Case: Bank Of Maharashtra Vs. Pandurang Keshav Gorwardkar

The appellant in one appeal is Bank of Maharashtra and in the other, Indian Banks Association. As a matter of fact, the main appeal is by Bank of Maharashtra. The Indian Banks Association was not a party to the proceedings before the High Court or before the DRT but it has preferred appeal, after permission was granted, as in its view the impugned judgment if implemented would have far reaching implications on the banking industry as a whole.3. As will appear, the High Court was concerned with the writ petition filed by the workmen/employees of Paper and Pulp Conversions Ltd. (for short,praying therein that direction be issued to the Recovery Officer, Debt Recovery Tribunal, Mumbai III (for short ‘DRTto recover the amount of Rs. 3 crores from Bank of Maharashtra (‘theThe facts and circumstances on which the workmen relied before the High Court are these: The Company had taken loan from the Bank somewhere in 1980. In 1984-85, the Company faced liquidity problems. One of the creditors of the Company filed a company petition being Company Petition No. 604/1986 before the Bombay High Court in 1986 for winding up of the Company. On 14.01.1987, the company petition was admitted.5. The Company was closed in 1992. In the same year, a reference was made by the Company to the Board for Industrial and Financial Reconstruction, New Delhi (BIFR) under Section 15(1) of Sick Industrial Companies (Special Provisions) Act, 1985 (for short,On 1.9.1993, BIFR passed an order for winding up of the Company. The Company challenged the order of the BIFR before the appellate authority but was unsuccessful.6. In or about 1995, the Bank filed a suit against the Company and its Directors for recovery of a sum of Rs. 25,39,08,282.79 with future interest thereon at the agreed rate and cost in the Court of Civil Judge, Senior Division, Panvel. The suit was transferred to the DRT III in 1999 and was numbered as original application no. 344/1999.7. On 19.07.2001, the DRT III allowed the original application made by the Bank by directing the Company and its Directors to pay jointly, severally and personally a sum of Rs. 25,49,91,756.94 with cost and interest at the rate of 6% per annum with quarterly rests from the date of application till its realization. The DRT III further directed in its judgment that in the event of failure of the Company and its Directors to pay the amount to the Bank, as directed, the Bank shall be entitled to sell hypothecated and mortgaged and other immovable and movable properties of the Company and the Directors and the sale proceeds shall be appropriated towards due amount.8. Consequent upon the Judgment dated 19.7.2001, the DRT III issued recovery certificate on 21.08.2001. In the recovery certificate, it was directed that the Recovery Officer shall realize the amount as per the certificate in the manner and mode prescribed under Sections 25 and 28 of the 1993 Act from the certificate debtors as specified in the certificate. As regards legal heirs of one of the deceased directors, it was directed that they would be liable only to the extent they inherited the property from their predecessor in interest.9. In the recovery proceedings, the workmen/employees of the Company through their Association made an application on 17.9.2003 and prayed that they be allowed to intervene in the matter and their claims be registered before any auction takes place. The workmen also sent a notice to the Company and its Managing Director requesting them to pay their dues.The Company, however, disputed their claim.10. On 22.01.2004, the Recovery Officer auctioned the movable properties of the Company and received an amount of Rs. 4,70,55,000/- by way of sale proceeds. Of that amount, Rs. 3 crores were disbursed to the Bank on 10.03.2004 and remaining amount of Rs. 1,70,55,000/- was kept aside towards the likely claim of the workmen of the Company.11. The workmen made an application in the company petition No. 604/1986 before the Bombay High Court on 19.03.2004 for appointment of Provisional Liquidator and for staying further proceedings before the DRT III arising out of the above recovery proceedings. The Bank opposed the application of the workmen before the Company Court and submitted that any restraint on the sale of theassets would adversely affect the interest of not only the secured creditors but also the workmen.12. By an order dated 08.10.2004, the Company has been ordered to be wound up by the Bombay High Court and official liquidator has been appointed as liquidator of the Company with the usual powers under the Companies Act.13. On 18.06.2004, the workmen filed a writ petition before the Bombay High Court for the reliefs as noted above. The Bombay High Court in the impugned Judgment after hearing the parties held that the jurisdiction to determine the payment and its priorities was totally vested with the DRT under the 1993 Act and, therefore, the workmen should approach the DRT for the purpose of determination of their claim and consequential payment in respect thereof. The relevant directions in the impugned judgment read as followsThe Debt Recovery Tribunal is directed to retain the sum of Rs. 1,17,55,000/- and not to disburse the same either to the 2nd respondent or to any other person till and until the claim of the workers is determined.2. The Presiding Officer of the Debt Recovery Tribunal, Mumbai shall adjudicate upon the claims of the petitioner workers and more particularly of the employees whose names are set out in Exhibitand determine the salaries payable either as and by way of arrears or otherwise to each of the workers.3. Once the claim of each of the workmen is determined, the Debut Recovery Tribunal shall make payment of the said dues to the workers out of the amount lying with him of the said Rs. 1,17,55,000/- and if there is a short fall, then the Debt Recovery Tribunal will be permitted to call for the said balance amount from the 2nd respondent out of the sum of Rs. 3 crores which has already been withdrawn by the 2nd respondent from the sale proceeds of the auction sale of the movable properties of respondent no. 1.4. The Debt Recovery Tribunal shall in the meantime deposit the said amount of Rs.1,17,55,000/- in fixed deposit with a nationalized bank initially for period of three months and then renewable for a further period of three months.The High Court in the impugned judgment, inter alia, has also issued certain guidelines to the DRT III while adjudicating the claim of the workmen and other secured creditors for determination of priorities.15. The main submission on behalf of the Bank in laying challenge to the impugned judgment is two fold, (one) the workmen have no claim or right over the security held by a bank or financial institution. Their dues can only be adjudicated in an appropriate court (e.g. Industrial Tribunal) when the company is not in liquidation and DRT has no competence in this regard and (two) if the debtor company is in liquidation and the security is sold in proceedings before DRT and Recovery Officer, the sale proceeds will be distributed by taking into account the pari passu charge to a limited extent of theas laid down in Section 529(1)(c) proviso read with Section 529A of the Companies Act, 1956 (for short, Companies

Court's reasoning:
72. In light of the above discussion, we sum up our conclusionsIf the debtor company is not in liquidation nor any provisional liquidator has been appointed and merely winding up proceedings are pending, there is no question of distribution of sale proceeds among secured creditors in the manner prescribed in Section 19(19) of the 1993 Act.(ii) Where a company is in liquidation, a statutory charge is created in favour of workmen in respect of their dues over the security of every secured creditor and this charge is pari passu with that of the secured creditor. Such statutory charge is to the extent ofportion in relation to the security held by the secured creditor of the debtor company.(iii) The above position is equally applicable where the assets of the debtor company have been sold in execution of the recovery certificate obtained by the bank or financial institution against the debtor company when it was not in liquidation but before the proceeds realized from such sale could be fully and finally disbursed, the company had gone into liquidation. In other words, pending final disbursement of the proceeds realized from the sale of security in execution of the recovery certificate issued by the debt recovery tribunal, if debtor company becomes company in winding up, Section 529A read with Section 529(1)(c) proviso come into operation and statutory charge is created in favour of workmen in respect of their dues over such proceeds.(iv) The relevant date for arriving at the ratio at which the sale proceeds are to be distributed amongst workmen and secured creditors of the debtor company is the date of the winding up order and not the date of sale.(v) The conclusions (ii) to (iv) shall be mutatis mutandis applicable where provisional liquidator has been appointed in respect of the debtor company.(vi) Where the winding up petition against the debtor company is pending but no order of winding up has been passed nor any provisional liquidator has been appointed in respect of such company at the time of order of sale by DRT and the properties of the debtor company have been sold in execution of the recovery certificate and proceeds of sale realized and full disbursement of the sale proceeds has been made to the concerned bank or financial institution, the subsequent event of the debtor company going into liquidation is no ground for reopening disbursement by the DRT.(vii) However, before full and final disbursement of sale proceeds, if the debtor company has gone into liquidation and a liquidator is appointed, disbursement of undisbursed proceeds by DRT can only be done after notice to the liquidator and after hearing him. In that situation if there is claim ofdues, the DRT has two options available with it. One, the bank or financial institution which made an application before DRT for recovery of debt from the debtor company may be paid the undisbursed amount against due debt as per the recovery certificate after securing an indemnity bond of restitution of the amount to the extent ofdues as may be finally determined by the liquidator of the debtor company and payable to workmen in the proportion set out in the illustration appended to Section 529(3)(c) of the Companies Act. The other, DRT may set apart tentatively portion of the undisbursed amount towardsdues in the ratio as per the illustration following Section 529(3)(c) and disburse the balance amount to the applicant bank or financial institution subject to an undertaking by such bank or financial institution to restitute the amount to the extentdues as may be finally determined by the liquidator, falls short of the amount which may be distributable to the workmen as per the above illustration. The amount so set apart may be disbursed to the liquidator towardsdues on ad hoc basis subject to adjustment on final determination of thedues by the liquidator.(viii) The first option must be exercised by DRT only in a situation where no application for distribution towardsdues against the debtor company has been made by the liquidator or the workmen before the DRT.(ix) Where the sale of security has been effected in execution of recovery certificate issued by the DRT under the 1993 Act, the distribution of sale proceeds has to be made by the DRT alone in accordance with Section 529A of the Companies Act and by no other forum or authority.(x) The workmen of the company in winding up acquire the standing of the secured creditors on and from the date of winding up order (or where provisional liquidator has been appointed, from the date of such appointment) and they become entitled to the distribution of sale proceeds in the ratio as explained in the illustration appended to Section 529(3)(c) of the Companies Act.(xi) Section 19(19) of the 1993 Act does not clothe DRT with jurisdiction to determine theclaim against the debtor company. The adjudication ofdues against the debtor company in liquidation has to be made by the liquidator. In other words, once the company is in winding up the only competent authority to determine thedues is the liquidator who obviously has to act under the supervision of the company court and by no other authority.(xii) Section 19 (19) is attracted only where a debtor company is in winding up or a provisional liquidator has been appointed in respect of such company. If the debtor company is not in liquidation or if in respect of such company no order of appointment of provisional liquidator has been made and merely winding up proceedings are pending, the question of distribution of sale proceeds among secured creditors in the manner prescribed in Section19(19) of the 1993 Act does not arise.For the above conclusions, we hold, as it must be held, that the claims of the workmen who claim to be entitled to payment pari passu have to be considered and adjudicated by the liquidator of the debtor company and not by the DRT. We answer the question accordingly.