Textile Labour Association and Ors. v. The Official Liquidators and Ors.

The case discusses that the relationship of workmen with the company is a tight rope of trust to walk on. It is because of the sheer hard work of the workmen that a company flourishes. However, sometimes this relation is strained especially during the times of winding up of the company.
Estimated Reading Time: 11 minutes

Introduction

The relationship of workmen with the company is a tight rope of trust to walk on. It is because of the sheer hard work of the workmen that a company flourishes. However, sometimes this relation is strained especially during the times of winding up of the company. During such scenarios, it becomes imperative to protect the rights of workmen which include payment of their due wages. Therefore, the legislature gives preference to their claims under the Companies Act, 2013. Their rights have also been secured by the courts through its interpretation in favor of workmen. One such instance is the judgment in Textile Labour Association and Ors. v. The Official Liquidators and Others.[1] Where the Supreme Court propounded interpretation of Sections 529, 529A and 530 of the Companies Act, 1956.

Facts

The present petition was a review petition before the Supreme Court wherein the court was hearing a set of appeals arising out of orders passed in writ petitions by a Division Bench of Gujarat High Court in Association titled Natural Gas Consuming Industries and Ors. v. Oil and Natural Gas Commission and Another.[2]In I.A. No, 168-178 of 1997 filed by the official liquidator in respect of Ambica Mills Ltd., the Supreme Court ruled that the dues of ONGC Ltd, were required to be paid off first and remaining creditors claim could arise only out of the surplus if any available.

The petitioner no. 1 was a labour association representing the workmen of Shri Ambica Mills Ltd. and petitioner no. 2 was also a labour association representing the workmen of Ambica Tubes which was a division of Shri Ambica Mills Ltd. On 15th April, 1987 the Supreme Court had directed the ONGC to supply gas to its consumers subject to the undertaking that they would not charge, encumber or alienate any of their immovable assets without the leave of the court. Subsequently, Company Petition No. 66 of 1988 was filed for winding up of Shri Ambica Mills Ltd. However, while the petition was pending before the court a reference under the Sick Industrial Companies (Special Provisions) Act, 1958 was filed before the Board for Industrial and Financial Reconstruction (BIFR) which opined that under Section 20 of the Sick Industrial Companies (Special Provisions) Act, 1985 it was just and equitable to wind up the company. Relying on this opinion[3], the Court passed the order to wind up the company on 17th January, 1997.Learning about this, the petitioners claimed that there were outstanding dues of the workmen of Shri Ambica Mills. However, the official liquidator refused to pay back citing the reason that there were no funds at disposal and even if amounts were realized out of sale of assets he could only pay ONGC in view of the order by the Court in I.A. No. 168-178 in CA No. 8530-40 of 1983.It was in light of these circumstances, the petitioners filed a review petition before the Supreme Court. The apex court ruled in favour of the petitioners.[4]

Issues

The Apex court was faced with two issues-

a) Whether the review petitioners can be made a party to the proceedings or not?

b) Whether the mandamus passed by the Court would prevail over law or not?

The major issue for discussion is whether Sections 529 and 529A[5] prevails over mandamus of court or not.

Contentions of both parties

The petitioners claimed that they haven’t received their wages and employment benefits which amounted to more than Rs. 40 Crores. They argued that the immovable properties of the company should be sold and the sale proceeds should be disbursed according to law. It was also argued that on the passing of the winding up order on 17th January 1997, the Companies Act will come into force and would be applicable in light of the decisions in UCO Bank v. Official Liquidator, High Court, Bombay & Another,[6]Industrial Credit and Investment Corporation of India Ltd. v. Srinivas Agencies & Others[7]A.P. State Financial Corporation v. Official Liquidator[8] and Allahabad Bank v. Canara Bank & Another.[9]They contended that according to Sections 529 and 529A of the Companies Act, 1956[10] the petitioners had prior right over the sale proceeds.

The respondents contend that the petitioners application should not be heard as there was inordinate delay in the filing the review petition on behalf of petitioners. Secondly, the respondents contended that mandamus issued by the Apex court deciding the priority of claims on payment would prevail over any law.

Court Decision and Judgment

Earlier, the Supreme Court in I.A. No, 168-178 of 1997 with respect to Ambica Mills held that- “All that is necessary to be said is that out of the assets of the company under liquidation, the dues of ONGC Ltd., are required to be paid off first and the question of making any payment to any other creditor can arise only out of the surplus, if any, remaining after the full dues of the ONGC Ltd. have been paid off. The High Court is, therefore, to proceed with the matter in this manner. I.As stand disposed of.”[11]

Under review petition, the Supreme Court firstlydealt with the issue of inordinate delay by petitioners in filing of review petition. The Court went through the records of the Gujarat High Court in Company Application No. 193/95. The order clearly stated that the petition was filed by Vatva Industries Mazdoor Sabha. No notice was given to the petitioners and they were also not made party in the proceedings. It was also explicit from the order that the Vatva Mazdoor Sabha was made a party to disburse the amounts realized from sale of the products. The High Court also mandated the Official Liquidator to make an application for impleading necessary parties. However, the Official Liquidator didn’t implead the petitioners. Thus there was no negligence on the part of the petitioners. Hence, the order condoning the delay didn’t require any consideration.

The second issue was the major topic of discussion in the proceedings. The Supreme Court made a thorough analysis of its plenary powers arising under Article 142 of the Constitution of India[12]. For this the Court referred to the landmark judgment of Supreme Court Bar Association v. Union of India & Another[13], where it was held that – “this Court in exercise of its power under Article 142 cannot ignore any substantive statutory provision dealing with the subject and it is only a residuary power, supplementary and complementary to the powers specifically conferred on this Court by statutes exercisable to do complete justice between the parties wherever it is just and equitable to do so. It is intended to prevent any obstruction to the stream of justice.” Therefore, the mandamus can be overridden if justice demands.

The Apex Court observed that the purpose of section 529A was to ensure that the workmen shouldn’t be deprived of their legitimate claims in the event of the liquidation of the company. The payment of due wages of workmen should be treated pari passu with that of the secured creditors. The non-obstante clause of Section 529A overrides preferential claim of Section 530 also. Since there was no law overriding it the workmen would be entitled to payment first. The payment would be disbursed in accordance with Sections 529 and 529A of the Companies Act, 1956. It relied on UCO Bank v. Official Liquidator, High Court, Bombay &Another[14]Therefore, the Court through this interpretation of Section 529A ruled in favour of the petitioners.

The review petition was thus allowed.

Analysis

The decision of the Supreme Court is correct and valid and to completely appreciate the significance of the judgment, it is imperative to look into the evolution of Sections 529, 529A and 530 of the Companies Act, 1956. Section 529 and 530 were amended and Section 529A was inserted by the Companies (Amendment) Act, 1985.[15]

Legislative Provisions- Section 529A begins with a non-obstante clause and overrides any other law in force at the time. The reason for making these changes was mentioned in the Statement of Objects and Reasons of the Amending Act- “Another announcement made by the Finance Minister in his Budget speech relates to the decision of the Government to introduce 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 companies constitute a major segment of the material resources of the 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 participate in the produce of their labour and effort. It is accordingly proposed to amend Sections 529 and 530 of the Companies Act and also to incorporate a new section in the Act, namely, Section 529A (vide Clauses 4, 5 and 6 of the Bill).”[16] Thus it is explicitly stated that the purpose of these sections was to secure the rights of poor workmen who are deprived of their due wages and benefits when a company is liquidated. It was done to provide an upper hand to the workmen and therefore, their rights are pari passu with that of secured creditors.

Case-laws: Before these sections were inserted, the workmen were kept outside the winding up proceedings. The Supreme Court in case of M.K. Ranganathan v. Government of Madras[17] held that once the winding up proceedings has been initiated, the secured creditor is outside of it. The same ratio was followed in the cases of Mayur Syntex Ltd. v. Punjab and Sind Bank[18], Hrushikesh Panda v. Orissa State Financial Corporation[19], and Aryavarta Plywood Ltd. v. Rajasthan State Industrial and Investment Corporation Ltd.[20]An analysis of these cases show that once winding up proceedings has started the court cannot intervene and thus secured creditor was deprived of his rights. Therefore, the question of reimbursement of wages to workmen couldn’t even arise in the first place.

However, the situation was changed by the insertion of Section 529A in the Companies Act, 1956. It provided major relief to the workmen who were unable to get their due wages from liquidated companies. Their amounts are now pari passu with that of the secured creditor. The Courts also changed their stance. The Supreme Court in Maharashtra Tubes Ltd. v. State Industrial and Investment Corporation of Maharashtra Ltd[21] held that the non-obstante clause of section 529A of the Companies Act, 1956 is a special clause and in absence of any law overriding it will prevail over existing laws. Similarly, in the case of Indian Textiles v. Gujarat State Financial Corporation[22] observed that- “Prior to insertion of section 529A in the Companies Act, 1 of 1956, it was settled law that a secured creditor could remain outside the winding up of the company and could realize its securities without the intervention of the court. After the insertion of section 529A in the Companies Act, 1 of 1956, this view no longer holds the field. In view of the insertion of section 529A in the Companies Act 1 of 1956, the workmen have statutory pari passu charge in their favour for their dues along with the secured creditors of the company and the official liquidator are enjoined by law to protect the interest of the workmen. In this view of the matter, the sale of the securities or the distribution of sale proceeds or the apportionment of the amount of sale proceeds cannot be left to the choice of the secured creditor.”[23] The same view was also expressed by the Supreme Court in UCO Bank v. Official Liquidator[24]where the Supreme Court observed that- “The proviso to sub-section (1) of section 529 inserted by the Amendment 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’. 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 unrealized on the date of the amendment. The clear object of the amendment is that the legitimate dues of workers must rank pari passu with those of secured creditors and above even the dues of the Government. This literal construction 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 learned counsel for the appellant, apart from being in conflict with the plain language of the proviso, also defeats the object of the legislation.” The same vies has been upheld in Official Liquidator, Ravindra Pharmaceutical Ltd v. Haryana Financial Corporation.[25]

In light of these decisions, the Apex court judgment in the present case is correct and in harmony with the purpose of legislature which is securing the wages of workmen in case of liquidation of company. Harmonious construction is the right way to interpret a statute for which the intention of legislature is paramount consideration. This point was overlooked by the Court earlier in the case. However, the Court corrected itself in the review petition. The intention was explicit and no special statute was overriding the provision so it was right on the part of the apex court togive preference to the non-obstante clause of Section 529A.

Conclusion

The above judgment is a good law to date. Sections 325, 326, and 327 of the Companies Act, 2013[26] correspond to Sections 529, 529A, and 530 of the Companies Act, 1956[27]. This itself shows that the legislature is keen on ensuring maximum protection of rights of the workmen in a company. The judgment has been followed by courts in cases such as Maharashtra State Co-operative Bank Ltd v. The Assistant Provident Fund Commissioner,[28]Official Liquidator of Commercial Ahmedabad Mills Ltd. v. Manager, State Bank of India and Others,[29]and Sunil Ratanparkhi v. Official Liquidator of Satwik Electric Control[30]where court emphasized the need to interpret such provisions in a manner which secures the rights of workmen in a crisis like the liquidation of the company and thus deliver justice to them.

This judgment was landmark as it protected the rights of workmen in situations of crisis such as winding up of the company. The harmonious interpretation broadened the scope of Section 529A of the Companies Act, 1956 whose spirit is christened in the 2013 Act as well. Therefore, the workmen can always resort to these provisions to claim their rights before the courts.


[1]Textile Labour Association and Ors. v. The Official Liquidators and Others, AIR2004SC2336.

[2](1983) 24 (2) GLR 1437.

[3]Supra 1, para 3.

[4]AIR2004SC2336.

[5] Companies Act 1956, Sections 529 and 529A.

[6]UCO Bank v. Official Liquidator, High Court, Bombay & Another, (1994)5SCC1.

[7]Industrial Credit and Investment Corporation of India Ltd. v. Srinivas Agencies & Others, [1996]2SCR 960.

[8]A.P. State Financial Corporation v. Official Liquidator, AIR2000SC2642.

[9]Allahabad Bank v. Canara Bank & Another, [2000]2SCR 1102.

[10]Supra 5.

[11]AIR2004SC2336.

[12] Constitution of India, Article 142.

[13]Supreme Court Bar Association v. Union of India & Another,[(1998) 4 SCC 409.

[14]UCO Bank v. Official Liquidator, High Court, Bombay & Another, (1994)5SCC1.

[15]Act 35 of the Companies (Amendment) Act, 1985.

[16]Id.

[17]AIR 1955 SC 604.

[18][1999] 96 Comp Cas 974(P&H).

[19][1987] 61 Comp Cas 448.

[20][1991] 72 Comp Cas 5.

[21]1993 SCC (2) 144.

[22][1994] 81 Comp Cas 599.

[23]Id.

[24]Supra 8.

[25][1999]98CompCas683(P&H),

[26] Companies Act 2013, Sections 325, 326 and 327.

[27]Supra 5.

[28]AIR2010SC868.

[29][2015]191CompCas106(Guj).

[30]2019(4)BomCR274.

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