Pankaj Kapoor v. M/S Weston Electronics Ltd & Ors.

1. The appellant is an ex-workman of the company in liquidation (Western Electronics Ltd.) and claims that he also represents other RAWAL workmen. The appellant has filed the present appeal impugning an order dated 17.02.2023 (hereafter ‘the impugned order’) passed by the Company Court in Co. Appl. No. 114/2023 in Co. Pet. No. 368/2001.

2. The appellant had filed the said application (Co.Appl.114/2023) for directions under Section 529A of the Companies Act, 1956 (hereafter ‘the Act’) read with Rule 9 of the Companies (Court) Rules, 1959 (hereafter ‘the Rules’). The appellant claims that he represents five ex-workers of the company in liquidation. The claims of the said workmen amounted to ₹34,09,525/-. However, the funds available with the Official Liquidator were limited. The Report dated 24.07.2019 submitted by the Official Liquidator indicated that the funds available with the Official Liquidator were to the extent of ₹2,95,032.1/-. In the aforesaid context, the said workmen had agreed to accept a sum of ₹55,000/- each. Accordingly, the Official Liquidator filed the Report dated 24.07.2019, inter alia, praying for orders for disbursing the said amount to the workmen from the available balance. The said directions were issued and an amount of ₹55,000/- was disbursed to each of the five workmen in question.

3. The appellant filed the aforementioned application claiming that additional amounts ought to have been disbursed to the applicant and other workmen as they ranked higher in priority for receiving such funds than the claims of the Government Commission and the Establishment. The appellant claimed that a sum of ₹19,41,853.61/- had been transferred as Government Commission (fee paid to the Central RAWAL Government) and a sum of ₹28,94,972/- had been transferred towards “Estt. Account”. The appellant claimed that the said amounts, which had been disbursed, were required to be recovered and disbursed to the workmen. The appellant claimed that the transfer of amounts as Government Commission and to the Establishment Account were unjustified and contrary to the order of priority as set out in Section 529A of the Act.

4. The aforesaid application was dismissed by the learned Company Court by the impugned order. During the course of the proceedings before the learned Company Court, the appellant did not press any objection regarding payment of sums transferred to the Establishment Account. He confined the application to the payment of commission to the Government. The learned Company Court held that the Government Commission (Official Liquidator’s fees) as contemplated under Section 451(2) of the Act was not a “debt obligation” of the company in liquidation, to be disbursed in the order of priority under Section 529A of the Act. The payment of such fees is triggered only after the winding up petition is admitted and the Official Liquidator is appointed as a Provisional Liquidator or as a Liquidator, which is in contrast with the debts covered under Section 529A of the Act.

5. The learned counsel appearing for the appellant contended that the dues of the workmen and of the secured creditors to the extent as specified under Section 529A of the Act would override the liability to RAWAL pay the Government Commission under the Rules. He contended that the Rules must necessarily yield to the provisions of the Act.

6. In view of the above, the only question to be addressed is whether the payment of Government Commission falls lower in order of priority than the dues of workmen and secured creditors.

7. Section 451 of the Act is relevant and is set out below: “451.

GENERAL PROVISIONS AS TO LIQUIDATORS.– (1) The liquidator shall conduct the proceedings in winding up the company and perform such duties in reference thereto as the Tribunal may impose. (2) Where the Official Liquidator referred to in clause (c) of sub-section (1) of section 448 becomes or acts as liquidator, there shall be paid to the Central Government out of the assets of the company such fees as may be prescribed. (3) The acts of a liquidator shall be valid, notwithstanding any defect that may afterwards be discovered in his appointment or qualification: Provided that nothing in this sub-section shall be deemed to give validity to acts done by a liquidator after his appointment has been shown to be invalid.”

8. It is material to note that Sub-section (2) of Section 451 of the Act mandates that the Official Liquidator shall be paid fees out of the assets of the company in respect of which the Official Liquidator becomes or acts as a Liquidator. It is clear that the said fee is payable to the Official Liquidator for discharge of the function of liquidating the company. It is obvious that funds from liquidating the assets of the RAWAL company would be available only on liquidation of such assets. Thus, the expenses and charges for liquidating the assets would necessarily have to be incurred in order to make available the funds, which may be utilised for the payment of dividends.

9. Sections 529A and 530 of the Act refer to the disbursement of the net funds as may be available with the Official Liquidator. To illustrate the point further, an immovable property of the company may be sold to pay its debts. The expenses for sale of such a property, such as fees payable to the Court Commissioner, expenses for conducting the auction etc., would necessarily have to be incurred for realising the value of that asset. It is the only the net value, which is realised that can be disbursed in the order of preference.

10. Sections 529A and 530 of the Act set out the priority for the payment of debts. The proviso to Clause (c) of Section 529(1) of the Act provides that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen. Section 529A(1) of the Act expressly provides that the workmen’s dues and debts due to secured creditor, to the extent that such debts rank pari passu with the workmen’s dues by virtue of proviso to Clause (c) of Section 529(1) of the Act, shall be paid in priority to other debts. Section 530 of the Act also contains provisions regarding preferential payments and sets out the order in which the payments are required to be made. However, as stated above, the order of preference as set out in Sections 529, 529A and 530 of the Act relate to the order in which funds of a RAWAL company in liquidation are to be disbursed. However, the funds available for distribution are funds that would be available on liquidation of the assets.

11. The commission to be paid to the Government under Section 451(2) of the Act is, essentially, the fee payable on the Official Liquidator being appointed. Thus, clearly the said payment refers to the amount payable for an Official Liquidator to act as such. The nature of the fees is clearly, in the nature of an expense for liquidating the assets and winding up the company. This is not covered under Sections 529, 529A and 530 of the Act, which refer to the order of priority for payment of dividends on liquidation of a company.

12. In IISCO Ujjain Pipe and Foundry Company Limited. v. Ujjain Nagar Palika Nigam & Ors.: (2023) 8 SCC 138, the Supreme Court held that Sections 529A and 530 of the Act would have no relevance in the context of a claim of an auction purchaser regarding the arears of tax under the Madhya Pradesh Municipal Corporation Act, 1956. The said principle is equally applicable in this case. The relevant extract of the said decision reads as under: