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The given case is about the protection of the Employees payments during liquidation proceedings. It revolves around the question of jurisdiction concerned with the claim of employees interest in the liquidation equal to that of the company’s creditors. The Supreme Court held that the employees’ claims during the event of liquidation must be considered by the Official Liquidator of the company and not the Debt Recovery Tribunal (DRT). This judgement was passed by SC in the case of Bank of Maharashtra v. Pandurang Keshav Gorwardkar & Orsand along with that laid down certain guidelines for deciding employee claims.
Paper and Pulp Conversions Limited (‘Company’) had borrowed money as a loan from the Bank of Maharashtra (“Appellant”) in the year 1980. The company closed its operations on facing liquidity issues in the year 1992 following an order for liquidation by the Board of Industrial Financial Reconstruction (BIFR). The appellant filed a petition against the Company and its directors for the recovery of certain sums along with future interest on them. The DRT directed the company for the payment of the amount to the appellant and held that in the event of the failure of the Company to repay the due and outstanding amounts, the Appellant was entitled to recover such amount by the sale of the properties and assets of the Company.
Following this immediately the recovery proceedings were initiated by the employees of the Company(“Respondents”) before the DRT requesting for registering their claims before the auctioning of the properties by the Appellants. The movable properties were auctioned by the Recovery Officer and certain amounts were received against it from which a portion was set aside for the likely claim of the employees.
After this the employees file a writ petition before the Bombay High Court immediately for the appointment of a provisional liquidator and request for an order to stop the proceedings of the DRT. The petition was opposed by the Appellants. The Bombay HC passed an order for liquidation and appointing an Official Liquidator. The Bombay HC also agreed that DRT had the jurisdiction to determine the payment and all the important requirements related to it are vested in DRT along with directed DRT to retain Rs. 1,17,55,000 ( amount which was claimed by the employees) but the claim of the employees was determined for an appeal before the SC.
- Whether in case of liquidation of a company, the claims of the employees which rank paripassu(equal footing) to the creditors’ claims, should be considered by the Official Liquidator or the DRT?
All the section given below belong to the Indian Companies Act, 1956.
- Section 529 (1) (c)
Section 529 pertains to the application of insolvency rules in winding up of insolvent companies.
(1) “In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to-
(a) Debts provable,
(b) The valuation of annuities and future and contingent liabilities, and
(c) The respective rights of secured and unsecured creditors; as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent:
Provided that the security of every secured creditor shall be deemed to be subject to a paripassu 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 paripassu with the workmen’s dues for the purposes of section 529A”.
- Section 529 (3) (c)
(3) “For the purposes of this section, section 529A and section 530,-
(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 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 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.)”
- Section 529A
“Overriding preferential payment. 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’s dues; and
(b) Debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub- section (1) of section 529 paripassu 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 (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.”
There were two-fold arguments made by the Appellants.
Firstly, that employees cannot claim any rights over the security held by a bank or a financial institution and that DRT lacked requisite competence to decide on adjudication of their claims. The objective or aim of DRT is to adjudicate the claims and recovery of dues of banks and financial institutions and not employee related dues which should be dealt by an appropriate forum such as the Industrial Tribunal.
Secondly, if the debtor company is already in liquidation process and the security has been sold in the proceedings before the DRT, then such proceeds from sale must be distributed taking in regards paripassu the charge to the limited extent of “employees portion”. Therefore it was argued that the Company was in the process of starting their liquidation process and the employees had no claim to the assets of the Company or any standing to approach the DRT to participate in a proceeding filed by a bank or financial institution.
The employees on the other hand contended that the DRT had the right to anticipate not only a situation when the Company is in liquidation but also when the Company, though not in liquidation, will be rendered as an empty shell if the assets of the Company are sold and the proceeds are handed over to financial institutions and banks. With regard to the claims of the creditor, it was argued that the official liquidator represented the entire body of creditors and the rights of the employees rank paripassu with that of the secured creditors.
The SC while analysing the arguments, held that the employees’ dues were paripassu with secured creditors under section 529A of the Companies Act, 1956 and a combined reading of section 529A and proviso to section 529(1)(c) of the Act indicates that where a company is in liquidation, a statutory charge is created in favour of the employees in respect of their dues over the security of every secured creditor and this charge is paripassu with that of the secured creditor. Such statutory charge of the secured creditor is limited to the extent of the employees’ portion in relation to the security held by the secured creditor in the company.
After an in-depth analysis of the case there were certain measures that were according to me right according to the law of current times and correspond with the Companies Act of today. But the appellants were somewhere correct that employees’ claims should not override the creditor’s claim during the liquidation process. However, there are some statutory provisions already mentioned in this regard and that the claims of both employees and creditors are on equal footing and has to be applied wherever the company is going into liquidation. At this time it is mandatory to include the employees’ claim which is limited to the extent of the secured creditors and vice-versa.
The SC laid down certain rules for the determination of the claims of employees after the observations which are as follows:
- Statutory charge is created in favour of employees for their dues which is paripassu with that of the secured creditor when a company is in liquidation or when the assets of the company have been sold for the recovery of dues but before the proceeds realized from the sale have been disbursed. However, the same is limited to the extent of employee’s portion in relation to the security held by the secured creditor of the debtor company and will be decided on the date of the liquidation order.
- Prior to full and final disbursement of sale proceeds if the debtor company goes into liquidation and subsequently Official Liquidator is appointed, disbursement of undisbursed sale proceeds by DRT can only be done after giving notice to and hearing the liquidator. In the event of claims by employees, the DRT has two options:
- either pay off the bank or the financial institution as per the recovery certificate after securing an indemnity bond of restitution of the amount of the employees’ dues as may be finally determined by the Official Liquidator, or
- set apart tentatively, a portion of the undisbursed amount towards employees’ dues in the ration as per the illustration in Section 529(3)(c) of the Act and disburse the balance amount to the bank on an undertaking to resituate the amount to the extent of the employees’ dues as may be finally decided by the Official Liquidator.
- The first option must be exercised only in the situation where no application for distribution of employees’ dues against the company has been made by the Official Liquidator or the employees before the DRT.
- Where the sale of security has been effected in lieu of DRT’s recovery certificate, the distribution of proceeds has to be made by the DRT alone according to Section 529A of the Act and by no other authority.
- The employees acquire the standing of the secured creditors on and from the date of order of liquidation and become entitled to the distribution of sale proceeds.
The above case was a good example of how employees must not be left while ascertaining the claims of other stakeholders of the company especially during the process of liquidation or when the company is going empty or into insolvency. It also helps in deciding the jurisdiction of the appropriate forum under which the activity of distribution of claim lies along with defining certain rules to determine the claim of employees in a prescribed manner without any ambiguity.
Bank of Maharashtra v. Pandurang Keshav Gorwardkar & Ors. A.I.R. 2013 3 SCC 650.
 Indian Companies Act, 1956.
Section 529(1)(c) proviso read with Section 529A of the Companies Act, 1956.
Payal Chatterjee, Sahil Shah, India: Indian Court Protects Employees’ Payments During Liquidation Proceedings, NISHITH DESAI ASSOCIATES. (July. 10, 2020 at 10:00 P.M.) https://www.mondaq.com/india/employee-rights-labour-relations/256610/indian-court-protects-employees-payments-during-liquidation-proceedings.