Case: Jitendra Nath Singh Vs. Official Liquidator

Tribunal). This limited priority is declared in Section 529-A(1) but it is restricted 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.65. Under clause (c) of the proviso to Section 529(1), the priority of the secured creditor who stands outside the winding-up is confined to the “workmens portion” as defined in Section 529(3)(c). “Workmens portion” means the amount which bears to the value of the security, the same proportion which the amount of the workmens dues bears to the aggregate of (a) workmens dues, and (b) the amounts of the debts due to all the creditors. This is explained in the illustration under the said provision. If the workmens 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 workmens 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 “workmens 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 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 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 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 “workmens 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 the same proportion as the amount of the workmens dues bears to the aggregate of (a) workmens due, and (b) the amount of the debts due to all the (sic secured) creditors. …..”“23. The language of Section 529-A is also clear and unequivocal, in terms whereof the workmens 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 priority over all other debts. Once the workmens 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. ……” 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 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 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 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.“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 in Allahabad Bank to the aforementioned extent does not 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 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) 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- 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 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.

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

Explanation:
1[ds]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 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 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 scheme of the above provisions, particularly with respect to determination of theportion. 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 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 have considered theportion 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 creditors in terms of Section 529A and 530 of the Act. Once that is done, the Court could then have settled the payment received by the Official 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