Case: Uco Bank Vs. Official Liquidator, High Court

is as under "529. Application of insolvency rules in winding up of insolvent companies. - (1) In the winding up of an insolvent company, the same rues shall prevail and be observed with regard to - (a) debts provable; (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 persons adjudged insolvent (Inserted by Companies (Amendment) Act, 1985) [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 workmens portion 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; (b) any amount realised by the liquidator by way of enforcement of such charge shall be applied rateably for the discharge of workmens 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 workmens portion in his security, whichever is less, shall rank pari passu with the workmens dues for the purposes of Section 529-A.]" * 3. The contention of the appellant, a secured creditor, which was accepted by the learned Company Judge but, on appeal, has been rejected by the Division Bench of the High Court in the impugned order dated 16-10-1991 in Appeal No. 920 of 1991, was that the aforesaid amendment including the above-quoted proviso is inapplicable in the present case since the decree had been obtained by the appellant prior to the above amendment made in the Principal Act. The submission of Dr. S. Ghose, learned counsel for the appellant, is that the above amendment including the said proviso has no application to a secured creditors claim based on a decree obtained prior to the said amendment. In other words, the submission is that the said proviso does not apply to a decree obtained for realisation of the security available to the secured creditor if the decree was obtained prior to the amendment even though realisation of the security by execution of the decree is subsequent to the amendment. We find no merit in this contention 4. Part VII of the Companies Act, 1956 relates to Winding up and therein Sections 528 to 530 pertain to Proof and ranking of claims in Chapter V relating to Provisions applicable to every mode of winding up. Section 529 deals with Application of insolvency rules in winding up of insolvent company, Section 529-A with Overriding preferential payments, and Section 530 with Preferential payments. It is obvious that these provisions, as they exist, apply to a winding up proceeding 5. The proviso to sub-section (1) of Section 529 inserted by the Amending Act clearly provides that "the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen." The effect of the proviso is to create, by statute, a charge pari passu in favour of the workmen on every security available to the secured creditors of the employer company for recovery of their debts at the time when the amendment came into force. This expression is wide enough to apply to the security of every secured creditor which remained unrealised on the date of the amendment. The clear object of the amendment is that the legitimate dues of workers must rank pari passu with those of secured creditors and above even the dues of the Government. This literal construction of the proviso is in consonance with, and promotes, the avowed object of the amendment made. On the contrary, the construction of the proviso suggested by the learned counsel for the appellant, apart from being in conflict with the plain language of the proviso also defeats the object of the legislation6. The existence of the security on the date the amendment came into effect creates a pari passu charge in favour of the workmen upon that security. It is only if the security has been realised, pursuant to a decree, prior to the date of the amendment that the pari passu charge is not created, for there is no security upon which it can operate. There is, therefore, no retrospectivity in the operation of the provision as interpreted by us7. A debt due to a secured creditor, when recovered by realisation of the security after commencement of the winding up proceedings, results in depletion of the assets in the hands of the Official Liquidator. This provision is intended to protect the interests of the workmen in proceedings for winding up. In view of the nature of workmens dues being similar to those of secured creditors, the purpose of this provision is to place the workmen on a par with the secured creditors and create a statutory charge in their favour on all available securities forming part of the assets of the company in liquidation so that the workmen also share the securities pari passu with the secured creditors. The workmen contribute to the growth of the capital and must get their legitimate share in the assets of the company when the situation arises for its closure and distribution of its assets first among of secured creditors due to winding up of the company. The aforesaid amendment made in the Act is a statutory recognition of this principle equating the legitimate dues of the workmen with the debts of the secured creditors of the company. To achieve this purpose, it is necessary that the amended provision must apply to all available securities which form part of the assets of the company in liquidation on the date of the amendment. The conclusion reached by the Division Bench of the High Court is supported by this reason

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]5. The proviso to(1) of Section 529 inserted by the Amending Act clearly provides that "the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen." The effect of the proviso is to create, by statute, a charge pari passu in favour of the workmen on every security available to the secured creditors of the employer company for recovery of their debts at the time when the amendment came into force. This expression is wide enough to apply to the security of every secured creditor which remained unrealised on the date of the amendment. The clear object of the amendment is that the legitimate dues of workers must rank pari passu with those of secured creditors and above even the dues of the Government. This literal construction of the proviso is in consonance with, and promotes, the avowed object of the amendment made. On the contrary, the construction of the proviso suggested by the learned counsel for the appellant, apart from being in conflict with the plain language of the proviso also defeats the object of the legislation6. The existence of the security on the date the amendment came into effect creates a pari passu charge in favour of the workmen upon that security. It is only if the security has been realised, pursuant to a decree, prior to the date of the amendment that the pari passu charge is not created, for there is no security upon which it can operate. There is, therefore, no retrospectivity in the operation of the provision as interpreted by us7. A debt due to a secured creditor, when recovered by realisation of the security after commencement of the winding up proceedings, results in depletion of the assets in the hands of the Official Liquidator. This provision is intended to protect the interests of the workmen in proceedings for winding up. In view of the nature of workmens dues being similar to those of secured creditors, the purpose of this provision is to place the workmen on a par with the secured creditors and create a statutory charge in their favour on all available securities forming part of the assets of the company in liquidation so that the workmen also share the securities pari passu with the secured creditors. The workmen contribute to the growth of the capital and must get their legitimate share in the assets of the company when the situation arises for its closure and distribution of its assets first among of secured creditors due to winding up of the company. The aforesaid amendment made in the Act is a statutory recognition of this principle equating the legitimate dues of the workmen with the debts of the secured creditors of the company. To achieve this purpose, it is necessary that the amended provision must apply to all available securities which form part of the assets of the company in liquidation on the date of the amendment. The conclusion reached by the Division Bench of the High Court is supported by this reason