M J Antony: Workers' dues get less priority

OUT OF COURT

The euphoria created by a judgement of the Supreme Court last year, giving top priority to the payment of dues to the employees of a company being wound up, has been rendered premature and short-lived by a new judgement delivered a few days ago.

The court, in Andhra Bank vs Official Liquidator, has now declared that the earlier judgement, Allahabad Bank vs Canara Bank, did not lay down the correct law. At best, it was a "stray observation" on a question that did not arise before that bench.

The issue was preferential payments while winding up a company. The Companies Act deals with the problem in Sections 529A and 529. According to Section 529A, the workers' dues and debts due to the secured creditors (with certain conditions) shall be paid in priority to all other debts during the winding up process.

In the Allahabad Bank case, it had obtained a decree in its favour from the debt recovery tribunal. However, its dues were unsecured. So the workers' dues were given priority.

A two-judge bench of the Supreme Court interpreted the provisions of the Companies Act in favour of the workers and said: "The workmen's dues have priority over all other creditors, secured and unsecured, because of Section 529A(1)(a). There is no material before us to hold that the workmen's dues have all been paid. In view of the general principles laid down in 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. We are, therefore, unable to release any amounts in favour of the bank straight away."

It is this interpretation of law that has been overturned by a larger bench now. It said: "Such an observation was neither required to be made keeping in view the fact situation, nor does it find support from the clear and unambiguous language contained in Section 529A."

In the latest case, the assets and properties of the tobacco division of Duncan Agro Industries Ltd were transferred to its subsidiary, New Tobacco Ltd. The latter company had been getting diverse credit facilities from the bank upon hypothecation of goods and raw materials like tobacco.

Following non-payment of the loans, the bank filed a suit for recovery of Rs 3 crore. It also moved an application for the winding up of the company. After some years of litigation, the company judge of the Calcutta High Court ordered the sale of the properties of the company.

He also directed the Andhra Bank to pay Rs 38 lakh to the official liquidator for disbursing salaries to the employees. The division bench of the high court confirmed this part of the order, prompting the bank to move the Supreme Court.

The bank argued that it was outside the purview of the winding up proceedings. The purchaser had entered into a settlement regarding the wages. Most importantly, the workers' dues could not take precedence over all the creditors, and the judgement in the Allahabad Bank case was wrongly decided.

The Supreme Court found substance in these arguments and thus overruled the earlier judgement. It rejected the theory that the high court has extensive jurisdiction to decide any question arising between the parties or any claim made under the Companies Act in terms of Section 446.

Another judgement that had been invoked in the Allahabad Bank judgement (NTC Workers' Union) was found to be out of context. The question that arose in that case was only regarding the right of the workers to be heard in the winding up proceeding. It was not applicable in any of these cases, according to the Supreme Court.

Thus, the workers' rights in the winding up process has been diluted. They may have to wait for long periods before they get their dues from the company that has been wound up, amalgamated or undergone transformation at the hands of the corporate wizards.