Wind up Petition by employee claiming unpaid Salary is Maintainable

An employee can maintain a Petition for winding up of a Company under section 439 r/w sections 433(e) and 434 of the Companies Act, 1956 as a creditor based on the claim of the recovery of his unpaid salary and wages. Further we hold that a winding up Petition at the instance of a Trade Union and for the dues that are payable to its members is maintainable as it clearly falls within section 439 of the Companies Act, 1956.

Extract of the Judgment

1. This matter has been placed before us by the Hon’ble Chief Justice in view of the order passed by the learned Single Judge on 24th January, 2017. The issue referred to us for our consideration is:-

“(i) Whether an employee can maintain a Petition for winding up of a Company under section 439 r/w sections 433(e) and 434(1)(a) of the Companies Act, 1956 as a creditor based on the claim of the recovery of his unpaid salary and wages?”

2. The reason why this matter was referred to a Larger Bench was because the learned Single Judge in this matter was not in agreement with a view taken by another learned Single Judge in the case of Mumbai Labour Union vs M/s Indo French Time Industries Ltd.1

3. Before we proceed further, it would be apposite to set out a few facts. By this Company Petition filed under section 439 of the Companies Act, 1956, the Petitioner seeks winding up of the Respondent Company on the ground that it is unable to pay its debts. The Petitioner was an employee of the Respondent Company and was initially appointed as the Regional Sales Manager and thereafter as the Manager, Key-Accounts and Trade Marketing, with effect from 1st October, 2007. It is the Petitioner’s case that since October 2009 till he resigned in March 2012, his entire salary was outstanding. It is in this light that the Petitioner issued a statutory notice under section 434 of the Companies Act, 1956 dated 21st February, 2014 calling upon the Respondent Company to pay his dues, failing which winding up proceedings would be initiated. Since no payment came forth, the Petitioner approached this Court claiming that the Company is indebted to him in the sum of Rs.39,51,558/- and filed the present Company Petition.

4. This Company Petition for winding up of the Respondent Company was resisted by it on several grounds. One of the contentions raised by the Respondent Company was that the Petitioner is not a creditor of the Respondent Company. It was the contention of the Respondent that the Petitioner being an employee of the Respondent, cannot maintain the Company Petition under section 439 of the Companies Act, 1956 as he was not a creditor of the Respondent Company. In support of this proposition, the Respondent relied upon a decision of the learned Single Judge of this Court in the case of Mumbai Labour Union.1 In this decision, the learned Single Judge, placing reliance on the decision of the Supreme Court in the case of National Textile Workers’ Union and others vs P.R. Ramkrishnan and others2, came to the conclusion that the workers had no right to prefer a Petition of winding up of the Company. If that was so, the learned Single Judge held that a Trade Union also could not present such a Petition claiming to represent the class of unpaid employees as creditors of the Company.

5. On the other hand, the Petitioner relied upon the judgment of the Full Bench of the Madhya Pradesh High Court in the case of Jonathan Allen vs Zoom Developers Pvt. Ltd.3 Placing reliance on this decision, the Petitioner submitted that even if an employee has no locus to file a Company Petition in respect of his unpaid wages, salary and emoluments, he was entitled to file a Company Petition as a creditor of the Company. He therefore contended that the Madhya Pradesh High Court has rightly distinguished the judgment of this Court in the case of Mumbai Labour Union.1 The Petitioner also placed reliance on a judgment of the Delhi High Court in the case of Argha Sen v/s Interra Information Technologies (India) (P) Ltd.,4 which also considered the Bombay High Court’s decision in Mumbai Labour Union1 and thereafter distinguished it.

6. After considering all these decisions, the learned Single Judge hearing this Company Petition was unable to agree with the view taken by this Court in Mumbai Labour Union.1 Since the decision in Mumbai Labour Union1 would affect a large number of workmen who seek to file a Company Petition for winding up in their capacity as creditors, the learned Judge hearing this Company Petition was of the view that this issue required reconsideration by a Larger Bench. In these circumstances, the learned Single Judge directed the Registry to place the papers of these proceedings before the Hon’ble Chief Justice in order to enable the Hon’ble Chief Justice to constitute a Larger Bench for answering the question set out by us earlier. This matter has therefore been assigned by the Hon’ble Chief Justice to our Bench to answer the aforesaid question.

7. When this matter was first placed before us on 22nd February 2017, we brought to the notice of the learned counsel that the judgment of the learned Single Judge in the case of Mumbai Labour Union1 has already been overruled by a Division Bench of this Court at Nagpur in the case of Khandelwal Tube Mill Kamgar Sangh, Kanhan v/s Government of Maharashtra and others.5 This decision was rendered in Writ Petition No.2243 of 2005 decided on 11th August, 2005. On a perusal of this decision, it is clear that a workman or an individual employee, being a creditor within the meaning of the relevant statutory provisions of the Companies Act, can institute or file a Petition for winding up of a Company. We therefore, in our order dated 22nd February, 2017, recorded that the only issue that would survive for our consideration was whether a Trade Union can file a Petition so as to espouse the cause of a workman or workmen who are members of such a Trade Union. Whether the Trade Unions Act, 1926 would be the governing law in so far as this aspect is concerned, or whether the applicable provisions in so far as the State enactments carving out a category of unions namely, representative / recognised unions alone could maintain such a Petition was also needed to be considered. The above being the only surviving issue, the parties have addressed us on the same.

8. To understand the controversy, it would be necessary to refer to certain provisions of the Companies Act, 1956 as well as the Trade Unions Act, 1926. As far as winding up of a Company is concerned, it falls under Part VII of the Companies Act, 1956. Part VII in turn is divided into five chapters. Chapter I of Part VII deals with the modes of winding up and consists of sections 425 to 432. Chapter II of Part VII deals with winding up by the Court (which jurisdiction is now exercised by the Tribunal). Section 433 sets out the circumstances in which a Company may be wound up. One of the grounds on which a Company may be ordered to be wound up is that it is unable to pay its debts [section 433(e) of the said Act]. Thereafter, section 434 creates a deeming fiction and inter alia stipulates that a Company shall be deemed to be unable to pay its debts if a creditor, by assignment or otherwise, to whom the Company is indebted in a sum exceeding Rs.1,00,000/- then due, has served on the Company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor. In other words, to put it simply, once a notice under section 434(1)(a) of the Companies Act, 1956 is served upon the Company at its registered office, claiming a sum in excess of Rs.1,00,000/- as due and payable by the Company and the sum is either unpaid or not secured to the reasonable satisfaction of the creditor then, the Company is deemed to be unable to pay its debts.

9. Section 439 of the Companies Act, 1956 deals with the provisions as to applications for winding up and inter alia sets out the persons who can file a Petition for winding up of a Company. Section 439 reads as under:-

“439. Provisions as to applications for winding up.—(1) An application to the Tribunal for the winding up of a company shall be by petition presented, subject to the provisions of this section—

(a) by the company; or

(b) by any creditor or creditors, including any contingent or prospective creditor or creditors; or

(c) by any contributory or contributories; or

(d) by all or any of the parties specified in clauses (a), (b) and (c), whether together or separately; or

(e) by the Registrar; or

(f) in a case falling under Section 243, by any person authorised by the Central Government in that behalf;

(g) in a case falling under clause (h) of Section 433, by the Central Government or a State Government.

(2) A secured creditor, the holder of any debentures (including debenture stock), whether or not any trustee or trustees have been appointed in respect of such and other like debentures, and the trustee for the holders of debentures, shall be deemed to be creditors within the meaning of clause (b) of sub-section (1).

(3) A contributory shall be entitled to present a petition for winding up a company, notwithstanding that he may be the holder of fully paid-up shares, or that the company may have no assets at all, or may have no surplus assets left for distribution among the shareholders after the satisfaction of its liabilities.

(4) A contributory shall not be entitled to present a petition for winding up a company unless —

(a) either the number of members is reduced, in the case of a public company, below seven, and, in the case of a private company, below two; or

(b) the shares in respect of which he is a contributory, or some of them either were originally allotted to him or have been held by him, and registered in his name, for at least six months during the eighteen months immediately before the commencement of the winding up, or have devolved on him through the death of a former holder.

(5) Except in the case where he is authorised in pursuance of clause (f) of sub-section (1), the Registrar shall be entitled to present a petition for winding up a company only on the grounds specified in3 [clauses (b), (c), (d), (e) 4 [(f) and (g)]] of Section 433:

Provided that the Registrar shall not present a petition on the ground specified in clause (e) aforesaid, unless it appears to him either from the financial condition of the company as disclosed in its balance sheet or from the report of5 [a special auditor appointed under Section 233-A or an inspector] appointed under Section 235 or 237, that the company is unable to pay its debts:

Provided further that the Registrar shall obtain the previous sanction of the Central Government to the presentation of the petition on any of the grounds aforesaid.

(6) The Central Government shall not accord its sanction in pursuance of the foregoing proviso, unless the company has first been afforded an opportunity of making its representations, if any.

(7) A petition for winding up a company on the ground specified in clause (b) of Section 433 shall not be presented—

(a) except by the Registrar or by a contributory; or

(b) before the expiration of fourteen days after the last day on which the statutory meeting referred to in clause (b) aforesaid ought to have been held.

(8) Before a petition for winding up a company presented by a contingent or prospective creditor is admitted, the leave of the6 [Tribunal] shall be obtained for the admission of the petition and such leave shall not be granted—

(a) unless, in the opinion of the7 [Tribunal], there is a prima facie case for winding up the company; and

(b) until such security for costs has been given as the8 [Tribunal] thinks reasonable.”

10. In so far as we are concerned, what we have to decide is whether a winding up Petition filed by a Trade Union would fall within any of the categories set out in section 439. If we answer the same is in the affirmative, then there can be no doubt that a winding up Petition would be maintainable at the instance of the Trade Union.

11. Having set out the relevant provisions of the Companies Act 1956, we would now turn our attention to a few provisions of the Trade Unions Act, 1926. It is an Act to provide for registration of Trade Unions and in certain respects to define the law relating to registered Trade Unions. The words ‘Registered Trade Unions’ have been defined in section 2(e) to mean a Trade Union registeredunder the Trade Unions Act, 1926. Section 2(g) defines the words ‘trade dispute’ to mean any dispute between employers and workmen or between workmen and workmen, or between employers and employees which is connected with the employment or non-employment, or the terms of employment or the conditions of labour of any person and ‘workmen’ means all persons employed in trade or industry whether or not in the employment of the employer with whom the trade dispute arises. From this definition, it is clear that when a workman or an employee is not paid his wages and/or salary, the same would certainly fall within the definition of the words ‘trade dispute‘.

12. Thereafter, Chapter II of this Act deals with the registration of Trade Unions and the conditions on which a Trade Union can gain registration as well as its cancellation. Section 13, which falls under Chapter II, stipulates that every registered Trade Union shall be a body corporate by the name under which it is registered and shall have perpetual succession and a common seal with power to acquire and hold both movable and immovable property and to contract, and shall, by the said name, sue and be sued. Thereafter, the rights and liabilities of Registered Trade Unions are set out in Chapter III. Section 15, which falls under Chapter III, sets out the object on which the general funds of the Trade Unions may be spent. Section 15 of the Trade Unions Act 1926 reads thus:-

“15. Objects on which general funds may be spent.—The general funds of a registered Trade Union shall not be spent on any other objects than the following, namely,—

(a) the payment of salaries, allowances and expenses to office-bearers of the Trade Union;

(b) the payment of expenses for the administration of the Trade Union, including audit of the accounts of the general funds of the Trade Union;

(c) the prosecution or defence of any legal proceeding to which the Trade Union or any member thereof is a party, when such prosecution of defence is undertaken for the purpose of securing or protecting any rights of the Trade Union as such or any rights arising out of the relations of any member with his employer or with a person whom the member employs;

(d) the conduct of trade disputes on behalf of the Trade Union or any member thereof;

(e) the compensation of members for loss arising out of trade disputes;

(f) allowances to members of their dependants on account of death, old age, sickness, accidents or unemployment of such members;

(g) the issue of, or the undertaking of liability under, policies of assurance on the lives of members, or under policies insuring members against sickness, accident or unemployment;

(h) the provision of educational, social or religious benefits for members (including the payment of the expenses of funeral or religious ceremonies for deceased members) or for the dependants of members;

(i) the upkeep of a periodical published mainly for the purpose of discussing questions affecting employers or workmen as such;

(j) the payment, in furtherance of any of the objects on which the general funds of the Trade Union may be spent, of contributions to any cause intended to benefit workmen in general, provided that the expenditure in respect of such contributions in any financial year shall not at any time during that year be in excess of one-fourth of the combined total of the gross income which has up to that time accrued to the general funds of the Trade Union during that year and of the balance at the credit of those funds at the commencement of that year; and

(k) subject to any conditions contained in the notification, any other object notified by the 2 [appropriate Government] in the Official Gazette.”

13. As can be seen from the said section, Registered Trade Unions can prosecute or defend any legal proceeding to which the Trade Union or member thereof is a party, when such prosecution or defence is undertaken for the purpose of securing or protecting any right of the Trade Union as such, or any rights arising out of the relations of any member with his employer or with a person whom the member employs. In fact, the Trade Union can even spend general funds on the conduct of trade disputes on behalf of the Trade Union or any member thereof.

14. On a conjoint reading of the provisions of the Companies Act, 1956 and more particularly sections 434 and 439 as well as the provisions of the Trade Unions Act 1926, we are clearly of the view that looking to the mandate of sections 13 and 15 of the Trade Unions Act 1926, there is no doubt in our mind that a Petition for winding up would be maintainable at the instance of the Trade Union. This is for the simple reason that section 15(c) and (d) clearly mandates that the prosecution or defence of any proceeding to which the Trade Union or any member thereof is a party as well as the conduct of trade disputes on behalf of the Trade Union or any member thereof can be done by the Trade Union. This would clearly go to show that the Trade Union, for and on behalf of the its members can certainly prefer a winding up Petition as contemplated under section 439 of the said Act. This is for the simple reason that if the workmen have not been paid their wages and/or salary by the Company, they would certainly be a creditor or creditors as contemplated under section 439(1)(b) of the Companies Act, 1956. Section 15 clearly mandates that the Trade Union can take up this cause for and on behalf of its members. Hence, after complying with the provisions of section 434 of the Companies Act, 1956 the Trade Union would certainly be competent to present a winding up Petition.

15. We may add here that this does not mean that in every instance when a Trade Union or a workman files a winding up Petition, the Company is ipso facto to be wound up. Whether or not there is any merit in the claim made by the workman and/or employee depends on the circumstances in each case. All that we are holding is that a Trade Union, though having a legitimate claim, cannot be shut out from approaching the appropriate forum for winding up the Company on the ground that its members have not been paid their wages and/or salaries.

16. We therefore hold that an employee can maintain a Petition for winding up of a Company under section 439 r/w sections 433(e) and 434 of the Companies Act, 1956 as a creditor based on the claim of the recovery of his unpaid salary and wages. Further we hold that a winding up Petition at the instance of a Trade Union and for the dues that are payable to its members is maintainable as it clearly falls within section 439 of the Companies Act, 1956. The issue is answered accordingly. Let this Company Petition be now placed before the Company Judge to be decided on its own merits and in accordance with law.