JITENDRA NATH SINGH v. THE OFFICIAL LIQUIDATOR & ORS.

5. A plain reading of clause (c) of sub-section (1) of Section 529 makes it clear that in the winding up of an insolvent company, the same rules shall prevail and be observed with regard to 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. This would mean that the respective rights of secured and unsecured creditors of an insolvent company, which is being wound up, will be the same as the respective rights of secured and unsecured creditors with respect to the estates of persons adjudged insolvent as are in force under the law of insolvency. In the State of Jharkhand, the Provincial Insolvency Act, 1920 (for short 'the Insolvency Act') is in force and accordingly the respective rights of secured and unsecured creditors with respect to the assets of the insolvent company being wound up will be the same as in the Insolvency Act. The Companies Act does not define a "creditor'' and a "secured creditor'' and hence, we have to refer to the Insolvency Act for the definitions of these two words. Sectio1n 2(1 )(a) and Section 2(1 )(e) of the H Insolvency Act define the words 'creditor' and 'unsecured

JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 391 ORS. [A.K. PATNAIK, J.] creditor' and are extracted hereinbelow: A "2(1 )(a) "creditor" includes a decree-holder, "debt" includes a judgment-debt, and "debtor" includes a judgment-debtor." "2(1)(e) "secured creditor" means a person holding a B mortgage, charge or lien on the property of the debtor or any part thereof as a security for a debt due to him from the debtor." It will be clear from the definition of 'creditor' in Section 2(1)(a) C of the Insolvency Act that it is an inclusive and not an exhaustive definition, whereas it will be clear from the definition of 'secured creditor' in Section 2(1 )(e) of the Insolvency Act that it is an exhaustive definition and that a secured creditor means a person holding a mortgage, charge or lien on the property of the debtor or any part thereof as a security for a debt due to him from the debtor. The result is that the expression 'secured creditor' in Section 529(1)(c) would mean a person who holds a mortgage, charge or lien on the property of the company or any part thereof as a security for a debt due to him from the company. Where, therefore, a creditor, such as the bank or the financial institution in this case, does not hold a mortgage, charge or lien on the property of the company or any part thereof as a security for a debt due to it from the company, it is not a secured creditor for the purposes of Sections 529 and 529A of the Companies Act. F

6. Sections 45 and 47 of the Insolvency Act, which enumerate the rights of unsecured creditors and secured creditors respectively are extracted hereinbelow: "45. Debt payable at a future time.- A creditor may G prove for a debt not payable when the debtor is adjudged an insolvent as if it were payable presently, and may receive dividends equally with the other creditors, deducting therefrom only a rebate of interest at the rate of six per centum per annum computed from the declaration H

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A of a dividend to the time when the debt would have become payable, according to the terms on which it was contracted." "47. Secured creditors.- (1) Where a secured creditor realises his security, he may prove for the balance due to B him, after deducting the net amount realised.

(2) Where a secured creditor relinquishes his security for the general benefit of the creditors, he may prove for his whole debt. c (3) Where a secured creditor does not either realise or relinquish his security, he shall, before being entitled to have his debt entered in the schedule, state in his proof the particulars of his security, and the value at which he assesses it, and shall be entitled to receive a dividend only in respect of the balance due to him after deducting the value so assessed. (4) Where a security is so valued, the Court may at any time before realisation redeem it on payment to the creditor of the assessed value.

(5) Where a creditor, after having valued his security, subsequently realises it, the net amount realised shall be substituted for the amount of any valuation previously made by the creditor, and :shall be treated in all respects as an amended valuation made by the creditor.

(6) Where a secured creditor does not comply with the provisions of this seii:;tion, he shall be excluded from all shares in any dividend." G On a reading of the two provisions quoted above, we find that an unsecured creditor is entitled under Section 45 of the Insolvency Act to receive dividends equally with the other creditors, whereas the secured creditor has the right under Section 47 of the Insolvency Act to realize the security and to H prove for the balance due to him in case on realization of such

JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 393 ORS. [A.K. PATNAIK, J.) security he is not able to recover the entire amount due to him. A If, however, the secured creditor does not opt to realize his security but relinquishes it for the general benefit of the creditors, then he may prove for his whole debt. Under the Insolvency Act, therefore, the secured creditor has only a right over the particular property offered to him as security and all B the creditors have equal rights over the other properties comprising the estate of the person adjudged insolvent.

7. In our considered opinion, therefore, on a reading of the provisions of clause (c) of sub-section (1) of Section 529 of the Companies Act along with the provisions of the Insolvency Act C relating to the respective rights of secured and unsecured creditors, a secured creditor of an insolvent company which is being wound up has only a right over the particular property or asset of the company offered to the secured creditor as a security and the unsecured creditors have rights over all other D properties or assets of the insolvent company. We may now examine whether the proviso to sub-section (1) of Section 529 of the Companies Act makes any difference to these rights of secured creditors and unsecured creditors of an insolvent company. E

8. The first limb of the proviso to sub-section (1) of Section 529 of the Companies Act states 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. Clause (c) of sub-section (3) of Section 529 of F the Companies Act states that the "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} G the amounts of the debts due to the secured creditors. Thus, the first limb of the proviso to clause (c) of sub-section (1) of Section 529 of the Companies Act creates a statutory charge over the security of every secured creditor to the extent of the workmen's portion. In other words, every property or asset of H

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A an insolvent company, which is being wound up and which has been offered as a security to a secured creditor is subject statutorily to a pari passu charge in favour of the workmen to the extent of the workmen's portion by virtue of the proviso to sub-·section (1) of Section 529 of the Companies Act. B Therefore, the first limb of the proviso to sub-section (1) of Section 529 does not create any pari passu charge in favour of secured creditor over property or asset of the company which has not been given as security by the company to the secured creditor. Rather, the language of the first limb of this proviso c makes it crystal clear that the security of every secured creditor created dehors the proviso to sub-section (1) of Section 529 of the Companies Act is statutorily subjected to a pari passu charge in favour of the workmen by the first limb of the proviso to sub-section (1) of Section 529 of the Companies Act.

D 9. The second limb of the proviso to sub-section (1) of Section 529 of the Companies Act states the consequences which follow where a secured creditor, instead of relinquishing his security and proving his debt, opts to realize his security. These are: (a) the liquidator shall be entitled to represent the workmen and enforce such charge; (b) any amount realized 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 realized 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 pari passu with the workmen's dues for the purposes of Section 529A of the Companies Act. What is relevant in this case is the consequence in clause (c) which provides that the portion of the debt due to the secured creditor as could not be realized because of the statutory charge created in favour of the workmen on the security of the creditor shall to the extent stated therein rank pari passu with the workmen's portion for the purposes of Section 529A of the Companies Act. Hence, clause (c) of this proviso does not create a pari passu charge over properties or assets of the

JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 395 ORS. [A.K. PATNAIK, J.] company which have not been offered to the secured creditor as security, but to the extent of the loss of security suffered by a particular secured creditor because of the statutory charge created in favour of the workmen, the secured creditor is ranked pari passu with the workmen for overriding preferential payment under Section 529A of the Companies Act. B

10. Section 529A of the Companies Act states that notwithstanding anything contained in any other provision of the Companies 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 of the Companies Act pari passu with such dues, shall be paid in priority to all other debts. This would mean that the workmen's dues and only the debts due to the secured creditors to the extent such debts rank pari passu with workmen's dues under clause (c) of the proviso to sub-section (1) of Section 529 will have priority over all other debts of the company. The entire object of Section 529A of the Companies Act is to ensure overriding preferential payment of (a) the workmen's dues and (2) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of Section 529 pari passu with the workmen's dues. The effect of the non- obstante clause in the opening part of Section 529A of the Companies Act, therefore, is that notwithstanding anything in the Companies Act and any other law including the Insolvency F Act, workmen's dues and dues of the secured creditor which could not be realized because of the pari passu charge in favour of the workmen under the proviso to sub-section (1) of Section 529 and only to the extent such dues rank pari passu with the dues of the workmen under clause (c) of the said G proviso are paid in priority over all other dues.

11. We may now refer to sub-section (2) of Section 529 of the Companies Act which states that all persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the H

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A winding up, and make such claims against the company as they respectively are entitled to make by virtue of Section 529 of the Companies Act The proviso to sub-section (2), however, states that if a secured creditor instead of relinquishing his security and proving for his debt proceeds to realize his security, B he shall be liable to pay his portion of the expenses incurred by the liquidator (including a provisional liquidator, if any) for the preservation of the security before its realization by the secured creditor. This provision in sub-section (2) of Section 529 of the Companies Act makes it amply clear that all c creditors, secured and unsecured, of the insolvent company are entitled to prove for and receive dividends out of the assets of the company but so far as secured creditors are concerned, they have the option either to relinquish their security in which case they like any unsecured creditor would only be entitled to prove for and receive the dividends out of the assets of the 0 company or to realize the security instead of relinquishing the security in which case they have to pay to the liquidator only expenses for the preservation of the security until they realize the security by appropriate proceedings other than the winding up proceedings. E

12. Our conclusions on interpretation of the provisions of Sections 529 and 529A of the Companies Act, therefore, are:

(i) a secured creditor has only a charge over a particular property or asset of the company. The F secured creditor has the option to either realize 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 realize his security, he is entitled to realize his security in a proceeding other than the winding up proceeding but has to pay to the liquidator the costs of preservation of the security till he realizes the security.

JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 397 ORS. [A.K. PATNAIK, J.] (ii) over the security of every secured creditor, a A statutory charge has been created in the first limb of the proviso to clause (c) of sub-section (1) of Section 529 of the Companies Act in favour of the workmen in respect of their dues from the company and this charge is pari passu with that of the B secured creditor and is to the extent of the workmen's portion in relation to the security of any secured creditor of the company as stated in clause (c) of sub-section (3) of Section 529 of the Companies Act. c (iii) where a secured creditor opts to realize the security then so much of the debt due to such secured creditor as could not be realized by him by virtue of the statutory charge created in favour of the workmen shall to the extent indicated in clause (c) D of the proviso to sub-section (1) of Section 529 of the Companies Act rank pari passu with the workmen's dues for the purposes of Section 529A of the Companies Act. E (iv) the workmen's dues and where the secured creditor opts to realize his security, the debt to the secured creditor to the extent it ranks pari passu with the workmen's dues under clause (c) of the proviso to sub-section (1) of Section 529 of the Companies F Act shall be paid in priority over all other dues of the company.

13. In support of our aforesaid conclusions, we may now cite some authorities. In Allahabad Bank v. Canara Bank & Anr. [(2000) 4 SCC 406], a two-Judge Bench of this Court G speaking through M. Jagannadha Rao, J. discussed these rights of the secured creditors in paragraphs 62, 63, 64 and 65 of the judgment as reported in the sec, which are extracted hereinbelow: H

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A "62. Secured creditors fall under two categories. Those who desire to go before the Company Court and those who like to stand outside the winding- up.

63. The first category of secured creditors mentioned above are those who go before the Company Court for B dividend by relinquishing their security in accordance with the insolvency rules mentioned in Section 529. The insolvency rules me those contained in Sections 45 to 50 of the Provincial Insolvency Act. Section 47(2) of that Act states that a secured creditor who wishes to come before c the official liquidator has to prove his debt and he can prove his debt only if he relinquishes his security for the benefit of the general body of creditors. In that event, he will rank with the unsecured creditors and has to take his dividend as provided in Section 529(2). Till today, Canara D Bank has not made it clear whether it wants to come under this category.

64. The second class of secured creditors referred to above are those who come under Section 529-A(1 )(b) read with proviso (c) to Section 529(1). These are those who opt to stand outside the winding-up to realise their security. Inasmuch as Section 19(19) permits distribution to secured creditors only in accordance with Section 529- A, the said category is the one consisting of creditors who stand outside the winding up. These secured creditors in certain circumstances can come before the Company Court (here, the Tribunal) and claim priority over all other creditors for releai;e of amounts out of the other monies lying in the Company Court (here, the Tribunal). This limited priority is declared in Section 529-A(1) but it is restricted only to the extent specified in clause (b) of Section 529- A(1 ). The said provision refers to clause (c) of the proviso to Section 529(1) and it is necessary to understand the scope of the said provision.

H 65. Under clause (c) of the proviso to Section 529(1 ), the

JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 399 ORS. [AK. PATNAIK, J.]

priority of the secured creditor who stands outside the winding-up is confined to the "workmen's portion" as defined in Section 529(3)(c). "Workmen's portion" means the amount which bears to the value of the security, the same proportion which the amount of the workmen's dues bears to the aggregate of (a) workmen's dues, and (b) the amounts of the debts due to all the creditors. This is explained in the illustration under the said provision. If the workmen's dues in all are, say, Rs.1 lakh and the debt due to all secured creditors is Rs.3 lakhs, the total amount due to all of them comes to Rs.4 lakhs. Therefore, the workmen's share comes to 25% (Rs 1 lakh out of Rs 4 lakhs). Now if the value of the security of a secured creditor (like Canara Bank) is Rs.1 lakh, the "workmen's portion" will be Rs.25,000 which is the pro-rata amount to be shared by the said secured creditor. By virtue of Section 529-A(1 )(b) his priority over all others out of other monies available in the Tribunal is restricted to Rs.25,000 only."

14. In Andhra Bank v. Official Liquidator & Anr. (supra), a three-Judge Bench speaking through S.B. Sinha, J. has also discussed in paragraphs 22 and 23 the rights of secured creditors, relevant extracts from which are quoted hereinbelow:

"22. In terms of the aforementioned provisions, the secured creditors have two options (i) they may desire to go before the Company Judge; or (ii) they may stand outside the winding-up proceedings. The secured creditors of the second category, however, would come within the purview of Section 529-A(1 )(b) read with proviso (c) appended to Section 529(1). The "workmen's portion" as contained in proviso (c) of sub-section (3) of Section 529 in relation to the security of any secured creditor 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 (a) workmen's due, and (b) the amount of the debts due to all the (sic secured) creditors. " H

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A "23. The language of Section 529-A is also clear and unequivocal, in terms whereof the workmen's dues or the debts due to the secured creditors, to the extent such debts rank under clause (c) of the proviso to sub-section (1) of Section 529 pari passu with such dues, shall have B priority over all othier debts. Once the workmen's portion is worked out in terms of proviso (c) of sub-section (1) of Section 529, indisputably the claims of the workmen as also the secured creditors will have to be paid in terms of Section 529-A. ...... "

C 15. In the present case, the learned Company Judge and the Division Bench of the High Court have held that all secured creditors along with the workmen have pari passu charge over all the properties or assets of the company and would be entitled to the dues as secured creditors along with the workmen's D dues by way of overriding preferential payments over all other dues under Section 529A of the Companies Act. The learned Company Judge of the High Court has also relied on some observations of this Court in Andhra Bank v. Official Liquidator & Anr. (supra) in support of his order. These observations of this Court in Andhra Bank v. Official Liquidator & Anr. (supra) were in the context of the observations of this Court in Allahabad Bank v. Canara Bank & Anr. (supra) and are quoted as under:

"25. While determining Point (6), however, a stray observation was made to the effect that the "workmen's dues" have priority over all other creditors, secured and unsecured because of Section 529-A(1 )(a). Such a question did not arise in the case as Allahabad Bank was indisputably an unsecured creditor. G "26. Such an observation was, thus, neither required to be made keeping in view the fact situation obtaining therein nor does it find support from the clear and unambiguous language contained in Section 529-A(1)(a). We have, therefore, no hesitation in holding that finding of this Court H

JITENDRA NATH SINGH v. OFFICIAL LIQUIDATOR & 401 ORS. [A.K. PATNAIK, J.] in Allahabad Bank to the aforementioned extent does not A lay down the correct law." The aforesaid observations of this Court in Andhra Bank v. Official Liquidator & Anr. (supra) are, thus, to the effect that workmen will not have priority over the dues of the secured creditor and this is because of the unambiguous language of B Section 529A (1) that the workmen's dues and the dues of the secured creditor to the extent such debts rank under clause (c) of sub-section (1) of Section 529 pari passu with such dues will have to be paid in priority to all other debts. But as we have held, only where under the second limb of the proviso to clause C (c) of sub-section (1) of Section 529 the secured creditor opts to realize the security and is unable to realize a portion of his dues because of the pari passu charge created in favour of the workmen under the first limb of the proviso, he has pari passu charge to the extent indicated in clause (c) of the proviso to sub- D section (1) of Section 529 and only such debts due to the secured creditor which rank pari passu with dues of the workmen under clause (c) of the proviso to sub-section (1) of Section 529 have to be paid in priority over all other debts of the company. The High Court has clearly fallen in error by holding that all debts due to secured creditors will rank pari passu with the workmen's dues and have to be paid along with the workmen's dues in priority to all other debts of the company.

16. In the result, the appeal is allowed. The impugned order of the Division Bench of the High Court and the order dated 28.11.2008 of the learned Company Judge in I.A. No.1511 of 2008 are set aside and the matter is remitted to the learned Company Judge to decide the I.A. in accordance with law as laid down in this judgment. There will be no order as to costs. G K.K.T. Appeal allowed & Matter remitted back to Company Court.