The Companies Act, 1956
529. Application of insolvency rules in winding up of insolvent companies.
(1) In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to
(b)the valuation of annuities and future and contingent liabilities; and
(c)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:
1[Provided 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, and, where a secured creditor, instead of relinquishing his security and proving his debt, opts to realise his security,
(a)the liquidator shall be entitled to represent the workmen and enforce such charge;
(b)any amount realised 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 realised 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.]
(2) 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 winding up, and make such claims against the company as they respectively are entitled to make by virtue of this section:
2[Provided that if a secured creditor instead of relinquishing his security and proving for his debt proceeds to realise his security, he shall be liable to 2[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.]
3[Explanation.For the purposes of this proviso, the portion of expenses incurred by the liquidator for the preservation of a security which the secured creditor shall be liable to pay shall be the whole of the expenses less an amount which bears to such expenses the same proportion as the workmen’s portion in relation to the security bears to the value of the security.]
4[(3) For the purposes of this section, section 529A and section 530,
(a)“workmen”, in relation to a company, means the employees of the company, being workmen within the meaning of the Industrial Disputes Act, 1947 (14 of 1947);
(b)“workmen’s dues”, in relation to a company, 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 (14 of 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 of 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 Workmen’s Compensation Act, 1923 (8 of 1923) rights capable of being transferred to and vested in the workman, all amounts 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 a provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the workmen, maintained by the company;
(c)“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)the amounts of the debts due to the secured creditors.
The value of the security of a secured creditor of a company is Rs. 1,00,000. The total amount of the workmen’s dues is Rs. 1,00,000. The amount of the debts due from the company to its secured creditors is Rs. 3,00,000. The aggregate of the amount of workmen’s dues and of the amounts of debts due to secured creditors is Rs. 4,00,000. The workmen’s portion of the security is therefore, one-fourth of the value of the security, that is Rs. 25,000.]
Once a winding up order is passed the assets of the company pass under the control of the liquidator whose statutory duty is to realize them and pay from out of the sale proceeds its creditors. Such creditors acquire on such order being passed the right to have the assets realised and distributed among them pari passu; J.K. (Bombay) Pvt. Ltd. v. New Kaiser-I-Hind Spinning and Weaving Co. Ltd., 1970 (40) Comp. Cas. 689: (1970) 1 Com LJ 151: AIR 1970 SC 1041.
1. Ins. by Act 35 of 1985, sec. 4 (w.e.f. 24-5-1985).
2. Ins. by Act 65 of 1960, sec. 183 (w.e.f. 28-12-1960).
3. Subs. by Act 35 of 1985, sec. 4, for “pay the expenses” (w.e.f. 24-5-1985).
4. Ins. by Act 35 of 1985, sec. 4 (w.e.f. 24-5-1985).