State Bank of India Vs. the Podar Mills Limited and Others - Court Judgment

Excerpt:
companies act (1 of 1956) - section 529a - suit by secured creditor for realisation of money advanced - workmen's trade union not a necesssary or a proper party.;workmen's trade union is neither a necessary nor a proper party to such a suit. - - board of revenue, air1963sc786 .the supreme court said that a necessary party was one without whom no order could be made effectively and a proper party was one in whose absence an effective order could be made but whose presence was necessary for a complete and final decision on the question involved in the proceeding.orderbharucha, j. 1. this is an appeal against the judgment and order of guttal, j. making absolute the chamber summons filed by the applicant (the 6th respondent before us) to make it a defendant to the suit.2. the 1st respondents have textile undertakings in bombay and jaipur. the management of the bombay undertaking was taken over in 1983 by the national textile corporation under the provisions -of the textile undertakings (taking over of management) act, 1983. the jaipur unit was closed on 2nd august, 1985. 3. on 18th december, 1986 the appellants, who are a nationalised bank, filed this suit against the 1st respondents, their directors and the national textile corporation to recover the sum of (approximately) rs. 14.76 crores which had been advanced by the appellants to the 1st respondents on the security of the mortgage of immoveable property and the hypothecation of plant and machinery. on 14th february, 1987 the appellants took out a notice of motion for the appointment of the court receiver as receiver of the security and for an injunction restraining the respondents from disposing it of. the notice of motion was, by an order dated 7th march 1988, made absolute in terms of prayer (a), i.e. to say, the court receiver was appointed receiver of the secured moveable and immoveable properties. the court receiver was directed to appoint the 1st respondents the agents of the court receiver in respect of the machinery, fittings, fixtures and the immoveable property of the jaipur undertaking. if the 1st respondents were not willing or not in a position to accept the terms and conditions fixed by the court receiver in this regard, the court receiver was given the liberty to have the machinery and moveables sold and retain the net sale proceeds. there was an appeal against the order dated 7th march, 1988. the appeal was admitted on 30th march, 1988. the appeal court, while it did not stay theoperation of the order, directed that the court receiver should take formal possession of the property, both immoveable and moveable. this ad interim order was confirmed when the notice of motion reached hearing before the appeal court. the appeal is still pending. 4. on 5th may, 1988 the chamber summons with which we are here concerned was taken out by the 6th respondent. the 6th respondent is a trade union representing the workmen of the 1st respondents in the jaipur unit. it was the case of the 6th respondent in the affidavit in support of the chamber summons that it was, on behalf of these workmen, entitled to make a claim against the 1st respondents for full wages from august, 1985 under the provisions of the industrial disputes act in the sum of approximately rs. 2,94,00,000/- and also a claim for notice pay, compensation and gratuity in the sum of approximately rs. 1,00,00,000/-. the workmen were very keen to re-start the undertaking and had approached the appropriate authorities of the state and central governments in that behalf. an exhaustive viability study had been made by the ahmedabad textile industry research association, which had concluded that the jaipur unit was technically viable. the workmen were confident that a viable scheme would be propounded within 3 to 4 months. in the circumstances, it was clear that the 6th respondent was a 'necessary and affected party with the results and outcome of the above suit in as much as the workers may lose their job and may not be able to recover the dues to the tune of rs. 4,25,00,000/-(approx.).' 5. the chamber summons was contested. the learned single judge allowed the chamber summons and directed that the 6th respondent be made a defendant to the suit. the learned judge relied upon the judgments of the supreme court in workers of m/s. rohtas industries ltd. v. m/ s. rohtas industries ltd., : (1987)iillj1sc , workers of m/s, rohtas industries v. m/sa rohtas industries ltd. : (1987)iillj1sc , and national textile workers' union v. p. r. ramakrishnan, : (1983)illj45sc . in his view, the judgments established a nexus betweenthe claim of the workmen and the relief claimed in the suit. if the workmen succeeded in their efforts to revive and rebuild the undertaking, they would be able to produce goods and increase the wealth of the 1st respondents, in which event the appellants would be able to realise the debt without selling the security and, consequently, the claim in regard to the sale of the mortgaged and hypothecated properly might be rejected. the suit had been filed in 1986. it was possible for the workmen to revive and revitalise the undertaking and make it a profitable enterprise and this could happen before the suit was heard and disposed of in the ordinary course. the 6th respondent had, therefore, a direct interest in the subject-matter of the suit, limited though it was to the sale of the mortgaged and hypothecated property, and it was, therefore, a necessary party to the suit. 6. we shall consider the relevant judgments. we think it necessary to go first to the basics. we asked mr. shah, who appeared on behalf of the 6th respondent, whether the 6th respondent could help in answering the issues in the suit; he, fairly and quite rightly, stated that it could not. he also rightly stated that the 6th respondent could not prevent a decree from being passed in favour of the appellants. his submission, however, was that since all the assets of the 1st respondents were secured to the appellants, as seemed apparent from the plaint, they would be realised in execution of the decree so that the 1st respondents would remain an empty husk without any assets. in the circumstances, the legal rights of the workmen, given by section 529-a of the companies act, 1956, would be lost. it was true that the execution of the decree could be not stopped by the 6th respondent but the proceeds of such execution would have to be apportioned between the appellants and the workmen. 7. since emphasis has been placed upon section 529-a, it needs to be reproduced. '529-a. overriding preferential payments. (1) notwithstanding anything contained in any other provision of this act or any other law for the time being in force, in the winding up of a company -- (a) workmen's dues; and (b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of section 529 pan passu with such dues; shall be paid in priority to all other debts. (2) the debts payable under clause (a) and clause (b) of sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.' it will be seen that workmen's dues and dues due to secured creditors are, by that provision, to be paid in priority to all other debts 'in the winding up of a company. 'this is not a winding up proceeding but a suit. section 529-a, therefore, does not help the 6th respondent in its clarion that it is a necessary party to the suit. it is not even a proper party thereto. in this behalf we may refer to the judgment of the supreme court in udit narain singh v. board of revenue, : air1963sc786 . the supreme court said that a necessary party was one without whom no order could be made effectively and a proper party was one in whose absence an effective order could be made but whose presence was necessary for a complete and final decision on the question involved in the proceeding. the 6th respondent does not satisfy either requirement. on principle, therefore, the 6th respondent is neither a necessary nor a proper party to the suit. 8. the supreme court was considering a winding up proceeding in workers of m/s. rohtas industries ltd. v. m/s. rohtas industries ltd., : (1987)iillj1sc . it had before it a claim to wages for about 7 years. it passed an order limited to 'stocks which were the products of this industry before its closure' and directed that the wages should be paid thereout. it did so because : 'so far as the pledge and the priority of the financial institutions are concerned, we have no doubt that they have other sufficient securities and properties of the company and, therefore, if this stock of finished products are sold to meet the basic requirements of the workers, their interests would not be injeopardy.' this order is distinguishable from the facts before us inasmuch as (1) this is not a winding-up proceeding; and (2) the claim is not for a part of the secured property on the basis that the balance is enough to meet the claim in full. this order came up for consideration again in workers of m/s. rohtas industries v. m/s. rohtas industries ltd., : (1987)iillj1sc , and the supreme court then said that in the earlier order it had already indicated 'the peculiar circumstances of the case'. these considerations were kept in view when the various claims of the financial institutions were brushed aside from immediate consideration and wages for the limited period were directed to be disbursed. the supreme court added, 'we have no difficulty in saying that that order of this court was made under peculiar circumstances obtaining in this case and may not be taken as a precedent. whether the company's assets are sufficient to meet all the liabilities is a matter which is yet to be seen and this court really intended to say that there were other assets against which the financial institutions could pitch their claim'. in our view, therefore, neither of these orders can be availed of by the 6th respondent. 9. in national textile workers' union v. p.r. ramakrishnan, : (1983)illj45sc , trade unions had made a claim to be made parties to a winding-up petition but at the hearing before the supreme court 'it was conceded on behalf of these two unions that they were not pressing their applications for being added as parties,..... and they were claiming only the right to appear and be heard in support or opposition to the winding up petition.' the majority judgment of the supreme court upheld this limited claim relying upon the audi alteram partem rule for it was 'difficult to imagine how any system of law which is designed to promote justice through fain play in action can permit the court to make a winding up order which has the effect of bringing about termination of the services of the workers without giving them an opportunity of being heard against the making of such order.' it is difficult to see how this judgment can assist the 6th respondent in its claim to be made adefendant to the suit. 10. we have mentioned that the affidavit-in-support of the chamber summons proceeded upon the basis that a viable scheme to re-start the jaipur unit would be formulated by the workmen in 3 to 4 months. these 3 to4 months expired in or about september 1988. we are told by mr. shah that he has no instructions to date about any such scheme. 11. for the reasons aforementioned, there is no justification for making the 6th respondent a defendant to the suit. the appeal is allowed. the judgment and order of the learned single judge are set aside. the chamber summons is dismissed. there shall be no order as to costs throughout. appeal allowed.

Judgment:
ORDER

Bharucha, J.

1. This is an appeal against the judgment and order of Guttal, J. making absolute the Chamber Summons filed by the applicant (the 6th respondent before us) to make it a defendant to the suit.

2. The 1st respondents have textile undertakings in Bombay and Jaipur. The management of the Bombay undertaking was taken over in 1983 by the National Textile Corporation under the provisions -of the Textile Undertakings (Taking Over of Management) Act, 1983. The Jaipur unit was closed on 2nd August, 1985.

3. On 18th December, 1986 the appellants, who are a nationalised bank, filed this suit against the 1st respondents, their directors and the National Textile Corporation to recover the sum of (approximately) Rs. 14.76 crores which had been advanced by the appellants to the 1st respondents on the security of the mortgage of immoveable property and the hypothecation of plant and machinery. On 14th February, 1987 the appellants took out a Notice of Motion for the appointment of the Court Receiver as Receiver of the security and for an injunction restraining the respondents from disposing it of. The Notice of Motion was, by an order dated 7th March 1988, made absolute in terms of prayer (a), i.e. to say, the Court Receiver was appointed Receiver of the secured moveable and immoveable properties. The Court Receiver was directed to appoint the 1st respondents the agents of the Court Receiver in respect of the machinery, fittings, fixtures and the immoveable property of the Jaipur undertaking. If the 1st respondents were not willing or not in a position to accept the terms and conditions fixed by the Court Receiver in this regard, the Court Receiver was given the liberty to have the machinery and moveables sold and retain the net sale proceeds. There was an appeal against the order dated 7th March, 1988. The appeal was admitted on 30th March, 1988. The Appeal Court, while it did not stay theoperation of the order, directed that the Court Receiver should take formal possession of the property, both immoveable and moveable. This ad interim order was confirmed when the Notice of Motion reached hearing before the Appeal Court. The appeal is still pending.

4. On 5th May, 1988 the Chamber Summons with which we are here concerned was taken out by the 6th respondent. The 6th respondent is a trade union representing the workmen of the 1st respondents in the Jaipur unit. It was the case of the 6th respondent in the affidavit in support of the Chamber Summons that it was, on behalf of these workmen, entitled to make a claim against the 1st respondents for full wages from August, 1985 under the provisions of the Industrial Disputes Act in the sum of approximately Rs. 2,94,00,000/- and also a claim for notice pay, compensation and gratuity in the sum of approximately Rs. 1,00,00,000/-. The workmen were very keen to re-start the undertaking and had approached the appropriate authorities of the State and Central Governments in that behalf. An exhaustive viability study had been made by the Ahmedabad Textile Industry Research Association, which had concluded that the Jaipur unit was technically viable. The workmen were confident that a viable scheme would be propounded within 3 to 4 months. In the circumstances, it was clear that the 6th respondent was a 'necessary and affected party with the results and outcome of the above suit in as much as the workers may lose their job and may not be able to recover the dues to the tune of Rs. 4,25,00,000/-(approx.).'

5. The Chamber Summons was contested. The learned single Judge allowed the Chamber Summons and directed that the 6th respondent be made a defendant to the suit. The learned Judge relied upon the judgments of the Supreme Court in Workers of M/s. Rohtas Industries Ltd. v. M/ s. Rohtas Industries Ltd., : (1987)IILLJ1SC , Workers of M/s, Rohtas Industries v. m/SA Rohtas Industries Ltd. : (1987)IILLJ1SC , and National Textile Workers' Union v. P. R. Ramakrishnan, : (1983)ILLJ45SC . In his view, the judgments established a nexus betweenthe claim of the workmen and the relief claimed in the suit. If the workmen succeeded in their efforts to revive and rebuild the undertaking, they would be able to produce goods and increase the wealth of the 1st respondents, in which event the appellants would be able to realise the debt without selling the security and, consequently, the claim in regard to the sale of the mortgaged and hypothecated properly might be rejected. The suit had been filed in 1986. It was possible for the workmen to revive and revitalise the undertaking and make it a profitable enterprise and this could happen before the suit was heard and disposed of in the ordinary course. The 6th respondent had, therefore, a direct interest in the subject-matter of the suit, limited though it was to the sale of the mortgaged and hypothecated property, and it was, therefore, a necessary party to the suit.

6. We shall consider the relevant judgments. We think it necessary to go first to the basics. We asked Mr. Shah, who appeared on behalf of the 6th respondent, whether the 6th respondent could help in answering the issues in the suit; he, fairly and quite rightly, stated that it could not. He also rightly stated that the 6th respondent could not prevent a decree from being passed in favour of the appellants. His submission, however, was that since all the assets of the 1st respondents were secured to the appellants, as seemed apparent from the plaint, they would be realised in execution of the decree so that the 1st respondents would remain an empty husk without any assets. In the circumstances, the legal rights of the workmen, given by Section 529-A of the Companies Act, 1956, would be lost. It was true that the execution of the decree could be not stopped by the 6th respondent but the proceeds of such execution would have to be apportioned between the appellants and the workmen.

7. Since emphasis has been placed upon Section 529-A, it needs to be reproduced.

'529-A. Overriding preferential payments. (1) Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company --

(a) workmen's dues; and

(b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of Section 529 pan passu with such dues;

shall be paid in priority to all other debts.

(2) The debts payable under clause (a) and clause (b) of sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.'

It will be seen that workmen's dues and dues due to secured creditors are, by that provision, to be paid in priority to all other debts 'in the winding up of a company. 'This is not a winding up proceeding but a suit. Section 529-A, therefore, does not help the 6th respondent in its clarion that it is a necessary party to the suit. It is not even a proper party thereto. In this behalf we may refer to the judgment of the Supreme Court in Udit Narain Singh v. Board of Revenue, : AIR1963SC786 . The Supreme Court said that a necessary party was one without whom no order could be made effectively and a proper party was one in whose absence an effective order could be made but whose presence was necessary for a complete and final decision on the question involved in the proceeding. The 6th respondent does not satisfy either requirement. On principle, therefore, the 6th respondent is neither a necessary nor a proper party to the suit.

8. The Supreme Court was considering a winding up proceeding in Workers of M/s. Rohtas Industries Ltd. v. M/s. Rohtas Industries Ltd., : (1987)IILLJ1SC . It had before it a claim to wages for about 7 years. It passed an order limited to 'stocks which were the products of this industry before its closure' and directed that the wages should be paid thereout. It did so because : 'So far as the pledge and the priority of the financial institutions are concerned, we have no doubt that they have other sufficient securities and properties of the company and, therefore, if this stock of finished products are sold to meet the basic requirements of the workers, their interests would not be injeopardy.' This order is distinguishable from the facts before us inasmuch as (1) this is not a winding-up proceeding; and (2) the claim is not for a part of the secured property on the basis that the balance is enough to meet the claim in full. This order came up for consideration again in Workers of M/s. Rohtas Industries v. M/s. Rohtas Industries Ltd., : (1987)IILLJ1SC , and the Supreme Court then said that in the earlier order it had already indicated 'the peculiar circumstances of the case'. These considerations were kept in view when the various claims of the financial institutions were brushed aside from immediate consideration and wages for the limited period were directed to be disbursed. The Supreme Court added, 'We have no difficulty in saying that that order of this Court was made under peculiar circumstances obtaining in this case and may not be taken as a precedent. Whether the company's assets are sufficient to meet all the liabilities is a matter which is yet to be seen and this Court really intended to say that there were other assets against which the financial institutions could pitch their claim'. In our view, therefore, neither of these orders can be availed of by the 6th respondent.

9. In National Textile Workers' Union v. P.R. Ramakrishnan, : (1983)ILLJ45SC , trade unions had made a claim to be made parties to a winding-up petition but at the hearing before the Supreme Court 'it was conceded on behalf of these two unions that they were not pressing their applications for being added as parties,..... and they were claiming only the right to appear and be heard in support or opposition to the winding up petition.' The majority judgment of the Supreme Court upheld this limited claim relying upon the audi alteram partem rule for it was 'difficult to imagine how any system of law which is designed to promote justice through fain play in action can permit the Court to make a winding up order which has the effect of bringing about termination of the services of the workers without giving them an opportunity of being heard against the making of such order.' It is difficult to see how this judgment can assist the 6th respondent in its claim to be made adefendant to the suit.

10. We have mentioned that the affidavit-in-support of the Chamber Summons proceeded upon the basis that a viable scheme to re-start the Jaipur unit would be formulated by the workmen in 3 to 4 months. These 3 to4 months expired in or about September 1988. We are told by Mr. Shah that he has no instructions to date about any such scheme.

11. For the reasons aforementioned, there is no justification for making the 6th respondent a defendant to the suit. The appeal is allowed. The judgment and order of the learned single Judge are set aside. The Chamber Summons is dismissed. There shall be no order as to costs throughout.

Appeal allowed.