Jitendra Nath Singh Vs. The Official Liquidator & Ors.

[Civil Appeal No.6755 of 2012 arising out of S.L.P. (C) No. 4104 of 2011]

A. K. PATNAIK, J.

1. Leave granted.

2. We have carefully read the learned opinion of our esteemed brother Swatanter Kumar, J. in this case but with great respect we are unable to persuade ourselves to agree with his interpretation of Sections 529 and 529A of the Companies Act, 1956 (for short 'the Companies Act').

3. Before we give our interpretation of Sections 529 and 529A of the Companies Act, we may very briefly state the relevant facts as stated by the appellant. U.M.I. Special Steel Limited (for short 'the company') is a company registered under the Companies Act. The company became sick and went before the BIFR but the BIFR in its opinion dated 08.03.2002 recommended for winding up of the company. On 05.08.2003, the learned Company Judge of the High Court of Jharkhand passed orders for winding up of the company and appointed the official liquidator as liquidator to conduct the liquidation proceedings in relation to the company and to take over the assets, books and documents of the company.

The liquidator then took over the assets of the company and sold some of the assets of the company and paid Rs.93,64,93,586/- to the secured creditors and Rs.8,19,22,371.12p to the workmen representing 50% of their verified claims towards wages. When the liquidator sold some more assets and received Rs.8,51,01,000/-, the appellant filed I.A. No.1511 of 2008 before the learned Company Judge of the High Court contending that the assets of the company situated at Chennai, Pune, Faridabad and Kolkata which have been sold are not properties over which the banks/financial institutions have any charge and therefore, they cannot be treated as secured creditors in respect of these properties and the sale proceeds from these properties should be kept separately and be paid to the workmen first before disbursing any amount to the banks/financial institutions.

The banks/financial institutions, which had given loans and advances to the company, on the other hand, contended before the learned Company Judge that claim of the workmen and secured creditors stand pari passu and the Companies Act does not make any difference between the mortgaged property and other properties of the company and, therefore, the entire sale proceeds obtained from the properties of the company should be distributed among the secured creditors and workers on pro rata basis. The learned Company Judge in his order dated 28.11.2008 held that the workmen and secured creditors have pari passu charge over the properties of the company as would be clear from Sections 529 and 529A of the Companies Act and the decision of this Court in Andhra Bank v. Official Liquidator & Anr. [(2005) 5 SCC 75].

Aggrieved, the appellant filed Company Appeal No.10 of 2008 before the Division Bench of the High Court and contended that the secured creditors have pari passu charge with the workmen only on the properties which have been offered by the company to the secured creditors as security. In its order dated 30.09.2010, the Division Bench of the High Court, however, held that the secured creditors have pari passu charge with the workmen over all the properties of the company under sections 529 and 529A and dismissed the appeal. It is this order dated 30.09.2010 of the Division Bench of the High Court of Jharkhand that is challenged in this appeal by way of special leave under Article 136 of the Constitution.

4. We have heard learned counsel for the appellant and the respondents and we are of the considered opinion that the learned Company Judge and the Division Bench of the High Court have not correctly interpreted the provisions of Sections 529 and 529A of the Companies Act. For easy reference, Sections 529 and 529A of the Companies Act, which have to be read together, are extracted here in below: "529. Application of insolvency rules in winding up of insolvent companies.-

1. In the winding up of an insolvent company, the same rules 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:

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 workmen's 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 workmen's 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 workmen's portion in his security, whichever is less, shall rank pari passu with the workmen's dues for the purposes of section 529A.

2. All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the winding up, and make such claims against the company as they respectively are entitled to make by virtue of this section: Provided that if a secured creditor instead of relinquishing his security and proving for his debt proceeds to realise his security, he shall be liable to pay his portion of the expenses incurred by the liquidator (including a provisional liquidator, if any) for the preservation of the security before its realization by the secured creditor.

Explanation.-For the purposes of this proviso, the portion of expenses incurred by the liquidator for the preservation of a security which the secured creditor shall be liable to pay shall be the whole of the expenses less an amount which bears to such expenses the same proportion as the workmen's portion in relation to the security bears to the value of the security.

3. For the purposes of this section, section 529A and section 530,-

a. "workmen", in relation to a company, means the employees of the company, being workmen within the meaning of the Industrial Disputes Act, 1947 (14 of 1947);

b. "workmen's dues", in relation to a company, means the aggregate of the following sums due from the company to its workmen, namely:-

i. all wages or salary including wages payable for time or piece work and salary earned wholly or in part by way of commission of any workman, in respect of services rendered to the company and any compensation payable to any workman under any of the provisions of the Industrial Disputes Act, 1947 (14 of 1947);

ii. all accrued holiday remuneration becoming payable to any workman, or in the case of his death to any other person in his right, on the termination of his employment before, or by the effect of, the winding up order or resolution;

iii. unless the company is being wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company, or unless the company has, at the commencement of the winding up, under such a contract with insurers as is mentioned in section 14 of the Workmen's Compensation Act, 1923 (8 of 1923) rights capable of being transferred to and vested in the workman, all amounts due in respect of any compensation or liability for compensation under the said Act in respect of the death or disablement of any workman of the company;

iv. all sums due to any workman from a provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the workmen, maintained by the company;

c. "workmen's portion", in relation to the security of any secured creditor of a company, means the amount which bears to the value of the security the same proportion as the amount of the workmen's dues bears to the aggregate of-

i. the amount of workmen's dues; and

ii. the amounts of the debts due to the secured creditors." "529A. Overriding preferential payment.-Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company-

a. workmen's dues; and

b. debts due to 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 be paid in priority to all other debts.

(2) The debts payable under clause (a) and clause (b) of sub- section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.

5. "A plain reading of clause (c) of sub-section (1) of Section 529makes it clear that in the winding up of an insolvent company, the same rules shall prevail and be observed with regard to 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. This would mean that the respective rights of secured and unsecured creditors of an insolvent company, which is being wound up, will be the same as the respective rights of secured and unsecured creditors with respect to the estates of persons adjudged insolvent as are in force under the law of insolvency. In the State of Jharkhand, the Provincial Insolvency Act, 1920 (for short 'the Insolvency Act') is in force and accordingly the respective rights of secured and unsecured creditors with respect to the assets of the insolvent company being wound up will be the same as in the Insolvency Act.

The Companies Act does not define a "creditor" and a "secured creditor" and hence, we have to refer to the Insolvency Act for the definitions of these two words. Section 2(1)(a) and Section 2(1)(e) of the Insolvency Act define the words 'creditor' and 'unsecured creditor' and are extracted here in below: "2(1)(a) "creditor" includes a decree-holder, "debt" includes a judgment-debt, and "debtor" includes a judgment-debtor." "2(1)(e) "secured creditor" means a person holding a mortgage, charge or lien on the property of the debtor or any part thereof as a security for a debt due to him from the debtor.

"It will be clear from the definition of 'creditor' in Section 2(1)(a) of the Insolvency Act that it is an inclusive and not an exhaustive definition, whereas it will be clear from the definition of 'secured creditor' in Section 2(1)(e) of the Insolvency Act that it is an exhaustive definition and that a secured creditor means a person holding a mortgage, charge or lien on the property of the debtor or any part thereof as a security for a debt due to him from the debtor. The result is that the expression 'secured creditor' in Section 529(1)(c) would mean a person who holds a mortgage, charge or lien on the property of the company or any part there of as a security for a debt due to him from the company. Where, therefore, a creditor, such as the bank or the financial institution in this case, does not hold a mortgage, charge or lien on the property of the company or any part thereof as a security for a debt due to it from the company, it is not a secured creditor for the purposes of Sections 529 and529A of the Companies Act.

6. Sections 45 and 47 of the Insolvency Act, which enumerate the rights of unsecured creditors and secured creditors respectively are extracted here in below: "45. Debt payable at a future time.- A creditor may prove for a debt not payable when the debtor is adjudged an insolvent as if it were payable presently, and may receive dividends equally with the other creditors, deducting there from only a rebate of interest at the rate of six per centum per annum computed from the declaration of a dividend to the time when the debt would have become payable, according to the terms on which it was contracted."

"47. Secured creditors.-

1. Where a secured creditor realises his security, he may prove for the balance due to him, after deducting the net amount realised.

2. Where a secured creditor relinquishes his security for the general benefit of the creditors, he may prove for his whole debt.

3. Where a secured creditor does not either realise or relinquish his security, he shall, before being entitled to have his debt entered in the schedule, state in his proof the particulars of his security, and the value at which he assesses it, and shall be entitled to receive a dividend only in respect of the balance due to him after deducting the value so assessed.

4. Where a security is so valued, the Court may at any time before realisation redeem it on payment to the creditor of the assessed value.

5. Where a creditor, after having valued his security, subsequently realises it, the net amount realised shall be substituted for the amount of any valuation previously made by the creditor, and shall be treated in all respects as an amended valuation made by the creditor.

6. Where a secured creditor does not comply with the provisions of this section, he shall be excluded from all shares in any dividend.

"On a reading of the two provisions quoted above, we find that an unsecured creditor is entitled under Section 45 of the Insolvency Act to receive dividends equally with the other creditors, whereas the secured creditor has the right under Section 47 of the Insolvency Act to realize the security and to prove for the balance due to him in case on realization of such security he is not able to recover the entire amount due to him. If, however, the secured creditor does not opt to realize his security but relinquishes it for the general benefit of the creditors, then he may prove for his whole debt. Under the Insolvency Act, therefore, the secured creditor has only a right over the particular property offered to him as security and all the creditors have equal rights over the other properties comprising the estate of the person adjudged insolvent.

7. In our considered opinion, therefore, on a reading of the provisions of clause (c) of sub-section (1) of Section 529 of the Companies Act along with the provisions of the Insolvency Act relating to the respective rights of secured and unsecured creditors, a secured creditor of an insolvent company which is being wound up has only a right over the particular property or asset of the company offered to the secured creditor as a security and the unsecured creditors have rights over all other properties or assets of the insolvent company. We may now examine whether the proviso to sub-section (1) of Section 529 of the Companies Act makes any difference to these rights of secured creditors and unsecured creditors of an insolvent company.

8. The first limb of the proviso to sub-section (1) of Section 529 of the Companies Act states 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 workmen's portion therein. Clause (c) of sub-section (3) of Section 529 of the Companies Act states that the "workmen's portion", in relation to the security of any secured creditor of a company, means the amount which bears to the value of the security the same proportion as the amount of the workmen's dues bears to the aggregate of - (i) the amount of workmen's dues; and (ii) the amounts of the debts due to the secured creditors.

Thus, the first limb of the proviso to clause (c) of sub-section (1) of Section 529 of the Companies Act creates a statutory charge over the security of every secured creditor to the extent of the workmen's portion. In other words, every property or asset of an insolvent company, which is being wound up and which has been offered as a security to a secured creditor is subject statutorily to a pari passu charge in favour of the workmen to the extent of the workmen's portion by virtue of the proviso to sub-section (1) of Section 529 of the Companies Act. Therefore, the first limb of the proviso to sub-section (1) of Section 529 does not create any pari passu charge in favour of secured creditor over property or asset of the company which has not been given as security by the company to the secured creditor.

Rather, the language of the first limb of this proviso makes it crystal clear that the security of every secured creditor created dehors the proviso to sub-section (1) of Section 529 of the Companies Act is statutorily subjected to a pari passu charge in favour of the workmen by the first limb of the proviso to sub-section (1) of Section 529 of the Companies Act.

9. The second limb of the proviso to sub-section (1) of Section 529 of the Companies Act states the consequences which follow where a secured creditor, instead of relinquishing his security and proving his debt, opts to realize his security.

These are: (a) the liquidator shall be entitled to represent the workmen and enforce such charge; (b) any amount realized by the liquidator by way of enforcement of such charge shall be applied rateably for the discharge of workmen's dues; and (c) so much of the debt due to such secured creditor as could not be realized by him by virtue of the foregoing provisions of this proviso or the amount of the workmen's portion in his security, whichever is less, shall rank pari passu with the workmen's dues for the purposes of Section 529A of the Companies Act.

What is relevant in this case is the consequence in clause (c) which provides that the portion of the debt due to the secured creditor as could not be realized because of the statutory charge created in favour of the workmen on the security of the creditor shall to the extent stated therein rank pari passu with the workmen's portion for the purposes of Section 529A of the Companies Act. Hence, clause (c) of this proviso does not create a pari passu charge over properties or assets of the company which have not been offered to the secured creditor as security, but to the extent of the loss of security suffered by a particular secured creditor because of the statutory charge created in favour of the workmen, the secured creditor is ranked pari passu with the workmen for overriding preferential payment under Section 529A of the Companies Act.

10. Section 529A of the Companies Act states that notwithstanding anything contained in any other provision of the Companies Act or any other law for the time being in force, in the winding up of a company - (a) workmen's dues; and (b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of Section529 of the Companies Act pari passu with such dues, shall be paid in priority to all other debts. This would mean that the workmen's dues and only the debts due to the secured creditors to the extent such debts rank pari passu with workmen's dues under clause (c) of the proviso to sub-section (1) of Section 529 will have priority over all other debts of the company.

The entire object of Section 529A of the Companies Act is to ensure overriding preferential payment of (a) the workmen's dues and (2)debts due to secured creditors to the extent such debts rank under clause(c) of the proviso to sub-section (1) of Section 529 pari passu with the workmen's dues. The effect of the non-obstante clause in the opening partof Section 529A of the Companies Act, therefore, is that notwithstanding anything in the Companies Act and any other law including the Insolvency Act, workmen's dues and dues of the secured creditor which could not be realized because of the pari passu charge in favour of the workmen under the proviso to sub-section (1) of Section 529 and only to the extent such dues rank pari passu with the dues of the workmen under clause (c) of the said proviso are paid in priority over all other dues.

11. We may now refer to sub-section (2) of Section 529 of the Companies Act which states that all persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the winding up, and make such claims against the company as they respectively are entitled to make by virtue of Section 529 of the Companies Act. The proviso to sub-section (2), however, states that if a secured creditor instead of relinquishing his security and proving for his debt proceeds to realize his security, he shall be liable to pay his portion of the expenses incurred by the liquidator (including a provisional liquidator, if any) for the preservation of the security before its realization by the secured creditor.

This provision in sub-section (2) of Section 529 of the Companies Act makes it amply clear that all creditors, secured and unsecured, of the insolvent company are entitled to prove for and receive dividends out of the assets of the company but so far as secured creditors are concerned, they have the option either to relinquish their security in which case they like any unsecured creditor would only been titled to prove for and receive the dividends out of the assets of the company or to realize the security instead of relinquishing the security in which case they have to pay to the liquidator only expenses for the preservation of the security until they realize the security by appropriate proceedings other than the winding up proceedings.

12. Our conclusions on interpretation of the provisions of Sections 529and 529A of the Companies Act, therefore, are:

i. a secured creditor has only a charge over a particular property or asset of the company. The secured creditor has the option to either realize his security or relinquish his security. If the secured creditor relinquishes his security, like any other unsecured creditor, he is entitled to prove the debt due to him and receive dividends out of the assets of the company in the winding up proceedings. If the secured creditor opts to realize his security, he is entitled to realize his security in a proceeding other than the winding up proceeding but has to pay to the liquidator the costs of preservation of the security till he realizes the security.

ii. over the security of every secured creditor, a statutory charge has been created in the first limb of the proviso to clause (c) of sub- section (1) of Section 529 of the Companies Act in favour of the workmen in respect of their dues from the company and this charge is pari passu with that of the secured creditor and is to the extent of the workmen's portion in relation to the security of any secured creditor of the company as stated in clause (c) of sub- section (3) of Section 529 of the Companies Act.

iii. where a secured creditor opts to realize the security then so much of the debt due to such secured creditor as could not be realized by him by virtue of the statutory charge created in favour of the workmen shall to the extent indicated in clause (c) of the proviso to sub-section (1) of Section 529 of the Companies Act rank pari passu with the workmen's dues for the purposes of Section 529A of the Companies Act.

iv. the workmen's dues and where the secured creditor opts to realize his security, the debt to the secured creditor to the extent it ranks pari passu with the workmen's dues under clause (c) of the proviso to sub-section (1) of Section 529 of the Companies Act shall be paid in priority over all other dues of the company.

13. In support of our aforesaid conclusions, we may now cite some authorities. In Allahabad Bank v. Canara Bank & Anr. [(2000) 4 SCC 406], at wo-Judge Bench of this Court speaking through M. Jagannadha Rao, J. discussed these rights of the secured creditors in paragraphs 62, 63, 64and 65 of the judgment as reported in the SCC, which are extracted here I below: "62. Secured creditors fall under two categories. Those who desire to go before the Company Court and those who like to stand outside the winding- up. 63. The first category of secured creditors mentioned above are those who go before the Company Court for dividend by relinquishing their security in accordance with the insolvency rules mentioned in Section 529. The insolvency rules are those contained in Sections 45 to 50 of the Provincial Insolvency Act. Section 47(2) of that Act states that a secured creditor who wishes to come before the official liquidator has to prove his debt and he can prove his debt only if he relinquishes his security for the benefit of the general body of creditors. In that event, he will rank with the unsecured creditors and has to take his dividend as provided in Section 529(2).

Till today, Canara Bank has not made it clear whether it wants to come under this category. 64. The second class of secured creditors referred to above are those who come under Section 529-A(1)(b) read with proviso (c) to Section 529(1). These are those who opt to stand outside the winding-up to realise their security. Inasmuch as Section 19(19) permits distribution to secured creditors only in accordance with Section 529-A, the said category is the one consisting of creditors who stand outside the winding up. These secured creditors in certain circumstances can come before the Company Court (here, the Tribunal) and claim priority over all other creditors for release of amounts out of the other monies lying in the Company Court (here, the 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 "workmen's portion" as defined in Section 529(3)(c). "Workmen's portion" means the amount which bears to the value of the security, the same proportion which the amount of the workmen's dues bears to the aggregate of (a) workmen's 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 workmen's 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 workmen's 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 "workmen's 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 22and 23 the rights of secured creditors, relevant extracts from which are quoted here in below: "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 "workmen's 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 workmen's dues bears to the aggregate of (a) workmen's 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 workmen's 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 workmen's 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 Courtin 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 asunder:

"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 overall 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.

16. In the result, the appeal is allowed. The impugned order of the Division Bench of the High Court and the order dated 28.11.2008 of the learned Company Judge in I.A. No.1511 of 2008 are set aside and the matter is remitted to the learned Company Judge to decide the I.A. in accordance with law as laid down in this judgment. There will be no order as to costs.

.............................CJI. (S.H. Kapadia)

...............................J. (A. K. Patnaik)

New Delhi,

September 21, 2012.

Jitendra Nath Singh Vs. Official Liquidator & Ors.

[Civil Appeal No.6755 of 2012 arising out of SLP (C) No.4104 of 2011]

Swatanter Kumar, J.

1. Leave granted.

2. An important question of law as to the ambit, scope and the legislative scheme of Sections 529, 529A and 530 of the Companies Act, 1956(for short, 'the Act') arises in the present case.

3. According to the appellant, on the true construction of these provisions, workmen have a preferential claim over all others including the secured creditors, in the matter of payment of dues out of the funds realized from sale of assets of the company in liquidation. It will particularly hold true when such assets are not mortgaged in favour of secured creditors of the company in liquidation. The secured creditors, therefore, have no charge on such unsecured assets as also no consequential, preferential or even pari passu claim over the sale proceeds derived from these assets of the company.

To the contra, the contention on behalf of the respondents is that the debts of the secured creditors would rank pari passu with that of the workmen as regards those dues of the secured creditors as could not be realised from the sale of secured assets, for the reason that they have relinquished their security to the extent of workmen's dues in terms of Section 529(1) of the Act. In support of their respective contentions, the appellant has relied upon the judgment of this Court in the case of Allahabad Bank v. Canara Bank and Another [(2000) 4SCC 406], while the respondents have placed heavy reliance upon the judgment of this Court in the case of UCO Bank v. Official Liquidator, High Court, Bombay & Anr. [(1994) 5 SCC 1]; Andhra Bank v. Official Liquidator[(2005) 5 SCC 75]; and ICICI Bank Ltd. V. Sidco Leathers Ltd. and Others[(2006) 10 SCC 452]. As both the parties to the present lis have relied upon the different decisions of this Court, this Court is now called upon to state the correct exposition of law in view of the divergent views stated in the afore-referred judgments.

4. I may, at the very outset, refer in brief to the facts giving rise to the present appeal. M/s. UMI Special Steels Ltd. (for short, the UMI) is a company incorporated under the provisions of the Act. It possesses assets at different places throughout India. Out of these assets of the UMI, some were mortgaged to the banks and financial institutions while others were not, particularly the assets located at Chennai, Pune, Faridabad and Kolkata. Towards the end of the year 2001, the company became sick. It, thereafter, approached the Board for Industrial and Financial Reconstruction (for short, 'the BIFR') for being declared a sick unit. BIFR, vide its opinion dated 8th March, 2002, opined that UMI should be wound up.

On consideration of the opinion of the BIFR, the High Court, vide its order dated 5th August, 2003 passed an order of winding up of UMI and appointed an official liquidator for conducting and completing the liquidation proceedings. This order of the High Court attained finality. In pursuance of this order, the official liquidator took over all the assets of the company. It is the undisputed position before us that the SASF/IDBI, the main secured creditor of UMI, filed an Original Application before the Debts Recovery Tribunal (DRT) being OA No.72 of 2004 for recovery of its debts aggregating to Rs.63.34 crore as on 31st January,2004. Upon this application, the DRT issued notice on 5th July, 2004 and since then, the matter is pending before the DRT without any furtherproceedings.

5. In the meanwhile, the official liquidator invited claims from all the secured creditors and amongst others, the IDBI also filed its claim on 30thJuly, 2006. The admitted claim of the secured creditors wasRs.1,60,08,43,739/- while that of the workmen was Rs.16,38,44,741.25. It is also not disputed before us that the secured assets of the company were sold separately and a separate account thereof was maintained. Similarly, the unsecured assets were sold separately by the official liquidator, for which again a separate account was maintained.

The total sale proceeds from the secured assets were Rs. 108.90 crore, out of which a sum ofRs.93,64,93,586/- was distributed amongst the secured creditors and an amount of Rs.8,19,22,371.12 had been paid to the workmen. The Official Liquidator sold the unsecured properties of the Company for a total sum ofRs.8.51 crores. This included the assets located at different places, which were not mortgaged to any bank or financial institution. The dispute between the parties primarily relates to distribution of this sum of Rs.8.51 crores.

According to the workmen their entire remaining claim of Rs.8.19 crores and odd should be satisfied in preference to all other claimants, in terms of Section 529A of the Act. However, it is contended on behalf of the secured creditors that they have a pari passu charge even on the sale proceeds of the unsecured assets in terms of the statutory provisions and more particularly , in view of the fact that they had given up their security in favour of the workmen to the extent ofRs.8,19,22,371.12. It is only upon such satisfaction that the sale proceeds can be distributed amongst other creditors in accordance with law. The notice of the O.A. filed by the secured creditors was also issued to the Official Liquidator.

6. One of the workmen, Jitendra Nath Singh, the appellant in the present appeal, filed an application being I.A. No. 1511/2008 in Company Petition No. 2/2002 praying that the sale proceeds from the unsecured assets should first be distributed to the workmen. This IA was rejected by the Company Court vide order dated 28th November, 2008. Against this order, Company Appeal No.10 of 2008 was filed by the workmen before the High Court. Three other workmen also filed an application praying that 50 per cent of their verified claim in respect of wages be paid to them by the official liquidator.

The Company Court passed an interim order in Company AppealNo.10 of 2008 dated 24th April, 2009 directing that money be distributed by the official liquidator only after obtaining permission of the Court. In view of this order, the Company Court rejected the claim of the three workmen vide its Order dated 16th April, 2010. Being aggrieved, these three workmen filed Company Appeal No.1 of 2010 before the High Court.

7. Both these appeals were dismissed by the High Court by a common judgment dated 30th September, 2010. Being dissatisfied with the judgment of the High Court, the workman Jitendra Nath Singh has preferred the present appeal against the decision in respect of Company Appeal No.10/2008.

8. In light of the above facts, the contention of the appellant in the present appeal is that in respect of unsecured assets, the claim of the workmen ranks higher than those of the secured creditors and should be paid in preference to their claims. The rule of distribution pro rata applies only for proceeds from sale of properties bearing a charge of a particular secured creditor. To put it simply, the statutory charge would get priority over any contractual charge.

9. Let us now examine the relevant statutory provisions and their scheme. By way of the Companies (Amendment) Act, 1985, Section 529A, as well as the proviso to Section 529(1) of the Act, were inserted with effect from 24th May, 1985. The purpose of these provisions appears to be that the dues of the workmen may be made to rank pari passu with those of the secured creditors and even above the dues of the Government, in the event of winding up of the company. The legislative intent appears to be that the dues of the secured creditors and workmen should be paid in preference to others, however, would remain pari passu to each other. It was not the intention of the framers of law to take away or deprive a secured creditor of its dues or charge of the workmen, unless, it was specifically given up by the secured creditor. At this stage, I may refer to the provisions of Sections 529, 529A and 530 of the Act which read as follows :-

1. "529. Application of insolvency rules in winding up of insolvent companies.--

(1) In the winding up of an insolvent company, the same rules 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: 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 workmen's 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 workmen's dues; and

2. All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the winding up, and make such claims against the company as they respectively are entitled to make by virtue of this section: Provided that if a secured creditor instead of relinquishing his security and proving for his debt proceeds to realise his security, he shall be liable to 2[pay his portion of the expenses] incurred by the liquidator (including a provisional liquidator, if any) for the preservation of the security before its realization by the secured creditor.

a. "workmen", in relation to a company, means the employees of the company, being workmen within the meaning of the Industrial Disputes Act, 1947 (14 of 1947);

b. "workmen's dues", in relation to a company, means the aggregate of the following sums due from the company to its workmen, namely:-

iv. all sums due to any workman from a provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the workmen, maintained by the company;

i. the amount of workmen's dues; and

ii. the amounts of the debts due to the secured creditors.

Illustration 529A. Overriding preferential payment.- Notwithstanding anything contained in any other provision of this Act, or any other law for the time being in force, in the winding up of a company-

a. workmen's dues; and

b. debts due to 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 be paid in priority to all other debts.

2. The debts payable under clause (a) and clause (b) of sub- section (1) shall be paid in full, unless the assets are insufficient to meet them in which case they shall abate in equal proportions. 530. Preferential payments. -

1. In a winding up subject to the provisions of section 529A, there shall be paid] in priority to all other debts-

a. all revenues taxes, cesses and rates due from the company to the Central or a State Government or to a local authority at the relevant date as defined in clause (c) of sub-section (8), and having become due and payable within the twelve months next before that date;

b. all wages or salary (including wages payable for time or piece work and salary earned wholly or in part by way of commission) of any employee, in respect of services rendered to the company and due for a period not exceeding four months within the twelve months next before the relevant date subject to the limit specified in sub-section (2);

c. all accrued holiday remuneration becoming payable to any employee, or in the case of his death to any other person in his right, on the termination of his employment before, or by the effect of, the winding up order or resolution;

d. unless the company is being wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company, all amounts due, in respect of contributions payable during the twelve months next before the relevant date, by the company as the employer of any persons, under the Employees' State Insurance Act, 1948 (34 of 1948), or any other law for the time being in force;

e. unless the company is being wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company, or unless the company has, at the commencement of the winding up, under such a contract with insurers as is mentioned in section 14 of the Workmen's Compensation Act, 1923 (8 of 1923), rights capable of being transferred to and vested in the workman, all amounts due in respect of any compensation or liability for compensation under the said Act in respect of the death or disablement of any employee of the company;

f. all sums due to any employee from a provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the employees maintained by the company; and

g. the expenses of any investigation held in pursuance of section 235 or 237, in so far as they are payable by the company.

2. The sum to which priority is to be given under clause (b) of sub-section (1), shall not, in the case of any one claimant, 2[exceed such sum as may be notified by the Central Government in the Official Gazette].

3. Where any compensation under the Workmen's Compensation Act, 1923 (8 of 1923), is a weekly payment, the amount due in respect thereof shall, for the purposes of clause (e) of sub-section (1), be taken to be the amount of the lump sum for which the weekly payment could, if redeemable, be redeemed if the employer made an application for that purpose under the said Act.

4. Where any payment has been made to any employee of a company,-

i. on account of wages or salary; or

ii. to him, or in the case of his death, to any other person in his right, on account of accrued holiday remuneration, out of money advanced by some person for that purpose, the person by whom the money was advanced shall, in a winding up, have a right of priority in respect of the money so advanced and paid, up to the amount by which the sum in respect of which the employee or other person in his right would have been entitled to priority in the winding up has been diminished by reason of the payment having been made.

5. The foregoing debts shall-

a. rank equally among themselves and be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions; and

b. so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company, and be paid accordingly out of any property comprised in or subject to that charge.

6. Subject to the retention of such sums as may be necessary for the costs and expenses of the winding up, the foregoing debts shall be discharged forthwith so far as the assets are sufficient to meet them, and in the case of the debts to which priority is given by clause (d) of sub-section (1), formal proof thereof shall not be required except in so far as may be otherwise prescribed.

7. In the event of a landlord or other person distraining or having distrained on any goods or effects of the company within three months next before the date of a winding up order, the debts to which priority is given by this section shall be a first charge on the goods or effect so distrained on, or the proceeds of the sale thereof: Provided that, in respect of any money paid under any such charge, the landlord or other person shall have the same rights of priority as the person to whom the payment is made.

8. For the purposes of this section-

a. any remuneration in respect of a period of holiday or of absence from work through sickness or other good cause shall be deemed to be wages in respect of services rendered to the company during that period;

b. the expression "accrued holiday remuneration" includes, in relation to any person, all sums which, by virtue either of his contract of employment or of any enactment (including any order made or direction given under any enactment), are payable on account of the remuneration which would, in the ordinary course, have become payable to him in respect of a period of holiday, had his employment with the company continued until he became entitled to be allowed the holiday; (bb) the expression "employees" does not include a workman; and

c. the expression "the relevant date" means-

i. in the case of a company ordered to be wound up compulsorily, the date of the appointment (or first appointment) of a provisional liquidator, or if no such appointment was made, the date of the winding up order, unless in either case the company had commenced to be wound up voluntarily before that date; and

ii. in any case where sub-clause (i) does not apply, the date of the passing of the resolution for the voluntary winding up of the company.

9. This section shall not apply in the case of a winding up where the date referred to in sub-section (5) of section 230 of the Indian Companies Act, 1913 (7 of 1913), occurred before the commencement of this Act, and in such a case, the provisions relating to preferential payments which would have applied if this Act had not been passed, shall be deemed to remain in full force.

10. "Chapter V of the Act deals with provisions that are applicable to every mode of winding up and in particular, the above provisions deal with the proof and ranking of claims. Section 529 is concerned with the application of insolvency rules to winding up of an insolvent company. The opening language of Section 529 contemplates that in winding up of an insolvent company, the Rules prevalent under the law of insolvency shall be applicable. Thus, the Provincial Insolvency Act, 1920 (for short the "Insolvency Act"), to the extent permissible, would be applicable in regard to the winding up of a company. Section 47 of the Insolvency Act reads asunder :

"47. Secured creditors.-

1. Where a secured creditor realizes his security, he may prove for the balance due to him, after deducting the net amount realized.

2. Where a secured creditor relinquishes his security for the general benefit of the creditors, he may prove for his whole debt.

3. Where a secured creditor does not either realize or relinquish his security, he shall, before being entitled to have his debt entered in the schedule, state in his proof the particulars of his security, and the value at which he assesses it, and shall be entitled to receive a dividend only in respect of the balance due to him after deducting the value so assessed.

4. Where a security is so valued, the Court may at any time before realization redeem it on payment to the creditor of the assessed value.

5. Where a creditor, after having valued his security, subsequently realizes it, the net amount realized shall be substituted for the amount of any valuation previously made by the creditor, and shall be treated in all respects as an amended valuation made by the creditor.

6. Where a secured creditor does not comply with the provisions of this section, he shall be excluded from all share in any dividend.

11. "The above provision gives different options that are available and can be exercised by a secured creditor. It, however, has to be kept in mind that in terms of section 529 the rules of insolvency shall prevail and be observed but only with regard to debts provable, the valuation of annuities and future and contingent liabilities and the respective rights of secured and unsecured creditors. Where a secured creditor realizes his security, he may prove the balance due to him after deducting the net amount realized; or where a secured creditor relinquishes his security for the general benefit of the creditors, he may prove for whole of his debt. Still, where a secured creditor does not exercise either of these options, he is entitled to have his debt entered in the schedule and would been titled to receive the dividend in terms of Section 47(3).

12. It is worthwhile to note that the proviso to Section 529 of the Act creates a deeming fiction in law and makes it clear 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 workman's portion there under. This fiction is intended to give the workmen a preferential right to recover their dues. The expression 'workmen's portion' appearing in the proviso to Section 529(1) is explained under clause (c) of Section 529(3) of the Act. The workmen's portion in relation to the security of any secured creditor of a company means the amount which bears to the value of the security the same proportion as the amount of the workmen's dues bears to the aggregate of the amount of the workmen's dues and the amount of the debts due to the secured creditors.

The workmen's portion is to be computed in terms thereof with the aid of the illustration given in that provision. Thus, the security of every secured creditor, by fiction of law, is subject to a pari passu charge in favour of the workmen to the extent of the workmen's portion and where the secured creditor, instead of relinquishing his security and proving his debt, opts to realize his security, in that event, so much of the debt due to such secured creditor as could not be realized by him by virtue of the pari passu charge in favour of the workmen or the amount of the workmen's portion in his security, whichever is less, shall rank pari passu with the workmen's dues for the purposes of Section 529A.

13. Section 529A of the Act opens with non-obstante clause, giving the workmen's dues and secured creditors' dues, as defined under the proviso to Section 529(1), an over-riding effect over the other provisions of the Act as well as any other law in the matter of priority of payment of dues. Application of Section 529A of the Act is not dependent upon any other provision of the Act including Section 529 except to the extent specified in Section 529, proviso (c). So, it is not dependent upon the limitation imposed by any other law for the time being in force, including Section 47of the Insolvency Act.

The non-obstante opening words of Section 529(A)are intended to give precedence to the 'overriding preferential payments' in contrast to the 'preferential payments' as contemplated under Section530 of the Act. This non-obstante language attains even greater significance as it, in no uncertain terms, provides that Section 529(A)shall have effect notwithstanding anything contained in any other provision of the Act or any other law for the time being in force. No law, including the insolvency law can undermine the application and effect of Section 529read with Section 529A of the Act. Thus, the provisions are exceptions to all other laws in force.

14. Once the contents of proviso to Section 529 and its clauses (a) to(c) are satisfied, then the secured creditor would be entitled to invoke the provisions and receive the benefits of Section 529A(i), subject to pari passu charge and in terms of the priority stated therein. The workmen's dues are to get preference in the winding up of a company under Section529A of the Act. The workmens' dues, however, have not been singularly placed in the preferential clause. The expression used in Section 529A is 'and' meaning thereby that the dues stated under clauses (a) and (b) of the section would remain pari passu.

But it is not the entire dues of the secured creditors that will get preference over other dues and remain pari passu with the charges payable to the workmen. Their dues are limited only to the extent of the debts which are due to the secured creditors under clause (c) of the proviso to sub-Section (1) of Section 529 which are pari passu with such dues. The term 'such dues' here refers to the dues of the workmen. The Andhra Bank case has clearly stated that not only the dues of the workmen would be paid in terms of Section 529A in precedence to all others but are pari passu to the amounts due to the secured creditors in terms of Section 529(1) proviso (c). On a plain reading of the language of these two Sections, i.e., 529 and 529A, it is clear that it is not the entire or unrealised amount owed to secured creditors which is protected under the provisions of Section 529A and stands pari passu with the workmen's charges, but it is only the portion or amount relinquished under proviso to Section 529(1), whichever is less that is protected.

In other words, the amount which is due to the secured creditors and remains unpaid due to enforcement of the pari passu charge of the workmen under Section529(1) is the portion of dues of secured creditors that are protected in terms of Section 529A. There is a direct link in the application of both these provisions. In a situation of the present kind, these provisions would have to be applied collectively and that too, upon the correct appreciation of the legislative intent. As far as Section 530 of the Act is concerned, it simpliciter provides for preferential payments with regard to persons other than those covered under Sections 529 and 529A of the Act. However, in the present case, we are primarily concerned with the application of Sections 529 and 529A.

15. If one analyses the scheme of the above-stated provisions, it is clear that in a winding up petition of an insolvent company, Rules of insolvency would apply to the stated extent. In terms of the proviso to Section 529(1), there is a deemed fiction created in law on the security of every secured creditor to the extent of the workmen's portion therein. The second part of the proviso states that where the secured creditor instead of relinquishing his security and proving his debts opts to realize his security, there the liquidator is entitled to represent the workmen and enforce the said charge in favour of the workmen to the extent of the workmen's dues.

From a cumulative reading of the relevant provisions under the Act as well as under the Insolvency Act, it is clear that neither the legislature intended nor can it be comprehended that where an act is done in complete adherence to the relevant statutory provisions, it can lead to two different results merely because such act is done before different forums/courts. That is to say that if a secured creditor realises his security before a forum other than the Company Court strictly in compliance to the provisions of Section 529 of the Act, then favourable consequences of Section 529A would follow but if he acts in identical terms before the Company Court and without prejudice to his remedy outside the winding up and without putting his sale proceeds in the common hotch potch in the winding up proceedings, he would not be entitled to the benefits of Section529A.

It is more so since even the sale of a security by a secured creditor before such other forum cannot be completed without approval of the Company Court. The Company Court has even been vested with the jurisdiction to transfer such proceedings in exercise of its powers under Section 446 of the Act. At this stage, it will be useful to refer to the dictum of this Court in Andhra Bank (supra) where the Court noticed, "where the matter is not pending before the Tribunal under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 ( "the RDB Act"), in terms of Section 19(19) thereof, the secured creditors would not get priority per se " to show that mere pendency of proceeding before a Tribunal would not deprive the secured creditor of the statutory benefits.

Of course, the situation will be entirely different where the secured creditor does not follow the scheme of the provisions of Section 47(1) of the Insolvency Act read in conjunction with Sections 529 and 529A of the Act but puts the sale proceeds in the winding up proceedings in a common hotch-potch or even relinqu