JUDGMENT
K.S. Rathore, J.
1. The petitioners are the Small Scale Industries situated at Kota. The petitioner No. 1 was supplying coal. Petitioner No. 2 undertook the work of repairing and maintaining the machines. Petitioner No. 3 manufactured machinery parts. Petitioner No. 4 supplied machinery parts on credit basis. Petitioner No. 5 also manufactured machinery parts as an ancillary to the J.K. Synthetics Ltd. Petitioner No. 6 also undertook the work of repairing and maintenance of machines at Kota Unit. Petitioner No. 7 was also doing the same work at Jhalawar Unit. Petitioner No. 8 was supplying machinery components to the Units of J.K. Synthetics Ltd., Kota and Jhalawar.
2. The petitioners in their petition have also shown the details of dues against J.K. Synthetics Ltd. in para No. 5.
3. Upon reference been made to the Board of Industrial and Financial Rehabilitation (BIFR) under Section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (for short, the Act of 1985) on 2.4.1998, the BIFR declared the respondent No. 2 as Sick Industrial Company and proposals were asked for its rehabilitation. On 27.4.2000 and 6.6.2000 the BIFR passed the following orders:
(i) IDBI (OA) would issue an advertisement by 7.7.2000 for change of management of the company inviting offers for take over/leasing/amalgamation/merger for rehabilitation, with or without One Time Settlement (OTS) of the dues of FIs/ Banks, giving 8 weeks’ time for submission of offers i.e., upto 7.9.2000.
(ii) The change of management will be for the company as a whole. However, bids can be made for the company as a whole or any one or more of the units of the company.
(iii) The present promoters may also submit an offer ei’ther on their own or with a joint venture partner or partners for the Company as a whole or one or more of the divisions of the company with MOF fully tied up.
(iv) Considering the large size and the complexities involved, the IDBI is requested to submit a note to the Board indicating the time frame as well as the procedure to be adopted for evaluating the bids in a transparent manner. The procedure would be examined and approved by the Board before evaluating the relative merits of the offers received by the OA.
(v) As per the procedure approved by the Board for evaluation of bids, the OA would evaluate the relative merits of the bids received and submit a report to the Board within 8 weeks i.e., 7.11.2000 after holding a joint meeting to arrive at an agreed package. The OA would also send an interim status report to the Board by 6.10.2000 indicating, inter alia, the position of offers received in response to the advertisement.
(vi) If no concrete rehabilitation proposal with means of finance fully tied up is received in response to the advertisement issued by the OA, the Bench may consider passing further appropriate orders which may include issue of a show-cause notice for winding up the company without holding further hearing.
(vii) The cost of the advertisement would initially be borne by IDBI and it would be subsequently shared by the secured creditors on a prorata basis within 15 days of the receipt of the bill from the OA. The OA would not delay the release of advertisement on this account.
4. As per the above orders, a new company “J.K. Cement Ltd.” was to be formed and the cement manufacturing units which are running profitably are to be demerged from J.K. Synthetics Ltd. and the new company will provide Rs. 449.11 crores to settle the dues of certain creditors. Since the petitioners have not been included in the scheme and thus they have been completely kept out of the scheme formulated for settlement of dues of the creditors.
5. Mr. Asopa, learned Counsel for the petitioners submits that the total dues of the petitioners including interest, is only Rs. 2.25 crores and the petitioners being small scale entrepreneurs should also be paid dues out of the amount of Rs. 511.55 crores which was kept reserved for settlement of dues for the secured creditors.
6. He has further contended that the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) has asked for comments in response to the scheme within 60 days from the secured creditors under Section 19(1) of the Act of 1985 but the petitioners were not called upon for submitting their comments. Being aggrieved by this order of AAIFR the petitioners have preferred this present writ petition.
7. Mr. Asopasubmits that the Appellate Authority should have considered the provisions of Sections 529 and 529-A of the Companies Act, 1956 with regard to preference of payment of dues.
8. Mr. Asopa has drawn my attention towards the Scheme formulated by AAIFR vide order dated 31.8.2001, by which, at Item No. 30, Scheme is formulated which stipulates that “This is a scheme for the settlement of the dues of term-fenders, debenture-holders, working capital financiers and preference share-holders of JKSL through demerger of the cement undertaking of JKSL into JKCL. Under this scheme there is no specific mention regarding secured creditors and unsecured creditors. It only mentions for settlement of the dues of term-lenders, debenture-holders, working capital financiers and this includes the petitioners also.
9. Mr. Asopa further referred Section 13(2) of the Act of 1985 which stipulates as under:
13. Procedure of Board and Appellate Authority.–(2) In particular and without prejudice to the generality of the foregoing provisions, the powers of the Board or, as the case may be, the Appellate Authority, shall include the power to determine the extent to which person interested or claiming to be interested in the subject-matter of any proceeding before it may be allowed to be present or to be heard, either by themselves or by their representatives or to cross-examine witnesses or otherwise to take part in the proceedings.”
10. Mr. Asopa submitted that the powers of the Appellate Authority shall include the power to determine the extent to which person interested or claiming to be interested in the subject-matter of any proceeding before it may be allowed to be present or to be heard either
by themselves or by their representatives and, thus, the petitioners should be called upon to make their submissions before the Appellate Authority.
11. Mr. K.K. Sharma, learned Counsel has appeared as a caveator on behalf of respondent No. 2. He has referred certain provisions of the Act of 1985 and submitted that Sub-section (2) of Section 13 is not applicable in the instant case. The reference, enquiries and claims are governed by Chapter III of the Act of 1985 and has referred Section 16, which deals with inquiry into working of Sick Industrial Companies and also referred Sub-section (3) of Section 16.
12. He has also referred Section 18, which provides for preparation and sanction of scheme. Section 19 rehabilitated by giving financial assistance and has submitted that, at this stage, the petitioners have no right to be heard as the petitioners are not secured creditors. The secured creditors are only necessary for rehabilitation for giving financial assistance under Section 19. He has referred Section 20, which deals with winding up of sick industrial company and contended that the petitioners can only claim their dues when the company is wound up and, particularly he referred Sub-section (4) of Section 20 which is reproduced as under:
“(4). Notwithstanding anything contained in Sub-section (2) or Sub-section (3), the Board may cause to be sold the assets of the sick industrial company in such manner as it may deem fit and forward the sale proceeds to the High Court for orders for distribution in accordance with the provisions of Section 529-A and other provisions of the Companies Act, 1956.
This Sub-section (4) of Section 20 clearly gives to sell the assets of the sick industrial company in such manner in accordance with the provisions of Section 529-A.”
Section 529-A of the Act of 1956 reads as under:
“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 pari 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.”
13. A bare perusal of Section 529-A of Companies Act, 1956 reveals that first priority has to be given to the workmen’s dues and second priority has to be given to the debts due to secured creditors and in view of Sub-section (2) of Section 529-A the debts payable under Clauses (a) and (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 proportion. Section 530 also deals with the preferential payment in case of winding up of company.
14. Mr. Sharma has submitted that if the petitioners lend any money to the respondent No. 2 company, they can recover the same by filing suit for recovery of the money or for the enforcement of any security against the industrial company or any guarantee in respect of any
loans or advances granted to the respondent No. 2 company after seeking consent of the Board or the Appellate Authority under Section 22 of the Act of 1985.
15. Mr. Sharma has further submitted that the matter is pending before the Appellate Authority but, in no case, the petitioners are required to be called upon by the Appellate Authority for making their submissions.
16. Having heard rival submissions of the respective parties and after careful examination of the material available on record and close look to the provisions of the Act of 1985 and that of the Companies Act, 1956 there is no doubt that the unsecured creditor has not been mentioned either in the Act of 1985 or in the Companies Act, 1956.
17. Sub-section (4) of Section 20 of the Act of 1985 provides that provisions of Section 529-A applies for the purpose of sick industrial company and, as per Section 529, the preference in the event of winding up of company, the workmen’s dues are to be paid first and second preference is given to the secured creditors and unsecured creditor has not been mentioned in Section 529. Since under the Act of 1985 the procedure of Section 529-A is adopted, obviously, the claim of the unsecured creditors are not taken care of under Section 529-A. Sub-section (2) of Section 13 as referred by Mr. Asopa, is with regard to regulate the powers of the Appellate Authority and the Appellate Authority has power to determine the extent to which persons interested or claiming to be interested in the subject-matter of any proceedings before it may be allowed to be present or to be heard either by themselves or by their representatives or to cross-examine witnesses or otherwise to take part in the proceedings.
18. It is not disputed that proceedings are still pending before the Appellate Authority and the Appellate Authority has only issued notice to the secured creditors although preference to which is given under Section 529-A, only but the unsecured creditor like the petitioners are at least having a right of hearing as they claim to be interested in the subject-matter of the proceedings which is pending before the Appellate Authority and they should be allowed to be present or to be heard either by themselves or by the representatives in view of Sub-section (2) of Section 13.
19. In view of the aforesaid discussion this Court arrived at the conclusion that unsecured creditors are not included in Section 529-A and as per Section 20(4) of the Act of 1985 provisions of Section 529-A of the Companies Act are applicable to the Act of 1985 obviously the preference is to be given to secured creditors in accordance with Section 529-A of the Companies Act but, in view of Section 13(2), the petitioners at least have a right to represent their case before the Appellate Authority as they are persons interested or claiming to be interested in the subject-matter of the proceedings which are pending before the Appellate Authority,
20. In the facts and circumstances of the case, I deem it proper to direct the Appellate Authority to hear the petitioners and after hearing them, pass appropriate orders in accordance with the provisions of the Act of 1985 and the Companies Act, 1956.
The petitioners may appear before the Appellate Authority and make their submissions before the Appellate Authority which have been raised in this writ petition,
The writ petition stands disposed of accordingly.