UCO BANKversusTHE OFFICIAL LIQUIDATOR HIGH COURT, BOMBAY AND ANR.

A                            UCO BANK
                                  v.
                THE OFFICIAL LIQUIDATOR HIGH COURT,
                          BOMBAY AND ANR.

                                  JULY 11, 1994
B          1•

           ,;      [J.S. VERMA AND S.P. BHARUCHA, JJ.)

        Companies Act, 1956: Sections 529, 529-A and 530 (As amended by
    Companies (Amendment) Act, 1985}-Scope and object of
c
          Proviso to Section 529-He/d applicable to a secured Creditor's claim
    based on a decree obtained prior to its insenion.

          The appellant-Bank, a secured creditor of a Company against which
    a winding up order was passed, obtained a decree to recover its debt
D   against the Company. In the meantime, by the Companies (Amendment)
    Act, 1985, Sections 529 and 530 of the Companies Act, 1956 were amended
    and Section 529-A was inserted. The Proviso added lo Section 529(1)
    provided that the security of every secured creditor shall be deemed to be
    subject to a pari passu charge in favour of the workmen. The appellant's
E   claim, that the amendment including the newly added proviso was inap-
    plicable to its case since it had obtained the decree prior to the amend·
    ment, was allowed by the Company Court but on appeal the High Court
    rejected it.

          In appeal to this Court, ii was contended on behalf of the appellant·
F   Bank that the said proviso does not apply lo a decree obtained for
    realisation of the security available to the s_ecured creditor if the decree
    was obtained prior to the amendment even though realisation of the
    security by execution of the decree is subsequent to the amendment.

          Dismissing the appeal, this Court
G
          HELD : 1. The proviso to sub-section (i) of Section 529 inserted by
    the Amending Act clearly provides that the security of every creditor shall
    be deemed to be subject to a pari passu charge in favour of the workmen.
    The effect of the proviso is to create, by statute, a charge pari passu in
H   favour of the workmen on every security available to the secured creditor
                                       294
               UCO BANKv. OFFICIAL LIQUIDATOR, H.C.                      295

or the employer company for recovery or their debts at the time when the        A
amendment came into force. This expression is wide enough to apply to
the security or every secured creditor which remained unrealised on the
date or the amendment. The clear object or the amendment is that the
legitimate dues or workers must rank pari passu with those or secured
creditors and above even the dues or the Government. This literal con-
                                                                                B
struction or the proviso is in consonance with, and promotes the avowed
object or the amendment made. [298-G, H 29~A)

       2. The existence or the security on the date the amendment came into
effect creates a pari passu charge in favour or the workmen upon that
security. It is only if the security has been realised, pursuant to a decree,   C
prior to the date or the amendment that the pari passu charge is not
created, for there is no security upon which it can operate. There is,
therefore, no retrospectlvity in the operation or the provision as inter-
preted by this Court. [299-C]

                                                                                D
      3. A debt due to a secured creditor, when recovered by realisation or
the security after commencement or the winding up proceedings, results in
depletion or the assets in the hands or the Official Liquidator. In view or
the nHture of workmen's dues being similar to those of secured creditors,
the purpose or the provision is to place the workmen at par with the
secured creditors and create a statutory charge in their favour on all          E
available securities forming part or the assets or the company in liquida-
tion so that the workmen also share the securities pari passu with the
secured creditors. The workmen contribute to the growth or the capital and
must get their legitimate share in the assets or the company when the
situation arises for its closure and distribution or its assets first among     F
the secured creditors due to winding up or the company. The amendment
made in the Act is a statutory recognition or this principle. To achieve this
purpose, it is necessary that the amended provisions mnst apply to all
available securities which form part or the assets of the company in
liquidation on the date of the amendment. [299-D, E, ~')
                                                                                G
        CIVIL APPELLATE JURISDICTION : Civil Appeal No. 816 of
1992.

     From the Judgment and Order dated 16.10.91 of the Bombay High
Court in A.No. 920 of 1991.                                        H
    296                  SUPREME COURT REPORTS [1994) SUPP.1 S.C.R.

A        Dr. Shankar Ghosh, A.K. Sil, G. Joshi and G. Kandpal for the
    Appellant.

          Arvind Kumar, Ms. Lamli Arvind for the Respondent No. 1.

          Ms. Suruchi AggarwaUor Ms. Manik Karanjawala for the Respon-
B dent No. 2.
          The Judgiiient of the Court was delivered by

         VERMA, J. In Company Petition No. 27 'of 1971 for winding up of
   the Company - M/s. Glass Carboys & Pressedwares Limited - on the
C ground, contained in clause (e) of Section 433 of the Companies Act, 1956
   (hereinafter referred to as "the Act'), that the Company was unable to pay
   its debts, the learned Company Judge of the Bombay High Court made a
  'winding up order on 15.11.1972; and the Official Liquidator took posses-
  sion of the assets of the Company. The appellant UCO Bank was a secured
D creditor of the Company. It chose to stand outside the winding up proceed-
   ings and obtained a decree on 22.4.1976 to recover its debt. In pursuance
   of the decree obtained by the appellant, the High Court's Commissioner
   for Taking Accounts was directed to sell certain movables of the Company.
   In the meantime, the Companies Act, 1956 was amended by the Companies
   (Amendment) Act, 1985 (hereinafter referred to as ' the Amending Act")
E with effect from 24.5.1985 \>y which Sections 529 and 530 of the Principal
   Act were amended and Section 529A was inserted therein. One of the
   effects of the amendment, as mentioned in the Statement of Objects and
   Reasons of the Amending Act, is as under: -

F           '2. Another announcement made by the Finance Minister in his
            Budget speech reJates to the decision of the Goverrunent to intro-
            duce necessary legislation so that legitimate dues of workers rank pari
            passu with secured creditors in the event of closure of the company
            and above even the dues to Government. The resources of com-
            panies constitute a major segment of the material resources of the
G           community and common good demands that the ownership and
             control of the resources of every company are so distributed that
            in the unfortunate event of its liquidation, workers, whose labour
            and effort constitute an invisible but easily perceivable part of the
             capital of the company are not deprived of their legitimate right to
H           participate in the produce of their labour and effort. It is accordingly
        UCO BANK v. OFFICIAL LIQUIDATOR, H.C. [VE!lMA,J.)                     '197

    /   proposed to amend sections 529 and 530 of the Companies Act                  A
        and also to incorporate a new section in the Act, namely, section
        529A (vide clauses 4, 5 and 6 of the Bill)."

                                                             (emphasis supplied)

      In this appeal, the question for decision is as to the· true meaning           B
and scope of the proviso to sub-section (1) of Section 529 inserted by the
above am_endment as a part of the aforesaid scheme. Sub-section (1) of
Section 529 including the said proviso- is as under: -

        Application of insolvency rules in winding up of insolvent com-              C
        panies.

        529.(1) In the winding up of an insolvent company, the same rules
        shall prevail and be observed with regard to -

              (a) debts provable;                                                    D
              (b) the valuation of annuities and future and contigent
              liabilities; and

               (c) the respective rights of secured and unsecured creditors;
                                                                                     E
         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,
                                                                                     F
        where a secured creditor, instead of relinguishing his security and
        proving his debt, opts to realise his security, -

         (a) the liquidator shall be entitled to represent tl\e workmen and
         enforce such charge;                                                        G
      (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

     Inserted by the Companies (Amc,ndmcnt) Act, 1985." (emphasis supplied)          H
    298                  SUPREME COURT REPORTS [1994] SUPP. l S.C.R.

A           (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,
            wlllchever is less, shall rank pari passu with the workmen's dues
            for the purposes of section 529A.]

B         The contention of the appellant, a secured creditor, which was
    accepted by the learned Company Judge but, on appeal, has been rejected
    by the Division Bench of the High Court in the impugned order dated
    16.10.1991 in Appeal No. 920 of 1991, was that the aforesaid amendment
    including the above-quoted proviso is inapplicable in the present case since
C   the decree had been obtained by the appellant prior to the above amend-
    ment made in the Principal Act. The submission of Dr. S. Ghose, learned
    counsel for the appellant, is that the above amendment including the said
    proviso has no application to a secured creditor's claim based on a decree
    obtained prior to the said amendment. In other words, the submission is
D   that the said proviso does not apply to a decree obt~ined for realisation of
    the security available to the secured creditor if the decree was obtained
    prior to the amendment even though realisation of the security by execution
    of the d~cree is subsequent to the amendment. We fmd no merit in this
    contention.

E          Part VII of the Companies Act, 1956 relates to 'Winding up' and
     therein Sections 528 to 530 pertain to 'Proof and ranking of claims' in
     Chapter V relating to 'Provisions applicable to every mode of winding up'.
    ·section 529 deals with 'Application of insolvency rules in winding up of
     insolvent company', Section 529A with 'Overriding preferential payments,
     and Section 530 with 'Preferential payments'. It is obvious that these
F    provisions, as they exist, apply to a winding up proceeding.

          The proviso to sub-section (1) of Section 529 inserted by the Amend-
    ing Act clearly provides that 'the security of every secured creditor shall
    be deemed to be subject to a pari passu charge in favour of the workmen'.
G   The effect of the proviso is to create, by statute, a charge pari passu in
    favour of the workmen on every security available to the secured creditors
    of the employer company for recovery of their debts at the time when the
    amendment came into force. This expression is wide enough to apply to
    the security of every secured creditor which remained unrealised on the
    date of the amendment. The clear object of the amendment is that the
H   legitimate dues of workers must rank pari passu with those of secured
         UCO BANK v. OFFICIAL LIQUIDATOR, H.C. [VERMA, J.]                299

creditors and above even the dues of the Government. This literal construe- A
lion of the proviso is in consonance with, and promotes, the avowed object
of the amendment made. On the contrary, the construction of the proviso
suggested by the learned counsel for the appellant, apart from being in
conflict with the plain language of lhe proviso also defeats the object of
the legislation.
                                                                                 B
       The existence of the security on the date the amendment came into
effect creates a pari passu charge in favour of the workmen upon that
security. It is only if the security has been realised, pursuant to a decree,
prior to lhe date of the amendment that the pari passu charge is not
created, for there is no security upon which it can operate. There is,           C
therefore, no retrospectivity in the operation of the provision as interpreted
by us.

      A debt due to a secured creditor, when recovered by realisation of
the security after commencement of the winding-up.proceedings, r.esults in
depletion of the assets in the hands of the Official Liquidator. This            D
provision is intended to protect the interests of the workmen in proceed-
ings for winding-up. In view of the nature of workmen's dues being similar
to those of secured creditors, the purpose of this provision is to place the
workmen at par with the secured creditors and create a sta.tutory charge
in their favour on all available securities forming part of the assets of the    E
company in liquidation so that the workmen also share the securities pari
passu with the secured creditors. The workmen contribute to the growth
of the capital and must· get their legitimate share in the assets of the
company when the situation arises for its closure and distribution of its
assets first among the secured creditors due to winding up of the company.
The aforesaid amendment made in the Act is·a statutory recognition of this       F
principle equating the legitimate dues of the workmen with th~ debts of
the secured creditors of the company. To achieve this purpose, it is
necessary that the amended provision must apply to all available securities
which form part of the assets of the company in liquidation on the date of
the amendment. The conclusion reached by. the Division Bench Of the
High Court is supported by this reason.                                          G

      Consequently, the appeal is dismissed with costs quantified at
Rs.5000 (Rupees five thousand) only.

T.N.A.                                                     Appeal dismissed.