Professional Documents
Culture Documents
During the winding up of a company the rights of the workman and labourers are usually ignored.
Although labour legislations have been made to save and protect the rights of the workman and labourers
but are the labour legislations actually curbing this problem is still a big question.
What is a Company?
A voluntary association formed and organized to carry on a business. Types of companies include sole
proprietorship, partnership, limited liability, corporation, and public limited company.
Incorporation of a Company
It is the first step in the making and formation of a company. According
Companies Act, 1956 a company means a company formed and registered under
the Companies Act, 1956 or any of the preceding Acts. Thus, a Company comes
into existence only by registration under the Act, which can be termed as
incorporation.
During the winding up of a company the rights of the workman and labourers are usually ignored.
Although labour legislations have been made to save and protect the rights of the workman and labourers
but are the labour legislations actually curbing this problem is still a big question.
In the absence of any agreement between the employer and the workers retrenched as regards the
procedure for retrenchment, the employer retrenches the worker who was the last person to be employed in
the category, unless for reasons to be recorded the employer retrenches any other worker (sec. 25G, IDA).
Severance pay
In case of retrenchments, employees with more than one years service, and other than temporary or casual
employees, are entitled to compensation equivalent to 15 days pay for each completed year of service (sec.
25F(b), IDA).
However, a distinction is made for cessation of business for reasons beyond the control of the employer.
This might include force majeure, frustration of contract, etc., but does not include financial difficulties or
loss of stock. In such circumstances, the employee is still entitled to a redundancy payment, but the amount
is less than that given for termination of employment due to other reasons, being a sum equivalent to no
more than the average of three months pay (sec. 25FFF, IDA).
Under the Payment of Gratuity Act, 1972, a worker continuously employed for five years or more is
entitled to a gratuity payment upon termination of service, except where such termination has been as a
result of his or her wilful omission or negligence resulting in damage or loss of the employers property, in
which case the gratuity is forfeited to the extent of the damage caused. Where the employee has been
dismissed on account of his or her riotous, violent or disorderly conduct or for an offence involving moral
turpitude committed in the course of employment, the gratuity shall be wholly or partly forfeited. The sum
is calculated at 15 days average pay for every completed year of service.
Section 530 under the Chapter V of Part VII of the Companies Act, 1956 provides for the sequence of
the payments which shall be made in the course of winding up of a company. However, Section 529A
is an exception to Section 530 which starts with a notwithstanding clause providing for the overriding
preferential payments. Section 529A was introduced in the Companies Act, 1956 by the Companies
(Amendment) Act, 1985 in order to provide a protection to the workmen and the secured lenders of
the Companies. Sub Section 2 of Section 529A further provides that 'the debts payable to the
workmen and secured creditors of the Company shall be paid in full, unless the assets are insufficient
to meet them, in which case they shall abate the equal proportions'.
Similar to the provisions above, where a claimant has proceeded with filing its claim with the Debt
recovery tribunal under the provisions of Recovery of Debts Due to Banks and Financial Institutions
Act, 1993 Section 19 (19) of this Act provides that where a certificate of recovery is issued against a
company registered under the Companies Act, 1956, the Tribunal may order the sale proceeds of such
company to be distributed among its secured creditors in accordance with the provisions of section
529A of the Companies Act, 1956 and to pay the surplus, if any, to the company.
However, comparing the above two stated provisions of the Companies Act, 1956 and the Recovery
of Debts Due to Banks and Financial Institutions Act, 1993, ambiguity lied on the fact that in case the
Company is under the course of winding up, who shall be the appropriate authority to decide on the
distribution to settle the claims and in case, the Company is not in the course of winding up but after
paying its debts to the secured creditors who applied under the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993 to the tribunal for the recovery and the settlement was made, who
shall be settled on priority.
Hon'ble Supreme Court of India recently in the case of Bank of Maharashtra v Pandurang Keshav
Gorwardkar & Ors reported in 2013(4)ABR390, decided this issue. In this case, the counsel
appearing for the bank argued that unless an order of winding up was made and the liquidator or the
provisional liquidator has been appointed and all the steps as provided in Sections 443 to 450 and 456
(dealing with the winding up) are taken, it cannot be said that Company is in winding up and until the
Company is in winding up, the workmen of the Company have no claims on the assets of the
Company nor do they have any locus to approach the DRT to participate in a proceeding filed by a
bank or financial institution; they are not creditors secured or otherwise. The only remedy that the
workmen have is to approach the appropriate Court e.g., Industrial Tribunal etc., for determination
and realization of their dues. Section 19(19) of the 1993 Act and Section 529A of the Companies Act
do not help the workmen as they are not secured creditors. However, where the order of winding up
has been made and liquidation proceedings started against a Company, in such a case the liquidator
would be control of all the assets of company. But in view of exclusive jurisdiction conferred on
DRT,no leave of the Company Court needs to be taken by DRT for adjudication under Section 17 and
execution of the recovery certificate issued under the 1993 Act. However, while allowing the appeal
the Hon'ble Supreme Court in the present case held as follows:
i.
If the debtor company is not in liquidation nor any provisional liquidator has been appointed
and merely winding up proceedings are pending, there is no question of distribution of sale
proceeds among secured creditors in the manner prescribed in Section 19(19) of the 1993 Act.
ii.
iii.
The above position is equally applicable where the assets of the debtor company have been
sold in execution of the recovery certificate obtained by the bank or financial institution
against the debtor company when it was not in liquidation but before the proceeds realized
from such sale could be fully and finally disbursed, the company had gone into liquidation. In
other words, pending final disbursement of the proceeds realized from the sale of security in
execution of the recovery certificate issued by the debt recovery tribunal, if debtor company
becomes company in winding up, Section 529A read with Section 529(1)(c) 529(3)(c) proviso
come into operation and statutory charge is created in favour of workmen in respect of their
dues over such proceeds.
iv.
The relevant date for arriving at the ratio at which the sale proceeds are to be distributed
amongst workmen and secured creditors of the debtor company is the date of the winding up
order and not the date of sale.
v.
The conclusions (ii) to (iv) shall be mutatis mutandis applicable where provisional liquidator
has been appointed in respect of the debtor company.
vi.
Where the winding up petition against the debtor company is pending but no order of winding
up has been passed nor any provisional liquidator has been appointed in respect of such
company at the time of order of sale by DRT and the properties of the debtor company have
been sold in execution of the recovery certificate and proceeds of sale realized and full
disbursement of the sale proceeds has been made to the concerned bank or financial
institution, the subsequent event of the debtor company going into liquidation is no ground for
reopening disbursement by the DRT.
vii.
However, before full and final disbursement of sale proceeds, if the debtor company has gone
into liquidation and a liquidator is appointed, disbursement of undisbursed proceeds by DRT
can only be done after notice to the liquidator and after hearing him. In that situation if there
is claim of workmen's dues, the DRT has two options available with it. One, the bank or
financial institution which made an application before DRT for recovery of debt from the
debtor company may be paid the undisbursed amount against due debt as per the recovery
certificate after securing an indemnity bond of restitution of the amount to the extent of
workmen's dues as may be finally determined by the liquidator of the debtor company and
payable to workmen in the proportion set out in the illustration appended to Section 529(3)(c)
of the Companies Act. The other, DRT may set apart tentatively portion of the undisbursed
amount towards workmen's dues in the ratio as per the illustration following Section and
disburse the balance amount to the applicant bank or financial institution subject to an
undertaking by such bank or financial institution to restitute the amount to the extent
workmen's dues as may be finally determined by the liquidator, falls short of the amount
which may be distributable to the workmen as per the above illustration. The amount so set
apart may be disbursed to the liquidator towards workmen's dues on ad hoc basis subject to
adjustment on final determination of the workmen's dues by the liquidator.
viii.
The first option must be exercised by DRT only in a situation where no application for
distribution towards workmen's dues against the debtor company has been made by the
liquidator or the workmen before the DRT.
ix.
Where the sale of security has been effected in execution of recovery certificate issued by the
DRT under the 1993 Act, the distribution of sale proceeds has to be made by the DRT alone in
accordance with Section 529A of the Companies Act and by no other forum or authority.
x.
The workmen of the company in winding up acquire the standing of the secured creditors on
and from the date of winding up order (or where provisional liquidator has been appointed,
from the date of such appointment) and they become entitled to the distribution of sale
proceeds in the ratio as explained in the illustration appended to Section 529(3)(c) of the
Companies Act.
xi.
Section 19(19) of the 1993 Act does not clothe DRT with jurisdiction to determine the
workmen's claim against the debtor company. The adjudication of workmen's dues against the
debtor company in liquidation has to be made by the liquidator. In other words, once the
company is in winding up the only competent authority to determine the workmen's dues is
the liquidator who obviously has to act under the supervision of the company court and by no
other authority.
xii.
WORKMENS DUES, means the aggregate of the following sums due from the company to its
workmen, namely:
(i) all wages or salary including wages payable for time or piece work and salary earned wholly or in part
by way of commission of any workman in respect of services rendered to the company and any
compensation payable to any workman under any of the provisions of the Industrial Disputes Act, 1947;
(ii) all accrued holiday remuneration becoming payable to any workman or, in the case of his death, to any
other person in his right on the termination of his employment before or by the effect of the winding up
order or resolution;
(iii) unless the company is being wound up voluntarily merely for the purposes of reconstruction or
amalgamation with another company or unless the company has, at the commencement of the winding up,
under such a contract with insurers as is mentioned in section 14 of the Workmens Compensation Act,
1923, rights capable of being transferred to and vested in the workmen, all amount due in respect of any
compensation or liability for compensation under the said Act in respect of the death or disablement of any
workman of the company;
(iv) all sums due to any workman from the provident fund, the pension fund, the gratuity fund or any other
fund for the welfare of the workmen, maintained by the company.
Overriding preferential payments (Section 326):
In the winding up of a company,
(a) workmens dues; and
(b) debts due to secured creditors to the extent such debts rank under clause (iii) of the proviso to subsection (1) of section 325 pari passu with such dues, shall be paid in priority to all other debts.
The sums towards wages or salary referred to in sub-clause (i) of clause (b) of sub-section (3) of section
325, which are payable for a period of two years preceding the winding up order shall be paid in priority to
all other debts (including debts due to secured creditors), within a period of thirty days of sale of assets and
shall be subject to such charge over the security of secured creditors. These debts payable shall be paid in
full before any payment is made to secured creditors and thereafter other debts payable shall be paid in
full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.
Where any payment has been made to any employee of a company on account of wages or salary or
accrued holiday remuneration, himself or, in the case of his death, to any other person claiming through
him, out of money advanced by some person for that purpose, the person by whom the money was
advanced shall, in a winding up, have a right of priority in respect of the money so advanced and paid-up
to the amount by which the sum in respect of which the employee or other person in his right would have
been entitled to priority in the winding up has been reduced by reason of the payment having been made.
The debts enumerated in this section shall
(a) rank equally among themselves and be paid in full, unless the assets are insufficient to meet them, in
which case they shall abate in equal proportions; and
(b) so far as the assets of the company available for payment to general creditors are insufficient to meet
them, have priority over the claims of holders of debentures under any floating charge created by the
company, and be paid accordingly out of any property comprised in or subject to that charge.
(4) Subject to the retention of such sums as may be necessary for the costs and expenses of the winding up,
the debts under this section shall be discharged forthwith so far as the assets are sufficient to meet them,
(5) In the event of a landlord or other person distraining or having distrained on any goods or effects of the
company within three months immediately before the date of a winding up order, the debts to which
priority is given under this section shall be a first charge on the goods or effects so distrained on or the
proceeds of the sale thereof. In respect of any money paid under any such charge, the landlord or other
person shall have the same rights of priority as the person to whom the payment is made.
(6) Any remuneration in respect of a period of holiday or of absence from work on medical grounds
through sickness or other good cause shall be deemed to be wages in respect of services rendered to the
company during that period.
The expression accrued holiday remuneration includes, in relation to any person, all sums which, by
virtue either of his contract of employment or of any enactment including any order made or direction
given thereunder, are payable on account of the remuneration which would, in the ordinary course, have
become payable to him in respect of a period of holiday, had his employment with the company continued
until he became entitled to be allowed the holiday.
The expression employee does not include a workman; and
The expression relevant date means
(a) in the case of a company being wound up by the Tribunal, the date of appointment or first appointment
of a provisional liquidator, or if no such appointment was made, the date of the winding up order, unless, in
either case, the company had commenced to be wound up voluntarily before that date; and
(b) in any other case, the date of the passing of the resolution for the voluntary winding up of the company.
Conclusion:
The insolvency of a company would normally cause the shareholders, contributories, investors,
creditors and other interested parties to go into a scurry to claim full recovery of the debt owing to
them. Employees, naturally, would be concerned about the salaries and other reimbursements or
compensation that would be outstanding.
The recent economic downturn has resulted in an increased number of companies going into
insolvency due to cash-flow problems and financial difficulties faced by them. Following from this, a
major concern of both the employers and employees of a company would be how a company's
insolvency affects their rights or liabilities, particularly so for employees who would be interested in
protecting their rights in the event of the company's insolvency.
The insolvency of a company would normally cause the shareholders, contributories, investors,
creditors and other interested parties to go into a scurry to claim full recovery of the debt owing to
them. Employees, naturally, would be concerned about the salaries and other reimbursements or
compensation that would be outstanding.
The law aids these employees to a certain extent via s 226G(6) of the Act in a judicial management
and s 328 of the Act in liquidation. However, these measures are of only limited effectiveness. It is
advisable for companies that are facing the prospect of insolvency to decide whether they wish to
terminate their employees' contracts at an early stage and to inform these employees accordingly.
Such employees who are laid off can then hope to get at least some form of recovery for the
outstanding sums owed to them, as well as to be put into the job market again, so that they can find a
new job swiftly to minimise the economic hardship to themselves and their dependants.
IMPORTANT CASE:
The unpaid salary of an employee is liable to be recovered from the employer, ...Winding-up petition
was filed against the company by one group of ... According to the averments made in the petition,
he had to leave the services of the company because he was told that the company was winding-up its
'business group division' where the petitioner was working directly. The respondent was not in a
position to pay up his salary dues, etc., and, therefore, requested the petitioner to submit his
resignation without insisting for full and final payment assuring that salary and dues, etc., would be
paid as soon as funds were available. On this assurance the petitioner submitted his resignation on 138-2001. Thereafter the managing director of the company, vide letter dated 2-9-2001, reiterated his
assurance to pay the dues. However, the needful was not done. The petitioner, in these circumstances,
sent statutory notice dated 28-7-2004 calling upon the company to pay a sum of Rs. 3,54,315 on
account of unpaid salary, perks and allowances. Held: Company should pay the debt.