TMI Blog2015 (6) TMI 650X X X X Extracts X X X X X X X X Extracts X X X X ..... he workmen's dues, such balance amounts, not exceeding workmen's portion in the secured debtor's security shall be treated as priority debts under sub-section (1) of section 529A and in such case, these debts shall be paid before considering the claims of other creditors. It is only after making payment of these debts in full, if any further amounts remain, that the creditors included under section 530 shall have preference for payment. If any further amount still remains, the unsecured creditors who include the secured creditors are entitled to, to the extent of the portions of their unsecured debt, payment of dividends subject to proof of their debt by applying the provisions of the Insolvency Act. While the claim for payment of interest at the contractual rate for the post winding up period is supported by the statutory provisions discussed above, even in equity also a secured creditor is entitled to claim interest at the contractual rate where the amounts realised from the sale of assets are sufficient to discharge the debt of the secured creditors and the workmen's dues. It is not merely iniquitous but also wholly illogical that a secured creditor is denied the contractual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ober 25, 2010, for a sum of ₹ 24,42,42,138.84 before the official liquidator in its capacity as the assignee of security interests of four secured creditors, viz., IDBI, IFCI, ICICI and LIC. As there was delay in filing its claim, the appellant has filed C. A. No. 1346 of 2010 before this court for condonation of delay. By order dated November 23, 2010, this court has condoned the delay. 3. Upon considering the claim put forth by the appellant as the assignee of the four secured creditors referred to above, the official liquidator has admitted the appellant's claim only to an extent of ₹ 2,66,73,817. While adjudicating the claim, the official liquidator has allowed the principal amount as claimed by the assignee along with contractual rate of interest up to the date of winding up of the company while disallowing the claim for interest at the contractual rate for the post winding up period. The appellant filed this appeal to the extent of the official liquidator disallowing the claim for interest at the contractual rate for the said period. 4. The appellant claimed that on the principal amount it is entitled to interest at 9.50 per cent which is the contractual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Illustration The value of the security of a secured creditor of a company is ₹ 1,00,000. The total amount of the workmen's dues is ₹ 1,00,000. The amount of the debts due from the company to its secured creditors is ₹ 3,00,000. The aggregate of the amount of workmen's dues and of the amounts of debts due to secured creditors is ₹ 4,00,000. The workmen's portion of the security is, therefore, one-fourth of the value of the security, that is ₹ 25,000. 529A. Overriding preferential payments.-(1) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d his employment with the company continued until he became entitled to be allowed the holiday ; (bb) the expression 'employee' 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. 7. Rules 156 and 179 of the Rules provide for payment of interest. While rule 156 pertains to pre-winding up period, rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the debt, or commence any suit or other legal proceeding, except with the leave of the court and on such terms as the court may impose. (3) For the purposes of sub-section (2), all goods being at the date of the presentation of the petition on which the order is made, in the possession, order or disposition of the insolvent in his trade or business, by the consent and permission of the true owner, under such circumstances that he is the reputed owner thereof, shall be deemed to be the property of the insolvent. (4) All property which is acquired by or devolves on the insolvent after the date of an order of adjudication and before his discharge shall forthwith vest in the court or receiver, and the provisions of sub-section (2) shall apply in respect thereof. (5) The property of the insolvent for the purposes of this section shall not include any property (not being books of account) which is exempted by the Code of Civil Procedure, 1908 (5 of 1908), or by any other enactment for the time being in force from liability to attachment and sale in execution of a decree. (6) Nothing in this section shall affect the power of any secured creditor to realise or otherwise deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (2) Where a debt which has been proved under this Act includes interest or any pecuniary consideration in lieu of interest, the interest or consideration shall, for the purposes of dividend be calculated at a rate not exceeding six per centum per annum, without prejudice to the right of a creditor to receive out of the debtor's estate any higher rate of interest to which he may be entitled after all the debts proved have been paid in full. 12. Section 61 of the Insolvency Act deals with priority of debts. This provision reads as under : 61. Priority of debts. - (1) In the distribution of the property of the insolvent, there shall be paid in priority to all other debts- (a) All debts due to the Government or to any local authority ; and (b) All salary or wages, not exceeding twenty rupees in all, of any clerk, servant or labourer in respect of services rendered to the insolvent during four months before the date of the presentation of the petition. (2) The debts specified in sub-section (1) shall rank equally between themselves, and shall be paid in full, unless the property of the insolvent is insufficient to meet them, in which case they shall abate in eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be seen from the statement of objects and reasons of Act 35 of 1985, these changes were brought out for protecting the workmen's interests in case of winding up of an insolvent company. The main object behind these amendments is mainly to ensure recovery of workmen's dues by treating them on par with the dues of the secured creditors. Under the proviso introduced to section 529 by the said Amendment Act, the secured creditors' dues are made subject to pari passu charge in favour of the workmen to the extent of the workmen's portion of dues and where a secured creditor, instead of relinquishing his security and proving his debt, opts to realise the security, under clause (a) of the said proviso, the liquidator shall represent the workmen and enforce the statutory charge over the workmen's dues ; under clause (b), the amount realised by enforcement of charge by the secured creditor shall be applied rateably for discharge of workmen's dues ; and under clause (c), where the debt of the secured creditor could not be realised in full by sale of the charged property of the company in liquidation, the balance amount due to such secured creditor or the amount of work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions, the dues of the secured creditor and the dues of the workmen of the company in liquidation are made to stand on par with each other. As per sub-section (2) of section 529A, the debts payable to these categories shall be paid in full. The phrase paid in full undoubtedly pre-supposes that in case of secured creditors, the debts must include principal and interest payable under the contract and in case of workmen, wages payable to them under the contract of employment, or the statutory provisions in force, as the case may be. Thus, unless the assets of the company in liquidation are insufficient to meet the dues payable to these two categories, they shall be paid in full. In case the amount realised by sale of the charged property is insufficient to satisfy the debts of the secured creditors and the workmen's dues, such balance amounts, not exceeding workmen's portion in the secured debtor's security shall be treated as priority debts under sub-section (1) of section 529A and in such case, these debts shall be paid before considering the claims of other creditors. It is only after making payment of these debts in full, if any further amounts remain, that the cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served or agreed for. Under the said provision, if the debt or sum is payable by virtue of a written instrument at a certain time, interest is payable from the time when such debt or sum was payable to the date of such adjudication. If the debt or sum is payable otherwise, from the time when a demand in writing has been made giving the debtor notice that interest will be claimed from the date of demand until the time of payment to the date of such adjudication. In either case, the maximum interest prescribed is 6 per cent per annum. 18. Rule 179 of the Rules placed a ceiling on payment of interest at 4 per cent per annum. There is an apparent conflict between section 48 of the Insolvency Act and rule 179 of the Rules as regards the rate of interest. We are, however, not concerned with this aspect in this case because neither of these provisions has any relevance to the case on hand, in that, both the provisions apply in respect of debts which are provable/proved under the Insolvency Act. The provisions of section 47 of the Insolvency Act make it clear beyond any cavil of doubt that the value of the secured asset, unless the secured creditor relinquishes his security, does not fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sum of ₹ 2 lakhs claimed by him, he is entitled to a charge only to the extent of ₹ 46,000 with subsequent interest at 5 per cent per annum, and that in relation to the balance sum of ₹ 1,53,000 he would rank only as an unsecured creditor. Subsequently, the official liquidator has adjudicated the claims. As there was a serious dispute as to the entitlement of the secured creditor for interest at the contractual rate post winding up period, the official liquidator has applied for directions of this court. In the light of those facts, the learned judge framed the following question (page 51 of 33 Comp Cas) : The only question for determination is whether the secured creditor is entitled to interest subsequent to the date of the order of winding up of the bank which is January 19, 1954. 19. Though section 529 of the Act making the provisions of the Insolvency Act applicable to winding up proceedings existed when this court has decided the case in K. V. Lakshminarayana Sastry case (supra) the learned judge has fallen back upon the provisions of section 229 of the Indian Companies Act, 1913 (Act 7 of 1913) which in its content, if not in form, are similar t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as any unsecured creditor or value the security and prove for the balance. In the last mentioned case, the security so valued will be governed by the provisions of sub-sections (4) and (5) of section 47 of the Insolvency Act. (x) Unless the secured creditor steps into the insolvency proceedings seeking to prove a part or whole or his debt, whether due under principal or interest, or both, he will not be governed by the provisions of the Insolvency Act like any unsecured creditor. (xi) If security is insufficient to meet his full demand, the respondent must be content with the amount realised to the extent of the value of his security. (xii) Section 48(2) must be construed along with sections 35, 61 and 67 and so construed where surplus is available the debt is payable in full which means principal and also interest at contractual rate. E. Summation of legal position : On the analysis of the provisions of the Companies Act and the Insolvency Act, the law can be summed up as under : A secured creditor is unaffected by the winding up proceedings to the extent of his security interest unless he has relinquished his security and chosen to prove his debt like any ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs and 86.50 per cent dividend to the unsecured creditors of the company in liquidation whose claims have been adjudicated. The official liquidator has allowed the claim of the SBI at the contractual rate of interest only up to the date of winding up of the company in liquidation. The SBI pleaded before the court that it is entitled to receive a sum of ₹ 1,66,84,572.19 at the contractual rate of interest for the post winding up period and that the official liquidator has committed an error in not admitting the said claim. It is in this background that this court allowed the claim of the SBI. Upon analysing the provisions of the Act, the Rules and the Insolvency Act, the learned judge, placing reliance on the judgments in Canara Bank v. Official Liquidator [1991] 70 Comp Cas 295 (Mad.) and State Bank of Patiala v. Northland Sugar Complex Ltd. [2004] 55 SCL 92 (Punj. Har.), held as under : It is thus evident that a secured creditor, if he intends to claim any amount in addition to the value of the security, is required to first assess the value of the security and to state the value of the security in his proof. The secured creditor is entitled to receive dividend only in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat too only in case a surplus is available after repaying the principal due to all creditors, both secured and unsecured. It is evident, from a conjoint reading of section 529(1)(c) of the Companies Act and sections 47(3) and 48 of the Provincial Insolvency Act, 1920, that in cases where a sum is available, on the sale of the security of which the secured creditor is a charge holder, even after the principal with interest at the contracted rate is paid from the date the debt fell due till the date of winding up, it shall be utilised for payment of the interest due to the secured creditor at the contracted rate from the date of winding up till the date of sale of the assets, subject of course to repayment of the dues of the workmen which rank pari passu with the debt of the secured creditor. It is only if some amount is still available, after such payment, can it be utilised for repayment of the dues of the unsecured creditors and, thereafter, if a surplus is still available it may be utilised for payment of interest to the unsecured creditors in accordance with section 48 of the Provincial Insolvency Act, 1920 or rule 179 of the Companies (Court) Rules, 1959, as the case may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um which is the contractual rate of interest for the post winding up period and that rule 156 (sic : 179) of the Rules, 1959 which restrict payment of interest subsequent to the order of winding up to 4 per cent per annum is ultra vires the provisions of the Indian Contract Act and liable to be ignored. These contentions were repelled by the learned judge, who, inter alia, held, at paragraph 12 as under (page 261 of 146 Comp Cas) : Therefore, when the assets of the company are sold and the proceeds realised, the debts by way of workmen's dues, and that of the secured creditors, have to be paid in full if the assets are sufficient to meet them and, if they are not sufficient, in equal proportions. Once a winding up proceeding has commenced, and the liquidator is put in charge of the assets of the company being wound up, the distribution of the proceeds of the sale of the assets, held at the instance of the financial institutions coming under the Recovery of Debts Act or of financial corporations coming under the SFC Act, can only be with the association of the official liquidator and under the supervision of the company court. The right of a financial institution stands rest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision under section 529A illusory. The learned judge, while declining the relief claimed by the APSFC for payment of contractual rate of interest for the post winding up period, has, directed the APSFC to set apart the workmen's dues determined by the official liquidator at ₹ 8,07,035 from out of the sum of ₹ 50 lakhs. 23. From the facts narrated in the above judgment, though it was not specifically stated that the amounts realised from the sale of the assets of the company in liquidation were not sufficient to satisfy the secured creditors and also the workmen's dues', from the observations of the court that (page 262 of 146 Comp Cas) : More often than that, the amounts received by the official liquidator, on the sale of the assets of the company in liquidation, is insufficient to meet the entire dues of the secured creditors and the workmen, necessitating the amount available being paid to them pari passu , it is presumable that that was a case where the sale proceeds were not sufficient to discharge the secured debts and also the workmen's dues. Sri L. V. V. Iyer, learned counsel for the appellant, soughts to distinguish this judgment from Cr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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