Delhi High Court
M/S Tata Iron & Steel Co. Ltd. vs M/S Jhalani Tools India Ltd on 19 July, 2023
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 20th March, 2023
Pronounced on: 19th July, 2023
+ CO.PET. 539/1998, CO.APPLs. 174/2018, 1506/2018, 696/2019,
698/2019, 772/2020, 132/2021, 658/2021, 780/2021, 789/2021,
434/2022, 718/2022, 61/2023 & 89/2023
M/S TATA IRON & STEEL CO. LTD ..... Petitioner
Through:
M/S JHALANI TOOLS INDIA LTD ..... Respondent
Through: Ms. Ruchi Sindhwani, SSC with Ms.
Megha Bharara, Advocate for OL.
Mr. B. L. Wali, Advocate for Kotak
Mahindra Bank Ltd.
Mr. Sangram Patnaik, Ms. Swayam
Sidha Patnaik and Mr. Aman Garg,
Advocates for IDBI.
Mr. A.K. Kohli and Mr. Ankush
Sharma, Advocates for non-Applicant
in CO.APPL. 174/2018.
Ms. Neeru Vaid, Advocate for
workers, Faridabad, Jhalna and
Aurangabad.
Mr. Dinkar Singh, Mr. Gagan Garg
and Mr. Rohit Singh, Advocates for
ARCIL.
Mr. Aman Vachher, Mr. Ashutosh
Dubey and Mr. Amit Kumar,
Advocates for Ex-Management.
Mr. Ramesh Kumar and Mr.
Abhishek Gusain, Advocates for
Bank of Baroda/Secured Creditor.
Mr. Shiv Charan Sharma, Advocates
for Workmen.
Signature Not Verified
Digitally Signed CO.PET. 539/1998 Page 1 of 22
By:SAPNA SETHI
Signing Date:19.07.2023
18:31:55
Mr. Ramesh Kumar, Advocate for
Applicant in CA 1313/2018.
Mr. Anil Nauriya and Ms. Sumita
Hazarika, Advocates for Kundli Unit.
Mr. Hemendra Jailiya, Advocate for
Jalna Workers Union.
CORAM:
HON'BLE MR. JUSTICE SANJEEV NARULA
JUDGMENT
SANJEEV NARULA, J.
CO.APPL. 1313/2018 (on behalf of Dena Bank/ secured creditor seeking
appropriate directions)
1. Despite explicit court directives issued on 10th July 2018 instructing
the Official Liquidator ("OL") to disburse payments towards the admitted
claims of workmen, the situation remains largely unchanged with a majority
of such claims yet to be settled. The key contributor to the present of affairs
is the above-captioned application filed by Dena Bank,1 a secured creditor
and the Lead Bank of a consortium of banks2 ("Consortium"). Dena Bank's
instant application pertains to Consortium's second charge on certain assets
belonging to the company in liquidation i.e., Jhalani Tools India Limited
("JTIL" or "Company"). They assert that this second charge ranks at par
with their first charge. Consequently, this judgment will address Dena
Bank's aforenoted contention, but at the same time also deal with the claims
of interest on outstanding dues, presented by the Company's workmen,
while contesting Dena Bank's afore-noted prayer.
Dena Bank merged with Bank of Baroda on 01 April 2019 and the merged entity is presently known as
Bank of Baroda. For convenience, Applicant is hereinafter referred to as Dena Bank.
Kotak Mahindra Bank, Indian Overseas Bank, Syndicate Bank, Canara Bank, and JP Morgan.
Signature Not Verified
By:SAPNA SETHI
Signing Date:19.07.2023
18:31:55
Course of events leading to the present deadlock
2. JTIL was engaged in the business of manufacturing hand tools and
other steel and iron implements, with six factories located in four different
locations - three in Faridabad and one each in Aurangabad, Jalna and
Kundli. Over time, all these units/ factories ceased operations. Tata Iron and
Steel Company Limited ("TISCO") sanctioned a working capital loan of Rs.
9 crores to the Company and failure to repay the same led to the filing of the
present petition. In parallel, JTIL had gone before the Board for Industrial
and Financial Reconstruction ("BIFR") under Case No. 288/1987 for
revival of the Company as a 'sick industrial company' as per Sick Industrial
Companies (Special Provisions) Act, 1985 ("SICA").
Proceedings before the BIFR
3. During the BIFR proceedings, a rehabilitation scheme was approved
in 1987. Pursuant to this scheme, two financial institutions, Industrial Bank
of India ("IDBI") and Industrial Investment Bank of India ("IIBI")
(together, "Financial Institutions" or "FIs") sanctioned a term loan ("TL")
of Rs. 1 crore and 1.56 crores respectively. In addition to this, as part of the
said scheme, from March 1988 onwards, the Consortium sanctioned/
released various facilities including TLs/ working capital term loans
("WCTL") of approx. Rs. 5.74 crores to the Company. In 1991, the
Company extended mortgages that were created in 1983 in favour of other
banks, namely, SICOM Ltd., Punjab & Sind Bank and Bank of America.
Further, in 1993, the Consortium approved additional facilities such as cash
credit/ overdraft/ packing credit/ bills purchased/ IPRS claim bills purchase/
letter of credit etc. with an aggregate limit of approximately Rs. 32 crores.
Signature Not Verified
By:SAPNA SETHI
Signing Date:19.07.2023
18:31:55
By 1998, the Company had settled all outstanding amounts owed to SICOM
Ltd., Punjab & Sind Bank and Bank of America. As a result, SICOM Ltd.
returned the original title deeds of various immovable properties of the
Company that had been mortgaged. These deeds were subsequently
transferred to Dena Bank to secure the outstanding loans.
Revival of proceedings before the Company Court
4. In view of BIFR proceedings, hearings in the present company
petition were indefinitely postponed. On 17th July 2000, the BIFR
recommended winding up of JTIL under Section 20(2) of SICA. This
reference was registered as CO. PET. 18/2001 and was consequently listed
alongside the instant petition. Subsequently, on 01st March 2003, the instant
petition was revived, and the OL attached with this Court as appointed as
Provisional Liquidator vide order dated 18th March, 2003. The OL took over
the custody and assumed possession of various properties belonging to JTIL
and under Court's directions, proceeded to auction the same, details whereof
are provided below:
S.NO. PROPERTY DATE OF AUCTION DATE &
POSSESSION AMOUNT
1. Unit I- 10,11,12, New Industrial Possession taken on * Movables & Building
Area, Faridabad, Haryana 05.10.2004 auctioned for Rs.
6,55,00,000/- vide order
dated 16.01.2014.
* Immovable land
auctioned for Rs.
43,82,28,090/- vide order
dated 11.04.2022.
2. Unit II- 4, New Industrial Area, Possession taken on
Faridabad, Haryana 07.10.2004
3. Unit III - 1, 2, New Industrial Possession taken on
Area, Faridabad, Haryana 07.10.2004
4. Unit IV - Narela Road, Village Possession taken on
Kundli Distt. Sonepat, Haryana 08.10.2004 Auctioned for Rs. 59
5. Unit-V - E-29, 30, Chikalithanu Possession taken on Crores vide order dated
Industrial Area, Aurangabad 13.10.2004 20.10.2005 & 11.08.2005
Signature Not Verified
By:SAPNA SETHI
Signing Date:19.07.2023
18:31:55
6. Unit-VI - C-1, Addl. Industrial Possession taken on
Area. Jalna and open land E-18 10.10.2004
& E-19
5. In accordance with order dated 20th May 2009, the OL issued notice
inviting creditors of the Company to submit their claims. Concurrently, on
25th March 2011, the Court constituted a three-member committee, headed
by Justice (Retd.) S.N. Dhingra ("Dhingra Committee") who were tasked
with assessing the claims filed by workmen. A settlement was agreed
between the ex-management and 2018 workmen of three units in Faridabad,
for a payment of Rs. 14.64 crores in terms of a One Time Settlement
("OTS").3 The total dues owed to the workmen were calculated as Rs. 51.95
crores. Additionally, the aggregate dues of all the secured creditors,
including FIs and the Consortium, were estimated at a combined total of Rs.
93.37 crores.
6. On 25th May 2011, the final order for winding up the Company was
issued.4 In the period subsequent thereto, OL engaged in several meetings
with stakeholders with the aim of determining a pro rata distribution
between secured creditors and workmen. OL also obtained a report dated
08th January, 2013 from M/s SSAS & Associates, Chartered Accountants
("CA Report"). During this time, Dena Bank filed various applications inter
alia contesting the computation of the ratio of pro rata pari passu
distribution inter se secured creditors, as well as between secured creditors
and workmen. Notably, among these applications, CO. APPL. 302/2013 was
On 13 August 2013, while considering OL's application to disburse lumpsum payments to workmen
under the OTS, this Court directed that the amount be distributed amongst all the workmen on a pro rata
basis. In appeal, [Company Appeal No. 69 of 2013] on 03 September 2014, the Division Bench passed an
order issuing directions inter alia upholding the release of the lumpsum OTS amount.
As recorded in order dated 13 August, 2013.
Signature Not Verified
By:SAPNA SETHI
Signing Date:19.07.2023
18:31:55
disposed of on 13th August 20135 and CO. APPL. 2061/2013 was withdrawn
on 03rd October 2018.
7. On 08th May 2017, OL was directed by this Court to give a
comprehensive report detailing the funds available with the OL and the dues
owed to both the workmen and the secured creditors. A year later, on 08th
May 2018, the Court noted that the report had not been filed and the
workmen had been waiting for an extended period to receive their unpaid
dues. In response, OL filed OLR No. 165/2018 on 06th July 2018 providing
the computation of dues payable to both, workmen and secured creditors.
Subsequently, the court passed the following order on 10th July 2018:
"OLR 165/2018
This OLR is filed pursuant to order of this court dated 8.5.2018
Copy of this Report be supplied to learned counsel appearing for the
Workmen, Secured Creditors and to the Ex. Management. The OL who is
appearing in person states that there are enough funds available to meet the
admitted claims of the workmen and payment shall be released within four
weeks to those workmen who provide the necessary details. He further
submits that regarding the issue of interest which some of the workmen
claim, that aspect can be gone into after sale of the immovable property
which is yet to be sold. Report is taken on record and stands disposed of."
8. Later, OL's office recomputed the figures on the basis of OLR No.
165/2018 and convened a meeting of representatives of workmen and the
secured creditors on 24th August 2018. The payments were calculated on the
principle of treating first charge holders and the workmen pari passu, which
was accepted by all parties involved, including Dena Bank. Following this
meeting, OL filed C.A. No. 1103/2018 based on the agreed-upon
computations, seeking directions from this Court to allow disbursement of
Said application was disposed of vide order dated 13 August 2018 with directions (see supra note 3) and
the appeal to the same was decided by order dated 03 September 2014 of the Division Bench of this Court
[Company Appeal No. 69 of 2013] (see supra note 3).
Signature Not Verified
By:SAPNA SETHI
Signing Date:19.07.2023
18:31:55
payments among all the stakeholders. The Court considered this request on
19th September 2018 and granted permission to the Official Liquidator to
disburse payments amounting to Rs. 4,53,85,682/- to the secured creditors
who held the security of the plant and machinery, and the land and building.
In addition, the Official Liquidator was also authorized to disburse payments
of Rs. 71,83,976/- to the secured creditors who held a charge on the
inventory or stock of the Company.
9. However, before the payments could be fully disbursed, the present
application was filed in October 2018, which paused the disbursal process.
10. Noticing the delay being caused, the Court, on 13th December 2018,
instructed the representatives of the workmen and the secured creditors to
meet with the OL in an attempt to resolve the dispute amicably. Despite
efforts, the meetings remained indecisive due to disagreements amongst the
parties. Subsequently, on 19th March 2019, in response to OLR No. 95/2019,
the Court, took cognizance of the ongoing dispute regarding payment of
dues to the workmen and passed the following order:
"OLR 95/2019
The learned counsel for the Official Liquidator states that pursuant
to the meeting held with Dena Bank/secured creditor, a fresh calculation
has been made and will be filed shortly within three days with an advance
copy of the same to the learned counsel for the Dena Bank/secured creditor.
There is a dispute regarding payment of the dues of the workers. In
this regard, the Official Liquidator has filed a report being OLR 95/2019
where it has been stated that in compliance with the order of this court
dated 19.09.2018, the OL has made payment to the 207 workmen of Jalna
Unit and 56 workmen of Aurangabad Unit in November, 2018. Another
payment of 126 workers of Jalna Unit is ready for dispatch but it could not
be sent due to disputes between the secured creditors and the workmen.
My attention has been drawn to the meeting held on 01.02.2019
between the OL, secured creditors and the learned counsel for the workers
of Jalna Unit and that of Kundli Unit. Para 3 of the minutes of the meeting
read as follows:
Signature Not Verified
By:SAPNA SETHI
Signing Date:19.07.2023
18:31:55
"3. Representative of Dena Bank has submitted one
calculation and according to that calculation he has agreed
to disburse to the ex-workers (non-OTS) amounting to
Rs.6,97,48,399/- and OTS workers amounting to
Rs.3,73,71,299/-. Also in the said calculation he proposed to
pay the amount to financial institutions amounting to
Rs.1,40,10,047/- of IFCI and Rs.89,86,891/- to IDBI. This
proposal of him does not cause any prejudice to the pending
adjudication of CA No.1313/2018."
The OL may take into account the above submission made by the
representative of the Dena Bank/secured creditor and takes steps
accordingly regarding payment of the dues of the workers only.
Report is disposed of."
11. OL submitted the Minutes of the Meetings that took place on the 14 th
and 16th January and 1st February 2019, along with OLR No. 95/2019. These
minutes reveal that all stakeholders were present at these meetings. We note
that despite some disagreements concerning the computation, the
representative from Dena Bank concurred with the disbursement plan to the
workmen, IFCI and IDBI.
Contentions of Applicant-Bank
12. Dena Bank/ Consortium holds first charge over the immovable
properties and fixed assets of the Company in respect of its TL/ WCTL
amounting to Rs. 5.74 crores, ranking pari passu with the TL advanced by
the Financial Institutions, and a second charge in respect of additional
working capital facilities of Rs. 32 crores. Applicant-Bank contends that for
the purpose of calculation of workmen's portion under Section 529 of the
Companies Act, 1956 ("the Act") amounts due under the second charge
must be combined with amounts due under the first charge, and then the
total amounts must be compared against the amounts due to workmen. They
Signature Not Verified
By:SAPNA SETHI
Signing Date:19.07.2023
18:31:55
dispute the approach followed by the OL whereby only the amounts due
against the first charge have been taken into account to calculate the pro rata
share payable to the workmen. In support of this contention, Dena Bank
proffers the judgment of this Court in In Re: Bokiyu Tanneries Ltd. 6,
wherein following observations were made by the Single Judge:
"20. For the purpose of Section 529 and 529A of the Act, all the secured
creditors including those having second charge are treated equally and
their claims cannot be differentiated. Similarly, the claims of all the
workmen have to be calculated and accordingly in terms of Sections 529(3)
and 529A of the Act, payment is to be made in the ratio and proportion
specified therein."
13. On the basis of these observations, Dena Bank argues that as no
distinction has been made out through the literal interpretation of the
provisions, all charges must be treated at par for the purposes of calculation
as per Section 529 and 529A of the Act.
Analysis
14. The present application is verbose and runs into nearly 100 pages and
contains repetitive contentions. Among these are allegations that OL acted
with bias and malice, thereby depriving the Consortium of its rightful dues.
However, these contentions were not raised during the hearing, and thus are
not addressed. The primary contention is thus: the entirety of dues owed to
the secured creditors must be computed as a single unit against the dues
owed to the workmen for calculating the pro rata shares. This calculation
should disregard the distinctions between the first and second charges held
by various creditors under Section 529 of the Act, as the Act does not
2006 (89) DRJ 513
Signature Not Verified
By:SAPNA SETHI
Signing Date:19.07.2023
18:31:55
provide for such differentiation.
(I) SECOND CHARGE VIS-À-VIS SECTION 529A OF THE ACT
15. Upon review of the pleadings on record, it emerges that the Financial
Institutions, i.e., IFCI (assignee of IIBI) and IDBI, hold the first charge over
the land, building, and plant and machinery of the Company's six units.
Dena Bank contends that the Consortium similarly holds the first charge
over the land, buildings, and plant and machinery of the six units pertaining
to its term loan/working capital term loan of approximately Rs. 5.74 crores.
Furthermore, Dena Bank suggests that the Consortium also holds a second
charge regarding the additional working c apital facilities of roughly Rs. 32
crores. OL, in their written submission, counters this claim by stating that
the Consortium's first charge pertains to the stock and inventories and that a
second charge is held over the land, building, and plant and machinery
associated with the six properties. Notwithstanding this factual dispute, for
the present purposes, the Court is adjudicating whether the Consortium's
second charge can be considered equivalent to their first charge as well as
those held by the Financial Institutions for the purpose of pari passu
distribution of dues.
16. The methodology adopted by OL for determining pari passu shares,
dues of the workmen and secured creditors holding first charge were
prioritized. OL maintains that admitted amounts due to workmen and first
charge secured creditors can be settled in full, given the availability of
sufficient funds. Subsequently, the residual amount is to be disbursed
towards the debt of the second charge holder. According to the OL, the
balance is insufficient for full payment to the second charge holders, leading
Signature Not Verified
By:SAPNA SETHI
Signing Date:19.07.2023
18:31:55
to calculation of pro rata payments for the secured creditors bearing a
second charge.
17. In the Court's opinion, Dena Bank's attempt to prioritize their claims
above the claims of the workmen lacks a valid basis. They cannot contend
that the Consortium's second charge should be merged with their first
charge. In situations where secured creditors hold both first and second
charges, like in the case of Dena Bank/Consortium, the debt associated with
the second charge cannot be at par with the first charge. It would be
inappropriate for the creditor to amalgamate these charges for the purposes
of Section 529 and 529A, as doing so would affect the rights of the secured
creditors having first charge. It is important to recognise that the underlying
intent of the legislature in enacting Section 529A of the Act was to prevent
circumvention of order of priority among the creditors, particularly those
holding different ranks of security. Allowing creation of a "basket" which
combines both, first charge and second charge debts would render it nearly
impossible to distinguish the debt associated with the second charge. This
could potentially undermine the object of the statute and disrupt the purpose
of Section 529A of the Act, which is to ensure fair and systematic
distribution of assets among all classes of creditors. Moreover, allowing
such a practice could open the door to manipulation, as a creditor holding
different charges might prioritize a lower-ranked claim over other creditors
during the asset distribution process. This would significantly undermine the
equitable principles that form the foundation of insolvency laws. Therefore,
to maintain the integrity of the statutory framework and ensure equitable
treatment of all creditors, it is crucial to distinguish between first and second
charge holders when applying the pari passu principle under Sections 529
Signature Not Verified
By:SAPNA SETHI
Signing Date:19.07.2023
18:31:55
and 529A of the Act.
18. The Supreme Court's ruling in the case of Jitendera Nath Singh v.
Official Liquidator & Ors.,7 elaborated on the distinct hierarchy of claims
and charges in the winding-up proceedings, particularly in the light of the
1985 amendment8 ("1985 Amendment") to the Act. The Supreme Court
emphasized that a secured creditor holds a charge solely over a specific asset
or property of the company, which is their secured asset. A statutory charge
favouring the workmen has been established under the first limb of the
proviso to Section 529(1)(c) of the Act, which covers workers' dues from a
company. This charge is pari passu with that of each secured creditor and
extends to the workers' share relative to the security of any secured creditor
of the company, as provided under Section 529(3)(c) of the Act. Therefore,
every property offered as security in favour of the creditors implicitly carries
a pari passu charge favouring the workmen, which is at par with the secured
creditors. This interpretation implies that, under Sections 529 and 529A of
the Act, JTIL's workmen hold a pari passu first charge over the assets of
JTIL at par with the first charge of the secured creditors. Consequently, the
workmen's admitted claims would be paid in priority over the amounts due
against second charge held by the Consortium.
19. Furthermore, accepting Dena Bank's interpretation of Sections 529
and 529A would effectively undermine the two crucial legislative
provisions. Firstly, Section 48 of the Transfer of Property Act, 1882 ("TP
Act"), which establishes a clear hierarchy of charges. Secondly, Section 529
of the Companies Act, 1956, which is a welfare provision enacted to
(2013) 1 SCC 462.
Companies (Amendment) Act, 1985.
Signature Not Verified
By:SAPNA SETHI
Signing Date:19.07.2023
18:31:55
acknowledge the contributions of workmen to the company in liquidation.
Section 529 of the Act recognizes the special status of workmen as creditors
and ensures their protection. Allowing the amalgamation of first and second
charges could result in inflating the amounts due to secured creditors against
an inferior charge, thereby jeopardizing the interests of the workmen and
subverting the purpose of this legislative provision. Maintaining the clear
legislative intent and established hierarchy of claims is crucial in winding-up
proceedings. It ensures a fair and just distribution of assets and upholds the
safeguards put in place to protect the interests of various stakeholders,
particularly the workmen. Blurring the distinction between first and second
charge holders would lead to an unjust distribution of assets and undermine
the purpose of the legislative provisions designed to safeguard the rights of
all stakeholders.
20. The priority between two sets of secured creditors has been elucidated
in the judgment in ICICI Bank Ltd v. Sidco Leathers Ltd & Ors.9 wherein
the Supreme Court addressed the relationship between various types of
secured creditors and determined their respective rights and priorities. The
Court was tasked with examining inter alia the following key issues:
a) Whether the rights of priority between different sets of secured
creditors are diminished under Section 529A of the Act.
b) Whether Section 48 of the TP Act is overridden by Section 529-A of
the Act.
21. After analysing the law on the subject, it was observed that the claim
of first charge holder will prevail over the claim of the second charge holder,
2006 10 SCC 452.
Signature Not Verified
By:SAPNA SETHI
Signing Date:19.07.2023
18:31:55
as under:
"44. Section 529(1)(c) of the Companies Act speaks about the respective
rights of the secured creditors which would mean the respective rights of
secured creditors vis-à-vis unsecured creditors. It does not envisage
respective rights amongst the secured creditors. Merely because Section
529 does not specifically provide for the rights of priorities over the
mortgaged assets, that, in our opinion, would not mean that the provisions
of Section 48 of the Transfer of Property Act in relation to a company,
which has undergone liquidation, shall stand obliterated.
45. If we were to accept that inter se priority of secured creditors gets
obliterated by merely responding to a public notice wherein it is
specifically stated that on his failure to do so, he will be excluded from the
benefits of the Dividends that may be distributed by the Official
Liquidator, the same would lead to deprivation of the secured creditor of
his right over the security and would bring him at par with an unsecured
creditor. The logical sequitor of such an inference would be that even
unsecured creditors would be placed at par with the secured creditors.
This could not have been the intendment of the legislation. The provisions
of the Companies Act may be a special statute but if the special statute
does not contain any specific provision dealing with the contractual and
other statutory rights between different kinds of the secured creditors, the
specific provisions contained in the general statute shall prevail."
22. As can be seen from the above excerpt, the Supreme Court has held
that the absence of explicit provisions in Section 529 of the Act regarding
priority rights over mortgaged assets does not exclude the application of
Section 48 of the TP Act in cases of company liquidation. The Court has
reasoned that if inter se priority rights of secured creditors were disregarded,
it would result in their exclusion from dividend distribution and unjustly
treat them as unsecured creditors. This would also unjustly deprive the
secured creditor of their rights over the security, which surely is not the
legislature's intent. Furthermore, the Court held that while the Companies
Act, 1956 is a specialized statute, nonetheless it does not specifically address
the contractual and statutory rights between different types of secured
creditors. Thus, the specific provisions outlined in a general statute like the
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By:SAPNA SETHI
Signing Date:19.07.2023
18:31:55
TP Act should take precedence. This interpretation preserves the hierarchy
of charges and protects the rights of various secured creditors as envisioned
by both the Act and the TP Act.
23. Although the judgment in ICICI Bank Ltd. (supra) has been referred
to in the decision of a Co-ordinate Bench of this Court in Bokiyu Tanneries
(supra), however, Court's interpretation appears to deviate from the
understanding provided by the Supreme Court in ICICI Bank Ltd. (supra)
qua secured creditors. Bokiyu Tanneries (supra) holds that Sections 529 and
529A of the Act create two classes of creditors - workmen and secured
creditors (regardless of whether they have the first charge or the second
charge). This view overlooks the nuanced distinction provided by the
Supreme Court in ICICI Bank Ltd. (supra) which made it clear that the
rights of a first charge holder take precedence over those of a second charge
holder. The interpretation presented in Bokiyu Tanneries (supra) which
suggests that Sections 529 and 529A of the Act treat all secured creditors
equally, regardless of whether they hold a first or second charge, appears to
be contrary to the Supreme Court's ruling in ICICI Bank Ltd. (supra). In
ICICI Bank Ltd. (supra), the Supreme Court did not declare that all secured
creditors are equal. Instead, it acknowledged that while the Act does not
explicitly differentiate between first and second charge holders, it does not
eliminate the existing rights and hierarchies defined by the TP Act. Thus, the
interpretation put forth in Bokiyu Tanneries (supra) does not align with the
reasoning and interpretation provided by the Supreme Court in ICICI Bank
Ltd. (supra), which emphasized the preservation of the rights of first charge
holders over second charge holders. Therefore, Dena Bank's reliance on
Bokiyu Tanneries (supra) is misplaced.
Signature Not Verified
By:SAPNA SETHI
Signing Date:19.07.2023
18:31:55
24. In view of the aforenoted discussion and holding in ICICI Bank Ltd.
(supra), it becomes evident that the first and second charge holders cannot
be treated equally. Upholding the objection of the second charge holder
would upset the priority of the first charge holder, which would go against
the provisions of Section 48 of the TP Act. The OL position on this issue, as
stated in paragraph 10 of its compliance report OLR No. 109/2019, is thus
accepted.
25. Having resolved the aforementioned issue, the inevitable outcome is
the dismissal of the present application. However, the Court believes that a
simple rejection would be insufficient given that Dena Bank has caused
significant delay in the proceedings, thereby depriving the workmen of their
rightful dues. Thus, the conduct of the Bank necessitates imposition of costs.
(II) IMPOSITION OF COSTS
26. In addition to disputing the disbursal of claims on a misconceived
legal premise, the Applicant-Bank also challenges the priority given to the
disbursement of the OTS reached between the former management and the
workmen of the Faridabad Units, as well as the validity of the OTS itself. It
is important to note that payments to the workmen of the Faridabad Units
were made based on a settlement approved by the Division Bench of this
Court through an order dated 3rd September, 2014, in which the Applicant-
Bank itself was a party. In fact, the Applicant-Bank had expressed its
support for the said settlement with the workmen of the Faridabad Units
because it involved return of funds (along with interest) to the Company's
account, which had previously been transferred by the OL to the Common
Pool Fund. As the Consortium would benefit from the return of these funds
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By:SAPNA SETHI
Signing Date:19.07.2023
18:31:55
to the Company's account, it accepted the special arrangement created for
the disbursement of the OTS amount. This fact is admitted by the Applicant-
Bank itself in paragraph 63 of the present application. The conflicting stance
taken by the Applicant-Bank clearly demonstrates their obstructive stance in
the ongoing proceedings.
27. During the proceedings, a mutual agreement was reached among the
secured creditors, including Dena Bank, to implement the payments outlined
in OLR No. 165/2018. This understanding is evidenced by the Minutes of
Meeting dated 24th August, 2018, which were signed by Mr. Rahul Pratap,
Chief Manager of Dena Bank. However, the Applicant-Bank has chosen to
backtrack on this commitment. The delay in releasing the dues to the
workmen can thus be attributed solely to the actions of the Applicant-
Bank/Consortium. The Applicant-Bank had previously filed CA No.
2061/2013, seeking a refund of liquidation expenses and the distribution of
sale proceeds among the Financial Institutions and the Consortium.
However, this application was later withdrawn. On 10th July, 2018, the Court
noted the OL's statement that there were sufficient funds to meet the
admitted claims of the workmen, and directed the payment to be released
within four weeks. Despite this directive and the withdrawal of CA No.
2061/2013, the present application was filed. On 13th December, 2018, the
Court observed that the disbursement of payments was unnecessarily being
delayed due to the filing of the instant application by Dena Bank. The Court
even directed a meeting between all stakeholders to facilitate an amicable
resolution regarding the payment of dues. Subsequent meetings were held
between the OL and the parties involved, but these discussions did not bring
about a definitive resolution to the issues at hand. Consequently, the
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Applicant-Bank has purposefully caused delays by attempting to undermine
the overriding priority granted by law to the first charge holders, namely the
workmen and their admitted claims.
28. For the foregoing reasons, the present application is dismissed with a
cost of Rs. 10 lakhs on the Consortium, to be deposited in terms of the
directions issued later in the judgment.
(III) WORKMEN'S CLAIM FOR INTEREST ON WAGES
29. The Court shall now analyse the claim of interest on outstanding
wages, which has been raised by workmen's unions of the Aurangabad,
Jalna and Faridabad Units. The aforenoted parties claim interest at the rate
of 12 percent p.a. on pending wages, calculated from the date of notice of
payment till the date of winding up, as applicable to the secured creditors.
On this issue, reliance has been placed on In Re: Crips Laboratories
Limited10, wherein the Andhra Pradesh High Court has made the following
observations:
"14. ...For all practical purposes, a workman is treated as a co-charge
holder along with the secured creditor and would, therefore, be entitled to
claim the same rate of interest from the assets of the Company under
liquidation as has been contracted to by the secured creditor which, in the
present case, is 15% per annum. This question can be examined from
another angle also. The dues payable to the secured creditor, inclusive of
the contracted rate of interest, has a bearing on the preferential payment to
be made to a workman under Section 529-A of the Companies Act. More
often than not, the amounts received by the Official Liquidator, on the sale
of the assets of the company in liquidation, is insufficient to meet the entire
dues of the secured creditors and the workmen, necessitating the amount
available being paid to them pari passu. If the total dues payable to a
secured creditor increases, then the proportionate amount available for
repayment of the dues of the workmen decreases. Accepting the contention
of Sri K. Gopalarishna Murthy, learned standing counsel for S.B.I, would
MANU/AP/0166/2008.
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mean that, while the secured creditor would be repaid the principal and
interest at the contracted rate till the date of repayment, the dues of the
workmen would be restricted only to the principal and they would not be
entitled for interest on their dues. The very purpose of inserting Section 529-
A, to treat workmen's dues on par with the dues of the secured creditors,
would be defeated thereby.
15. It must, therefore, be held that since the workmen are entitled to have
their dues ranked pari passu with the debts of the secured creditor they
shall, on par with the secured creditor, be entitled for payment of interest at
the contracted rate of interest which the secured creditor is entitled to claim
from the sale proceeds of the assets of the Company under liquidation to the
extent to which it holds a charge over such assets."
[Emphasis Supplied]
30. Ms. Neeru Vaid, the counsel representing the workmen of Faridabad,
Jalna, and Aurangabad units, asserts that under Section 529A of the Act, the
workmen should be entitled to receive interest, as they are considered to be
on an equal footing with the secured creditors. She argues that the failure to
award interest would not only misconstrue the legislative intent behind
Section 529A but also result in a miscarriage of justice. Furthermore, Ms.
Vaid contends that granting interest solely to the secured creditors would
confer a double benefit upon them. This is because the workmen have been
deprived of their rightful wages for a substantial period, and denying them
interest while providing it to the secured creditors would create an
imbalance in the distribution of funds. In light of these arguments, Ms. Vaid
emphasizes the importance of granting interest to the workmen to ensure a
fair and equitable resolution in accordance with the provisions of Section
529A of the Act.
31. No formal application has been submitted on behalf of the workmen
seeking the aforementioned relief regarding the entitlement to interest.
When claims were invited against JTIL, the workmen presented their claims,
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which were subsequently reviewed and approved by the Dhingra
Committee. Rules 156-178 of the Companies (Court) Rules, 1959 ("Rules")
outline the procedure for processing claims for interest, when it has not been
explicitly provided for. Rule 163 of the Rules, provides the process of
admission of debt, requiring submission of evidence, which is followed by a
decision by OL. If dissatisfied with this decision, the creditor, in this
instance, the workmen, has the option to file an appeal under Rule 164
before the Company Judge. However, it is pertinent to note that the
workmen have not raised any such claim for interest under these Rules and
cannot be permitted to raise the same at this juncture.
32. The judgment in Crips Laboratories (supra) relied upon by Ms. Vaid
provides limited assistance to the present dispute. While the aforesaid
judgment seemingly awards workmen interest on the principal amount at the
same rate as the contractual rate of interest payable to secured creditors, it
does not establish any statutory provision or legal basis for granting such an
interest rate. The decision has been rendered in specific circumstances and
contractual provisions involved in that case and cannot be conclusively
relied upon as a precedent for the present case.
33. Furthermore, another judgment referenced by Ms. Vaid - Textile
Labour Association v. Official Liquidator of Jubilee Mills 11, appropriately
establishes that no interest (apart from subsequent interest under Rule 179)
can be granted to secured creditors or workmen after the date of winding up.
The Court in that case declined to award interest to the workmen who sought
payment at the same rate as the secured creditors, as there was no contract or
[2000] 99 Comp. Cas. 189 (Guj)
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statutory provision brought to the Court's attention that supported such an
interest payment.
34. The contractual provisions outlined in the facility documents of the
secured creditors serve as the basis for their entitlement of interest. On the
other hand, the workmen do not present any comparable contractual
stipulation or statutory basis for the payment of interest on their overdue
salaries or other remuneration. Their claim for interest is grounded in equity,
which cannot serve as a sufficient foundation for the Court to approve such a
claim. Unless debts explicitly carry interest as per the terms of a contract,
interest cannot be awarded, except in specific situations outlined under the
relevant rules. Therefore, without a valid contractual provision or statutory
basis supporting the payment of interest, and considering the nature of the
workmen's claim, it is not justifiable to equate their situation with that of the
secured creditors for the purpose of interest payment. Interest payment for
workmen would only arise if there is a surplus, which triggers the
application of Rule 179 and not otherwise. It is also noteworthy that the
entitlement to interest from the date of the winding-up order, as per Rule
179, for subsequent interest is not in dispute. The OL has confirmed that
once the admitted claims have been settled, any surplus funds will be
utilized to declare dividends in accordance with Rule 179. These dividends
will be distributed to all relevant parties, including the workmen.
35. Based on the aforementioned reasons, Ms. Vaid's claim for payment
of interest to the workmen at a rate of 12 percent lacks merit and is rejected.
Additionally, it should be noted that Ms. Vaid has also argued that no
interest has been added to the gratuity payment. However, the Official
Liquidator disputes this allegation and maintains that interest on gratuity has
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indeed been paid to the workmen. Ms. Vaid has not provided any evidence
to substantiate her claim or refute the Official Liquidator's assertion.
(IV) DIRECTIONS
36. In view of the foregoing, the following directions are issued:
(i) CO. APPL. 1313/2018 is dismissed.
(ii) Costs of Rs. 10 lakhs is imposed on Dena Bank and other members of
the Consortium. Said banks are directed to collectively deposit the same
with OL, in proportion to their claims admitted by OL within a period of two
weeks from today. OL is directed to utilise the amount to set off OL's
liquidation expenses and deposit the balance, if any, in the Common Pool
Fund.
(iii) OL is directed to resume disbursement of admitted dues to the first
charge holders and workmen, as also the second charge holders, in terms of
the calculation sheet filed by the OL on 16th January 2023 vide Index D. no.
66941/2023. In case any further amounts or interest is payable in addition
thereto, the same shall be disbursed by the OL at the earliest, with the leave
of the Court.
CO.PET. 539/1998
37. List before the Roster Bench on 1st August, 2023.
SANJEEV NARULA, J
JULY 19, 2023
nk
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