Monday, November 21, 2011

Priority of Dues in Winding Up of Companies

An interesting question was recently resolved by the Supreme Court in Employees Provident Fund Commissioner v. Official Liquidator of Esskay Pharmaceuticals. This sprang up a rather unusual situation where the Court was required to decide between non obstante clauses contained in two different legislations that ran somewhat contrary to each other.
Section 529-A of the Companies Act provides that “notwithstanding anything contained in any other provision of this Act or any other law for the time being in force”, in case of a winding up, the workmen’s dues and debts due to secured creditors shall be paid in priority to all debts. On the other hand, section 11(2) of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (EPF Act) provides that amounts due under that Act from an insolvent employer shall be deemed to be a first charge and be paid in priority to all other debts “notwithstanding anything contained in any other law for the time being in force”. The argument made by the company was that since section 529-A was introduced by an amendment to the Companies Act and was later in point of time, that should prevail. However, the court refused to accept that contention.
The Supreme Court’s reasoning was based on principles of statutory interpretation, and the court was also persuaded by the fact that the EPF Act is a welfare legislation that must be given importance. Further detailed discussions of this judgment are available here and here.

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