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M J Antony: Scramble of creditors

Workers' dues in a failed company dangle on a razor's edge

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A decision to wind up an insolvent company is closely followed by a mad scramble of creditors, secured and unsecured. Along with the secured creditors are the workers, whose claims for payment have been given high priority by the . However, Sections 529 and 529A dealing with the disbursement of sums from the sale of assets of the company are couched in complex clauses that have been a cause of incessant litigation. Adding to the perplexity is the juxtaposition of the Insolvency Act.

Earlier, the judgments of the had differed on the interpretation of these clauses. Secured creditors and workers have constantly engaged in a tug of war and the court appeared to be swaying over the issue. It was again split 2:1 recently in the case of Jitendra Nath vs Official Liquidator. The Jharkhand High Court gave its judgment in favour of banks and financial institutions. The workers moved the Supreme Court. It allowed the appeal. The blue collar seems to have gained an upper hand over the tie-wallahs this time.

The significance of this judgment is that the Supreme Court has formulated its view in a four-point conclusion. The problem arises from facts like the ones in this case. A company called UMI Special Steel Ltd became sick and the (Board for Industrial and Financial Reconstruction) recommended winding it up in 2002. The high court appointed an official liquidator to take over the assets and sell them to meet the demands of the creditors. The first cache from the proceeds of the sale was distributed among the secured creditors and the workers. The claims of neither were met completely.

The trouble started when the second lot of properties situated in four metros were sold. The workers moved the high court contending that the banks and financial institutions did not have any charge over these properties and, therefore, could not claim priority over theirs. They wanted the sale proceeds to be kept separately and their dues should be disbursed first, before taking up the claims of the banks and financial institutions.

On the other hand, the secured creditors contended that their claim as well as that of the workers stood on an equal footing as the Companies Act did not make any difference between mortgaged property and other properties. So, the entire proceeds should be distributed among the secured creditors and the workers on a pro-rata basis. When the dispute was taken to the high court, it ruled that the secured creditors and workers have equal claim over all the properties of the companies. This judgment was overruled by the Supreme Court by a thin majority.

The court tried to crystallise its conclusions. Essentially, it said that a secured creditor has only a charge over a particular property or asset of the company. The secured creditor has the option to either realise his security or relinquish his security. If the secured creditor relinquishes his security, like any other unsecured creditor, he is entitled to prove the debt due to him and receive dividends out of the assets of the company in the winding up proceedings.

If the secured creditor opts to realise his security, he is entitled to realise his security in a proceeding other than the winding up. Where a secured creditor opts to realise the security, then so much of the debt due to such secured creditor as could not be realised by him by virtue of the statutory charge created in favour of the workmen, shall rank on an equal footing with the workmen’s dues.

This thin majority judgment is another swing in the judicial stand. In 2000, the court stated in the case, Allahabad Bank vs Canara Bank, that “the workmen’s dues have priority over all other creditors, secured and unsecured, because of Section 529A.

In view of the general principles laid down in the judgment, NTC Workers’ Union vs P R Ramakrishnan, there is an obligation resting on this court to see that no secured or unsecured creditors, including banks or financial institutions, are paid before the workmen’s dues are paid.”

But this view of a two-judge bench was diluted by a later judgment in the case, vs Official Liquidator. A three-judge bench stated in this case that the Allahabad Bank case did not lay down the correct law. The dictum of the larger bench prevailed so far.

In any case, the workers have to wait for long periods before they can get their dues from the company that has been wound up, amalgamated or undergone transformation at the hands of the corporate wizards. The present judgment might have eased their plight, but few of them will have the stamina to fight such battles where company lawyers take the front seat in the courtrooms. The life span of humans is limited; but companies last till the end.

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