A PROJECT REPORT ON “RIGHTS OF LABOURS DURING THE WINDING UP OF

A COMPANY”

Submitted by: Submitted to:

Ayushi Mr.Dayanand murthy

201224 Company Law Faculty

VII sem

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ACKNOWLEDGMENT

I take this opportunity to express my profound gratitude and deep regards to my guide Mr

Dayanand Murthy for his guidance, monitoring and constant encouragement throughout the

course of this semester on project “rights of labours during the winding up of a company”. The

blessing, help and guidance given by him time to time have only made it possible the successful

completion of the project.

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Contents

What is a company

Incorporation of a company

What is winding up of a company

Compensation to be paid in case of winding up operations

Preferential payments on winding up of the company

General provisions relating to winding up

Preferential payments (section 327)

Severance pay

Conclusion

References

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OBJECTIVES OF THE STUDY

The objective of this project is:

To study the process of winding up of company

To study the rights of labourers during the winding up of company.

SIGNIFICANCE AND BENEFIT OF THE STUDY

The benefit which will be derived from the research work of this project will be very helpful in

conducting further research work related to rights of labours during the winding up of a

company. After the study of this topic, it will be easy for the author to further conduct any

research successfully. One can easily develop easy understanding of this topic.

SCOPE OF THE STUDY

The project would be focusing on the rights of the labours during the winding up of the

company, as these people are also an important aspect of the company. On a general basis when

it comes to winding up, the rights of these people have been neglected many a times in the front

of creditors and members. The project would be dealing in details about the rights and problems

faced by them.

HYPOTHESIS

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

ignored. The line of research of the project would analyze the labour law along with the

company law and would try to come up with a conclusion whether these legislations are actually

curbing the problem or not.

RESEARCH METHODOLOGY

The present research study is mainly a doctrinal and analytical. Keeping this in view, the

researcher has gone through different books, journals, Web references, E-journal, reports etc.

The relevant material is collected from the secondary sources. Materials and information are

collected both legal sources like books.

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LITERATURE REVIEW

1. Lakshmi,1 in article, “Winding Up of a Company,” explained during the winding up of a

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 workman and labourers

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

2. S Patwari,2 in article, “Winding Up in India,” explained where a company is in

liquidation, a statutory charge is created in favour of workmen in respect of their dues

over the security of every secured creditor and this charge is pari passu with that of the

secured creditor. Such statutory charge is to the extent of workmen’s portion in relation

to the security held by the secured creditor of the debtor company.

3. G. Kinyua,3 in article, “Winding Up of Company in India,” explained Section 530 under

the Chapter V of Part VII of the Companies Act, 1956 provides for the sequence of the

payments which shall be made in the course of winding up of a company. However,

Section 529A is an exception to Section 530 which starts with a notwithstanding clause

providing for the overriding preferential payments. Section 529A was introduced in the

Companies Act, 1956 by the Companies (Amendment) Act, 1985 in order to provide a

protection to the workmen and the secured lenders of the Companies.

INTRODUCTION

What is a Company?

A voluntary association formed and organized to carry on a business. Types of companies

include sole proprietorship, partnership, limited liability, corporation, and public limited

company.

Incorporation of a Company

It is the first step in the making and formation of a company. According to sec. 3 (1) (ii) of the

Companies Act, 1956 a company means a company formed and registered under the Companies

1 Lakshmi, Winding Up of a company, 2009, available at http://www.caclubindia.com/articles/winding-up-of-companies-3971.asp (last updated on 21st September 2015)2 S Patwari, Winding Up in India, 2014, available at www.ssrn.com (last updated on 21st September 2015) 3 G. Kinyua, Winding Up of Company in India, available at www.academia.edu/.. (last updated on 21st September 2015)

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Act, 1956 or any of the preceding Acts. Thus, a Company comes into existence only by

registration under the Act, which can be termed as incorporation.

What is winding up of a Company?

Winding up of a company is defined as a process by which the life of a company is brought to an

end and its property administered for the benefit of its members and creditors. In words of

Professor Gower, “Winding up of a company is the process whereby its life is ended and its

Property is administered for the benefit of its members & creditors. An Administrator, called a

liquidator is appointed and he takes control of the company, collects its assets, pays its debts and

finally distributes any surplus among the members in accordance with their rights.”4

According to Halsburry’s Laws of England, “Winding up is a proceeding by means of which the

dissolution of a company is brought about & in the course of which its assets are collected and

realised; and applied in payment of its debts; and when these are satisfied, the remaining amount

is applied for returning to its members the sums which they have contributed to the company in

accordance with Articles of the Company.” Winding up is a legal process.

Under the process, the life of the company is ended & its property is administered for the

benefits of the members & creditors. A liquidator is appointed to realise the assets & properties

of the company. After payments of the debts, is any surplus of assets is left out they will be

distributed among the members according to their rights. Winding up does not necessarily mean

that the company is insolvent. A perfectly solvent company may be wound up by the approval of

members in a general meeting.

Who is a workman?

Definition of “workman” is provided under Sec. 2 (s) of the Act is as under:

“Workman” is any person (including an apprentice) employed in any industry to do any manual,

unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether

the terms of employment be express or implied and for the purposes of any proceedings under

this act in relation to an industrial dispute, includes any such person who has been dismissed,

4 Winding Up a Registered Company and an Unregistered Company, last accessed on 20 th October,2015, www.archive.india.gov.in/business/...business/windingup_company.php

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discharged or retrenched in connection with, or as a consequence of, that dispute, or whose

dismissal, discharge or retrenchment has led to that dispute.5

In Reserve Bank of India and Others vs. C.N. Sahasranaman and Others6

It was held that employees are fully covered by the definition of the term “workman” in section

2(S) of the said Act.

Nexus between workman and winding up of a company

During the winding up of a 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

workman and labourers but are the labour legislations actually curbing this problem is still a big

question.

IMPORTANT CASE: “Argha Sen vs Interra Information”7

FACTS:

The petitioners were employees of the respondent company alleged that their terminal dues are

not paid in spite of statutory notice and, therefore, it be deemed that the respondent-company is

unable to pay the debt and it be ordered to be wound up. The petitioner was vice president and

was compelled to submit his resignation on 13-8-2001 by the respondent on the ground that

business division was being wound up and on assurance that his dues would be settled as and

when funds were available. Under same circumstances he issued legal notice dated 28-7-2004

claiming a sum of Rs. 4,29,252.

ISSUE:

Whether there was legal relationship of debtor and creditor between the petitioner and the

respondent-company and liability, if any, is that of Interra Information Technologies Enabled

Services (P.) Ltd. (‘UTESPL’), which is a separate legal entity.

HELD: Company should pay the debt.5 Which employees do not fall under the ambit of Industrial Dispute Act, 1947, last accessed on 21st October,2015, 4:15 pm, http://www.legalservicesindia.com6 AIR 1998 SCC 2117 2007 75 SCL 150 Delhi

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COMPENSATION TO BE PAID IN CASE OF WINDING UP OPERATIONS

Under sec. 25F of the The Industrial Disputes Act, 1947, an employer proposing to retrench

workers, who have been continuously employed for more than one year, must give one month’s

notice or pay in lieu of such notice to the worker, and must also notify the relevant governmental

authority, giving the reasons for the proposed retrenchment.

Special provisions under the IDA are applicable in relation to industrial establishments

employing 100 workers or more. In this case, workers may not be retrenched unless three

months’ written notice, stating reasons for the retrenchment, or pay in lieu of notice, is given to

the worker. In addition, the employer must seek prior authorization from the relevant

governmental authority before the retrenchment can be carried out (sec. 25N, IDA).

The concept of “prior authorization” in this context perhaps needs some elaboration here. The

Supreme Court of India has recognized the right of management to run its own business as it

pleases without any interference by the courts. The decision to retrench is thus left solely up to

the discretion of management.8 The court will inquire only into the closure to verify that it is

bona fide and for economic reasons and will not question the motive behind it. The concept of a

bona fide redundancy does not, for example, include a situation where retrenchment is carried

out in accordance with unfair labour practices or to victimize workers. Consequently, the proper

governmental authority is required to examine the reasons given in the notice for the proposed

retrenchment to ascertain whether they are in accordance with good labour practice and are for

bona fide reasons of redundancy. If this is not found to be so, the governmental authority may

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

In the absence of any agreement between the employer and the workers retrenched as regards the

procedure for retrenchment, the employer retrenches the worker who was the last person to be

employed in the category, unless for reasons to be recorded the employer retrenches any other

worker (sec. 25G, IDA).

SEVERANCE PAY

8 http://www.citehr.com/185952-compensation-paid-when-company-winding-up-operations.html last accessed on 27th October, 2015, 3.30 pm.

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In case of retrenchments, employees with more than one year’s service, and other than temporary

or casual employees, are entitled to compensation equivalent to 15 days’ pay for each completed

year of service (sec. 25F(b), IDA).

However, a distinction is made for cessation of business for reasons beyond the control of the

employer. This might include force majeure, frustration of contract, etc., but does not include

financial difficulties or loss of stock. In such circumstances, the employee is still entitled to a

redundancy payment, but the amount is less than that given for termination of employment due

to other reasons, being a sum equivalent to no more than the average of three months’ pay (sec.

25FFF, IDA). Under the Payment of Gratuity Act, 1972, a worker continuously employed for

five years or more is entitled to a gratuity payment upon termination of service, except where

such termination has been as a result of his or her willful omission or negligence resulting in

damage or loss of the employer’s property, in which case the gratuity is forfeited to the extent of

the damage caused. Where the employee has been dismissed on account of his or her riotous,

violent or disorderly conduct or for an offence involving moral turpitude committed in the course

of employment, the gratuity shall be wholly or partly forfeited.9 The sum is calculated at 15

days’ average pay for every completed year of service.

PREFERENTIAL PAYMENTS ON WINDING UP OF THE COMPANY

Section 530 under the Chapter V of Part VII of the Companies Act, 1956 provides for the

sequence of the payments which shall be made in the course of winding up of a company.

However, Section 529A is an exception to Section 530 which starts with a notwithstanding

clause providing for the overriding preferential payments. Section 529A was introduced in the

Companies Act, 1956 by the Companies (Amendment) Act, 1985 in order to provide a protection

to the workmen and the secured lenders of the Companies. Sub Section 2 of Section 529A

further provides that, the debts payable to the workmen and secured creditors of the Company

shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate

the equal proportions’.

Similar to the provisions above, where a claimant has proceeded with filing its claim with the

Debt recovery tribunal under the provisions of Recovery of Debts Due to Banks and Financial 9 http://www.citehr.com/185903-severance-pay-law-internet-services.html last accessed on 23rd October,2015 4.30pm.

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Institutions Act, 1993 Section 19 (19) of this Act provides that where a certificate of recovery is

issued against a company registered under the Companies Act, 1956, the Tribunal may order the

sale proceeds of such company to be distributed among its secured creditors in accordance with

the provisions of section 529A of the Companies Act, 1956 and to pay the surplus, if any, to the

company.

However, comparing the above two stated provisions of the Companies Act, 1956 and the

Recovery of Debts Due to Banks and Financial Institutions Act, 1993, ambiguity lied on the fact

that in case the Company 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 Company is not in the

course of winding up but after paying its debts to the secured creditors who applied under the

Recovery of Debts Due to Banks and Financial Institutions Act, 1993 to the tribunal for the

recovery and the settlement was made, who shall be settled on priority.

Hon’ble Supreme Court of India recently in the case of Bank of Maharashtra v Pandurang

Keshav Gorwardkar & Ors10 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 all the steps as provided in Sections 443 to 450 and 456

(dealing with the winding up) are taken, it cannot be said that Company is in winding up and

until the Company is in winding up, the workmen of the Company have no claims on the assets

of the Company nor do they have any locus to approach the DRT to participate in a proceeding

filed by a bank or financial institution; they are not creditors secured or otherwise. The only

remedy that the workmen have is to approach the appropriate Court e.g., Industrial Tribunal etc.,

for determination and realization of their dues. Section 19(19) of the 1993 Act and Section 529A

of the Companies Act do not help the workmen as they are not secured creditors. However,

where the order of winding up has been made and liquidation proceedings started against a

Company, in such a case the liquidator would be control of all the assets of company. But in

view of exclusive jurisdiction conferred on DRT, no leave of the Company Court needs to be

taken by DRT for adjudication under Section 17 and execution of the recovery certificate issued

under the 1993 Act. However, while allowing the appeal the Hon’ble Supreme Court in the

present case held as follows:

10 AIR 2013 SCC 475

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i. If the debtor company is not in liquidation nor any provisional liquidator has been

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

distribution of sale proceeds among secured creditors in the manner prescribed in Section

19(19) of the 1993 Act.

ii. Where a company is in liquidation, a statutory charge is created in favour of workmen in

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

passu with that of the secured creditor. Such statutory charge is to the extent of

workmen’s portion in relation to the security held by the secured creditor of the debtor

company.

iii. The above position is equally applicable where the assets of the debtor company have

been sold in execution 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 execution of the recovery certificate issued by the debt

recovery tribunal, if debtor company becomes company in winding up, Section 529A

read with Section 529(1) (c) 529(3) (c) proviso come into operation and statutory charge

is created in favour of workmen in respect of their dues over such proceeds.

iv. The relevant date for arriving at the ratio at which the sale proceeds are to be distributed

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

up order and not the date of sale.

v. The first option must be exercised by DRT only in a situation where no application for

distribution towards workmen's dues against the debtor company has been made by the

liquidator or the workmen before the DRT.

vi. Where the sale of security has been affected in execution of recovery certificate issued by

the DRT under the 1993 Act, the distribution of sale proceeds has to be made by the DRT

alone in accordance with Section 529A of the Companies Act and by no other forum or

authority.

vii. The workmen of the company in winding up acquire the standing of the secured creditors

on and from the date of winding up order (or where provisional liquidator has been

appointed, from the date of such appointment) and they become entitled to the

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distribution of sale proceeds in the ratio as explained in the illustration appended to

Section 529 (3) (c) of the Companies Act.

viii. Section 19(19) of the 1993 Act does not clothe DRT with jurisdiction to determine the

workmen’s claim against the debtor company. The adjudication of workmen’s dues

against the debtor company in liquidation has to be made by the liquidator. In other

words, once the company is in winding up the only competent authority to determine the

workmen’s dues is the liquidator who obviously has to act under the supervision of the

company court and by no other authority.

PREFERENTIAL PAYMENTS UNDER COMPANIES ACT, 2013

Section 327 of the Companies Act, 2013 deals with preferential payments

1. In a winding up, subject to the provisions of section 32611, there shall be paid in priority to all

other debts,—

a.     all revenues, taxes, cesses and rates due from the company to the Central Government or a

State Government or to a local authority at the relevant date, and having become due and payable

within the twelve months immediately before that date;

11 Sec 326 of the Companies Act, 2013

Overriding preferential payments.

1. Notwithstanding anything contained in 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 (iii) of the proviso to sub-section (1) of section 325 pari passu with such dues, shall be paid in priority to all other debts:

Provided that in case of the winding up of a company, the sums towards wages or salary referred to in sub-clause (i) of clause (b) of sub-section (3) of section 325, which are payable for a period of two years preceding the winding up order or such other period as may be prescribed, shall be paid in priority to all other debts (including debts due to secured creditors), within a period of thirty days of sale of assets and shall be subject to such charge over the security of secured creditors as may be prescribed.

2. The debts payable under the proviso to sub-section (1) shall be paid in full before any payment is made to secured creditors and thereafter debts payable under that sub-section shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.

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b.    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 employee in respect of services rendered to the company

and due for a period not exceeding four months within the twelve months immediately before the

relevant date, subject to the condition that the amount payable under this clause to any workman

shall not exceed such amount as may be notified;

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 employment before, or

by the winding up order, or, as the case may be, the dissolution of the company;

d.    unless the company is being wound up voluntarily merely for the purposes of reconstruction

or amalgamation with another company, all amount due in respect of contributions payable

during the period of twelve months immediately before the relevant date by the company as the

employer of persons under the Employees’ State Insurance Act, 1948 or any other law for the

time being in force;

e.     unless the company has, at the commencement of winding up, under such a contract with

any insurer as is mentioned in section 14 of the Employees Compensation Act 1923, rights

capable of being transferred to and vested in the workmen, all amount due in respect of any

compensation or liability for compensation under the said Act in respect of the death or

disablement of any employee of the company:

Provided that where any compensation under the said Act is a weekly payment, the amount

payable under this clause shall be taken to be the amount of the lump sum for which such weekly

payment could, if redeemable, be redeemed, if the employer has made an application under that

Act;

f.     all sums due to any employee from the provident fund, the pension fund, the gratuity fund or

any other fund for the welfare of the employees, maintained by the company; and

g.    the expenses of any investigation held in pursuance of sections 21312 and 21613 of The

Companies Act,2013, in so far as they are payable by the company.

12 Section 213 deals with Investigation into company’s affairs in other cases

13 Section 216 deals with Investigation of ownership of company

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2.     Where any payment has been made to any employee of a company on account of wages or

salary or accrued holiday remuneration, himself or, in the case of his death, to any other person

claiming through him, out of money advanced by some person for that purpose, the person by

whom the money was advanced shall, in a winding up, have a right of priority in respect of the

money so advanced and paid-up to the amount by which the sum in respect of which the

employee or other person in his right would have been entitled to priority in the winding up has

been reduced by reason of the payment having been made.

3.     The debts enumerated in this section shall:

a.     rank equally among themselves and be paid in full, unless the assets are insufficient to meet

them, in which case they shall abate in equal proportions; and

b.    so far as the assets of the company available for payment to general creditors are insufficient

to meet them, have priority over the claims of holders of debentures under any floating charge

created by the company, and be paid accordingly out of any property comprised in or subject to

that charge.

4.     Subject to the retention of such sums as may be necessary for the costs and expenses of the

winding up, the debts under this section shall be discharged forthwith so far as the assets are

sufficient to meet them, and in the case of the debts to which priority is given under clause (d) of

sub-section (1), formal proof thereof shall not be required except in so far as may be otherwise

prescribed.

5.     In the event of a landlord or 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 priority is given under this section shall be a first charge on the goods or

effects so distrained on or the proceeds of the sale thereof:

Provided that, in respect of any money paid under any such charge, the landlord or other person

shall have the same rights of priority as the person to whom the payment is made.

6.     Any remuneration in respect of a period of holiday or of absence from work on medical

grounds through sickness or other good cause shall be deemed to be wages in respect of services

rendered to the company during that period.

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CONCLUSION:

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

insolvency due to cash-flow problems and financial difficulties faced by them. Following from

this, a major concern of both the employers and employees of a company would be how a

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company’s insolvency affects their rights or liabilities, particularly so for employees who would

be interested in protecting their rights in the event of the company’s 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 owing

to them. Employees, naturally, would be concerned about the salaries and other reimbursements

or compensation that would be outstanding.

The law aids these employees to a certain extent via s 226G (6) of the Act in a judicial

management and s 328 of the Act in liquidation. However, these measures are of only limited

effectiveness. It is advisable for companies that are facing the prospect of insolvency to decide

whether they wish to terminate their employees’ contracts at an early stage and to inform these

employees accordingly. Such 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 job market

again, so that they can find a new job swiftly to minimize the economic hardship to themselves

and their dependents.

After analyzing various provisions of the Companies Act, 2013 and labour laws like Industrial

Dispute Act, 1947 it can be concluded that laws are very specific about the rights of the labourers

during the winding up of any company. There are provisions for helping the labourers but it all

depends upon their awareness and their fight for it.

BIBLIOGRAPHY

Books referred

Avtar Singh, Company Law, Eastern Book Company, 15th Edition.

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N.K. Jain, Company Law, Law and Practice

Websites referred

www.legalservicesindia.com, last accessed on 25th October, 2015

www.manupatrafast.com/articles, last accessed on 28th October,2015

Articles referred

Lakshmi, Winding Up of a company, 2009, http://www.caclubindia.com/articles/winding-up-of-companies-3971.asp (last updated on 21st September 2015)

S Patwari, Winding Up in India, 2014, www.ssrn.com (last updated on 21st September 2015)

G. Kinyua, Winding Up of Company in India, www.academia.edu/.. (last updated on 21st September 2015)

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