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Judgment
Lakshmanan J.
C.A. No. 206 of 1992 has been filed by the applicant, A. Shanmugham, to set aside the order of the learned official liquidator dated December
11, 1991, in Claim No. 194 in so far as it relates to the closure compensation and to direct the respondent, official liquidator, to award interest at
18 per cent. per annum on the admitted amount and to pass such other orders as may be deemed fit and proper.
C.A. No. 207 of 1992 has been filed by the said applicant, A. Shanmugham, to set aside the various orders made in various claims as set out in
the annexure to the application, in so far as it relates to the closure compensation.
C.A. No. 206 of 1992 was filed by Mr. A. Shanmugham in his personal capacity. C.A. No. 207 of 1992 was filed by him in his capacity as
vice-president of Madras Pen and Ink Factory Workers'' Union and representing the workmen of the company in liquidation. In the annexure to
C.A. No. 207 of 1992, the names of the claimants and other particulars, viz., claim number, claim amount, amount granted and amount rejected,
have been furnished with reference to the company in liquidation. Both the matters were heard together by consent of parties. Originally, the
learned official liquidator alone was impleaded as respondent in these applications. In view of the importance of the questions of law raised by the
applicant herein and also by the learned official liquidator assisting the court at the time of hearing, the legal heirs of the late Sanjeevi, viz.,
respondents Nos. 2 to 7, were ordered to be impleaded. The State Bank of Hyderabad was also ordered to be impleaded as the either
respondent since the issue raised has to be decided in the presence of the State Bank of Hyderabad who is a secured creditor.
The brief facts of the case are as follows :
The company in liquidation was ordered to be wound up by an order dated October 27, 1978, in C.P. No. 11 of 1978 on the ground that the
company was unable to pay its debts. Consequent on the passing of the said winding up order, the learned official liquidator has entered upon his
duties as the liquidator of the above company in liquidation. In liquidation proceedings, it is the duty of the official liquidator to settle the list of
creditors of the company in liquidation after adjudicating upon the claims of creditors lodged with him in accordance with the rules laid down in
rules 149 to 163 of the Companies (Court) Rules, 1959.
Rules 164 and 165 of the Companies (Court) Rules, 1959, provide a procedure for an appeal against the order of the official liquidator. In the
above liquidation, the official liquidator has been permitted to enquire and adjudicate upon the claims of creditors by this court. The claims received
by the official liquidator include claims of the ex-workmen of the company in liquidation. The workmen have lodged their claims for the payment of
workmen''s dues. u/s 529 of the Companies Act, 1956, workmen''s dues include the amount payable under the Industrial Disputes Act. One of the
amounts payable under the Industrial Disputes Act is closure compensation u/s 25-FFF. The payment of compensation u/s 25-FFF of the
Industrial Disputes Act arises due to the termination of the service of employees by operation of law u/s 445(3) of the Companies Act, 1956, with
effect from October 27, 1978 being the date of winding up. The industrial undertaking of the company has been closed down due to the passing of
the winding up order.
Section 25-FFF of the Industrial Disputes Act states as under :
25-FFF. Compensation to workmen in case of closing down of undertakings. - (1) Where an undertaking is closed down for any reason
whatsoever, every workman who has been in continuous service for not less than one year in that undertaking immediately before such closure
shall, subject to the provisions of sub-section (2), be entitled to notice and compensation in accordance with the provisions of section 25-F, as if
the workman had been retrenched :
Provided that where the undertaking is closed down on account of unavoidable circumstances beyond the control of the employer, the
compensation to be paid to the workman under clause (b) of section 25-F shall not exceed his average pay for three months.
Explanation. - An undertaking which is closed down by reason merely of -
(i) financial difficulties (including financial losses); or
(ii) accumulation of undisposed of stocks; or
(iii) the expiry of the period of the lease or licence granted to it; or
(iv) in a case where the undertaking is engaged in mining operations, exhaustion of the minerals in the area in which such operations are carried on;
shall not be deemed to be closed down on account of unavoidable circumstances beyond the control of the employer within the meaning of the
proviso to this sub-section.
(1-A) Notwithstanding anything contained in sub-section (1), where an undertaking engaged in mining operations is closed down by reason merely
of exhaustion of the minerals in the area in which such operations are carried on, no workman referred to in that sub-section shall be entitled to any
notice or compensation in accordance with the provisions of section 25-F, if -
(a) the employer provides the workman with alternative employment with effect from the date of closure at the same remuneration as he was
entitled to receive, and on the same terms and conditions of service as were applicable to him, immediately before the closure;
(b) the service of the workman has not been interrupted by such alternative employment; and
(c) the employer is, under the terms of such alternative employment or otherwise, legally liable to pay to the workman, in the event of his
retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by such alternative employment.
(1-B) For the purposes of sub-sections (1) and (1-A), the expressions ''minerals'' and ''mining operations'' shall have the meanings respectively
assigned to them in clauses (a) and (d) of section 3 of the Mines and Minerals (Regulation and Development) Act, 1957 (67 of 1957).
(2) Where any undertaking set up for the construction of buildings, bridges, roads, canals, dams or other construction work is closed down on
account of the completion of the work within two years from the date on which the undertaking had been set up, no workman employed therein
shall be entitled to any compensation under clause (b) of section 25-F, but if the construction work is not so completed within two years, he shall
be entitled to notice and compensation under that section for every completed year of continuous service or any part thereof in excess of six
months.
Under the proviso to section 25-FFF(1) of the Industrial Disputes Act, if the undertaking is closed down on account of unavoidable
circumstances beyond the control of the employer, the compensation payable to the workman shall not exceed his average pay for three months.
The applicant herein was a worker of the company in liquidation as on the date of the winding up order and hence he is entitled to claim closure
compensation u/s 25-FFF of the Industrial Disputes Act, 1947.
In adjudication proceedings before the official liquidator in respect of the applicant''s claim and claims of other workers, a question that arose for
consideration was whether the undertaking of the company in liquidation was closed down on account of unavoidable circumstances beyond the
control of the employer. In the instant case, the undertaking of the company in liquidation was closed down with effect from October 27, 1978,
consequent on the passing of the winding up order. The learned official liquidator, in view of the judicial pronouncement in Palai Central Bank
Employees'' Union v. Official Liquidator, Palai Central Bank Ltd. [1965] 35 Comp Cas 279; [1965] II Comp LJ 110, by a Division Bench of the
Kerala High court, came to the conclusion that the passing of a winding up order resulted in the closing down of the undertaking and hence the
closure is due to unavoidable circumstances beyond the control of the company in liquidation and consequently restricted the claim of the workmen
for closure compensation to the extent provided in the proviso to section 25-FFF(1) of the Industrial Disputes Act not only to the applicant herein
but also to the other claimants/workers who were in the employment of the company in liquidation on the date of passing of the winding up order.
In this connection, it is relevant to refer to the judgment of the Kerala High Court (Division Bench), which held that a closure under a winding up
order is closure on account of unavoidable circumstances beyond the control of the employer. Following the Division Bench of the Kerala High
court, the learned official liquidator came to the conclusion as stated above.
With regard to the claim for interest at 18 per cent. per annum, the official liquidator submits that, under rule 179 of the Companies (Court)
Rules, 1959, unsecured creditors of the company in liquidation, whether preferential or ordinary; are entitled to payment of interest at the rate of 4
per cent. per annum from the date of winding up till the date of dividend. Rule 179 of the Companies (Court) Rules, 1959, states as under :
Payment of subsequent interest. - In the event of there being a surplus after payment in full of all the claims admitted to proof, creditors
whose proofs have been admitted shall be paid interest from the date of the winding-up order or of the resolution, as the case may be, up to the
date of the declaration of the final divided, at a rate not exceeding 4 per cent. per annum, on the admitted amount of the claim, after adjusting
against the said amount the dividends declared as on the date of the declaration of each dividend.
Under rule 179, unsecured creditors of the company in liquidation, whether preferential or ordinary, are entitled for payment of interest at the
rate of 4 per cent. per annum from the date of winding up till the date of dividend. The above rule 179 does not apply to secured creditors who
have elected to rely on the security in view of the provisions contained in the Presidency Towns Insolvency Act read with section 529 of the
Companies Act, 1956. Under the provisions of sections 529 and 529-A of the Companies Act, 1956, workmen of the company become secured
creditors by operation of law to the extent of the amount due under the head ""Workment''s dues"" provided there exists a secured creditor by
contract. If there is no secured creditor then the workmen of the company for the amount due to them under the head ""Workmen''s dues"" become
unsecured preferential creditors only u/s 529-A of the Companies Act, 1956.
In this liquidation, the State Bank of Hyderabad claiming to be a secured creditor has filed a suit in C.S. No. 52 of 1978 claiming Rs.
5,34,183.07 plus interest from July 20, 1978, at the rate of 15 per cent. per annum. The securities said to be offered by the company in respect of
this suit are the company''s land and buildings located at No. 271, Anna Salai, Madras-18, measuring about 18.83 grounds better known as
Vanavil Buildings"". The State Bank of Hyderabad has filed another suit in C.S. No. 1052 of 1987 claiming Rs. 15,56,463.42 plus interest from
July 11, 1978, at 15 per cent. per annum. The securities said to be offered by the company in respect of this suit are the company''s factory and
land measuring about 12.17 acres with superstructure thereon located at G.N.T. Road, Puzhal and Kathivedu Villages, Madras. The State Bank
of Hyderabad have elected to remain outside the liquidation and they are relying on the securities offered by the company in liquidation. The State
Bank of Hyderabad can claim interest at the rates specified in the above suit till the date of realisation of the security. But the right of workmen for
interest from the date of the winding up order till the date of payment of dividend to them or till the date of realisation of security, whichever is
earlier, has not been specified either in section 529 or 529-A of the Companies Act, 1956, or under the Companies (Court) Rules, 1959.
In view of the importance of the questions of law that arise for consideration in this case, the learned official liquidator was also requested by
this court to assist the court on the legal issues. Likewise, this court also heard the arguments of Mr. M. K. Kabhir, Mr. M. S. Sundararajan and
Mr. Shree Krishnan, learned counsel appearing for the legal heirs of the founder of the company and the State Bank of Hyderabad, respectively.
The learned official liquidator, at the time of hearing, has raised the following two questions of law for my consideration :
(1) Whether the cut off date for arriving at the ratio at which the sale proceeds should be divided on a pari passu basis as per section 529 of the
Companies Act, 1956, should be the date of the winding up order.
(2) If the cut off date is the date of sale, whether the workmen-creditors to the extent of the workmen''s dues can claim interest from the date of
winding up till the date of payment of dividend or till the date of realisation of security, whichever is earlier and if so the rate of interest payable is a
question at large which has to be decided by this court particularly in the light of the fact that the secured creditor by contract will be sharing the
security with the workmen u/s 529 of the Companies Act, 1956, and that the secured creditor by contract will be eligible for payment of interest at
the contracted rate up to the date of realisation of security.
Since the questions as to law, practice and procedure are involved in the above claims for interest made by the applicant, in view of the
provisions contained in sections 529 and 529-A of the Companies Act, 1956, the official liquidator requests this court to give a ruling for adoption
not only in the present case, but also in similar cases that may arise in future. Since the State Bank of Hyderabad is a secured creditor, at the
request of the official liquidator, the State Bank of Hyderabad was also impleaded as a party, viz., the eighth respondent in this case, and Mr. Sree
Krishnan, counsel for the bank, was also heard on this matter.
Mr. Shanmugham, the applicant in C.A. No. 206 of 1992, states that he preferred his claim for a total sum of Rs. 22,083.50 under various
heads, viz., notice pay, closure compensation, gratuity, leave salary, bonus, provident fund dues, etc. His claim has been allowed for a total sum of
Rs. 13,223.25 by the learned official liquidator. The details are set out hereunder :
---------------------------------------------------------------------
Nature of Amount Amount Amount
the claim claimed admitted rejected
under
section 529-A
---------------------------------------------------------------------
Notice pay 465.00 465.00 -
Closure compensation 5,812.50 1,396.00 4,417.50
Gratuity 5,812.50 5,812.50 -
Bonus 465.00 465.00 -
Leave salary 387.50 387.50 -
Salary dues 5,618.00 5,115,00 503.00
P.F. dues 3,523.00 - 3,523.00
----------------------------------------------
22,083.50 13,640.00 8,443.50
*Less : Khadi dues (-) 416.75 (+)416.75
----------------------------------------------
Total 22,083.50 13,223.25 8,860.25
----------------------------------------------
*This amount is payable to Tamilnadu Khadi and Village
Industries Board towards purchase of clothes by you from the Board,
vide Bill Nos. 316212 and 50100.
According to the applicant, the learned official liquidator, while considering the claim, has taken into consideration only a period of three years
for closure compensation instead of ten years and that he ought to have fixed the closure compensation only for a period of ten years because the
company went into liquidation only on a creditor''s petition and not by an act of God or for reasons beyond the control of the directors. It is further
contended by the applicant through his counsel, Mr. K. Gopal, that the learned official liquidator ought to have awarded interest at 18 per cent. per
annum on the amounts admitted because the claims were long pending. Hence, the applicant has prayed that the order dated December 11, 1991,
made in Claim No. 194 may be set aside in so far as it relates to the closure compensation and the learned official liquidator may be directed to
award interest at 18 per cent. per annum on the admitted amount.
Mr. S. Anthony Raj, one of the legal heirs of late Sanjeevi, who was the founder of the Pilot Pen Company (India) Limited, states that the
company was wound up by this court on October 27, 1978, and that the workmen would be entitled to an average pay of three months only and
that the application now filed by the workmen claiming closure compensation of a sum otherwise that what has been ordered by the learned official
liquidator is not maintainable and is liable to be dismissed. In so far as payment of interest is concerned, he states that payment at the rate not
exceeding 4 per cent. per annum on the admitted amount of claims would arise only in the event of there being a surplus after payment in full of all
claims admitted to proof and all the creditors have been paid and not earlier as stipulated under rule 179 of the Companies (Court) Rules;
consequently, the payment of interest at this juncture does not arise for consideration. The official liquidator has to admit the claims of all the
creditors and only if there be any excess after satisfying all the claims, can he pay interest not exceeding four per cent. on the admitted claims. The
applicant is not entitled to the claim now made, as the company was dosed beyond its control and the payment of interest would arise only after
the claims of the entire creditors are satisfied and there remains a surplus.
Mr. M. S. Sundararajan, learned counsel appearing for respondents Nos. 4 to 7, submits that the claim made for closure compensation is
exorbitant and not in accordance with law as laid down under the Companies Act or the Industrial Disputes Act which governs the same. The
amount of interest claimed is based on the adjudication of the claims being delayed. The shareholders cannot be penalised on that account. It is for
the official liquidator to decide if interest is payable at all. The workers cannot claim the same as if interest as claimed is payable as a matter of
right.
The State Bank of Hyderabad, through its branch manager, has filed an affidavit disputing the claims raised by the applicant herein. Mr. Shree
Krishnan, learned counsel appearing for the bank, argued the case on behalf of the bank. According to the bank, they are the secured creditors of
the company in liquidation and stand outside the liquidation. The counter-affidavit also refers to two suits filed by them. The properties under
mortgage the sale of which has been claimed in the two suits, viz., a property in Anna Salai, Madras, called Vanavil and the factory lands and
building and plant and machinery in Puzhal and Kathivedu Villages and certain hypothecated goods, machines. According to the bank, the claim
now made in the two suits will exceed Rs. 70,00,000. It is useful to reproduce paragraphs 5 to 7 of the counter-affidavit hereunder :
I state that the closure of the business and working of the company was due to unavoidable reasons beyond the control of the company, that
the claim for payment of closure compensation exceeding 3 months'' wages is untenable and that it cannot be allowed.
I further state that the claim for payment of any interest on the sums due and payable to the ex employees is without any legal basis.
As regards the question as to the basis on which the pari passu formula determining the amounts due to the secured creditor and to the
workment has to be worked out, I state that so far as the secured creditor is concerned, the amount due has to be calculated as on the date the
security is actually realised and payment made to the secured creditor and that so far as the employees are concerned, it is the date of the winding-
up order.
Similar allegations have also been raised in the affidavit filed in support of C.A. No. 207 of 1992 by Mr. Shanmugham, representing 139
claimants who are members of the union. A counter-affidavit has also been filed by the legal heirs of the late Sanjeevi on the same lines as in the
other company application.
As regards the question relating to the quantum of closure compensation payable to the workmen, the main issue to be decided would be
whether the closure of the undertaking was due to unavoidable circumstances beyond the control of the employer or not. If is found that the
closure was due to reasons beyond the control of the employer, the workmen would be entitled to a maximum of three months'' average salary,
whereas if it was not due to reasons beyond the control of the employer then the workmen would be entitled to closure compensation under the
provisions of section 25-FFF of the Industrial Disputes Act at the rate of 15 days'' salary for every year of continuous service.
In the instant case, the closure of the company was due to the order of winding up passed by the court in a winding up petition filed at the
instance of a creditor of the company. There is divergence of judicial opinion among High Courts on the question whether the closure of a
company on an order of winding up passed by court could be considered to be due to reasons beyond the control of the employer.
A Division Bench of the Kerala High Court, in the decision in Palai Central Bank Employees'' Union v. Official Liquidator, Palai Central Bank
Ltd. [1965] 35 Comp Cas 279; [1965] 2 Comp LJ 110, has held as under (at page 280) :
The closing down of the bank was something imposed on it by the order of the High Court and was, therefore, on account of unavoidable
circumstances beyond its control. The question that it was misconduct or mismanagement that brought about the winding up is not relevant to the
consideration whether the closing down was imposed on it by the court.
Unless the order of the court was obtained by collusion or fraud, every case of closure following an adjudication in insolvency or a compulsory
winding up must necessarily come within the proviso to sub-section (1) of section 25-FFF of the Industrial Disputes Act, 1947.
The carrying on of the business of the company in so far as it is necessary for the beneficial winding up of the company is not continuing the
business of the company. Therefore, it is clear that the winding up work by the liquidator is not a continuation of the business of the bank.
Held, on facts, there is no evidence to show that there was any subsequent agreement whatever between the official liquidator and the employees
that they should go on under a new contract similar in terms to the old one. In the absence of such evidence, the winding up order operated as
discharge of the employees as contemplated by section 445(3) of the Companies Act, 1956.
The Kerala High Court held that the closure of a company under an order of winding up would be on account of unavoidable circumstances
beyond the control of the employer and would fall within the proviso to section 25-FFF(1) of the Industrial Disputes Act and, consequently, the
workman would be entitled to closure compensation on the basis of his average pay for a maximum period of three months. However, a learned
single judge of the Bombay High Court in the decision In Re: Shree Madhav Mills Ltd., , has held as follows (headnote) :
In all cases of claims for compensation, the only important issue which arises for decision having regard to the provisions in section 25-FFF would
be whether the undertakings were closed down on account of unavoidable circumstances beyond the control of the employers. The answer to that
question would depend upon diverse circumstances. Petitions for winding up in most cases would be based upon the failure of the companies to
discharge their debts in the due course of business. In almost all cases, such failure would necessarily result in winding up orders. The winding up
orders in such cases must be considered the result of financial difficulties of the companies and/or inability of the companies to discharge all their
debts in due course of business. In most cases, it would be impossible to make a finding that, because the court has intervened and passed a
winding up order, the closure of the undertaking is due to or on account of unavoidable circumstances beyond the control of the employers. On the
contrary, in those circumstances, the appropriate finding would be that the financial difficulties were in fact the result of the companies'' usual
trading activities and were not on account of unavoidable circumstances beyond the control of the companies. It is clear that diverse and different
facts would have to be examined if the companies raise the question that their undertakings were closed down on account of ""unavoidable
circumstances beyond the control of the employer"". The mere fact that, u/s 445(3) of the Companies Act, employment of employees stands
terminated as a result of a winding up order cannot and does not justify the conclusion that the undertaking of the company was closed down on
account of unavoidable circumstances beyond the control of the employer.
The above is a case filed by Shree Madhav Mills Ltd. against the official liquidator, which is an appeal against the decision of the official
liquidator of the said mills dated August 19, 1963, whereby the official liquidator dismissed large parts of claims made by several ex-employees of
the company. The ex-employees claimed retrenchment bonus on the footing that the provisions of section 25FFF of the Industrial Disputes Act
were applicable to the facts of their case. The company carried on the business of textile mills. Gill and Co. Private Ltd. applied to the court for a
winding up order against the company. The company failed to pay to the sellers a huge amount on sale transactions, whereas particulars were
mentioned in the petition to show that the company was in huge financial difficulties and unable to pay its debts. By order dated August 5, 1959,
the company was ordered to be wound up. The ex-employees'' claim for retrenchment compensation was based on the provisions in section 25-
FFF and section 25-F of the Industrial Disputes Act. The case of the employees/claimants before the liquidator and in the appeal before the High
Court was that was nothing to show and no one had contended on the record that the undertaking of the mill''s company was closed down on
account of unavoidable circumstances beyond the control of the company. In the result, all workmen who were employed in the service of the
company continuously for not less than one year prior to the closure and retrenchment are entitled to payment of retrenchment compensation
equivalent to 15 days'' average pay for every completed year of service. The learned official liquidator held that, having regard to the provisions in
section 445(3) of the Companies Act, the winding up order must be deemed to be notice of discharge to the employees. According to him, the
termination of services of the employees was statutory and was not an act of the employer. He, therefore, held that the termination of the services
was for reasons beyond the control of the employer and the result of the supervening liquidation proceedings instituted at the instance of a creditor.
He further held that when the services of the employees had not been terminated in the manner prescribed by section 25-F of the Industrial
Disputes Act and were terminated as a result of the liquidation proceedings which were beyond the control of the employer, the compensation
must be limited to three months'' average pay under the above proviso to sub-section (1) of section 25-FFF.
The finding of the official liquidator was challenged by the appellant before the High Court. Counsel on behalf of the interveners who
represented certain creditors and counsel appearing for the official liquidator had argued that the claimants were not entitled to compensation on
the footing mentioned in section 25-F because the mill''s undertaking was closed down on account of unavoidable circumstances beyond the
control of the employer. Justice K. K. Desai, on a consideration of the relevant provisions, held as extracted above.
There appears to be no verdict of the apex court on this point. Two other decisions in Tatanagar Foundry Co. Ltd. Vs. Their Workmen, and
Kalinga Tubes Ltd. Vs. Their Workmen, , were referred to by Mr. K. Gopal, learned counsel for the applicant. The Supreme Court, in these two
decisions, only states that, if the closure is due to reasons which are not beyond the control of the employer, then the compensation would not be
paid under the first part of section 25-FFF. The said proposition is well-settled and there is no quarrel about it. The Supreme Court, in these
decisions, has not touched upon the question whether the closure of a company under a winding up order of the court could be considered to be
due to unavoidable circumstances beyond the control of the company.
Of the two decisions of the High Courts referred to above, one in Palai Central Bank Employees'' Union v. Official Liquidator, Palai Central
Bank Ltd. [1965] 35 Comp Cas 279; [1965] 2 Comp LJ 110 (Ker) and the other in In Re: Shree Madhav Mills Ltd., , I am inclined to accept the
view of the learned single judge of the Bombay High Court in preference to that of the Division Bench of the Kerala High Court.
The company in the instant case was ordered to be wound up pursuant to a petition for winding up failed by a creditor of the company. Hence,
the root cause for the closure was the undischarged debts of the company which is due to the financial difficulties of the company. The Explanation
to the proviso the sub-section (1) of section 25-FFF of the Industrial Disputes Act specifically provides that the closure of an undertaking due to
financial strain, etc., shall not be deemed to be due to unavoidable circumstances beyond the control of the employer. Hence, I am of the opinion
that, in the instant case, though the closure of the company was pursuant to an order of winding up of court, it cannot be held to be due to
unavoidable circumstances beyond the control of the employer. The closure was due to the inability of the company to pay its debts. This cannot
be considered to be an unavoidable circumstance. The situation could have well been averted had the company acted prudently.
I am inclined to take the view that the proviso to section 25-FFF of the Industrial Disputes Act should be strictly construed bearing in mind the
Explanation which clearly sets out the circumstances which shall not be deemed to be ""unavoidable circumstances beyond the control of the
employer"". Further, if the company in question had closed down its undertaking due to financial reasons, the rights of the workmen to claim
compensation would squarely fall in the main part of section 25-FFF. Merely because the said financial circumstances lead to the filing of the
winding up petition by a creditor on the ground that the company is unable to pay its debts would not deprive the rights of the workmen to claim
full compensation under the main part of section 25-FFF. It is also to be borne in mind that the Industrial Disputes Act is a beneficial legislation and
in particular section 25-FFF which provides for closure compensation to the workmen to tide over the difficulties faced due to the sudden closure
of the undertaking and to mitigate the hardship caused to the workmen due to such closure. Hence, I am of the view that there is no force in the
argument of learned counsel appearing for the legal heirs of the founder of the company in liquidation that the workmen are entitled to the maximum
compensation of three months under the proviso to section 25-FFF of the Industrial Disputes Act. Perhaps, there may be a case where there is a
closure of an undertaking on account of a winding up order which may confine itself to the right of the workmen to claim compensation under the
proviso to section 25-FFF of the Act. However, closure of an undertaking as a result of an order of winding up at the instance of a creditor on the
ground of inability to pay its debts does not take away the right of the workman to claim full compensation u/s 25-FFF and the proviso would not
be attracted to such cases.
Hence, in view of my finding that the closure of the company was not due to unavoidable circumstances beyond the control of the company,
the petitioner/workman would be entitled to closure compensation at the rate of 15 days'' pay for every year''s continuous service, as prescribed
under the first part of section 25FFF(1) of the Industrial Disputes Act. This question is answered accordingly.
By Amendment Act No. 35 of 1985, Parliament had brought about very important and significant changes in the provisions of the Companies
Act. By virtue of sections 529, 529A and 530, conferring substantial rights and benefits on the workmen of the closed undertaking, the workmen
get rights pari passu with those of the secured creditors over the assets of the company in liquidation. Rule 179 of the Companies (Court) Rules,
1959, applies to unsecured creditors in the matter of payment of interest from the date of the winding up order till the date of dividend. The said
rule cannot be applied to workers who, under the amended provisions of the Act, are treated on par with secured creditors. By virtue of the
provisions of sections 529 and 529A, the workmen of the company have to be treated on par with secured creditors. The status of secured
creditors is conferred on the workmen by operation of law.
In State of Kerala and Others Vs. M. Padmanabhan Nair, , the Supreme Court has held as follows while granting interest at 15 per cent. per
annum (headnote) :
Pension and gratuity are no longer any bounty to be distributed by the Government to its employees on their retirement but are valuable right and
property in their hands and any culpable delay in settlement and disbursement thereof must be visited with the penalty of payment of interest at the
current market rate till actual payment. The liability to pay penal interest on these dues at the current market rate commences at the expiry of two
months from the date of retirement.
The above case is a glaring instance of culpable delay in the settlement of pension and gratuity claims due to the respondent/worker who
retired in the year 1973. His pension and gratuity were ultimately paid to him on August 14, 1975, i.e., more that two years and three months after
his retirement and hence, after serving a lawyer''s notice, he filed a suit mainly to recover interest by way of liquidated damages for delayed
payment. The State of Kerala put the blame on the respondent/workman for delayed payment on the ground that he had not produced the
requisite last pay certificate from the treasury officer under rule 185 of the Treasury Code. But the High Court held that a duty was cast on the
treasury office to grant to every retiring Government servant the last pay certificate which, in that case, had been delayed by the concerned officer
for which neither any justification nor explanation had been given. The claim for interest was, therefore, rightly decreed in the respondent''s favour.
However, the claim for interest was allowed in favour of the respondent by the District Court and confirmed by the High Court at the rate of
six per cent. per annum though interest at 12 per cent. had been claimed by the respondent in his suit. However, since the respondent acquiesced
in his claim being decreed at 6 per cent. by not preferring any cross-objections in the High Court, the Supreme Court thought that it would not be
proper to enhance the rate to 12 per cent. per annum which they were otherwise inclined to grant.
The State Bank of Hyderabad which is a secured creditor has claimed interest at 15 per cent. per annum. Hence, in my opinion, the workers
are entitled to interest at 12 per cent. per annum in view of the judgment of the apex court cited above.
The next question that arises for consideration is with regard to the date from which interest has to be granted to the workman. u/s 445(3) of
the Companies Act, an order to winding up shall be deemed to be notice of discharge to the officers and employees of the company, except when
the business of the company is continued. Therefore, once the company is wound up, there is an automatic discharge of officers and employees of
the company. If this statutory provision is borne in mind then the employees of the company should be deemed to be on par with secured creditors
from the date of winding up. Then naturally it follows that the amounts due to the workmen like closure compensation, notice pay, etc., become
payable from the date of winding up order. Hence, in my opinion, the workmen are entitled to claim interest from the date of the winding up order
till the date of realisation of security.
Thus, I hold that (i) the workmen become secured creditors by operation of law from the date of the winding up order, (ii) the workmen have
a pari passu charge over the security which is held by the secured creditor under the contract, and (iii) the cut off date for arriving at the ratio at
which the sale proveeds should be divided on a pari passu basis as per section 529 of the Companies Act, 1956, should be the date of the winding
up order and not the date of sale. The workmen are entitled to claim interest from the date of the winding up order till the date of realisation of
security.
In the result, the order of the learned official liquidator dated December 11, 1991, in claim No. 194 is set aside in so far as it relates to the
closure compensation and in regard to the payment of interest on the admitted amount. No costs.