Companies Act Case Law Uco Bank Vs Official Liquidator High Court






1994 SCC (5) 1 JT 1994 (6) 350
1994 SCALE (3)83




The Judgment of the Court was delivered by
VERMA, J.- In Company Petition No. 27 of 1971 for winding up
of the Company M/s Glass Carboys and Pressedwares Limited
on the ground, contained in clause (e) of Section 433 of the
Companies Act, 1956 (hereinafter referred to as “the Act”),
that the Company was unable to pay its debts, the teamed
Company Judge of the Bombay High Court made a winding up
order on 15-11-1972; and the Official Liquidator took
possession of the assets of the Company. The appellant UCO
Bank was a secured creditor of the Company. It chose to
stand outside the winding up proceedings and obtained a
decree on 22-4-1976 to recover its debt. In pursuance of
the decree obtained by the appellant, the High Court’s
Commissioner for Taking Accounts was directed to sell
certain movables of the Company. In the meantime, the
Companies Act, 1956 was amended by the Companies (Amendment)
Act, 1985 (hereinafter referred to as “the Amending Act”)
with effect from 24-5-1985 by which Sections 529 and 530 of
the Principal Act were amended and Section 529-A was
inserted therein. One of the effects of the amendment, as
mentioned in the Statement of Objects and Reasons of the
Amending Act, is as under:
“2. Another announcement made by the Finance
Minister in his Budget speech relates to the
decision of the Government to introduce
necessary legislation so that legitimate dues
of workers rank pari passu with secured
creditors in the event of closure of the
company and above even the dues to Government.
The resources of companies constitute a major
segment of the material resources of the
community and common good demands that the
ownership and control of the resources of
every company are so distributed that in the
unfortunate event of it,,. liquidation,
workers, whose labour and effort constitute an
invisible bus easily perceivable part of the
capital of the company are not deprived of
their legitimate right to participate in the
produce of their labour at, effort. It is
accordingly proposed to amend Sections 529 and
530 of the
Companies Act and also to incorporate a new
section in the Act, namely, Section 529-A
(vide clauses 4, 5 and 6 of the Bill).”
(emphasis supplied)
2. In this appeal, the question for decision is as to the
true meaning and scope of the proviso to sub-section (1) of
Section 529 inserted by the above amendment as a part of the
aforesaid scheme. Sub-section (1) of Section 529 including
the said proviso is as under:
“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
*[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
(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 529-A.]”
(emphasis supplied)
3. The contention of the appellant, a secured creditor,
which was accepted by the learned Company Judge but, on
appeal, has been rejected by the Division Bench of the High
Court in the impugned order dated 16-10-1991 in Appeal No.
920 of 1991, was that the aforesaid amendment including the
above-quoted proviso is inapplicable in the present case
since the decree had been obtained by the appellant prior to
the above amendment made in the Principal Act. The
submission of Dr S. Ghose, learned counsel for the
appellant, is that the above amendment including the said
proviso has no application to a secured creditor’s claim
based on a decree obtained prior to the said amendment. In
other words, the submission is that the said proviso does
not apply to a decree obtained for realisation of the
security available to the secured creditor if the decree was
obtained prior to the amendment even though realisation of
the security by execution of the decree is subsequent to the
amendment. We find no merit in this contention.
Inserted by the Companies (Amendment) Act, 1985
4. Part VII of the Companies Act, 1956 relates to ‘Winding
up’ and therein Sections 528 to 530 pertain to ‘Proof and
ranking of claims’ in Chapter V relating to ‘Provisions
applicable to every mode of winding up’. Section 529 deals
with ‘Application of insolvency rules in winding up of
insolvent company’, Section 529-A with ‘Overriding
preferential payments’, and Section 530 with ‘Preferential
payments’. It is obvious that these provisions, as they
exist, apply to a winding up proceeding.
5. The proviso to sub-section (1) of Section 529 inserted
by the Amending Act clearly provides that “the security of
every secured creditor shall be deemed to be subject to a
pari passu charge in favour of the workmen”. The effect of
the proviso is to create, by statute, a charge pari passu in
favour of the workmen on every security available to the
secured creditors of the employer company for recovery of
their debts at the time when the amendment came into force.
This expression is wide enough to apply to the security of
every secured creditor which remained unrealised on the date
of the amendment. The clear object of the amendment is that
the legitimate dues of workers must rank pari passu with
those of secured creditors and above even the dues of the
Government. This literal construction of the proviso is in
consonance with, and promotes, the avowed object of the
amendment made. On the contrary, the construction of the
proviso suggested by the learned counsel for the appellant,
apart from being in conflict with the plain language of the
proviso also defeats the object of the legislation.
6. The existence of the security on the date the amendment
came into effect creates a pari passu charge in favour of
the workmen upon that security. It is only if the security
has been reallied, pursuant to a decree, prior to the date
of the amendment that the pari passu charge is not created,
for there is no security upon which it can operate. There
is, therefore, no retrospectivity in the operation of the
provision as interpreted by us.
7. A debt due to a secured creditor, when recovered by
realisation of the security after commencement of the
winding up proceedings, results in depletion of the assets
in the hands of the Official Liquidator. This provision is
intended to protect the interests of the workmen in
proceedings for winding up. In view of the nature of
workmen’s dues being similar to those of secured creditors,
the purpose of this provision is to place the workmen on a
par with the secured creditors and create a statutory charge
in their favour on all available securities forming part of
the assets of the company in liquidation so that the workmen
also share the securities pari passu with the secured
creditors. The workmen contribute to the growth of the
capital and must get their legitimate share in the assets of
the company when the situation arises for its closure and
distribution of its assets first among the secured creditors
due to winding up of the company. The aforesaid amendment
made in the Act is a statutory recognition of this principle
equating the legitimate dues of the workmen with the debts
of the secure( creditors of the company. To achieve this
purpose, it is necessary that the amended provision must
apply to all available securities which form part C the
assets of the company in liquidation on the date of the
amendment. The
conclusion reached by the Division Bench of the High Court
is supported by this reason.
8. Consequently, the appeal is dismissed with costs
quantified at Rs 5000 (Rupees five thousand) only.



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