SARFAESI and Company Liquidation: Secured Creditors and Workmen's Dues

When the borrower is a company in liquidation, a secured creditor's right to enforce meets the workers' claim on a failing company's assets. SARFAESI lets the creditor realise its security outside the winding up, but not free of the workmen's dues, which rank equally with it. This note sets out the creditor's choices, the pari passu status of workmen's dues under Section 529A of the Companies Act, and the Section 13(9) proviso that ties SARFAESI to that scheme.

1. The Secured Creditor's Choices

Figure 1: Inside or outside the winding up

• Two courses for the creditor. A secured creditor may stand outside the winding up and realise its security, or relinquish it and prove its debt in the winding up.
• Standing outside. If it stands outside, it enforces under SARFAESI, but it cannot ignore the claims the law protects in a winding up.
• Associate the liquidator. In Rajasthan State Financial Corporation v Official Liquidator the Court held the creditor must associate the official liquidator to protect workmen's dues.
• Not an unfettered right. The right to realise outside winding up is real but conditioned by the statutory claims of the workmen.

2. Workmen's Dues Rank Pari Passu

Figure 2: Workers stand level with the secured creditor

• Workmen's dues, s.529A. Under s.529A of the Companies Act 1956, workmen's dues and the secured creditor's dues rank pari passu as an overriding preferential payment.
• Pari passu, not subordinate. Workmen's dues are not merely preferential; they stand on an equal footing with the secured creditor to the extent of the workmen's portion.
• The portion is carved out. The secured creditor's realisation is subject to the workmen's pari passu share, which must be set aside for them before the creditor takes the balance.
• A social-justice balance. The scheme balances the lender's security against the workers' claim on a failing company's assets.

3. The Section 13(9) Proviso

Figure 3: SARFAESI ties into Section 529A

• s.13(9) proviso. Where the borrower-company is in winding up, SARFAESI requires the enforcement to proceed with distribution in accordance with s.529A (Topic 24)
• Distribute per s.529A. The secured creditor realising the asset must distribute the proceeds as s.529A directs, so the SARFAESI sale does not escape the winding-up scheme.
• Account to the liquidator. The workmen's portion is deposited with the liquidator before the creditor retains the balance of the proceeds.
• The schemes dovetail. The s.13(9) proviso makes SARFAESI dovetail with company law, so the fast SARFAESI route still honours the workers' pari passu claim.

4. Frequently Asked Questions

Can a secured creditor enforce under SARFAESI against a company in liquidation?

Yes, but subject to the workmen's dues. A secured creditor has two courses when the borrower company is in liquidation: it may stand outside the winding up and realise its security, or it may relinquish the security and prove its debt in the winding up. If it stands outside and enforces under SARFAESI, it must associate the official liquidator, as held in Rajasthan State Financial Corporation v Official Liquidator, because it cannot ignore the claims the law protects in a winding up. Chiefly, it must honour the workmen's dues, which under Section 529A of the Companies Act 1956 rank pari passu with the secured creditor's dues as an overriding preferential payment.

How are workmen's dues protected when a secured creditor sells under SARFAESI?

Workmen's dues are protected by their pari passu ranking and by the proviso to Section 13(9) of the SARFAESI Act. Under Section 529A of the Companies Act 1956, workmen's dues and the secured creditor's dues rank equally as an overriding preferential payment, so the workmen's portion must be set aside and is not subordinate to the secured creditor. The proviso to Section 13(9) requires that where the borrower company is being wound up, the proceeds of the SARFAESI sale be distributed in accordance with Section 529A, with the workmen's share deposited with the official liquidator before the secured creditor retains the balance. The SARFAESI route therefore dovetails with the company-law scheme rather than defeating it.

5. Related Topics

• Topic 24: The Authorised Officer and Consortium Enforcement. Section 13(9) and its proviso.
• Topic 76: SARFAESI and the Insolvency and Bankruptcy Code. Distribution under the IBC waterfall.