TMI Blog2013 (5) TMI 269X X X X Extracts X X X X X X X X Extracts X X X X ..... n appended to Section 529(3)(c) of the Companies Act. If the debtor company is not in liquidation nor any provisional liquidator has been appointed and merely winding up proceedings are pending, there is no question of distribution of sale proceeds among secured creditors in the manner prescribed in Section 19(19) of the 1993 Act. Where a company is in liquidation, a statutory charge is created in favour of workmen in respect of their dues over the security of every secured creditor and this charge is pari passu with that of the secured creditor. Such statutory charge is to the extent of workmen’s portion in relation to the security held by the secured creditor of the debtor company. The above position is equally applicable where the assets of the debtor company have been sold in execution of the recovery certificate obtained by the bank or financial institution against the debtor company when it was not in liquidation but before the proceeds realized from such sale could be fully and finally disbursed, the company had gone into liquidation. The relevant date for arriving at the ratio at which the sale proceeds are to be distributed amongst workmen and secured credito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two appeals from the Bombay High Court came up before a two-Judge Bench (B.P. Singh and R.V. Raveendran, JJ.) on 21.11.2005. While granting leave on that day, the Bench was of the view that the question whether the claims of the workmen who claimed to be entitled to payment pari passu have to be considered by the official liquidator or whether their claims have to be adjudicated upon by the Debts Recovery Tribunal (for short, DRT ) is likely to arise in a large number of cases where recoveries are sought to be made pursuant to the certificates issued by the DRT and, therefore, these appeals required consideration preferably by a Bench of three-Judges. This is how these appeals have come up before us. 2. The appellant in one appeal is Bank of Maharashtra and in the other, Indian Banks Association. As a matter of fact, the main appeal is by Bank of Maharashtra. The Indian Banks Association was not a party to the proceedings before the High Court or before the DRT but it has preferred appeal, after permission was granted, as in its view the impugned judgment if implemented would have far reaching implications on the banking industry as a whole. 3. As will appear, the High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ests from the date of application till its realization. The DRT III further directed in its judgment that in the event of failure of the Company and its Directors to pay the amount to the Bank, as directed, the Bank shall be entitled to sell hypothecated and mortgaged and other immovable and movable properties of the Company and the Directors and the sale proceeds shall be appropriated towards due amount. 8. Consequent upon the Judgment dated 19.7.2001, the DRT III issued recovery certificate on 21.08.2001. In the recovery certificate, it was directed that the Recovery Officer shall realize the amount as per the certificate in the manner and mode prescribed under Sections 25 and 28 of the 1993 Act from the certificate debtors as specified in the certificate. As regards legal heirs of one of the deceased directors, it was directed that they would be liable only to the extent they inherited the property from their predecessor in interest. 9. In the recovery proceedings, the workmen/employees of the Company through their Association made an application on 17.9.2003 and prayed that they be allowed to intervene in the matter and their claims be registered before any auction takes pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers out of the amount lying with him of the said Rs. 1,17,55,000/- and if there is a short fall, then the Debt Recovery Tribunal will be permitted to call for the said balance amount from the 2nd respondent out of the sum of Rs. 3 crores which has already been withdrawn by the 2nd respondent from the sale proceeds of the auction sale of the movable properties of respondent no. 1. 4. The Debt Recovery Tribunal shall in the meantime deposit the said amount of Rs.1,17,55,000/- in fixed deposit with a nationalized bank initially for period of three months and then renewable for a further period of three months. 14. The High Court in the impugned judgment, inter alia, has also issued certain guidelines to the DRT III while adjudicating the claim of the workmen and other secured creditors for determination of priorities. 15. The main submission on behalf of the Bank in laying challenge to the impugned judgment is two fold, (one) the workmen have no claim or right over the security held by a bank or financial institution. Their dues can only be adjudicated in an appropriate court (e.g. Industrial Tribunal) when the company is not in liquidation and DRT has no competence in this rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n winding up, the workmen of the Company have no claims on the assets of the Company nor do they have any locus to approach the DRT to participate in a proceeding filed by a bank or financial institution; they are not creditors secured or otherwise. The only remedy that the workmen have is to approach the appropriate court e.g., Industrial Tribunal etc., for determination and realization of their dues. Section 19(19) of the 1993 Act and Section 529A of the Companies Act do not help the workmen as they are not secured creditors. However, where the order of winding up has been made and liquidation proceedings started against a Company, Mr. Bhaskar P. Gupta, learned senior counsel would submit that in such a case the liquidator would be in custody and control of all the assets of company. But in view of exclusive jurisdiction conferred on DRT, no leave of the Company Court needs to be taken by DRT for adjudication under Section 17 and execution of the recovery certificate issued under the 1993 Act. In support of his submissions, learned senior counsel placed reliance upon paragraphs 50, 63, 64 to 70 of the decision of this Court in Allahabad Bank v. Canara Bank Anr.[ (2000) 4 SCC 40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale proceeds to the bank (secured creditor) on 10.03.2004, no winding up order had been passed under Section 443(d) of the Companies Act qua the Company and Company s properties had not come to the custody of official liquidator in terms of Section 456. In this view of the matter, the workmen did not enjoy any secured charge on the assets of the Company for the purposes of Section 529A. Accordingly, he would submit that workmen cannot claim under Section 19(19) of the 1993 Act when they even cannot claim under the Companies Act. In this regard, Mr. L. Nageshwar Rao relied upon the decision of this Court in Radheshyam Ajitsaria (2006) 11 SCC 771. 21. Relying upon the decision of this Court in International Coach Builders Ltd. v. Karnataka State Financial Corporation[(2003) 10 SCC 482] and Rajasthan State Financial Corporation(2005) 8 SCC 190, Mr. L. Nageshwar Rao argued that the workmen s claim can only be considered under Section 19(19) of the 1993 Act where winding up order has been made and the liquidator is in the custody of company s assets. 22. Mr. L. Nageshwar Rao argued that the view of the High Court was clearly in error as DRT is a limited Tribunal created by a statu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be rendered an empty shell if the assets of the company are sold and proceeds handed over to the bank and financial institutions. In the latter circumstances, it is the duty of the DRT to anticipate such a situation and if DRT comes to the conclusion that by selling the assets and paying the proceeds to the bank and/or financial institutions there will be nothing left for the payment of the dues to the workmen, it is bound to disburse the proceeds between the banks and financial institutions, other secured creditors and the workmen as if Section 529A of the Companies Act applies. It was submitted on behalf of the Kamgar Union that a close look at Section 19(19) of the 1993 Act will indicate that it is legislation by reference and not legislation by incorporation and therefore it is not required that the company must be in liquidation to attract the provisions of Section 19(19). 26. Mr. Colin Gonsalves heavily relied upon a decision of this Court in Rajasthan State Financial Corporation5 and submitted that the issue of jurisdiction of the Company Court and the DRT in respect of companies in liquidation was referred to a three-Judge Bench in view of the apparent conflict between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct is founded on erroneous assumption that no order for winding up the Company has been made. In I.A. 7 of 2013 filed by the respondent no. 1, the copy of the Report dated 01.08.2011 of the official liquidator has been placed on record. It is apparent therefrom that on 08.10.2004, the Company Judge has ordered the Company to be wound up and the official liquidator has been appointed as liquidator of the Company with the usual powers under the Companies Act. There is thus no doubt that on and from 08.10.2004, the Company is in liquidation and the official liquidator stands appointed. 29. In the backdrop of the above factual position, we think that the question framed in the referral order may be examined by us. 30. It is important first to notice some of the provisions of the 1993 Act and the Companies Act. The question can be conveniently answered in light of the statutory provisions. 31. Section 2(d) of the 1993 Act, defines bank , which, inter alia, means a banking company. Under Section 2(e) banking company has the meaning assigned to it in clause (c) of Section 5 of the Banking Regulation Act, 1949. Financial institution is defined in Section 2(h). The tribunal est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are vested in a civil court under the CPC in respect of the matters set out in Section 22(2). 34. Section 25 provides the modes of recovery of debts. The Recovery Officer on receipt of the copy of the recovery certificate is required to proceed to recover the amount of debt specified in the certificate by one or more of the modes set out in that Section which includes attachment and sale of the movable or immovable property/properties of the certificate debtor. Under Section 28, the Recovery Officer may recover the amount of debt under the certificate by one or more of the modes provided thereunder without prejudice to the modes of recovery specified in Section 25. Section 28(4) provides that the Recovery Officer may apply to the court in whose custody there is money belonging to the certificate debtor for payment to him of the entire amount of such money, or if it is more than the amount of debt due an amount sufficient to discharge the amount of debt so due. 35. Section 34 gives the 1993 Act overriding effect. Sub-section (1) thereof provides that the provisions of the 1993 Act shall have the effect notwithstanding anything inconsistent therewith contained in any other law or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g up order has been made or where a provisional liquidator has been appointed the liquidator or the provisional liquidator, as the case may be, shall take into his custody or under his control all the properties, effects and actionable claims to which the company is or appears to be entitled. 42. Section 457 empowers the liquidator to do acts stated in paragraphs (a) to (e) of sub-section (1) with the sanction of the court. In a winding up by the court, the liquidator has power to do all acts set out in clauses (i) to (v) of sub-section (2). 43. Section 529, to the extent it is relevant, reads as follows:- Section 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- . . . . . . .; (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, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 45. It may be immediately observed that 1993 Act has not only conferred exclusive jurisdiction upon DRT for determination of the matters specified in Section 17 but has also ousted jurisdiction of all other courts and other authorities in entertaining and deciding such matters. The powers of the Supreme Court and the High Court under Articles 226 and 227, however, remain unaffected. The applications for recovery of debts due to banks or financial institutions can be decided by DRT alone after coming into force of the 1993 Act and no other forum. In other words, the jurisdiction of DRT in regard to matters specified in Section 17 is exclusive. 46. DRT has also been vested with power, on adjudication of the application for recovery of debts due to banks or financial institutions, to issue certificate of recovery. On issuance of certificate of recovery, the exclusive jurisdiction has been conferred upon the Recovery Officer in regard to its execution. A complete pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited extent restricted by Section 529-A. Can the secured creditors like Canara Bank claim under Section 19(19) any part of the realisations made by the Recovery Officer and is there any difference between cases where the secured creditor opts to stand outside the winding up and where he goes before the Company Court? (6) What is the relief to be granted on the facts of the case since the Recovery Officer has now sold some properties of the Company and the monies are lying partly in the Tribunal or partly in this Court? 48. As regards first point, this Court held in Allahabad Bank1 that the adjudication of liability and the recovery of the amount by execution of the certificate are respectively within the exclusive jurisdiction of DRT and Recovery Officer and no other court or authority much less the civil court or the company court can go into the said questions relating to the liability and the recovery, except as provided in the 1993 Act. On second and third point, it was held that at the stage of adjudication under Section 17 and execution of the certificate under Section 25, the provisions of 1993 Act confer exclusive jurisdiction on the DRT and the Recovery Officer in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank3 and recently again by a three-Judge Bench in Jitendra Nath Singh (2013) 1 SCC 462. 52. A. P. State Financial Corporation v. Official Liquidator[(2000) 7 SCC 291], was a case where the Corporation had made applications under Section 446(1) of the Companies Act read with Sections 29 and 46 of the State Financial Corporations Act, 1951 (for short, ₹ 1951 Act ) before the Company Judge of the High Court for permission to stay outside the liquidation proceedings. The Company Judge granted conditional permission. One of the conditions was that Corporation will undertake to discharge the liability due to the workmen, if any, under Section 529A of the Companies Act. This Court noted that 1951 Act was a Special Act for grant of financial assistance to industrial concerns with a view to boost up industrialization and also recovery of such financial assistance if it becomes bad; similarly, the Companies Act deals with companies including winding up of such companies. The proviso to sub-section (1) of Section 529 and Section 529A being a subsequent enactment, the non obstante clause in Section 529A must prevail over Section 29 of the 1951 Act. This Court further said that the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t unilaterally exercisable under Section 29 of the SFC Act is available against a debtor, if a company, only so long as there is no order of winding up. 2. SFCs cannot unilaterally act to realise the mortgaged properties without the consent of the official liquidator representing workmen for the pari passu charge in their favour under the proviso to Section 529 of the Companies Act, 1956. 3. If the official liquidator does not consent, SFCs have to move the Company Court for appropriate directions to the official liquidator who is the pari passu charge-holder on behalf of the workmen. In any event, the official liquidator cannot act without seeking directions from the Company Court and under its supervision. 54. In the case of Andhra Bank (2005) 5 SCC 75, a three-Judge Bench framed three questions for consideration. As regards the question, whether the statement of law contained in para 76 of the Judgment of this Court in Allahabad Bank1 was a good law, this Court answered the question in the negative. Dealing with the question whether the workmen could be directed to be paid on an adhoc basis having regard to their claim of past dues vis- -vis the claim of Andhra Bank, this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on thus: (i) A Debts Recovery Tribunal acting under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 would be entitled to order the sale and to sell the properties of the debtor, even if a company-in-liquidation, through its Recovery Officer but only after notice to the Official Liquidator or the Liquidator appointed by the Company Court and after hearing him. (ii) A District Court entertaining an application under Section 31 of the SFC Act will have the power to order sale of the assets of a borrower company-in-liquidation, but only after notice to the Official Liquidator or the Liquidator appointed by the Company Court and after hearing him. (iii) If a financial corporation acting under Section 29 of the SFC Act seeks to sell or otherwise transfer the assets of a debtor company-in-liquidation, the said power could be exercised by it only after obtaining the appropriate permission from the Company Court and acting in terms of the directions issued by that court as regards associating the Official Liquidator with the sale, the fixing of the upset price or the reserve price, confirmation of the sale, holding of the sale proceeds and the distribution ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e secured creditors. Whilst holding so, this Court also said that insofar as the amounts realised under the 1993 Act were concerned, the priorities have to be worked out by DRT alone. 58. In Central Bank of India v. State of Kerala and Ors [(2009) 4 SCC 94], a three-Judge Bench of this Court was concerned with the question whether Section 38-C of the Bombay Sales Tax Act, 1959 (for short, the Bombay Act ) and Section 26-B of the Kerala General Sales Tax Act, 1963 (for short, the Kerala Act ) and similar provision contained in other State legislations by which first charge has been created on the property of the dealer or such other person, who is liable to pay sales tax, etc. are inconsistent with the provisions contained in the 1993 Act for recovery of debt and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, the Securitisation Act ) for enforcement of security and whether by virtue of non obstante clauses contained in Section 34(1) of the 1993 Act and Section 35 of the Securitisation Act, the two Central legislations will have primacy over the State legislations. The scheme of 1993 Act was highlighted and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Companies Act, 1956 would have been incorporated in the DRT Act and the Securitisation Act. 130. Undisputedly, the two enactments do not contain provision similar to the Workmen's Compensation Act, etc. In the absence of any specific provision to that effect, it is not possible to read any conflict or inconsistency or overlapping between the provisions of the DRT Act and the Securitisation Act on the one hand and Section 38-C of the Bombay Act and Section 26-B of the Kerala Act on the other and the non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act cannot be invoked for declaring that the first charge created under the State legislation will not operate qua or affect the proceedings initiated by banks, financial institutions and other secured creditors for recovery of their dues or enforcement of security interest, as the case may be. 131. The Court could have given effect to the non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act vis- -vis Section 38-C of the Bombay Act and Section 26-B of the Kerala Act and similar other State legislations only if there was a speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dues and where the secured creditor opts to realise 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. 61. Whilst there was divergence of opinion on certain aspects, as regards the exposition of law in paragraph 76 of the judgment in Allahabad Bank1 that workmen s dues have priority over all other creditors, secured and unsecured because of Section 529A(1)(a), the Bench was of unanimous opinion that the said statement in Allahabad Bank1 was not a good law. 62. Section 529A was inserted by Companies (Amendment) Act, 1985. By incorporation of this provision, workmen s dues rank pari passu with secured creditors. In other words, the workmen of the company in winding up acquire the status of secured creditors. Pertinently, while inserting Section 529A in the Companies Act by the Companies (Amendment) Act, 1985, the proviso to sub-section (1) of Section 529 was also inserted which provides that the security of every secured creditor shall be deemed to be subject to a pari passu charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9(3)(c) of the Companies Act. The question is whether Section 19(19) of the 1993 Act clothes DRT with jurisdiction to determine the workmen s claims against the debtor company? We do not think so for reasons more than one. 66. In the first place, 1993 Act has provided for special machinery for speedy recovery of dues of banks and financial institutions in specific matters. It is with this objective that it provides for establishment of DRT with the jurisdiction, power and authority for adjudication of claims of the banks and financial institutions. 1993 Act also provides for the modes of recovery of the amount so adjudicated by the DRTs. 1993 Act has not brought within its sweep, the adjudication of claims of persons other than banks and financial institutions. DRT has not been given powers to adjudicate the dues of workmen of the debtor company. Section 17 or Section 19 of the 1993 Act cannot be read in a manner that allows such exercise to be undertaken by the DRT. DRT does not possess necessary statutory powers to address all disputes that may arise in adjudicating workmen s claims in winding up proceedings. The adjudication of workmen s claims against the debtor company is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enior counsel for the Kamgar Union that Section 19(19) is not restricted to a situation where the debtor company is in winding up. In our view, Section 19(19) covers situation where a debtor company is in winding up or where a provisional liquidator has been appointed in respect of the debtor company and in no other situation. If the debtor company is not in liquidation nor any provisional liquidator has been appointed and merely winding up proceedings are pending, there is no question of distribution of sale proceeds among secured creditors in the manner prescribed in Section 19(19) of the 1993 Act. 70. The position stated in Allahabad Bank1 that priorities, so far as the amounts realized under the 1993 Act are concerned, are to be worked out only by DRT admits of no ambiguity and is legally sound but this statement cannot be read as laying down the proposition that in respect of the amounts realized under the 1993 Act, the DRT has power, competence or authority to determine the workmen s dues of the debtor company. The manner of distribution among secured creditors of the monies realized under the 1993 Act does not clothe DRT to adjudicate the claims of secured creditors other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally determined by the liquidator, falls short of the amount which may be distributable to the workmen as per the above illustration. The amount so set apart may be disbursed to the liquidator towards workmen s dues on ad hoc basis subject to adjustment on final determination of the workmen s dues by the liquidator. The first option must be exercised by DRT only in a situation where no application for distribution towards workmen s dues against the debtor company has been made by the liquidator or the workmen before the DRT. 72. In light of the above discussion, we sum up our conclusions thus:- (i) If the debtor company is not in liquidation nor any provisional liquidator has been appointed and merely winding up proceedings are pending, there is no question of distribution of sale proceeds among secured creditors in the manner prescribed in Section 19(19) of the 1993 Act. (ii) Where a company is in liquidation, a statutory charge is created in favour of workmen in respect of their dues over the security of every secured creditor and this charge is pari passu with that of the secured creditor. Such statutory charge is to the extent of workmen s portion in relation to the secur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt to the extent of workmen s dues as may be finally determined by the liquidator of the debtor company and payable to workmen in the proportion set out in the illustration appended to Section 529(3)(c) of the Companies Act. The other, DRT may set apart tentatively portion of the undisbursed amount towards workmen s dues in the ratio as per the illustration following Section 529(3)(c) and disburse the balance amount to the applicant bank or financial institution subject to an undertaking by such bank or financial institution to restitute the amount to the extent workmen s dues as may be finally determined by the liquidator, falls short of the amount which may be distributable to the workmen as per the above illustration. The amount so set apart may be disbursed to the liquidator towards workmen s dues on ad hoc basis subject to adjustment on final determination of the workmen s dues by the liquidator. (viii) The first option must be exercised by DRT only in a situation where no application for distribution towards workmen s dues against the debtor company has been made by the liquidator or the workmen before the DRT. (ix) Where the sale of security has been effected in executi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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