of India praying for the direction from this Court to the Official Liquidator to disburse an amount amongst the secured creditors and the workers, realized on sale of the assets of the Company in liquidation. 9.Company Application No. 174 of 2005 is filed by one Mr. C.H. Patel, Ahmedabad praying for the direction to the Official Liquidator to disburse an amount of Rs. 6,24,330/- in favour of the applicant towards legal dues on account of outstanding salary, bonus, gratuity, retrenchment compensation, leave encashment etc. as determined by the Labour Court. 10.Though this Court is not disposing of all COMA/362/2004 9/55 JUDGMENT these applications by this common judgment and order, they are tagged together only because the learned advocates appearing in all these matters on behalf of their respective parties have made their submissions on the common issue which is referred to above and after deciding the said issue, the office is directed to place these matters for further orders before the appropriate Court. 11.In Company Application No. 362 of 2004, it is the case of the applicant – union that the Company, namely, Gujarat Steel Tubes Limited was ordered to be wound up by this Court by an order dated 27.12.2001 passed in Company Petition No. 7 of 2001 and the Official Liquidator attached to this Court has been appointed as the Liquidator with all the powers under the provisions of the Companies Act, 1956. This Court vide its order dated 05.02.2003 has constituted Sale Committee COMA/362/2004 10/55 JUDGMENT consisting of Official Liquidator as its Chairman and representatives of secured creditors and workers union as its members for disposing of the assets of the Company as per the provisions of Section 457 of the Companies Act, 1956 read with Rule 272 and 273 of Companies (Court) Rules, 1959 by issuing advertisement in newspaper and conducting public auction. This Court vide its order dated 27.11.2003 passed in O.L.R. No. 87 of 2003 confirmed the sale of all assets and properties except land for Rs. 12.31 Crores and the said amount has already been received by the Official Liquidator. Thereafter, on the basis of the report submitted by the Official Liquidator, auction for land was taken place before this Court and vide order dated 30.09.2004, this Court has confirmed the sale at the consideration of Rs. 42.10 Crores and this Court has issued certain directions for effecting the sale and receipt of COMA/362/2004 11/55 JUDGMENT consideration. 12.It is also the case of the applicant – Union that they have already lodged the claim of the workers for their dues receivable from the Company in liquidation with regard to unpaid wages, bonus, leave encashment, retrenchment compensation, gratuity, P.F. etc. with the Official Liquidator in respect of 1118 workmen employed in the factory and 229 workmen employed as office staff and as per the directions of this Court, the Official Liquidator has already completed the process of assessing the claims. The total claim of the workmen for the period from June 1997 to 27.12.2001 was Rs. 46,13,54,855/- and the total claim of the office staff for the period from June 1997 to 27.12.2001 is Rs. 10,71,37,951/-. The total claim of the workmen is, therefore, Rs. 56,84,92,806/-. The Chartered Accountant appointed by the Official Liquidator has COMA/362/2004 12/55 JUDGMENT accepted and certified the claim of Rs. 26,09,50,142/- for workmen and Rs. 6,17,40,772/- for office staff, total claim being Rs. 32,26,19,914/-. The applicant – Union has not accepted this amount and has filed its objections. It is in this background of the matter, the applicant – Union has preferred this application praying for the direction for disbursement of the amount towards part of the claim lodged and admitted. 13.It is also the case of the applicant that as per the provisions of the Companies Act, 1956, Section 529 & Section 529-A in particular and in view of the law laid down by this Court and the Hon'ble Apex Court, members of the applicant union have first right over the amount realized by way of sell of the property of the Company in liquidation and that rights of the other creditors can be settled only after the claims of workmen are settled. It is COMA/362/2004 13/55 JUDGMENT also the case of the applicant union that the workmen have not received any payment for the last seven years and are facing acute financial crisis. 14.In Company Application No. 375 of 2004, it is the case of the applicant union that the applicant union has been registered on 27.07.2000 and has a large chunk of members consisting of 1010 out of total 1200 permanent workmen employed in Gujarat Steel Tubes Limited (In liquidation). It is also the case of the applicant union that each workmen member be made available the amount to the extent of Rs.75,000/- out of the amount realized on sale of plant and machinery in question. It is also contended in the said application that Section 529-A of the Companies Act, 1956 mandates preference to be given to the legal dues of the workmen. COMA/362/2004 14/55 JUDGMENT 15.Considering both these applications, this Court has passed an order on 04.11.2004 observing that after having heard the parties and taking into consideration the fact that State Bank of India viz. Respondent No. 3 in Company Application No. 362 of 2004 has not lodged its claim with the Official Liquidator and the further fact that ratio regarding entitlement of the workmen qua the secured creditors has not been worked out, has held that it would be in the fitness of things if a direction is made to the Official Liquidator to distribute a sum of Rs. 4 Crores in the ratio of 60% to the workmen and 40% to the secured creditors i.e. the first charge holders. The Court has, therefore, directed the Official Liquidator to make payment to the workmen by Account Payee Cheque upon identification by the representative of the applicant union. In so far as the payment relatable to the secured creditors is concerned, the Official Liquidator COMA/362/2004 15/55 JUDGMENT was directed to make payment to Bank of Baroda who in turn shall distribute amongst the other secured creditors. For the purpose of such disbursement, it was open to the Official Liquidator to prematurely encash fixed deposit receipts. The Court has also made it clear that this arrangement was purely by way of adhoc distribution without prejudice to rights and contentions of the parties and they were directed to return the payment, as and when, called upon by the Court, with interest at the prevailing rate of fixed deposit receipts, if ultimately it is found that the recipient is either not entitled to any sum or is entitled to a lesser amount than paid to it under the said order. 16.During the pendency of the aforesaid two applications and after the aforesaid order is passed by this Court, the respective unions have filed two more applications before this COMA/362/2004 16/55 JUDGMENT Court, namely, Company Application Nos. 232 & 233 of 2005. In both these applications, the claims originally made were enhanced in view of the fact that by this time, the land of the Company in liquidation was also sold and an amount of Rs. 42.10 Crores was realized on sale of the land of the Company in liquidation. The applicants union more or less have reiterated all their contentions in these two applications. However, considering the O.L. Report dated 25.03.2005 placed before this Court, the applicants have submitted that their objections have not been taken into consideration and virtually, the report of the Chartered Accountant was taken into consideration. The applicants have, therefore, prayed before this Court to examine their claim and work out the final ratio. 17.Dr. Mukul Sinha, learned advocate appearing for the applicant union in Company Application COMA/362/2004 17/55 JUDGMENT Nos. 362 of 2004 & 232 of 2005 has taken the lead in making his submissions. He has submitted that the applicants union have the first charge over the amount realized by way of sale of the property of the Company in liquidation and the rights of the other creditors including the secured creditors can be settled only after the claims of workmen are settled. In support of this submission, he has invited the Court's attention to the decision of the Hon'ble Supreme Court in the case of Andhra Bank V/s. Official Liquidator and another, 2005 AIR SCW 1608 wherein doubt was raised about the correctness of the statement of law contained in para 76 of the judgment of the Hon'ble Supreme Court in the case of Allahabad Bank V/s. Canara Bank and another (2000) 4 SCC 406 and the matter was placed before the Bench of three Judges of the Hon'ble Supreme Court. The Hon'ble Supreme Court after considering the provisions contained in COMA/362/2004 18/55 JUDGMENT Section 529, 529-A has observed that 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 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 means the amount which bears to the value of the security in 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 creditors. The Court held that the illustration appended to clause (c) of sub-section (3) of Section 529 is a clear pointer to the effect that the amount of debts due to the secured creditors should be taken into consideration for the purpose of COMA/362/2004 19/55 JUDGMENT ascertaining the workmen's portion of security. The Court further observed that the language of Section 529-A is also clear and unequivocal, in terms whereof the workmen's due 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 priority over all other debts. Once the workmen's portion is worked out in terms of proviso (c) of sub-section (1) of Section 529, indisputably the claim of the workmen as also the secured creditors will have to be paid in terms of Section 529-A. The Court has also made it very clear that the words “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 proviso” obviously mean the amount taken away from the private realization of the secured creditor by the liquidator by way of enforcing the charge for workmen's dues under clause (c) COMA/362/2004 20/55 JUDGMENT 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 before the Tribunal to reimburse himself from out of other monies available in the Tribunal, claiming priority over all creditors, by virtue of Section 529-A(1)(b). The Court emphasized that whatever secured creditor loses towards the workmen's portion out of the security, he can claim the same amount with priority over such unsecured creditors out of realization made by other creditors whose moneys are lying in the Tribunal. After clarifying the aforesaid situation, the Court has observed that while determining the point No. 6, however, a stray 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 COMA/362/2004 21/55 JUDGMENT did not arise in the case as the Allahabad Bank was indisputably an unsecured creditor. The Court, therefore, took the view that such an observation was 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). The Court, therefore, has no hesitation in holding that finding of the Hon'ble Supreme Court in the case of Allahabad Bank to the aforementioned extent does not lay down the correct law. The Court further observed that the reliance was wrongly placed on National Textile Workers' Union and Others V/s. P.R. Ramakrishnan and Others [1983] 1 SCC 228 as the question which arose therein was only as regard the right of the workers to be heard in the winding up proceeding. The said decision was, therefore, not applicable. 18.Based on the aforesaid judgment of the Hon'ble COMA/362/2004 22/55 JUDGMENT Supreme Court, Dr. Sinha has strongly urged before the Court that the secured creditors have come before this Court meaning thereby they have not exercised their option to remain outside the winding up and they have relinquished their security. He has, therefore, submitted that as per the provisions contained in Section 529-A which starts with non-obstante clause and says that in the winding up of a Company, workmen's dues and 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. He has submitted that under clause (c) of the proviso to sub-section (1) of Section 529, estimate of the debt due to such secured creditor as could not be realized 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, COMA/362/2004 23/55 JUDGMENT shall rank pari passu with the workmen's dues for the purpose of Section 529-A. Since the secured creditors have not sacrificed anything under the proviso (c) to Sub-section (1) of Section 529, they have no right to claim any priority under Section 529-A. He has, therefore, submitted that the workmen shall have the exclusive right of satisfaction of their dues in priority to all other creditors including secured creditors. He has, therefore, submitted that the entire amount should be distributed amongst the workers excluding the claim of the secured creditors and this Court should direct the secured creditors to return the amount which was earlier disbursed in their favour by virtue of an order passed by this Court on 04.11.2004. 19.Learned advocates Mr. L.N. Medipally and Mr. D.S. Vasavada appearing for their respective unions have adopted the arguments of Dr. Sinha COMA/362/2004 24/55 JUDGMENT that their respective unions should be held to have priority of the claims of their members for the purpose of satisfaction of their dues and they should be paid first before any disbursement is made in favour of the secured creditors. 20.The claim of the workers was strongly objected to by the learned advocates appearing on behalf of the secured creditors. In this connection, Learned advocates Mr. R.M. Desai, Mr. A.C. Gandhi, Mrs. Nalini Lodha, Mr. Uday Bhatt, Mr. Sandeep M. Singhi and learned Senior advocate Mr. Mihir J. Thakore have made their submissions. 21.The learned advocates appearing for the Secured Creditors have submitted that the workman has no right to realize the security. The secured creditors have right to realize the amount under Section 529 of the Companies Act, COMA/362/2004 25/55 JUDGMENT 1956. The stage envisaged under Section 529-A has still not come. The secured creditors remained outside the winding up proceedings. Simply because they participate in the proceedings for the sake of convenience, it does not amount to relinquishment of their securities. Reliance was placed on the decision of the Bombay High Court in the case of Cafin Homes Ltd. V/s. Lloyds Steel Industries Ltd., 106 Company Cases 52. The issue before the Court was whether the winding up petition filed by the secured creditor is maintainable. The Court has observed that the secured creditor who seeks to prove the whole of his debt in the course of the proceedings of winding up must, before he can prove his debt, relinquish his security for the benefit of the general body of the creditors. If he surrenders his security for the benefit of the general body of creditors, he may prove the whole of his debt. If the secured creditor has COMA/362/2004 26/55 JUDGMENT realized his security, he may prove for the balance due to him after deducting the net amount that has been realized. The stage for relinquishing security arises when a secured creditor seeks to prove the whole of his debt in the course of winding up. If he elects to prove in the course of winding up the whole of the debt due and owing to him he has to necessarily surrender his security for the benefit of the general body of creditors. That however, cannot be construed to mean that when he files a petition for winding up, a secured creditor must relinquish his security. Therefore, it would be wholly inappropriate and inapposite to require the secured creditor at the stage when he files a company petition for winding up to exercise the option of relinquishing his security since that stage does not arise until the debt is to be proved. The Court accordingly held that there could be no doubt about the proposition that the object COMA/362/2004 27/55 JUDGMENT of a petition for winding up is to realize the property of the company for distribution to all the creditors in accordance with the applicable rules and the petitioner had evinced a clear intention to enforce the security by filing a suit in the court for the recovery of its dues and the enforcement of its securities. When the stage for the