Holding

Workmen’s dues and the claims of secured creditors standing outside the winding‑up are pari‑passu under Section 529‑A, and the High Court’s ad‑hoc order directing the bank to pay workmen’s salaries is unsustainable.

Summary

Andhra Bank, a secured creditor, appealed against a Calcutta High Court order that directed it to pay Rs 38 lakhs on an ad‑hoc basis to the official liquidator for disbursing workmen’s salaries. The Supreme Court examined whether the High Court had jurisdiction to issue such an order, the priority of workmen’s dues versus secured creditors under Sections 529 and 529‑A of the Companies Act, 1956, and the effect of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. It held that workmen’s dues and the claims of secured creditors standing outside the winding‑up are pari‑passu under Section 529‑A, that the High Court order was unsustainable and lacked reasoning, and that subsequent events and the RDB Act must be considered. Consequently, the order was set aside and the appeal allowed.

Issues considered

Whether the High Court had jurisdiction to pass an ad‑hoc order directing the bank to pay workmen’s dues when the company’s assets were sold as a going concern.
Whether workmen’s dues enjoy overriding preferential status over secured creditors under Sections 529 and 529‑A of the Companies Act, 1956.
Whether a secured creditor standing outside the winding‑up proceedings is entitled to pari‑passu priority with workmen’s dues under Section 529‑A.
Whether the order should be assessed in light of subsequent events and the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, particularly Section 19.
Whether Section 446 of the Companies Act confers power to pass interlocutory orders without a full hearing.

Legislation cited

Companies Act, 1956s. 446, s. 529, s. 529-A, s. 530
Recovery of Debts Due to Banks and Financial Institutions Act, 1993s. 19

Subjects

Companies Actwinding upsecured creditorworkmen's duespreferential paymentSection 529Section 529-ARecovery of Debts Due to Banks Actpriorityad hoc orderjurisdictionSection 446pari passu

Judgment

A ANDHRA BANK
v.
OFFICIAL LIQUIDATOR AND ANR.

MARCH 14, 2005

B [N. SANTOSH HEGDE, B.P. SINGH AND S.B. SINHA, J.T.]

Companies Act, 1956:

Sections 529-A and 529-0verriding preferential payment-Bank-secured
C creditor's claim against Company-Winding up of company-Assets sold, as
an ongoing concern, purchaser entered into settlement with workmen regarding
past salaries of workmen and workmen were paid substantial amount-Bank-
l'
secured creditor standing outside winding up proceedings-High Court
directing the bank to pay past dues to workmen on ad hoc basis over claim
D ofsecured creditors-Sustainability of-Held: Claims ofthe secured creditors
are pari passu with the workmen-Debts due to secured creditor is considered
for ascertainment of workmen's portion of security-Hence, cannot be said ·\
\
that workmen's dues have complete priority over~all other creditor, as such
order ofHigh Court unsustainable-Further, correctness ofan equitable order
is judged in' light of subsequent events and High Court did not consider the
E subsequent events-Also gave ·no reasons for such direction-Furthermore,
rights and obligations of the parties are determined after the /is is adjudicated
upon, as such issuance of any certificate under section 19 would arise upon
the conclusion of the froceeding before it-Since order of High Court was
passed after RDB Act came into force but before establishment ofDebt Recovery
Tribunal in State, dispute is to be resolved with reference to the Act-Recovery
F of Debts Due to Banks and Financial Institutions Act, 1993, Section 19.
Sections 529-A and 529-Interpretation of-Discussed.

Section 446-Power of Company Judge-Held : Section confers wide
power upon Company Judge, but can be exercised only upon consideration of
G contentions of parties raised in a suit or proceeding or any claim made-
Priorities would also be determined if the parties claim the same before the
Court-However, section 446 ipso facto confers no power upon the Court to ---
t
pass interlocutory orders.

H 776
- ANDHRA BANK v.OFFICIAL LIQUIDATOR 777

A Company was obtaining and enjoying diverse credit facilities A
from the appellant-Bank upon hypothecation of goods, raw materials,
stocks of tobacco including movable properties. Company went in
liquidation. Appellant filed recovery suit against the Company. Joint-
receivers sold the hypothecated goods lying in the factories and sale
proceeds of Rs. 135 lakhs was deposited in a fixed deposit with the . B
appellant. Thereafter, winding up order of the Company was passed.
Assets and the properties of the Company were directed to be sold, as an
ongoing concern and purchaser entered into a settlement as regard past
salaries of the workmen. Single Judge of High Court directed the appellant
to pay Rs 38 lakhs to the Liquidator on an ad hoc basis for disbursing the
salaries to Officers, staff and workers of the Company. Appellant C
challenged the order of disbursal. The.said order was later upheld by the
Division Bench of High Court. Meanwhile, the suit filed by the appellant
was transferred to DRT. Hence the present appeal.

Appellant-B~nk contended that High Court erred in passing the
order since the assets of the Company had been sold as a going concern D
and the purchaser entered into a settlement as regards past salaries of
the workmen, and a sum of Rs 6.8 crores had already been paid; that the
workmen could approach only if such ainount was not sufficient to pay
the entire dues of the workmen; that the appellant was outside the purview
of the winding up proceeding as it filed the suit upon obtaining leave of E
the Company Judge under section 446 of the Companies, 1956; that the
ad hoc order passed was without jurisdiction; and that the workers' dues
could not be held to have any precedence over all secured and unsecured
creditors as has been held by this Court in Allahabad Bank's case and
reliance thereupon by the High Court was unsustainable.
F
Respondents contended that the High Court has extensive
jurisdiction to decide any question arising between the parties or any
claim made under the Companies Act in terms of Section 446 thereof;
that when the Single Judge passed the order as far back as 1993, the
judgment of this Court in Allahabad Bank's case was not pronounced and
even the Debts Recovery Tribunal was not constituted and as such the G
judgment should be upheld without reference to the provisions of the
Recovery of Debts Due to Banks and Financial Institutions Act, 1993 or
the decision in Allahabad Bank's case; that the Bank claimed its security
only in relation to 135 lakhs whereas the claim of the workmen was more
than 19 crores, and having regard to section 529, the impugned order H
778 SUPREME COURT REPORTS [2005] 2 S.C.R.
.......
A does not cause any prejudice to the appellant; and that in. any event,
having regard to the purport and object of sections 529 and 529-A, this
Court should not interfere with the judgment.

Allowing the appeal, the Court

B HELD : 1. In terms of Section 529 A and 529 of the Companies Act,
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(l)(b) read with provis~ (c).
appended to Section 529(1). The 'workmen's portion' as contained in
C 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 in 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 creditors. It cannot be said that in a situation of this
D nature, the Single Judge was to find out the amount in relation whereto
the appellant was raising its claim as a secured creditor, namely, 135
lakhs vis-a-vis the aggregate of the amount of the workmen's dues of 19
crores and the claim of any other secured creditor was not required to be
taken into consideration. The illustration appended to Section 529(3)(c)
is a clear pointer to the .effect that the amount of debts due to the secured
E creditors should be takell into consideration for the purpose of ascertaining
th.e workmen's portion of security. (791-D-G]

1.2. The language of Section 529-A is also clear and unequivocal, in
terms whereof the workmen's due or the debts due to the secured creditors
• 1 : '
to the extent such debts rank under clause (c) of the proviso to sub-
F 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 claim of
the workmen as also the secured creditors will have to be paid in terms
of Section 529-A. (791-H; 792-A]
G 1.3. Whether the workmen could be directed to be paid on an ad
hoc basis having regard to their claim of past dues vis-a-vis the claim of
appellants had not been deliberated upon. When a matter is not pending
before the Tribunal under the RDB Act, in terms of section 19(19) thereof,
the secured creditors would not get priority per se as it is qualified by the
H words "in accordance with the provisions of section 529-A". Thus, the
ANDHRA BANK v.OFFICIAL LIQUIDATOR 779
claims of the secured creditors are required to be considered giving A
priority over unsecured creditors but their claim would be pari passu
with the workmen. (793-H; 794-A)
Allahabad Bank v. Canara Bank and Anr., (2000( 4 SCC 406, explained
and partly overruled.
B
National Textile Workers' Union and Ors. v. P. R. Ramakrishnan and
Ors., (19831 1 SCC 228, distinguished.

UCO Bank v. Official Liquidator, High Court, Bombay and Anr., (1994)
5 sec 1, referred to.
c
1.4. Section 446 of the Companies Act indisputably confers a wide
power upon the Company Judge, but such a power can be exercised only
upon consideration of the respective contentions of the parties raised in a
suit or a proceeding or any claim made by or against the Company. A
question of determining the priorities would also fall for consideration if
the parties claiming the same are before the Court. Section 446 of the D
Act ipso facto confers no power upon the Court to pass interlocutory
orders. Assuming that inherent power to pass such order exists, it was
imperative that the same should have been exercised on consideration of
the factors laid down by this Court. An unreasoned order does not
subserve the doctrine of fair play. (794-B-D) E
Morgan Stanley Mutual Fund etc. v. Kartick Das etc., (1994) 4 SCC
225 and Mangalore Ganesh Beedi Works v. The Commissioner of Income

- Tax Mysore and Anr., JT (2005) 2 SC 442, relied on.

1.5. The contention that the impugned order having been passed by F
the Single Judge in the year 1993, the considerations which prevailed at
that time only should be considered, cannot be accepted as it is trite that
even the appellate court while passing its order may take into
consideration, the subsequent events. Correctness of an equitable order
like the impugned one may be judged upon taking into consideration the
subsequent events. Subsequent events are not disputed. Company Judge G
in its order has noticed that a substantive amount has been paid to the
workers towards their past dues. Payments have also been made not only
to the statutory authorities but also to the secured creditors and the
Special Officers. The workmen since the sale of the assets of the Company
as a working concern, have received substantial amounts towards their H
780 SUPREME COURT REPORTS [2005) 2 S.C.R.

A past dues and are being paid their current dues. The order passed by the
Single Judge cannot moreover be sustained on amongst others, the ground
of not assigning any reason in support thereof. (794-F-G; 796-A-CJ
Rajesh D. Darbar and Ors. v. Narasingrao Krishnaji Kulkarni and
Ors., (2003] 7 SCC 219 and Board of Control for Cricket, India and Anr. v.
B Netaji Cricket Club and Ors., JT (2005) 1 SC 235, relied on.

1.6. The submission that Debts Recovery Tribunal having been
established in the West Bengal on 27.4.1994, the dispute has to be resolved
without reference to the RDB Act, also cannot be accepted. The rights
and obligations of the parties would only be crystallized after the lis is
C adjudicated upon. The question of issuance of any certificate in terms of
Section 19 of the RDB Act would arise only upon the conclusion of the
proceeding before it. (796-D-E]

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1321 of
2003.
D
From the Judgment and Order dated 19.3.2002 of the Calcutta High
Court in A.P.O. No. 1082 of 1993.

L. Nageswar Rao, V. Sheshagiri, M.Rajshekhar and Ms. Bella
Maheshwari for the Appellant.
E
Dipankar P. Gupta, Siddhartha Choudhury and Ms. Radha Rangaswamy
for the Respondents. ·

The Judgment of the c,ourt was delivered by

F S.B. SINHA, J. Doubting the correctness of the statement of law
contained in paragraph 76 of the judgment of this Court in Allahabad Bank
v. Canara Bank and Anr., [2000] 4 SCC 406, a Division Bench of this Court
has directed that the matter be placed before a Bench of three Judges.

BACKGROUND FACT:
G
By a scheme of amalgamation approved by the High Court of Calcutta
on or about 317.1984; the assets and properties of Tobacco Division of Duncan
Agro Industries Limited were transferred to its subsidiary New Tobacco
Limited ('the Company', for short). The company had been obtaining and
H enjoying diverse credit facilities from the Appellant~Bank upon hypothecation
ANDHRA BANK v.OFFICIAL LIQUIDATOR [SINHA, J.] 781

of all goods, raw materials, stocks of tobacco including movable properties A
situated at Biccavolu in the State of Andhra Pradesh.

The Appellant herein on or about 15.9.1987 filed a suit in the Calcutta
High Court for recovery of Rs. 2,69 ,54,228.15 along with interest at the rate
of 18.5% p.a. against the company. In the same year, an application for
winding up of the said company was filed before the Company Judge of the B
Calcutta High Court, which was marked as CP No. 621 of 1987. The Appellant
in the said suit filed an interlocutory application; whereupon the Joint Receivers
were appointed for making inventory of hypothecated goods lying in the
factories of the company at Agarpara in the State of West Bengal and
Biccavolu. Upon such inventory having been made, the ..stock of tobacco C ·
lying in the godown at Guntur and Biccavolu were ordered by a learned
Single Judge of the High Court to be sold by auction and the Joint Receivers
were directed to keep separate accounts of the sale proceeds of the goods m
the two godowns. The said sale was later on confirmed and the sale proceeds
of Rs. 135 lacs was directed to be deposited in a fixed deposit with the
Appellant. The company was directed to be wound up by the learned Company D
Judge by an order dated 25.11.1991 and an Official Liquidator was directed
to take possession of the assets of the company. The said order dated
25.l I.1991 was, however, stayed in view of a scheme for revival of the
company which was approved; whereupon a committee of management was
appointed by the Calcutta High Court which was directed to reopen and run E
the factories of the company both at Agarpara and Biccavolu. The said scheme
of management, however, ultimately having failed, the assets and properties
of the company were directed to be sold by an order dated 23.9.1993 as an
on-going concern. By reason of an order dated 12. l 0.1993, the Company
Judge directed the Appellant to pay a sum of Rs. 38 lakhs to the Official
Liquidator on an ad hoc basis for the purpose of disbursing salaries to the F
officers, staff and workers of the company before the ensuing Puja vacation.

An appeal preferred thereagai~st by the Appellant was dismissed by a
Division Bench of the High Court by an order dated 23.11.1993 directing the
Joint Receivers to draw the s~id sum of Rs. 38 lakhs from the fixed deposit
made with the Appellant and pay the same to the Joint Special Officers in G
terms of the order of the learned Single Judge.

Two Special Leave Petitions were filed by the Appellant before this
Court which were marked as S.L.P. (Civil) No. 20833of1993 and 20834 of
1993 against the said orders of disbursal . whereupon by an order dated H
782 SUPREME COURT REPORTS c2oos1 2 s.c.R.
A 14.1.1994, an interim order of stay was passed. In the year 1995, an application
was filed by the workers before the High Court for a declaration that they are
entitled to a sum of Rs. 19,57,77,408 towards their past dues. The said
application is still pending decision before the Company Judge. The assets
and properties of the company were directed to be auctioned by the Joint
B Special Officers in June 1995 and by an order dated 29.6.1995, the sale
thereof in favour of Mis R.D Industries Limited for Rs. 23 crores was
confirmed. It is stated that, in the meantime, an agreement was entered into
by and between the Appellant herein and the said Duncan Agro Industries
Limited to underwrite the dues of the company on the condition that the
amount would be repaid to the extent it was able to recover its dues from the
C company. Allegedly, the said agreement has been performed by Duncan·only
partially.

This Court by an order dated 9.1.1998, requested the High Court to
dispose of the penqing appeal and directed that the interim stay, granted on
14.1.1994 would continue for a period of seven months; whereupon by reason
D of a judgment and order dated 19 .3 .2002, the appeal preferred by the Appellant
herein. was dismissed by ·th~ Division Bench, stating : ·

"Having regard to the above facts, circumstances, materials on record
and the legal aspects as discussed above we find no infirmify in the
impugned order passed by the learned Company Judge. There is' no
E merit in the appeal. The appeal is accordingly dismissed. Tlie order
under appeal is affirmed subject to the following directions. We direct
the Joint Receivers to draw the sum of Rs. 38 lakhs from the fixed
deposit made with the appellant Andhra Bank arid pay the amourit to
the Joint Special Officers ih terms of the order dated 12th October,
1993 passed by the learned Single Judge for disbursement of salary
F
to the officers, staff and workers of New Tobacco·Co. Ltd. The Joint
Receivers are directed to encash the fixed deposit receipts only after
their maturity, ifthe same have not already matured and will continue
to hold the balance amount with interest in further short term deposit
account until further orders to be obtained from any appropriate forum:
G . The Joint Special Officers are directed to disburse the money within
one rrionth from the date of recei"pt of the money from the Joint
Receivers in terms of the direction contained in the order dated 12th
October, 1993. No order as to costs."

In the meantime, the suit filed by the Appellant was transferred to
H Debts Recovery Tribunal on 25.7.2000.
ANDHRA BANK v.OFFICIAL LIQUIDATOR [SINHA, J.] 783
SUBMISSIONS : A
Mr. L. Nageshwar Rao, the learned Senior Counsel appearing on behidf
of the Appellant, assailing the judgment and order p(_lssed by the Division
Bench of the High Court, would contend: (1) that the assets of the company
having been sold as a going concern and the purchaser having been permitted
to enter into a settlement as regard past salaries of the workmen, the Hig~ B
Court could not have passed the impugned order as the workmen could
approach only if such amount was not sufficient to pay the entire dues of the
workmen; (2) the impugned order which was ad hoc in nature could not have
been passed by the High Court particularly in view of the fact that the
Appellant was outside the purview of the winding up proceeding as it filed C
the suit upon obtaining leave of the learned Company Judge in terms of
Section 446 of the Companies, 1956; and (3) the workers' dues could not be
held to have any precedence over all secured and unsecured creditors as has
been held by this Court in Allahabad Bank (supra) and reliance thereupon by
the High Court is unsustainable.
D
Drawing our attention to a judgment of this Court Allahabad Bank
(supra), the learned counsel would contend that although in earlier paragraphs
therein this Court has correctly interpreted the provisions of Sections 529 and
529-A of the Companies Act, the observations made in paragraph 76, being
contrary thereto in relation to the secured creditors standing outside the winding
up proceeding, was not correct. E

The learned counsel would contend that the learned Single Judge of the
High Court while passing the order dated 12.10.1993 did not apply his mind
to the question as regard· its jurisdiction in passing an ad hoc order. The
Division Bench of the High Court also, Mr. Rao would submit, committed a F
manifest error in passing the impugned judgment relying on or on the basis
of the said observations made by this Court in Allahabad Bank (supra).

Drawing our attention to the auditor's report, Mr. Rao would submit
that it would appear therefrom that a sum of 6.8 crores has already been paid
to the workmen in terms of the settlement arrived at by and between the G
purchaser and the workmen, and, thus, the High Court must be held to have
committed a manifest error in passing the impugned order. As regard the
purported agreement entered into by and between the Appellant and the
aforementioned Duncan Agro Industries Limited, Mr. Rao drew our attention
to the following statements made in the Rejoinder Affidavit :
H
784 SUPREME COURT REPORTS [2005] 2 S.C.R.

A "With reference to paragraphs 6, 7, 7(a) and 7(b) of the affidavit,
it is stated that the same are not germane to the issues in the SLP. It
is stated that pursuant to the said agreement dt. 11th December 1996
between M/s Duncan Agro Industries Limited and the petitioner bank,
the latterreceived Rs. 135 la~hs on 30th December 1996. The balance
amount of Rs. 135 lakhs, M/s DAIL have deposited Rs. 45 lakhs in
B a 'No Lien' deposit account in their own name with the petitioner
bank. Shares worth Rs. 90 lakhs in the year 1996 are also lying
deposited with the bank in terms of the said agreement. The value of
the said shares is drastically reduced today. The claim of the bank has
· thus not been settled or even fully secured. After applying interest @
c 18.5% p.a. as claimed in the plaint in the bank's suit now pending
before ORT at Calcutta on the principal claim amount of Rs.·
2,69,54,228 and after adjusting Rs. 135 lakhs in the year 1996, there
is no due and owing by the said company in liquidation a sum of Rs.
35,50,80,103.15 as on 30th June, 2002. In any event clause (5) of the
said agreement states as follows :
D
"That ifthe Hon'ble Calcutta High Court allows the Bank to
receive from the Joint Receivers the whole of Rs. 135.00 lacs
with or without the interest accrued thereon lying with Joint
Receivers being the sale proceeds of hypothecated goods against
the dues ofNTC to the Bank, the Bank is entitled to appropriate
E the said amount towards the balance of the suit amount of Rs.
135 lacs and interest accrued thereon. In the above event the
entire amount of money being in the fixed deposit together with
interest thereon referred to in paragraph 3 herein above, will be
....._
returned to the company within thirty days from the date of the
F order."

The petitioner bank is therefore obliged to conduct its suit and
enforce its claim in respect of Rs. 135 lakhs, being sale proceeds of
tobacco lying with Joint Special Officers in the matter. It is denied
that the claim.ofthe petitioner bank against the company in liquidation
G has been settled.''

Mr. Dipankar P. Gupta, learned Senior Counsel appearing on behalf of
the Respondents, on the other hand, would submit that the High Court has
extensive jurisdiction to decide any question aris1ng between the parties or
any claim made under the Companies Act in terms of Section 446 thereof,
H the impugned order was within the jurisdiction of the High Court.
ANDHRA BANK v.OFFICIAL LIQUIDATOR [SINHA, J.] 785
Mr. Gupta would draw our attention to the fact that the learned Single A
Judge passed the order as far back as 1993, when the judgment of this Court
in Allahabad Bank (supra) was not pronounced and even the Debts Recovery
Tribunal was not constituted (it was constituted in the State of West Bengal
on 27.4.1994), and submit that the impugned judgment should be upheld
without reference to the provisions of the Recovery of Debts Due to Banks
and Financial Institutions Act, 1993 ('the ROB Act', for short) or the decision B
of this Court in Allahabad Bank (supra). It was urged that keeping in view
the fact that the Bank claimed its security only ir. relation to 135 lakhs
whereas the claim of the workmen was more than 19 crores, and having .
regard to the provisions contained in Section 529 of the Companies Act, the
impugned order does not cause any prejudice to the Appellant. In any event, C
having regard to the purport and object of Section 529 and 529-A of the Act,
this Court should not interfere with the impugned judgment. Reliance, in this
connection, has been placed on Jay Laxmi Salt Works (P) Limited v. State of
Gujarat, [1994] 4 SCC I.

Drawing our attention to the following statements made in paragraph 6 D
of the Affidavit filed before this. Court, the learned counsel would contend
that the Appellant should not be permitted to take a different stand in its
Rejoinder:

"I aiso respectfully submit that Mis Duncan Industries Ltd.,
formerly known as Duncan Agro Industries Ltd., from which the E
New Tobacco Company was transferred and amalgamated in 1984,
the said Duncan Industries Ltd. has also paid the Bank's suit amount
of Rs. 270 lacs to the Bank with a clause that in the event of adjustment
of SJlle proceeds of Rs. 135 lacs is passed which is to be adjusted by
the Hon'ble Court, the same amount to be refunded to the Duncan p
Industries Ltd ... "

POINTS FOR DETERMINATION :

In view of the rival submissions made at the Bar, the questions which
arise for our consideration are : (i) whether the statement of law contained G
in paragraph 76 of the judgment of this Court in Allahabad Bank (supra)
does not lay down a good law; (ii) whether the impugned judgment could
have been passed by way of an ad hoc measure in view of the fact that the
company was sold as a going concern and the workers' dues were to be paid
. from the sale proceeds of the assets of the company; and (iii) whether any
payment could be made to the parties to the winding up proceedings only H
786 SUPREME COURT REPORTS (2005] 2 S.C.R.

A upon considering the claims of all the creditors and in terms of the certificate
issued ·by the Debts Recovery Tribunal under the the .ROB Act.

ALLAHABAD BANK :
·•
The Allahabad Bank was an unsecured creditor; it had obtained a simple
B money decree from the D~bts Recovery Tribunal (ORT) again.st the debtor
Company Mis M.S. Shoes (East) Co. Limited, wherea5 the Respondent therein,
Canara Bank, ·was a secured creditor, but its claim was pending before the
ORT at Delhi. A sale proceeding was taken by the Allahabad Bank before the
Recovery Officers under the ROB Act. The learned Company Judge in exercise
C of his power under Sections 442 and 537 of the· Companies Act stayed the
proceedings. A question a~ose as to whether the Appellant Allahabad Bank
was obliged to seek leave of the Company Court under the Companies Act
and the Company Court could stay the said proceedings under Sections 442
and 537 of the Companies Act. for the ultimate purpose of deciding the
priorities, in the event of a winding up order or other order appointing a
D provisional liquidator being passed under Sect~on 446~1) of the Companies
Act: 1The Allahabad Bank. contended that the Tribunal under th~ ROB Act
was·competent to deal wi~h the questio~. of appropriation of sale proceeds in
respect of sales of the company properties held at the instance of the Appellant
and the Appellant alone was entitled to all the sums so realized. This Court
framed the following issues :
E ' • • .J

"(l) Whether in respect of proceedings under the ROB f.ct at the
stage of adjudication for the money due. to ~he banks or financial
institutions and at the stage of execution for recovery of monies
under the ROB Act, the. Tribunal and the Recovery Officers are
conferred exclusive jurisdiction in their respective spheres ?
F
(2) Whether for initiation of various proceedings by the banks
and financial institutions under the ROB Act, leave of the Company
Court is necessary under Section 537 before a winding-up order is
passed against the company or before provisional liquidator is
appointed under Section 446(1) and whether the Company Court can
G pass orders of stay of proceedings before the Tribunal, in exercise Of
powers under Section 442?

(3) Whether after a winding-up order is passed under ' Section
446( l) of the Companies Act or a provisional liquidator is appointed,
whether the Company Court can stay proceedings under the ROB
H
ANDHRA BANK v.OFFICIAL LIQUIDATOR [SINHA, J.] 787
Act, transfer them to itself and also decide questions of liability, A
execution and priority under Section 446(2) and (3) read with Sections
529, 529-A and 530 etc. of the Companies Act or whether these
questions are all within the exclusive jurisdiction of the Tribunal?

(4) Whether in case it is decided that the distribution of monies
is to be done only by the Tribunal, the provisions of Section 73 CPC B
and sub-sections (-1) and (2) of Section 529, Section 530 of the
Companies Court also apply - apart from Section 529-A - to the
proceedings before the Tribunal under the RDB Act ?

( 5) Whether in view of provisions in Sections 19(2) and 19(19)
as introduced by Ordinance 1 of 2000, the Tribunal can permit the C
appellant Bank alone to appropriate the entire sale proceeds realised
by the appellant except to the limited 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 D
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 E
Court?

As regard the first issue, it was held :

"In our opinion, the jurisdiction of the Tribunal in regard to
adjudication is exclusive. The RpB Act requires the Tribunal alone F
to decide applications for recovery of debts due to banks or financial
institutions. Once the Tribunal passes an order that the debt is due,
the Tribunal has to issue a certificate under Section 19(22) [formerly
under Section 19(7)) to the Recovery Officer for recovery of the debt
specified in the certificate. The question arises as to the meaning of
the word "recovery" in Section 17 of the Act. It appears to us that G
basically the Tribunal is to adjudicate the liability of the defendant
and the!} it has to issue a certificate under Section 19(22). Under
Section 18, the jurisdiction of any other court or authority which
. would otherwise have had jurisdiction but for the provisions of the
Act, is ousted and the power to adjudicate upon the liability is H
788 SUPREME COURT REPORTS {2005] 2 S.C.R.

A exclusively vested in the Tribunal. (This exclusion does not however
apply to the jurisdiction of the Supreme Court or of a High Court .
exercising power under Articles 226 or 227 of the Constitution.).
This is the effect of Sections 17 and 18 of the Act.''

This Court while considering the position of secured creditors standing
B outside the winding up proceeding·s, notic.ed the provisions of Section 529-
A and 529 of the Companies Act; holding :

"But the point here is that the occasion for such a claim by a
secured creditor {here Canara Bank) against realisations by other
creditors (like Allahabad Bank) under Section 529-A read with proviso
c (c) to Section .529(1) can arise before the Tribunal only if Canara
Bank has stood outside winding-up and realised amounts and if it
shows that out of the amounts privately realised by it, some portion
has been rateably taken away by the liquidator under clauses (a) and
(b) of the proviso to Section 529(1). It is only then that" it can claim
that it is to be reimbursed at the same level as a secured creditor with
D
priority over the realisations of other creditors lying in the Tribunal.
None of these conditions is satisfied by Canara Bank. Thus, Canara
Bank does not. belong to the class of secured creditors covered by
Section 529-A( I )(b ).

E Therefore, the result is that Canara Bank cannot rely on the words
in Seetion 19(19) viz., "to be distributed among its secured creditors"
for claiming any amount lying in the Tribunal towards its security
nor can It claim priority as against Allahabad Bank.

If none of the-conditions required for applying Section 19(19)
F and Section 529-A is, therefore, satisfied, then the claim of Canara
Bank before the Tribunal can only be on the basis of principles
underlying Section 73 CPC. There being no decree in its favour from
any court or from any Tribunal, and the other conditions of Section
73 not having been satisfied, no dividend can be claimed out of
monies realised at the instance of Allahabad Bank, even if Allahabad
G Bank is an unsecured creditor."

As regard Point No. 6, however, this Court at paragraph 76 of the
judgment held :

"The next question is whether the amounts realised under the
H ROB Act at the instance of the appellant can be straight away released
ANDHRA BANK v.OFFIC!AL LIQUIDATOR [SINHA, J.] 789

in its favour. Now, even if Section 19(19) read with Section 529-A A
of the Companies Act does not help the respondent Canara Bank, the
said provisions can still have an impact on the appellant Allahabad
Bank which has no doubt a decree in its favour passed by the Tribunal.
Its dues are unsecured. The "workmen's dues" have priority over all
other creditors, secured and unsecured because of Section 529-A(l)(a), B
There is no material before us to hold that the workmen's dues of the
defendant Company have all been paid. In view of the general
principles laid down in National Textile Workers' Union v. P. R.
Ramakrishnan, [1983] I SCC 228 : [1983] SCC (L&S) 72 : [1983]
SCC Tax 2 : AIR (1983) SC 75 there is an obligation resting on this
Court to see that no secured or unsecured creditors including banks C
or financial institutions, are paid before the workmen's dues are paid.
We are, ther,efore, unable to release any amounts in favour of the
appellant Bank straight away."

The observations were presumably made having regard to the fact
situation obtaining therein as the Allahabad Bank was an unsecured creditor D
and the Canara Bank although a secured creditor would not come within the
purview of Section 529 and 529-A of the Companies Act. The decision in
Allahabad Bank (supra) could, thus, be explained but we think it necessary
to clarify the legal position having regard to the fact that the matter has been
referred to this Bench and particularly when reliance thereupon has been E
placed by the High Court as a proposition of law as regard interpretation of
Section 529 and 529-A of the Companies Act.

Before adverting to the question, we may notice the relevant provisions
of Sections 529A and 529 of the Companies Act, which read as under :

"529-A. Overriding preferential payments. - (I) Notwithstanding F
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 G
under clause (c) of the proviso to sub-section (I) 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 (I) shall be paid in full, unless the assets are insufficient to
meet them, in which case they shall abate in equal proportions. H
·-

790 SUPREME COURT REPORTS [2005] 2 S.C.R.

A 529. Application of insolvency rules in winding up of insolvent
companies. - (I) 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;
B
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 :
c 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, -
D (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
E
(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 ofth~'.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.
F
(2) All persons who in any such· case would be entitled to prove
for and receive dividends out of the asst>ts 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 :

G * * *
(3) For the purposes of this Section, Section 529A and Section
530,-

(a) * * *
H
ANDHRA BANK v.OFFICIAL LIQUIDATOR [SINHA, J.] 791

(b) * * * A
(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 -
B
(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 Rs. 1,00,000. The total amount of the workmen's dues is.
Rs. 1,00,000. The amount of the debts due from the company to its C
secured creditors is Rs. 3,00,000. The aggregate of the amount of
workmen's dues and of the amounts of debts due to secured creditors
is Rs. 4,00,000. The workmen's portion of the security is, therefore,
one-fourth of the value of the security, that is Rs. 25,000."

In terms of the aforementioned provisions, the secured creditors have D
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(l )(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 E
relation to the security of any secured creditor means the amount which bears
to the value of the security in 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 creditors. The submission of Mr. Gupta is
that in a situation of this nature, what was necessary to be considered by the
learned Single Judge was to find out the amount in relation whereto the F
appellant was raising its claim as a secured creditor, namely, 135 lakhs vis-
a-vis the aggregate of the amount of the workmen's dues of 19 crores and the
claim of any other secured creditor was not required to be taken into
consideration. We cannot accept the said contention. The illustration appended
to clause (c) of sub-section (3) of Section 529 is a clear pointer to the effect G
that the amount of debts due to the secured creditors should be taken into
consideration for the purpose of ascertaining the workmen's portion of security.

The language of Section 529-A is also clear and unequivocal, in terms
whereof the workmen's due or the debts due to the secured creditors to the
extent such debts rank Linder clause (c) of the proviso to sub-section (1) of H
792 SUPREME COURT REPORTS [2005] 2 S.C.R.

A 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 claim of the workmen as also the
secured creditors will have to be paid in terms of Section 529-A. This Court
in Allahabad Bank (supra) held :

B "Learned Attorney General on the other hand submitted that the
first part of clause (c), of the proviso to Section 529(1) is to be read
along with the words "or the amount of the workmen's portion in his
security, whichever is less". Jn other words, the priority of the secured
creditor is only to the extent that any Pllrt of the said security is lost
in favour of the workmen consequent to demands ma.de by the
c liquidator under ciauses (a), (b) or the said proviso to Section 529(1 ).
No such situation· has arisen so far. It is contended that where a
secured creditor keeps himself outside as stated in the proviso to
Section 529( 1) and seeks to recover his dues outside the Company
Court, if he loses part of his security towards workmen's dues, he
D gets reimbursed to that extent as a secured creditor, with an overriding
priority under Section 529-A(l)(b). He gets priority over all other
creditors before the Tribunal, to be compensated for this loss out of
the monies that may have been realised at the instance of other creditors
before the Tribunal. It is pointed out that Canara Bank has neither
realised any amount outside winding-up nor has it lost any part of its
E security towards workmen's dues. fn our view, this contention of the
learned Attorney General is well founded and is entitled to be accepted.

In our opinion, the words "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" obviously mean the amount
F taken away from the private realisation of the secured creditor by the
liquidator by way of enforcing the charge for workmen's dues under
clause (c) of the proviso to section 529(1) "rateably" against each
secured creditor. To that extent, the secured creditor - who has stood
outside the winding-up and who has lost a part, of the monies otherwise
G covered by, security - can come before the Tribunal. to reimburse
himself from out of other monies available in the Tribunal, claiming
priority over all creditors, by virtue of Section 529-A( I )(b ). "

This Court emphasized that whatever secured creditor loses towards the
workmen's portion out of the security, he can claim the same amount with
H priority over such unsecured creditors out of realization made by other creditors
ANDHRA BANK v.OFFICIAL LIQUIDATOR [SINHA, J.] 793
whose moneys are lying in the Tribunal. A
While detennining the Point No. 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(l)(a). Such a
question did not arise in the case as the Allahabad Bank was indisputably an
unsecured creditor. B
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(l)(a). We have,
therefore, no hesitation in holding that finding of this Court in Allahabad C
Bank (supra) to the aforementioned extent does not lay down the correct law.

The court also wrongly placed reliance on National Textile Workers'
Union and Ors. v. P.R. Ramakrishnan and Ors., [1983) 1 SCC 228. The
q~estion which arose therein was only as regard the right of the workers be
heard in the winding up proceeding. The said decision was, therefore, not D
applicable.

DETERMINATION :

By reason of the order dated 12.10.1993, the learned Single Judge
while issuing various directions, directed : E
"Andhra Bank is directed to pay a sum of Rs. 38 lacs to the
official liquidator for the purpose of disbursing forthwith the salary
to the officers, staff and workers of New Tobacco Co. Ltd., both at
Calcutta and Durgapur, before the ensuing Puja. The Official
Liquidator will disburse such salary to the officers, staff and workers F
ofNew Tobacco Co. Ltd., as aforesaid, before the ensuing Puja."

No reason has been assigned in support of the said direction. The
contentions of the parties had not been noticed. What impelled the learned
Judge in issuing the said directions is not discernible. The jurisdictional G
question had also not been addressed.

Whether the workmen could be directed to be paid on an ad hoc basis
having regard to their claim of past dues vis-a-vis the claim of the Appellants
had not been deliberated upon. When a matter is not pending before the
Tribunal under the RDB Act, in tenns of Section 19(19) thereof, the secured H
794 SUPREME COURT REPORTS . [2005) 2 S.C.R.

A creditors would not get priority per se as it is qualified by the words "in
accordance with the provisions of Section 529-A". The claims of the secured
creditors are, thus, required to be considered giving priority over unsecured
creditors but their claim would be pari passu with the workmen.

Section 446 of the Companies Act indisputably confers a ~ide power
B upon the Company Judge, but such a power can be exercised only upon .·
consideration of the respective contentions of the parties raised in a suit or
a proceeding or any claim made by or against the company. A question of
determining the priorities would also fall for consideration if the parties
claiming the same are before the court. Section 446 of the Companies Act
C ipso facto confers rlo power upon the court to pass interlocutory orders. The
question as to whether the courts have inherent power to pass such orders,
in our opinion, does not arise for consideration in this proceeding. Assuming
-
such a power exists, it was imperative that the same should have been exercised
on consideration of the factors laid down by. this Court in Morgan Stanley
MutualFund etc. v. Kartick Das etc., [1994] 4 SCC 225. An unreasoned
D order does not subserve the doctrine of fair play [See lvfls. Mangalore Ganesh
Beedi Works v. The Commissioner of Income Tax, Mysore and Anr., JT
(2005) 2 SC 442 ].

In UCO Bank ':'· Official Liquidator, High Court, Bombay and Anr.,
[1994] 5 SCC 1, whereupon Mr. Gupta placed strong reliance, this Court
E although noticed the legislative intent in enacting Sections 529 ·and 529-A
did not lay down the law that the claim of the workers ranked higher in
priority than the secured creditors.· It merely states that for achieving the
purpose for which the said amendment was made, it is necessary that the.
amended provisions must apply to all available securities which form part of
F the assets of the company in liquidation on the date of the amendment.

. Submission of Mr. Gupta, that the impug!:ied order qav.ing been passed
by the learned Single Judge in the year 1993, the considerations which·
prevailed at that time only should be ~onsidered, cannot be. accepted as ·it is
trite that even the appellate court while passing its order may .take into
G consideration, the subsequent events.
In Rajesh D.. Darbar and Ors. v. Narasingrao Krishnaji Kulkarni and
Ors., [2003] 7 SCC 219, this Court noticed :

"4. The impact of subsequent happenings may now be spelt out.
H First, its bearing on the right of action, second, on the nature of the
ANDHRA BANK v.OFFICIAL LIQUIDATOR [SINHA, J.] 795

relief and third, on its importance to create or destroy substantive A
rights. Where the nature of the relief, as originally sought, has become
obsolete or unserviceable or a new form of relief will be more
efficacious on account of developments subsequent to the suit or
even during the appellate stage, it is but fair that the relief is moulded,
varied or reshaped in the light of updated facts. Patterson v. State of B
Alabama, (1934] 294 U.S. 600, illustrates this position. It is important
that the party claiming the relief or change of relief must have the
same right from which either the first or the modified remedy may
flow. Subsequent events in the course of the case cannot be constitutive
of substantive rights enforceable in that very litigation except in a
narrow category (later spelt out) but may influence the equitable C
jurisdiction to mould reliefs. Conversely, where rights have already
vested in a party, they cannot be nullified or negated by subsequent
events save where there is a change in the law and it is made applicable
at any stage. Lachmeshwar Prasad Shukul v. Keshwar Lal Chaudhuri,
AIR (1941) FC 5 falls in this category Courts of justice may, when
the compelling equities of a case oblige them, shape reliefs - cannot D
deny rights - to make them justly relevant in the updated circumstances.
Where the relief is discretionary, Courts may exercise this jurisdiction
to avoid injustice. Likewise, where the right to the remedy depends,
under the statute itself, on the presence or absence of certain basic
facts at the time the relief is to be ultimately granted, the Court, even E
in appeal, can take note of such supervening facts with fundamental
impact. This Court's judgment in Pasupuleti Venkateswarlu v. Motor
& General Traders, AIR (1975) SC 1409 read in its statutory setting,
falls in this category. Where a cause of action is deficient but lr.ter
events have made up the deficiency, the Court may, in order to avoid
multiplicity of litigation, permit amendment and c.ontinue the F
proceeding, provided no prejudice is caused to the other side. All
these are done only in exceptional situations and just cannot be done
if the statute, on which the legal proceeding is based, inhibits, by its
scheme or otherwise, such change in cause of action or relief. The
·primary concern of the court is to implement the justice of the G
legislation. Rights vested by virtue of a statute cannot be divested by
this equitable doctrine - See V.P.R. V. Chockalingam Chetty v. Seethai
Ache, AIR (l 927) PC 252."

(See also Board of Control for Cricket, India and Anr. v. Netaji Cricket
qub and Ors., JT (2005) l SC 235]. H
796 SUPREME COURT REPORTS [2005) 2 S.C.R.

A Correctness of an equitable order like the impugned one may be judged
upon taking into consideration the subsequent events. Subsequent events as
pointed ou·t by Mr. Rao, furthermore, are not disputed.

The learned Company Judge in its order .dated 8.5.2002 has noticed
that a substantive amount has been paid to the workers towards their past
B .dues. Payments have also been made not only to the statutory authorities but
also to the secured creditors and the Special Officers. The workmen since the
sale of the assets of the company as a working concern, have received
substantial amounts towards their past dues and are being paid their current
dues. A situation of starvation of the workmen does no longer prevail. The
C order passed by the learned Single Judge cannot moreover be sustained on
amongst others, the ground of not assigning any reason in support thereof.
The Division Bench of the High Court also relied on the observation made
in paragraph 76 of this Court's judgment in Allahabad Bank (supra). It did
not advert independently to any other contention of the parties.

D The contention of Mr. Gupta that Debts Recovery Tribunal having
been established in the West Bengal on 27.4.1994, the dispute has to be
resolved without reference to the RDB Act, also cannot be accepted.

The rights and obligations of the parties would only be crystallized
after the lis is adjudicated upon.
E
The question of issuance of any certificate in terms of Section 19 of the
RDB Act would arise only upon the conclusion of the proceeding before it.

In view of our findings aforementioned, it may not be necessary for us
to 'consider the question as to whether the claim of the company having been
F underwritten by the Duncan Agro Industries Limited in favour of the Bank,
it has suffered any prejudice or not.

For the reasons aforementioned, the impugned judgment cannot be
sustained, which is set aside accordingly. The appeal is allowed. However, in
the facts and circumstances of the case, there shall be no order as to costs.
G
N.J. Appeal allowed.