Case: Uco Bank Vs. Official Liquidator, High Court

In Company Petition No. 27 of 1971 for winding up of the CompanyM/s. Glass Carboys and Pressedwares Limitedon the ground, contained in clause (e) of Section 433 of the Companies Act, 1956 (hereinafter referred to as "the Act"), that the Company was unable to pay its debts, the learned Company Judge of the Bombay High Court made a winding up order onand the Official Liquidator took possession of the assets of the Company. The appellant UCO Bank was a secured creditor of the Company. It chose to stand outside the winding up proceedings and obtained a decree onto recover its debt. In pursuance of the decree obtained by the appellant, the High Courts Commissioner for taking Accounts was directed to sell certain movables of the Company. In the meantime, the Companies Act, 1956 was amended by the Companies (Amendment) Act, 1985 (hereinafter referred to as "the Amending Act") with effect fromby which Sections 529 and 530 of the principal Act were amended and Sectionwas inserted therein. One of the effects of the amendment, as mentioned in the Statement of Objects and Reasons of the Amending Act, is as under"2. Another announcement made by the Finance Minister in his Budget speech relates to the decision of the Government to introduce necessary legislation so that legitimate dues of workers rank pari passu with secured creditors in the event of closure of the company and above even the dues to Government. The resources of companies constitute a major segment of the material resources of the community and common good demands that the ownership and control of the resources of every company are so distributed that in the unfortunate event of its liquidation, workers, whose labour and effort constitute an invisible but easily perceivable part of the capital of the company are not deprived of their legitimate right to participate in the produce of their labour and effort. It is accordingly proposed to amend Sections 529 and 530 of the Companies Act and also to incorporate a new section in the Act, namely, Section(vide clauses 4, 5 and 6 of the Bill)." *

Court's reasoning:
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