Ayushi Company Law Project

(1)

Hypothesis

During the winding up of a

During the winding up of a company the rights of the workman and labourers are usually ignored.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

Although labour legislations have been made to save and protect the rights of the workman and labourersworkman and labourers but are the labour l

but are the labour legislations actually curegislations actually curbing this problem is still a big questiobing this problem is still a big question.n.

What is a Company?

A

A voluntary voluntary associationassociation formed and formed and organized organized to carry on ato carry on a business business.. Types Types of companies includeof companies include sole sole proprietorship,

proprietorship, partnership partnership,, limited liability, limited liability, corporationcorporation, and, and public limited company public limited company..

Incorporation of a Company

It is the first

It is the first step in the making and formation of a company.step in the making and formation of a company.

According to sec.  !"# !ii# of the

$ompanies Act, "%&' a company means a company formed and registered under

the $ompanies Act, "%&' or any of the preceding Acts. Thus, a $ompany comes

into e(istence only by registration under the Act, which can be termed as

incorporation.

What is winding up of a Company?

)inding up of a company is defined as a process by which the life

)inding up of a company is defined as a process by which the life of a company is brought to of a company is brought to an end andan end and its property administered for the

its property administered for the benefit of its benefit of its members and creditors. In words of members and creditors. In words of *rofessor +ower,*rofessor +ower, )indin

)inding up of a g up of a company is the process whereby its life is ended and its company is the process whereby its life is ended and its *roperty is administered for the*roperty is administered for the benefit of its member

benefit of its members - creditors. s - creditors. An AAn Administrator, cdministrator, called a liquidator is appalled a liquidator is appointed and he takes cointed and he takes controlontrol of the company, collec

of the company, collects its assets, pays its ts its assets, pays its debts and finally distributes any surplus among the members indebts and finally distributes any surplus among the members in accordance with their rights.

accordance with their rights.

According to /alsburry0s 1aws of 2ngland, )inding up is a proceeding by means of which the According to /alsburry0s 1aws of 2ngland, )inding up is a proceeding by means of which the dissolution of a company is brought about -

dissolution of a company is brought about - in the course of which its assets are in the course of which its assets are collected and realised3collected and realised3 and applied in payment of its debts3

and applied in payment of its debts3 and when these are satisfied, the remaining amount is applied forand when these are satisfied, the remaining amount is applied for returning to its

returning to its members the sums which they members the sums which they have contributed to the company in have contributed to the company in accordance with Araccordance with Articlesticles of the $ompany. )i

of the $ompany. )inding up is nding up is a legal process.a legal process.

4nder the process, the life of the company is ended -

4nder the process, the life of the company is ended - its property is administered for the benefits of theits property is administered for the benefits of the members - creditors. A liquidator is appointed to realise the

members - creditors. A liquidator is appointed to realise the assets - properties of assets - properties of the company. Athe company. Afterfter payments of the debts,

payments of the debts, is any surplus of asseis any surplus of assets is left out they will be distributets is left out they will be distributed among the memberd among the memberss according to their rights. )inding up does

according to their rights. )inding up does not necessarily mean that the not necessarily mean that the company is insolvent. A perfeccompany is insolvent. A perfectlytly solvent company may be wound up by the

solvent company may be wound up by the approval of members in a general meeting.approval of members in a general meeting. )ho is a workman5

(2)

Definition of 6workman6 , is provided under 7ec. 8!s# of the Act is as under9 Definition of 6workman6 , is provided under 7ec. 8!s# of the Act is as under9 6)o

6)orkman6 is any person rkman6 is any person !including an apprentice# employed in any industry !including an apprentice# employed in any industry to do any to do any manual, unskilled,manual, unskilled, skilled, technical, operational, clerical or supervisory work for

skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms hire or reward, whether the terms ofof employment be e(press or implied and for the purposes of any proceedings under this act in

employment be e(press or implied and for the purposes of any proceedings under this act in relation to anrelation to an industrial dispute, includes any such

industrial dispute, includes any such person who has been person who has been dismissed, discharged or retrenched indismissed, discharged or retrenched in connection with, or as

connection with, or as a consequence of, that dispute, or a consequence of, that dispute, or whose dismissal, discharge or retrenchment haswhose dismissal, discharge or retrenchment has led to that dispute.

led to that dispute.

: In $hintaman rao vs. state of

: In $hintaman rao vs. state of ;adhya *radesh A;adhya *radesh AI< !"%&=# 7$ &= it I< !"%&=# 7$ &= it was held that there should be awas held that there should be a contractual relationship between master and servant i.e. the

contractual relationship between master and servant i.e. the workman is under the workman is under the supervision, directionsupervision, direction and control of his

and control of his master.master.

: In Atam prakash - ors vs. state of /aryana - ors "%%>

: In Atam prakash - ors vs. state of /aryana - ors "%%> !8# 11? !* - /# it was held that !8# 11? !* - /# it was held that to be a workmanto be a workman within section 8!s# of this Act he should be employed in an

within section 8!s# of this Act he should be employed in an industry and there should be master servantindustry and there should be master servant relationship.

relationship.

: In ?ohn @oseph khokar vs.

: In ?ohn @oseph khokar vs. bhadange . 7. - ors "%%= !"# 11? bhadange . 7. - ors "%%= !"# 11? BB> !bom# it was held that BB> !bom# it was held that in determiningin determining that whether a person is a workman or not

that whether a person is a workman or not the court has to principally see main or the court has to principally see main or substantial work forsubstantial work for which he is employed. Ceither designation nor any incidental work done by him

which he is employed. Ceither designation nor any incidental work done by him will get him outside thewill get him outside the purview of this

purview of this Act.Act.

: In *illai +. ;.

: In *illai +. ;. vs. A. *vs. A. *. lakhani. lakhanikar, @udge iii labour court - ors "%%= !8# kar, @udge iii labour court - ors "%%= !8# 11? BB !bom# it was held to11? BB !bom# it was held to determine whether a person is a workman his main and substantial work have to

determine whether a person is a workman his main and substantial work have to be seen.be seen.

: In *hysical <esearch 1aboratory vs.

: In *hysical <esearch 1aboratory vs. .+. 7harma !74*<2;2 $E4<T EF ICDIA.+. 7harma !74*<2;2 $E4<T EF ICDIA## It was held

It was held that 1aboratory Ahmadthat 1aboratory Ahmadabad, would come within abad, would come within the definition of the definition of 6workmen6 under the6workmen6 under the Industrial Disputes Act and other similar legislation in

Industrial Disputes Act and other similar legislation in the field of relations bthe field of relations b etween employers andetween employers and employees.6

employees.6

: In 7tandard $hartered +rindlays ank

: In 7tandard $hartered +rindlays ank <etired 2mployees Associ<etired 2mployees Association v. 4nion of India ation v. 4nion of India 8GG> II 11? 8GG> II 11? ==>==> !$al# it was held that a

!$al# it was held that a retired employee can be included in the term 6workman6 as defined in section 8!s#retired employee can be included in the term 6workman6 as defined in section 8!s# of the Industrial Disputes Act, "%B> and can be a party to an industrial dispute.

of the Industrial Disputes Act, "%B> and can be a party to an industrial dispute.

: In <eserve ank

: In <eserve ank of India and Ethers of India and Ethers vs. $.C. 7ahasranaman and Ethers !74*<2;2 $E4<T EFvs. $.C. 7ahasranaman and Ethers !74*<2;2 $E4<T EF ICDIA#

ICDIA#

it was held that employees are fully covered by the definition of

it was held that employees are fully covered by the definition of the term 6workman6 in section 8!s# of thethe term 6workman6 in section 8!s# of the said Act.

said Act.

Ce(us between w

(3)

During the winding up of a

During the winding up of a company the rights of the workman and labourers are usually ignored.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

Although labour legislations have been made to save and protect the rights of the workman and labourersworkman and labourers but are the labour l

but are the labour legislations actually curegislations actually curbing this problem is still a big questiobing this problem is still a big question.n.

Rights of Labourers during winding up of

Rights of Labourers during winding up of the company

the company

Compensation to be paid in case of

Compensation to be paid in case of winding up operationswinding up operations

4nder sec. 8&F of the IDA, an employer proposing to retrench workers, who have been continuously 4nder sec. 8&F of the IDA, an employer proposing to retrench workers, who have been continuously employed for more than one year, must give one monthHs notice or pay in lieu of such notice to

employed for more than one year, must give one monthHs notice or pay in lieu of such notice to the worker,the worker, and must also

and must also notify the relevant governmental authority, giving the reasons for the notify the relevant governmental authority, giving the reasons for the proposed retrenchment.proposed retrenchment.

7pecial provisions under the IDA are applicable in relation to

7pecial provisions under the IDA are applicable in relation to industrial establishments employing "GGindustrial establishments employing "GG workers or more. In this

workers or more. In this case, workers may not be case, workers may not be retrenched unless three monthsH writteretrenched unless three monthsH written notice, statingn notice, stating reasons for the retrenchment, or pay in lieu of notice, is

reasons for the retrenchment, or pay in lieu of notice, is given to the worker. In addition, the employer mustgiven to the worker. In addition, the employer must seek prior authorization from the relevant

seek prior authorization from the relevant governmental authority before the retrenchment can be carriedgovernmental authority before the retrenchment can be carried out !sec. 8&C, IDA#.

out !sec. 8&C, IDA#.

The concept of prior authorization in

The concept of prior authorization in this conte(t perhaps needs some this conte(t perhaps needs some elaboration here. The 7upremeelaboration here. The 7upreme $ourt of India has recognized the right of management to run its

$ourt of India has recognized the right of management to run its own business as it pleases without anyown business as it pleases without any interference by the courts. The decision to retrench is thus left solely up to

interference by the courts. The decision to retrench is thus left solely up to the discretion of management.the discretion of management. The court will inquire only into

The court will inquire only into the closure to verify that it is the closure to verify that it is bona fide and for economic reasons and willbona fide and for economic reasons and will not question the motive behind it. The concept of a

not question the motive behind it. The concept of a bona fide redundancy does not, for e(ample, include abona fide redundancy does not, for e(ample, include a situation where retrenchment is carried out in

situation where retrenchment is carried out in accordance with unfair labour practices or to accordance with unfair labour practices or to victimizevictimize workers. $onsequently, th

workers. $onsequently, the proper governmental authority is e proper governmental authority is required to e(amine the reasons given required to e(amine the reasons given in thein the notice for the proposed retrenchment to

notice for the proposed retrenchment to ascertain whether they are in accordance with good ascertain whether they are in accordance with good labour practicelabour practice and are for bona fide reasons of redundancy. I

and are for bona fide reasons of redundancy. If this is f this is not found to be so, not found to be so, the governmental authority maythe governmental authority may refuse permission for the retrenchment, giving its reasons in writing.

refuse permission for the retrenchment, giving its reasons in writing.

In the absence of

In the absence of any agreement between the employer and the any agreement between the employer and the workers retrenched as regards theworkers retrenched as regards the procedure for r

procedure for retrenchment, the emetrenchment, the employer retrenches ployer retrenches the worker who wathe worker who was the last person to be es the last person to be employed inmployed in the category, unless for reasons to be recorded the

the category, unless for reasons to be recorded the employer retrenches any other worker !sec. 8&+, IDA#.employer retrenches any other worker !sec. 8&+, IDA#.

Severance pay

In case of retrenchments, employees with more

In case of retrenchments, employees with more than one yearHs service, and other than than one yearHs service, and other than temporary or casualtemporary or casual employees, are entitled to compensation equivalent to

employees, are entitled to compensation equivalent to "& daysH pay for each completed year of service !sec."& daysH pay for each completed year of service !sec. 8&F!b#, IDA#.

(4)

/owever, a distinction is made for cessation of

/owever, a distinction is made for cessation of business for reasons beyond the business for reasons beyond the control of the employer.control of the employer. This might include

This might include force ma@eure, frustration of contract, etc., but force ma@eure, frustration of contract, etc., but does not include financial difficulties ordoes not include financial difficulties or loss of stock. In such circumstances, the employee is still

loss of stock. In such circumstances, the employee is still entitled to a redundancy payment, but the amountentitled to a redundancy payment, but the amount is less than that given for

is less than that given for termination of employment due to other reasons, being a sum equivalent to notermination of employment due to other reasons, being a sum equivalent to no more than the average of three monthsH pay !sec. 8&FFF, IDA#.

more than the average of three monthsH pay !sec. 8&FFF, IDA#.

4nder the *ayment of +ratuity Act, "%>8, a

4nder the *ayment of +ratuity Act, "%>8, a worker continuously employed for five years or worker continuously employed for five years or more ismore is entitled to a gratuity payment upon termination of service, e(cept where such termination has been as a entitled to a gratuity payment upon termination of service, e(cept where such termination has been as a result of his or her wilful

result of his or her wilful omission or negligence resulting in damage or loss of the employerHs property, inomission or negligence resulting in damage or loss of the employerHs property, in which case the gratuity is forfeited to the e(tent of

which case the gratuity is forfeited to the e(tent of the damage caused. )herthe damage caused. )here the employee has beene the employee has been dismissed on account of his or her riotous,

dismissed on account of his or her riotous, violent or disorderly conduct or for an offence involving moralviolent or disorderly conduct or for an offence involving moral turpitude committed in the course of employment, the gratuity shall be wholly

turpitude committed in the course of employment, the gratuity shall be wholly or partly forfeited. The sumor partly forfeited. The sum is calculated at "&

is calculated at "& daysH avedaysH average pay for every completed year of rage pay for every completed year of service.service.

Preferential Payments On Winding Up Of The Company

7ection &G under the $hapter  of *

7ection &G under the $hapter  of *art II of the $ompanies Act, "%&' provides for the sart II of the $ompanies Act, "%&' provides for the sequence ofequence of

the payments which shall

the payments which shall be made in the be made in the course of winding up of course of winding up of a company. /owevera company. /owever, 7ection &8%A, 7ection &8%A

is an e(ception to 7ection &G which starts with a notwithstanding clause providing for the overriding

preferential payments. 7ection &8%A

preferential payments. 7ection &8%A was introduced in the $ompanies was introduced in the $ompanies Act, "%&' by the $Act, "%&' by the $ompaniesompanies

!Amendment# Act, "%=& in order to provide a protection to

!Amendment# Act, "%=& in order to provide a protection to the workmen and the secured lenders the workmen and the secured lenders ofof

the $ompanies. 7ub 7ection 8

the $ompanies. 7ub 7ection 8 of 7ection &8%A further provides that 0the debts paof 7ection &8%A further provides that 0the debts payable to theyable to the

workmen and secured creditors of the $ompany shall be paid in full, unless the assets are insufficient

to meet them, in which case they shall abate

to meet them, in which case they shall abate the equal proportions0.the equal proportions0.

7imilar to the provisions above, where a claimant has proceeded with filing its

7imilar to the provisions above, where a claimant has proceeded with filing its claim with the Debtclaim with the Debt

recovery tribunal under the provisions of <ecovery of Debts Due to anks and Financial Institutions

Act, "%% 7ection "% !"%# of this Act provides that where a certificate of recovery is issued against a

company registered under the $ompanies Act, "%&', the Tribunal may order the sale proceeds

company registered under the $ompanies Act, "%&', the Tribunal may order the sale proceeds of suchof such

company to be distributed among its secured creditors in accordance with the provisions of section

&8%A of the $ompanies Act, "%&' and

&8%A of the $ompanies Act, "%&' and to pay the to pay the surplus, if any, to the surplus, if any, to the companycompany..

/owever, comparing the above two stated provisions of

/owever, comparing the above two stated provisions of the $ompanies Act, "%&' and the <ecoverythe $ompanies Act, "%&' and the <ecovery

of Debts Due to anks and Financial Institutions Act, "%%, ambiguity lied on the fact that in case the

$ompany 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 $ompany is not in the course of winding up but after

(5)

paying its debts to the secured creditors who applied un

paying its debts to the secured creditors who applied under the <ecovery of Debts Due to ankder the <ecovery of Debts Due to anks ands and

Financial Institutions Act, "%% to the tribunal for the recovery and the settlement was made, who

shall be settled

shall be settled on priority.on priority.

/on0ble 7upreme $ourt of India recently in the case of

/on0ble 7upreme $ourt of India recently in the case of Bank of aharashtra v !andurang "eshavBank of aharashtra v !andurang "eshav

#orwardkar $ %rs

#orwardkar $ %rs reported in 8G"!B#A<%G, decided this issue. In this case, the counsel reported in 8G"!B#A<%G, 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

provisional liquidator has been appointed and all the steps as provided in 7ections BB to B&G anall the steps as provided in 7ections BB to B&G and B&'d B&'

!dealing with the winding up# are taken, it cannot be said that $ompany is in winding up

!dealing with the winding up# are taken, it cannot be said that $ompany is in winding up and until theand until the

$ompany is in winding up, the workmen of the $ompany have no claims on the assets of the

$ompany nor do they have any

$ompany nor do they have any locus to approach the D<T to participate in a locus to approach the D<T to participate in a proceeding filed by aproceeding filed by a

bank or financial institution3 they are not credi

bank or financial institution3 they are not creditors secured or otherwise. The only rtors secured or otherwise. The only remedy that theemedy that the

workmen have is to approach t

workmen have is to approach the appropriate $ourt e.g., Industrial Tribunal etc., for determinationhe appropriate $ourt e.g., Industrial Tribunal etc., for determination

and realization of their dues.

and realization of their dues. 7ection "%!"%# of the "%% Act and 7ection &8%A of the $ompanies Act7ection "%!"%# of the "%% Act and 7ection &8%A of the $ompanies Act

do not help the

do not help the workmen as they are not workmen as they are not secured creditors. /owever, where the order of winding upsecured creditors. /owever, where the order of winding up

has been made and

has been made and liquidation proceedings started against a $oliquidation proceedings started against a $ompanympany, in such a case , in such a case the liquidatorthe liquidator

would be control of all

would be control of all the assets of cothe assets of companympany. ut in view of . ut in view of e(clusive @urisdiction conferred one(clusive @urisdiction conferred on

D<T

D<T,no leave of the ,no leave of the $ompany $ourt needs $ompany $ourt needs to be taken to be taken by D<T for ad@udication under 7ection "> by D<T for ad@udication under 7ection "> andand

e(ecution of the recovery certificate

e(ecution of the recovery certificate issued under the "%% Act. /owever, while allowing the appealissued under the "%% Act. /owever, while allowing the appeal

the /on0ble 7upreme $ourt in the present case held as follows9

i.

i. If thIf the debe debtor cotor compmpany is nany is not in liot in liquiquidatdation noion nor any pr any provrovisioisional linal liquiquidatdator haor has bees been appon appointeintedd

and merely winding up proceedings are pending, there is no question of distribution of sale

proceeds among secured creditors in the m

proceeds among secured creditors in the manner prescribed in 7ection "%!"%# of anner prescribed in 7ection "%!"%# of the "%% Athe "%% Act.ct.

ii.

ii. )he)here a core a compmpany iany is in lis in liquiquidatdationion, a sta, a statutotutory chry chargarge is cre is createated in fed in favoavour our of worf workmkmen inen in

respect of their dues over the security of every secured creditor and this charge is pari passu

with that of the

with that of the secured creditor. 7uch statutory charge is to the e(tent secured creditor. 7uch statutory charge is to the e(tent of workmen0s portionof workmen0s portion

in relation to the

in relation to the security held by the ssecurity held by the secured creditor of the debtor company.ecured creditor of the debtor company.

iii

iii.. The aThe abovbove pose positioition is equn is equally aally applpplicaicable whble where there the assee assets of thts of the debe debtor cotor compmpany haany have beve beenen

sold in e(ecution 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

e(ecution of the recovery certificate issued by the debt recovery tribunal, if debtor company

becomes company in winding up, 7ection &

(6)

come into operation and statutory charge is created in favour of workmen in respect of their

dues over such proceeds.

iv

iv.. The rThe releelevanvant date ft date for aror arrivriving aing at the rat the ratio at wtio at whichich the sah the sale prle proceoceeds areds are to be die to be distrstribuibutedted

amongst workmen and secured creditors of the debtor company is the date of the winding up

order and not the date of sale.

v.

v. The The concluconclusions sions !ii# !ii# to !to !iv# iv# shall shall be be mutatimutatis ms mutandiutandis aps applicabplicable wle where here proviprovisional sional liquidliquidatorator

has been appointed in respect

has been appointed in respect of the debtor company.of the debtor company.

vi.

vi. )he)here thre the winde winding up ping up petietitiotion agan againsinst the det the debtobtor comr company ipany is pens pendinding but no og but no orderder of winr of windindingg

up has been passed nor any provisional liquidator has been appointed in respect of such

company at the time of

company at the time of order of sale border of sale by D<T any D<T and the properties of td the properties of the debtor company havehe debtor company have

been sold in e(ecution of the recovery

been sold in e(ecution of the recovery certificate and proceeds of sale realized and certificate and proceeds of sale realized and fullfull

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 b

reopening disbursement by the Dy the D<T<T..

vii.

vii. /oweve/owever, r, befobefore fure full anll and find final dal disbursisbursement ement of saof sale prle proceedoceeds, if s, if the the debtodebtor comr company pany has ghas goneone

into liquidation and a li

into liquidation and a liquidator is appointed, disbursement of undisbursed proceeds quidator is appointed, disbursement of undisbursed proceeds by D<Tby D<T

can only be done after notice to the liquidator and after hearing him. In that situation if there

is claim of workmen0s dues, the D<T has two options available with it. Ene, the bank or

financial institution which made

financial institution which made an application before D<T for recovery of debt from thean application before D<T 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 e(tent of

workmen0s dues as may be finally determined by the liquidator of the debtor company and

payable to workmen in the propo

payable to workmen in the proportion set out in the illustration appended to 7ection &8%rtion set out in the illustration appended to 7ection &8%!#!c#!#!c#

of the $ompanies Act. The other, D<

of the $ompanies Act. The other, D<T may set apart tentatively portion T may set apart tentatively portion of the undisbursedof the undisbursed

amount towards workmen0s dues in the ratio as per the illustration following 7ection and

disburse the balance amount to the applicant bank or financial institution sub@ect to an

undertaking by such bank or financial institution to restitute the amount to the e(tent

workmen0s 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 workmen0s dues on ad hoc basis sub@ect to

ad@ustment on final determination of

(7)

vii

viii.i. The fThe firsirst optit option muon must be e(st be e(ercercised bised by D<y D<T onT only in a sitly in a situatuation whion where nere no appo appliclicatioation forn for

distribution towards workmen0s dues against the debtor company has been made by the

liquidator or the

liquidator or the workmen before the D<T.workmen before the D<T.

i(.

i(. )he)here thre the sale oe sale of secuf security hrity has beeas been effn effectected in e(ed in e(ecuecutiotion of ren of recovcovery cery certertificificate isate issuesued by thd by thee

D<T un

D<T under the "%% Act, the distribution of sale der the "%% Act, the distribution of sale proceeds has to be made proceeds has to be made by the D<T alone inby the D<T alone in

accordance with 7ection &8%A of the $ompanies Act and by no other forum or

accordance with 7ection &8%A of the $ompanies Act and by no other forum or authority.authority.

(.

(. The wThe workorkmen omen of the cf the comompany pany in wiin windnding uing up acqp acquiruire the se the stantandinding of thg of the sece secureured cred creditditors oors onn

and from the date of

and from the date of winding up order !or where provisional winding up order !or where provisional liquidator has been appointed,liquidator has been appointed,

from the date of such appointment# and they become entitled to the distribution of sale

proceeds in the ratio as e(plained in the illustration ap

proceeds in the ratio as e(plained in the illustration appended to 7ection &8%!#!c# of thepended to 7ection &8%!#!c# of the

$ompanies Act.

(i.

(i. 7ec7ectiotion "%!n "%!"%# o"%# of the "%f the "%% A% Act doct does not ces not clotlothe D<he D<T wiT with @urth @urisdisdictiction to dion to deteetermirmine thene the

workmen0s claim against the

workmen0s claim against the debtor company. debtor company. The ad@udication of workmen0s dues against The ad@udication of workmen0s dues against thethe

debtor company in liquidation has to

debtor company in liquidation has to be made by the be made by the liquidator. In other words, once theliquidator. In other words, once the

company is in winding up the only competent authority to determine the workmen0s dues is

the liquidator who obviously has to act under the supervision of the company court and by no

other authorit

other authorityy..

(ii

(ii.. 7ec7ectiotion "%!n "%!"%# i"%# is attrs attractacted oned only whely where a debre a debtor cotor compampany is in wny is in windinding uing up or a prop or a provisvisionionalal

liquidator has been appointed in res

liquidator has been appointed in respect of such company. If the debtor company is not inpect of such company. If the debtor company is not in

liquidation or if in

liquidation or if in respect of such company no order of respect of such company no order of appointment of provisional liquidatorappointment of provisional liquidator

has been made and merely winding up proceedings are pending, the question of distribution

of sale proceeds among secured creditors in the manner prescribed in 7ection "%!"%# of the

"%% Act does not arise.

GENE

RAL

PROVI

ION REL

A

TIN

G TO

WIN!I

NG UP

" #

W%R"&'((W%R"&'(( means the employees of the company, being workmen within the meaning of clause !s# of means the employees of the company, being workmen within the meaning of clause !s# of section 8 of

(8)

W%R"&'(S )*&S(W%R"&'(S )*&S(H, means the aggregate of the following sums due from the company to H, means the aggregate of the following sums due from the company to itsits workmen, namely9J

workmen, namely9J

!i# all wages or salary including wages payable for time or piece work and salary earned wholly or

!i# all wages or salary including wages payable for time or piece work and salary earned wholly or in partin part by way of commission o

by way of commission of any workman in ref any workman in respect of services rspect of services rendered to the compendered to the company and anyany and any compensation payable to any workman under any

compensation payable to any workman under any of the provisions of of the provisions of the Industrial Disputes Act, "%B>3the Industrial Disputes Act, "%B>3 !ii# all accrued holiday remuneration becoming payable to any workman or, in the case of his death, to any !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

other person in his right on the termination of his employment before or by the effect of the winding upthe termination of his employment before or by the effect of the winding up order or resolution3

order or resolution3

!iii# unless the company is being wound up

!iii# unless the company is being wound up voluntarily merely for the purposes of reconstruction orvoluntarily merely for the purposes of reconstruction or

amalgamation with another company or unless the company has, at the commencement of the winding up, amalgamation with another company or unless the company has, at the commencement of the winding up, under such a contract with

under such a contract with insurers as is insurers as is mentioned in section "B mentioned in section "B of the )orkmof the )orkmenHs $ompensatioenHs $ompensation Act,n Act, "%8, rights capable of being transferred to and vested in the workmen, all amount due

"%8, rights capable of being transferred to and vested in the workmen, all amount due in respect of anyin respect of any compensation or liability for compensation under the said Act in respect of the death or disablement of any compensation or liability for compensation under the said Act in respect of the death or disablement of any workman of the company3

workman of the company3 !iv# all sums due to

!iv# all sums due to any workman from the provident fund, the pension fund, the gratuity fund or any workman from the provident fund, the pension fund, the gratuity fund or any otherany other fund for the welfare of

fund for the welfare of the workmen, maintained by the the workmen, maintained by the companycompany.. Everriding preferential payments !7ection 8'#9

Everriding preferential payments !7ection 8'#9 In the winding up of a company,J

In the winding up of a company,J !a# workmenHs dues3 and

!a# workmenHs dues3 and

!b# debts due to secured creditors to the e(tent such debts

!b# debts due to secured creditors to the e(tent such debts rank under clause !iii# of the proviso to subKrank under clause !iii# of the proviso to subK section !"# of section 8& pari passu with such

section !"# of section 8& pari passu with such dues, shall be paid in priority to dues, shall be paid in priority to all other debts.all other debts.

The sums towards wages or salary referred to in subKclause !i# of clause !b# of subKsection !# of section The sums towards wages or salary referred to in subKclause !i# of clause !b# of subKsection !# of section 8&, which are payable for a period of two years preceding the winding up

8&, which are payable for a period of two years preceding the winding up order shall be paid in priority toorder shall be paid in priority to all other debts !including debts due to secured creditors#, within a period of

all other debts !including debts due to secured creditors#, within a period of thirty days of sale of assets andthirty days of sale of assets and shall be sub@ect to such charge over the security of secured creditors. These debts payable shall be paid in shall be sub@ect 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 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

(9)

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!R&+&R&',I-L !

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.&',S /S&C,I%' 012

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34

7ection 8' deals with

7ection 8' deals with top preference of payment.top preference of payment. In a winding up, sub@ect to

In a winding up, sub@ect to the provisions of section 8', there shall be paid the provisions of section 8', there shall be paid in priority to all other in priority to all other debts,J debts,J !a# all revenues, ta(es, cesses and rates due from the company to the $entral +overnment or a 7tate

!a# all revenues, ta(es, cesses and rates due from the company to the $entral +overnment or a 7tate +overnment or to a local authority at the relevant date, and having become due and

+overnment or to a local authority at the relevant date, and having become due and payable within thepayable within the twelve months immediately before that date3

twelve months immediately before that date3

!b# all wages or salary including wages payable for time or piece work and salary earned wholly or in !b# all wages or salary including wages payable for time or piece work and salary earned wholly or in partpart by way of commission o

by way of commission of any employee in rf any employee in respect of serviceespect of services rendered to the cs rendered to the company and due fompany and due for aor a period not e(ceedi

period not e(ceeding four months within the twng four months within the twelve months immediately belve months immediately before the relevefore the relevant date. Theant date. The amount payable under this clause to any workman shall not e(ceed such amount as may

amount payable under this clause to any workman shall not e(ceed such amount as may be notified3be notified3 !!employee and workman is different hereemployee and workman is different here##

!c# all accrued holiday remuneration becoming payable to any employee, or in the case of his death, to any !c# all accrued holiday remuneration becoming payable to any employee, or in the case of his death, to any other person claiming under him, on the termination of his

other person claiming under him, on the termination of his employment before, or by the winding up order,employment before, or by the winding up order, or, as the case may be, the dissolution of the company3

or, as the case may be, the dissolution of the company3 !d# unless the company is being wound up

!d# unless the company is being wound up voluntarily merely for the purposes of reconstruction orvoluntarily merely for the purposes of reconstruction or amalgamation with another company, all amount due in respect of

amalgamation with another company, all amount due in respect of contributions payable during the periodcontributions payable during the period of twelve months immediately before the relevant date by the company as the employer of persons under of twelve months immediately before the relevant date by the company as the employer of persons under the 2mployeesH 7tate Insura

the 2mployeesH 7tate Insurance Act, "%B= or any other nce Act, "%B= or any other law for the tilaw for the time being in force3me being in force3 !e# unless the company has, at the commencement of winding up, under such a

!e# unless the company has, at the commencement of winding up, under such a contract with any insurer ascontract with any insurer as is mentioned in

is mentioned in section "B of section "B of the )othe )orkmenHs $omperkmenHs $ompensation Act, "%8, rights capable of being nsation Act, "%8, rights capable of being transferredtransferred to and vested in the workmen, all

to and vested in the workmen, all amount due in respect of any compensation or liability for compensationamount due in respect of any compensation or liability for compensation under the said Act in respect of

under the said Act in respect of the death or disablement of the death or disablement of any employee of the company. )here anyany employee of the company. )here any compensation under the said Ac

compensation under the said Act is a t is a weekly payment, the amount payable under this clause shall be takenweekly payment, the amount payable under this clause shall be taken to be the amount of the

to be the amount of the lump sum for which such weekly payment could, if redeemable, be redeemed, iflump sum for which such weekly payment could, if redeemable, be redeemed, if the employer has made an

the employer has made an application under that Act3application under that Act3 !f# all sums due to any

!f# all sums due to any employee from the provident fund, the pension fund, the gratuity fund or any employee from the provident fund, the pension fund, the gratuity fund or any otherother fund for the welfare of the employees, maintained by the company3 and

fund for the welfare of the employees, maintained by the company3 and

!g# the e(penses of any investigation held in pursuance of sections 8" and 8"',

!g# the e(penses of any investigation held in pursuance of sections 8" and 8"', in so far as they arein so far as they are payable by the com

(10)

)here any payment has been made to any employee of a company on account of wages or salary or )here any payment has been made to any employee of a company on account of wages or salary or accrued holiday remunera

accrued holiday remuneration, himself or, in the case of his tion, himself or, in the case of his death, to any other person claiming throughdeath, to any other person claiming through him, out of money advanced by some person for that

him, out of money advanced by some person for that purpose, the person by whom the money waspurpose, the person by whom the money was advanced shall, in a winding up, have a right

advanced shall, in a winding up, have a right of priority in respect of the money so of priority in respect of the money so advanced and paidKupadvanced and paidKup to the amount by which the

to the amount by which the sum in respect of which the employee or other person in sum in respect of which the employee or other person in his right would havehis right would have been entitled to priority in

been entitled to priority in the winding up has beethe winding up has been reduced by rean reduced by reason of the payment hason of the payment having been made.ving been made. The debts enumerated in this section shallJ

The debts enumerated in this section shallJ

!a# rank equally among themselves and be paid in full, unless the

!a# rank equally among themselves and be paid in full, unless the assets are insufficient to meet them, inassets are insufficient to meet them, in which case they shall abate in equal proportions3 and

which case they shall abate in equal proportions3 and !b# so far as the assets of th

!b# so far as the assets of the company available for payment to general creditors are insufficiee company available for payment to general creditors are insufficient to meetnt to meet them, have priority over the claims of holders of debentures under any floating charge created by the them, have priority over the claims of holders of debentures under any floating charge created by the company, a

company, and be paid nd be paid accordingly out of any property comprised in accordingly out of any property comprised in or sub@ect to or sub@ect to that charge.that charge. !B# 7ub@ect to the retention of such sums

!B# 7ub@ect to the retention of such sums as may be necessary for the costs and e(penses of the winding up,as may be necessary for the costs and e(penses of the winding up, the debts under this section shall be discharged forthwith so far as the

the debts under this section shall be discharged forthwith so far as the assets are sufficient to meet them,assets are sufficient to meet them, !&# In the event of a landlord

!&# In the event of a landlord or other person distraining or having distrained on any goods or effects of theor 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

company within three months immediately before the date of a winding up order, the debts to which priority is given under t

priority is given under this section shall be a first his section shall be a first charge on the charge on the goods or effegoods or effects so distrained on or tcts so distrained on or thehe proceeds of the s

proceeds of the sale thereof. In rale thereof. In respect of any money espect of any money paid under any such cpaid under any such charge, the lanharge, the landlord or otherdlord or other person shall have the

person shall have the same rights of priority asame rights of priority as the person to whom ths the person to whom the payment is made.e payment is made. !'# Any remuner

!'# Any remuneration in respect of a period of holiday ation in respect of a period of holiday or of absence from work on medical groundsor of absence from work on medical grounds through sickness or other good cause shall be deemed to be wages in

through sickness or other good cause shall be deemed to be wages in respect of services rendered to therespect of services rendered to the company during that period.

company during that period.

The e(pression accrued holiday remune

The e(pression accrued holiday remuneration includes, in relation to any person, all sums ration includes, in relation to any person, all sums which, bywhich, by virtue either of his contract of employment or of any

virtue either of his contract of employment or of any enactment including any order made or directionenactment including any order made or direction given thereunder, are payable on account of the remuneration which would,

given thereunder, are payable on account of the remuneration which would, in the ordinary course, havein the ordinary course, have become payable t

become payable to him in respect of a po him in respect of a period of holidayeriod of holiday, had his e, had his employment with the compamployment with the company continuedny continued until he became entitled to be allowed the holiday.

until he became entitled to be allowed the holiday. The e(pression employee does not include a

The e(pression employee does not include a workman3 andworkman3 and The e(pression relevant date meansJ

(11)

!a#

!a# in the case of a company being wound up by the Tin the case of a company being wound up by the Tribunal, the date of appointmeribunal, the date of appointment or first appointmentnt or first appointment of a provisional liquidator, or if no such appointment was made, the date of

of a provisional liquidator, or if no such appointment was made, the date of the winding up order, unless, inthe winding up order, unless, in either case, the company had commenced to be wound up voluntarily before that date3 and

either case, the company had commenced to be wound up voluntarily before that date3 and !b# in any other case, the date of

!b# in any other case, the date of the passing of the resolution for the voluntary winding up the passing of the resolution for the voluntary winding up of the company.of the company.

Conc5usion4

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

creditors and other interested parties to go into a scurry to claim full recovery of the debt owing toowing to

them. 2mployees, naturally, would be concerned about the salaries and

them. 2mployees, naturally, would be concerned about the salaries and other reimbursements orother reimbursements or

compensation that would be outstanding.

The recent economic downturn has resulted in an increased number of companies going into

insolvency due to cashKflow problems and financial difficulties faced by them. Following from this, a

ma@or concern of both the employers and employees of a company would be how a company0s

insolvency affects their rights or liabilities, particularly so for employees who would be interested in

protecting their rights in the event of the com

protecting their rights in the event of the company0s insolvency.pany0s 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

creditors and other interested parties to go into a scurry to claim full recovery of the debt owing toowing to

them. 2mployees, naturally, would be concerned about the salaries and

them. 2mployees, naturally, would be concerned about the salaries and other reimbursements orother reimbursements or

compensation that would be outstanding.

The law aids these employees to a certain e(tent via

The law aids these employees to a certain e(tent via s 88'+!'# of the Act in a @udicial managements 88'+!'# of the Act in a @udicial management

and s 8= of

and s 8= of the Act in liquidation. /owever, these measures are of only the Act in liquidation. /owever, these measures are of only limited effectiveness. It islimited effectiveness. It is

advisable for companies that are facing the prospect of insolvency to decide whether they wish to

terminate their employees0 contracts at

terminate their employees0 contracts at an early stage and an early stage and to inform these employees accordingly.to inform these employees accordingly.

7uch 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 @ob market again, so that they can find a

new @ob swiftly to minimise the economic hardship to themselves and their

new @ob swiftly to minimise the economic hardship to themselves and their dependants.dependants.

I;*E<TACT $A729

-rgha Sen vs Interra Information

1662 27 SCL 876 )e5hi1662 27 SCL 876 )e5hi The unpaid salary of an

The unpaid salary of an emp5oyeeemp5oyee is is5iab5e5iab5e to be recovered from to be recovered from the employer, ...the employer, ...WindingWindingKKupup petition petition was filed

was filedagainstagainst the thecompanycompany by one group of by one group of ... According to the averments made in the petition, According to the averments made in the petition, he had to leave the services of the company because he was told

he had to leave the services of the company because he was told that the company was windingKup itsthat the company was windingKup its 0business group division0 where the

(12)

position to pay up his salary dues, etc., and, th

position to pay up his salary dues, etc., and, therefore, requested the petitioner to submit hiserefore, requested the petitioner to submit his

resignation without insisting for full and final payment assuring that salary and dues, etc., would be resignation without insisting for full and final payment assuring that salary and dues, etc., would be paid as soon as funds were available. En this assurance the pe

paid as soon as funds were available. En this assurance the petitioner submitted his resignation on "Ktitioner submitted his resignation on "K =K8GG". Thereafter the managing director of the company, vide letter dated 8K%K8GG", reiterated his =K8GG". Thereafter the managing director of the company, vide letter dated 8K%K8GG", reiterated his assurance to pay the

assurance to pay the dues. /owever, the needful was not done. The petitioner, in these dues. /owever, the needful was not done. The petitioner, in these circumstances,circumstances, sent statutory notice dated 8=K>K8GGB calling upon the company to pay a sum of <s. ,&B,"& on sent statutory notice dated 8=K>K8GGB calling upon the company to pay a sum of <s. ,&B,"& on account of unpaid salary, perks and allowances