Document Fragment View

Matching Fragments

The Division Bench of the Bombay High Court has considered in detail the change in the legal situation brought about by these new legal provision in Maharashtra State Financial Corporation v. Ballarpur Industries Limited, AIR (1993) Bombay 392.

As a result of the proviso added in Section 529, the security of every secured creditor is deemed to be subject to a 'pari passu' charge in favour of the workmen to the extent of the workmen's dues (called 'workmen's portion, as defined in sub-section (3)(c) therein. It is further provided that, where the secured creditor, instead of relinquishing its mortgage and proving his debt, opts to stand outside the winding up proceedings and realise his security, the Official. Liquidator shall be entitled to represent the workman and enforce such charge and that any amount realised by enforcement of such charge shall be applied ratably by the Official Liquidator for the discharge of workmen's dues. It is true that even the amended proviso does not give the Liquidator an independent right of enforcing the charge by selling the security against which such charge is created. Nonetheless, it creates a 'pari passu' charge in favour of the workmen to the extent of their dues and makes the Liquidator the representative of the workmen to enforce such a charge. By reason of Clause

The decision of the Bombay High Court in Maharashtra State Financial Corporation case (supra) gives weighty reasons as to why when the company is under winding up the SFC to which the assets of the company are charged cannot proceed to realise the security without intervention of the Company Court. We have already noticed that as a result of the amendment to Section 529 a pari passu charge to the extent of the workmen's portion is created on the security of every secured creditor when he opts to realize a security by standing outside winding up. 'Pari Passu' means "with equal steps, equally, without preference" (Jowitt's Dictionary, Vol. II, 1959 Edition 1294). Black's Law Dictionary, 6th Edition, 115 defines it as 'By an equal progress... used especially of creditors who, in marshalling assets, are entitled to receive out of the same fund without any precedence over each other." It is also defined as "With equal steps, that is to say, proceeding side by side at the same place" (Prem's Judicial Dictionary, Volume III, 1964 Edition, page 1217) The rights of the pari passu charge holders would run equally, temporally and potently, with the rights of the secured creditors. The Official Liquidator, as the representative of the workmen, to enforce such pari passu charge would have the right of representing the workmen equally with the rights of the secured creditors. Charge is defined under Section 100 of the Transfer of Properties Act thus:

"Section 100-Where immoveable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property; and all the provisions hereinbefore contained [which apply to a simple mortgage shall, so far as may be, apply to such charge.] Though the charge by itself may not amount to mortgage, all the provisions which apply to a simple mortgage, so far as may be, apply to a charge. Thus, the Official Liquidator, as the representative of the workmen's pari passu charge, would be in the position of a co-mortgagee. Though Section 29 hitherto enabled the SFC as a mortgagee to exercise its right thereunder by taking possession of the property and selling it in satisfaction of its debt, the situation has now changed. Because of the aforesaid statutory intervention, the SFC must necessarily contend with a pari passu charge holder who has equal rights. It is well established law that where there are co-mortgagees, one co-mortgagee cannot sell without consent of the comortgagee or institute any proceedings for sale of mortgaged property without joining the other co-mortgagees either as plaintiffs or as defendants. The SFC's right under Section 29 of freely realising its security gets trammeled if it has to take on a pari passu charge holder. The realisation of the security can thereafter only be done either by satisfaction of the pari passu charge or by a suit in which the pari passu charge holder would be a party defendant. Though when the SFC Act was enacted in 1951 it was intended that SAF could act unilaterally, the amendments made to the Companies Act in 1985 have introduced a pari passu charge holder as a co-helmsman of the ship of the SFC, who can neither be ignored nor overridden. In other words, the existence of the pari passu charge holder being represented by the Official Liquidator would necessarily bring in supervision of the Company Court as the Official Liquidator cannot act without directions from and supervision of the Company Court. This is precisely the reason why the judgment of this Court in A.P. State Financial Corporation (supra) holds that the statutory right of the SFCs to sell the property under Section 29 of the SFC Act is now subject to the provisions of Section 529 and Section 529 A of the Companies Act. The statutory right to sell the property under Section 29 of the Act has now to be exercised in tandem with the rights of pari passu charge in favour of the workmen created by the proviso to Section 529 of the Companies Act. This Court observed in A.P. State Financial Corporation (Supra):
"The Act of 1951 is a special Act for grant of financial assistance to industrial concerns with a view to boost up industrialization and also recovery of such financial assistance if it becomes bad and similarly the Companies Act deals with companies including winding up of such companies. The proviso to sub-section (1) of Section 529 and Section 529-A being a subsequent enactment, the non obstante clause in Section 529-A prevails over Section 29 of the Act of 1951 in view of the settled position of law. We are, therefore, of the opinion that the above proviso to sub-section (1) of Section 529 and Section 529-A will control Section 29 of the Act of 1951. In other words the statutory right to sell the property under Section 29 of the Act of 1951 has to be exercised with the rights of pari passu charge to the workmen created by the proviso to Section 529 of the Companies Act. Under the proviso to sub-section (1) of Section 529, the liquidator shall be entitled to represent the workmen and force (sic enforce) the above pari passu charge. Therefore, the Company Court was fully justified in imposing the above conditions to enable the Official Liquidator to discharge his function properly under the supervision of the Company Court as the new Section 529-A of the Companies Act confers upon a Company Court the duty to ensure that the workmen's dues are paid in priority to all other debts in accordance with the provisions of the above section. The legislature has amended the Companies Act in 1985 with a social purpose viz. to protect dues of the workmen. If conditions are not imposed to protect the right of the workmen there is every possibility that the secured creditor may frustrate the above pari passu right of the workmen."