Bombay High Court
Axis Bank Limited vs State Of Maharashtra And Anr on 7 March, 2017
Bench: R.M. Borde
1 /40 wp-1796-15.doc
Ladda
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION No. 1796 OF 2015
AXIS BANK LIMITED, a banking ] PETITIONER.
company incorporated under the ]
]
Companies AXIS Bank Ltd, 1956
]
having its registered office at ]
"Trishul" 3rd Floor, Opposite ]
Samartheshwar Temple, Law ]
Garden, Ellis Bridge, AXIS Bank Ltd ]
380 006 and Corporate Office at ]
]
AXIS House, C-2, Wadia
]
International Center, P.B. Marg, ]
Worli, Mumbai 400 025. ]
VERSUS
1) State of Maharashtra through the
Office of the Assistant Commissioner ]
]
of Salex Tax Ivestigation (D-001),
]
Pawar Industrial Estate, 2nd Floor, ]
Near Makhmali Talao, Edulji Road, ]
Charai, Thane (West) 400 601. ]
2) Official Liquidator of M/s Jay ] RESPONDENTS.
Mechanical Private Limited, ]
]
attached to Hon'ble High Court of
]
Bombay, having his office at 5th ]
Floor, Bank of India Building, M.G. ]
Road Fort, Mumbai-23.
::: Uploaded on - 09/03/2017 ::: Downloaded on - 10/03/2017 00:49:44 :::
2 /40 wp-1796-15.doc
APPEARANCE :-
Mr.Venkatesh Dhond, Senior
Counsel a/with Mr. Rohit Gupta and
Mr. Nikhil Rajani i/by V. Deshpande
and Co. for the petitioner.
Mrs. Jyoti Chavan, AGP for
Respondent No.1.
None for Respondent No.2.
CORAM : R.M. BORDE &
A.S.GADKARI, JJ.
RESERVED ON : 8th February, 2017.
DELIVERED ON : 7th March, 2017.
JUDGMENT (PER : R.M. BORDE, J)
1) The petitioner Axis bank Ltd., is seeking quashment
of the notices dated 12th August, 2013 and 19th September,
2013 issued by Respondent No.1/Assistant Commissioner of
Sales Tax, (Investigation) (D-001), Thane City Division Thane.
The petitioner is also aggrieved by the notice in Form No. 318
under section 33 (1) of the Maharashtra Value Added Tax Act,
2002 issued by the Assistant Commissioner of Sales Tax as
well as the consequential communication issued by the
Reserve Bank of India on 12th February, 2015.
3 /40 wp-1796-15.doc
2) According to the petitioner, one M/s. Jay
Mechanical Pvt. Ltd., (represented by the Official Liquidator,
in the instant petition as respondent No.2), approached the
petitioner in the year 2008 with a request to extend financial
assistance. The petitioner bank extended the financial
assistance to the respondent No.2 - Company and in order to
secure the finances the Company mortgaged its immovable
property as well as hypothecated its assets in favour of
petitioner-bank. The respondent No.1 Company defaulted in
making repayment of the loan. As such the petitioner-bank
was constrained to initiate action for recovery of dues.
3) The petitioner bank through its authorized officer
issued notice under section 13 (2) on 6th June, 2011 of the
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (54 of 2002) (for
short, SARFAESI Act, 2002) calling upon the Company to
repay an amount of Rs. 4,30,51,432.51 ps within a period of
60 days from the date of the notice. In addition to the
initiation of proceedings under the provisions of SARFAESI
Act, 2002, the Bank has also presented proceedings before the
Debt Recovery Tribunal (DRT) under Section 19 of the
4 /40 wp-1796-15.doc
Recovery of Debts due to Banks Act, 1993 (for short, "RDDB
Act,1993"). The amount claimed in the Original Application
No. 464 of 2013 by the petitioner Bank as against the
Respondent No.2 Company is to the tune of Rs. 2,81,43,918.17
ps.
4) The Company failed to honour the demand notice
dated 6th June, 2011 issued under section 13(2) of the
SARFAESI Act and as such the petitioner bank took
possession of the secured assets on 5th December, 2011. The
petitioner through its Authorized Officer published the
possession notice dated 5th December, 2011 in two news
papers on 23rd December, 2011. The petitioner received a copy
of the Prohibitory Order issued by respondent No.1 to
Respondent No.2 Company under Section 38 of the
Maharashtra Value Added Tax Act, 2002 (for short, MVAT
Act, 2002) restraining it from transferring and/or alienating
any of the assets of the Company. There was no demand made
by Respondent No.1 in respect of the taxes in the notice.
5) Petitioner No.1 through its authorized officer took
over physical possession of the property and thereafter in
observance of the SARFAESI Act, said property was put to
5 /40 wp-1796-15.doc
public auction and sale under sale notices dated 19 th and 20th
June, 2012. The auction sale was conducted on 8 th February,
2013 and one M/s Vinals Precisions Pvt. Ltd., being the
highest bidder for an amount of Rs. 3,25,25,000/-the property
was sold in its favour. A sale certificate came to be issued on
18th March, 2013 in favour of the auction purchaser.
6) The petitioner thereafter on 22nd July, 2013
received a notice under Section 38 of the MVAT Act, 2002
issued to Respondent No.2 Company a copy of which was
marked to the petitioner calling upon the petitioner to intimate
respondent No.1 about transfer undertaken by the said
Company. The petitioner received two notices issued by
respondent No.1 on 12th August, 2013 and 19th September,
2013 respectively calling upon the petitioner to deposit an
amount of Rs.46,49,317/- with the respondent No.1.
7) The petitioner contends that the petitioner bank
being a secured creditor has preferential claim over the
secured assets and is entitled to take appropriate steps for
realization of the amount due and recoverable from
Respondent No.2 Company. The petitioner contends that the
provisions of the SARFAESI Act override the provisions of the
6 /40 wp-1796-15.doc
MVAT Act, 2002, since the company is under liquidation. It is
contended that in view of provisions of Section 529A of the
Companies Act, 1956 in the winding up of an insolvent
Company, debts due to secured creditor to the extent of such
debts rank under clause (c) of the proviso to sub-section (1) of
Section 529 (of the Companies Act, 1956) pari passu with
such dues shall be paid in priority to all other debts. Where a
secured creditor, instead of relinquishing his security and
proving his debt, opts to realize his security interest such dues
shall be paid in priority to all other debts.
8) It is contended that the respondent No.2 company
is under liquidation and an application was moved to the
Company Court in Company Petition No. 340 of 2011 and the
Company was ordered to be wound up by an order dated 19 th
November, 2014 and an Official Liquidator came to be
appointed. It is contended that since the Respondent-
Company is under liquidation, the petitioner bank, as a
secured creditor can stand out of the liquidation proceedings
and enforce its security interests. Secondly, it is contended
that respondent No.1 has an option to approach DRT for
protection of its interests and cannot be permitted to proceed
7 /40 wp-1796-15.doc
against the petitioner bank.
9) It is further contended that the action taken by the
Respondent No.1 is in violation of provisions of Section 35 of
the SARFAESI Act, 2002. It is also contended that since the lis
is pending provisions of Section 26-E (inserted by Act 44 of
2016) shall apply and the petitioner shall have priority claim
over the claim of the respondent-State. In short, it is
contended that Section 26-E of the SARFAESI Act, 2002 is in
the nature of a statutory recognition of priority claim of the
secured creditor i.e. the petitioner herein.
10) The contentions raised in the petition and the relief
claimed is strenuously resisted on behalf of the respondent-
State. It is contended that in view of the provisions of Section
37 of the MVAT Act, 2002, the State has the first charge on
the property belonging to respondent No.2 in preference to the
claim of the petitioner bank. It is contended that in the matter
of Thane Janta Sahakari Bank Ltd. Vs. Commissioner of Sales
Tax & Ors reported in 148 STC 32, (Writ petition No. 6383 of
2005 decided on 18th April, 2006) it has been held that Section
35 of the SARFAESI Act has no effect whatsoever in operation
8 /40 wp-1796-15.doc
of Section 38C of the Bombay Sales Tax Act, 1959. Section 35
of the SARFAESI Act, 2002 does not override Section 38C of
the Bombay Sales Tax Act, 1959 and, therefore, based on
Section 35 of the SARFAESI Act, the bank shall not have
precedence or for that matter priority over the statutory first
charge under Section 38C of the Bombay Sales Tax Act, 1959.
Rather the statutory first charge under Section 38C of the
Bombay Sales Tax Act has precedence over the bank's charge
based on contract. The judgment of the Division Bench of this
Court was carried in appeal to the Hon'ble Supreme Court and
the Apex Court has up held the view of the Division Bench of
this Court in the matter of Central Bank of India Vs State of
Kerala & Ors reported in (2009) 4 SCC 94. It is contended that
the provisions of Section 38C of the Bombay sales Tax Act,
1959 is identical to the Section 37 of the MVAT Act, 2002
which has been enacted to replace Bombay Sales Tax Act,
1959. It is further contended that the petitioner was aware of
the Sales Tax proceedings and the Salex Tax demand before
the property was attached and sold in auction.
9 /40 wp-1796-15.doc
11) It would be appropriate to refer to Section 37 and
38 of the MVAT Act, 2002. The relevant provisions are quoted
below :-
37. Liability under this Act to be the
first charge -
Notwithstanding anything contained in
any contract to the contrary, but subject to any
provision regarding creation of first charge in any
Central Act for the time being in force, any
amount of tax, penalty, interest, sum forfeited,
fine or any other sum, payable by a dealer or any
other person under this Act, shall be the first
charge on the property of the dealer or, as the
case may be, person.
38. Transfer to defraud revenue void.
(1) Where, during the pendency of any
proceedings under this Act or after the
completion thereof, [the Commissioner
has reason to believe that the liability of
the dealer to pay tax or any other sum
payable under this Act, is likely to be in
excess of rupees twenty-five thousand
and the dealer] creates a charge on, or
parts with the possession by any mode
of transfer whatsoever, including sale,
mortgage, gift or exchange of any of the
assets of his business valued at rupees
ten thousand or more in favour of any
other person with intent to defraud
revenue, then, notwithstanding
anything contained in any Act or
contract to the contrary such charge or
transfer shall be void as against any
claim in respect of any tax or other sum
payable by the dealer as a result of the
10 /40 wp-1796-15.doc
completion of such proceedings or
otherwise:
PROVIDED that, such charge or transfer
shall not be void if made for adequate
consideration and without notice of the
pendency of the proceeding or of the
liability to pay any sum on completion of
any proceedings.
(2) Where any person liable to pay tax or
other sum payable under this Act has,
during the pendency of any proceeding
under this Act or after completion
thereof, created a charge on or parted
with possession by any mode of transfer
including sale, mortgage, gift or
exchange of any of his assets in favour of
any other person and the Commissioner,
is of the opinion that such charge or
transfer becomes void under sub-section
(1), then the Commissioner shall issue a
notice and hold enquiry and decide
whether the charge or transfer became
void under sub-section (1).
(3) If, after holding such enquiry the
Commissioner is satisfied that the charge
or transfer is void, he shall make an
order declaring such charge or transfer
to be void for the purposes of this Act.
Explanation: In this section, "assets"
include land, building, machinery, plant,
shares, securities and fixed deposits in
banks, to the extent to which any of the
assets aforesaid does not form part of the
stock-in-trade of the business of the
assessee.
__
Section 38-C of the Bombay Sales Tax Act,1959 is pari-materia
11 /40 wp-1796-15.doc
to Section 37 of MVAT Act, 2002.
Section 529A and Section 530 of the Companies Act,
1956 read thus :
Section 529A. :- Overriding preferential
payment. - 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.]
530. Preferential payments. -
(1) In a winding up, [subject to the provisions of section
529A, there shall be paid] in priority to all other debts-
(a) all revenues, taxes, cesses and rates due from the
company to the Central or a State Government or to a local
authority at the relevant date as defined in clause (c) of sub-
section (8), and having become due and payable within the
twelve months next before that date;
12 /40 wp-1796-15.doc
(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 next before the
relevant date subject to the limit specified in sub- section
(2);
(c) all accrued holiday remuneration becoming payable
to any employee, or in the case of his death to any other
person in his right, on the termination of his employment
before, or by the effect of, the winding up order or resolution;
(d) unless the company is being wound up voluntarily
merely for the purposes of reconstruction or of amalgamation
with another company, all amounts due, in respect of
contributions payable during the twelve months next before
the relevant date, by the company as the employer of any
persons, under the Employees' State Insurance Act, 1948 (34
of 1948), or any other law for the time being in force;
(e) unless the company is being wound up voluntarily
merely for the purposes of reconstruction or of amalgamation
with another company, or unless the company has, at the
commencement of the winding up, under such a contract with
insurers as is mentioned in section 14 of the Workmen's
Compensation Act, 1923 , (8 of 1923), rights capable of being
transferred to and vested in the workman, all amounts due in
respect of any compensation or liability for compensation
13 /40 wp-1796-15.doc
under the said Act in respect of the death or disablement of
any employee of the company;
(f) all sums due to any employee from a provident fund,
a pension fund a 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 section 235 or 237, in so far as they are payable by the
company.
(2) The sum to which priority is to be given under
clause (b) of sub-section (1), shall not, in the case of any one
claimant, [exceed such sum as may be notified by the Central
Government in the Official Gazette].
(3) Where any compensation under the Workmen's
Compensation Act, 1923 (8 of 1923), is a weekly payment, the
amount due in respect thereof shall, for the purposes of clause
(e) of sub-section (1), be taken to be the amount of the lump
sum for which the weekly payment could, if redeemable, be
redeemed if the employer made an application for that purpose
under the said Act.
(4) Where any payment has been made to any employee
of a company,--
(i) on account of wages or salary; or
(ii) to him, or in the case of his death, to any other
person in his right, on account of accrued holiday
remuneration, out of money advanced by some person for that
purpose, the person by whom the money was advanced shall,
14 /40 wp-1796-15.doc
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 diminished by reason of the payment having been
made.
(5) The foregoing debts 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
of 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.
(6) Subject to the retention of such sums as may be
necessary for the costs and expenses of the winding up, the
foregoing debts 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 by clause (d) of sub- section (1),
formal proof thereof shall not be required except in so far as
may be otherwise prescribed.
(7) In the event of a landlord or other person
distraining or having distrained on any goods or effects of the
company within three months next before the date of a
winding up order, the debts to which priority is given by this
section shall be a first charge on the goods or effects so
15 /40 wp-1796-15.doc
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.
(8) For the purposes of this section-
(a) any remuneration in respect of a period of holiday or of
absence from work through sickness or other good cause shall
be deemed to be wages in respect of services rendered to the
company during that period;
(b) the expression" accrued holiday remuneration" includes,
in relation to any person, all sums which, by virtue either of
his contract of employment or of any enactment (including
any order made or direction given under any enactment), are
payable on account of the remuneration which would, in the
ordinary course, have become payable to him in respect of a
period of holiday, had his employment with the company
continued until he became entitled to be allowed the holiday.
(bb) [the expression "employee" does not include a workman;]
and]
(c) the expression" the relevant date" means-
(i) in the case of a company ordered to be wound up
compulsorily, the date of the appointment (or first -
appointment) of a provisional liquidator, or if no such
appointment was made, the date of the winding up order,
unless in either case the company had commenced to be
wound up voluntarily before that date; and
(ii) in any case where sub-clause (i) does not apply, the date
of the passing of the resolution for the voluntary winding up of
16 /40 wp-1796-15.doc
the company.
(9) This section shall not apply in the case of a winding up
where the date referred to in sub- section (5) of section 230 of
the Indian Companies Act, 1913 , (7 of 1913 .) occurred before
the commencement of this Act, and in such a case, the
provisions relating to preferential payments which would have
applied if this Act had not been passed, shall be deemed to
remain in full force.
____
12) There is no controversy in respect of the
Respondent company being under liquidation and appointment
of an Official Liquidator. There is also no controversy that the
assets sold by way of auction by the petitioner bank are the
secured assets mortgaged by respondent No.2-company with
the petitioner bank. There is also apparently no controversy
that the notice is issued under Section 38 of the MVAT Act and
Respondent No.1 claimed tax liability against respondent No.2
Company to the tune of Rs.42,49,317/-. The respondent
placing reliance on the judgment in the matter of Thane
Janata Sahakari Bank Ltd Vs. The Commissioner of Sales Tax
(Writ Petition No. 6383 of 2005) decided on 18 th April, 2006,
has strenuously contended that Section 35 of the SARFAESI
Act, has no effect whatsoever in the operation of Section 38C
17 /40 wp-1796-15.doc
of the Bombay Sales Tax Act. Section 35 of the SARFAESI Act,
does not override Section 38C of the Bombay Sales Tax Act
and as such bank does not get precedence or for that matter
priority over the statutory first charge of respondent No.1 in
respect of the sale tax liability. In the aforesaid matter, it was
contended by the bank that there being a conflict under
section 38-C of the Bombay Salex Act, 1959 and Section 35 of
the SARFAESI Act, 2002, being the Central Act, must prevail.
(i) Even otherwise SARFAESI Act being the later enactment
having been enacted in the year 2002 must prevail over the
Bombay Sales Tax Act,1959 and under Section 169 of the
Maharashtra Land Revenue Code, 1966 the State Government
can claim priority over the unsecured debts but the bank being
the secured creditor, the bank has first and exclusive charge
over the properties of the Company and has priority over the
sales tax dues. The Division Bench of this Court has
considered the contentions and has recorded the negative
finding as has been specified above.
13) The judgment of the Division Bench of this Court in
the matter of Thane Janata Sahakari Bank was a subject to
18 /40 wp-1796-15.doc
challenge along with the other Special Leave Petitions, the first
one being presented by the Central Bank of India against the
State of Kerala & Ors to the Hon'ble Supreme Court reported in
(2009) 4 SCC 94.
14) The Hon'ble Supreme Court delivered the common
judgment in the matter of Central Bank of India v. State of
Kerala reported in (2009) 4 SCC 94 and in paragraph 158 of
the judgment observed that, "the DRT Act and the
Securitisation Act do not create first charge in favour of banks,
financial institutions and other secured creditors and the
provisions contained in Section 38-C of the Bombay Act and
Section 26-B of the Kerala Act are not inconsistent with the
provisions of the DRT Act and the Securitisation Act so as to
attract non obstante clauses contained in Section 34 (1) of the
DRT Act or Section 35 of the Securitisation Act."
It would be relevant to refer to paragraphs 114 to
116 of the Judgment, which read thus :
114. "By enacting various provisos to
sub-section (9) of Section 13, the legislature
has ensured that priority given to the claim of
workers of a company in liquidation under
Section 529-A of the Companies Act, 1956 vis-
19 /40 wp-1796-15.doc
a-vis the secured creditors like banks is duly
respected. This is the reason why first of the
five unnumbered provisos to Section 13(9)
lays down that in the case of a company in
liquidation, the amount realised from the sale
of secured assets shall be distributed in
accordance with the provisions of Section
529-A of the Companies Act, 1956. This and
other provisos do not create first charge in
favour of the worker of a company in
liquidation for the first time but merely
recognise the existing priority of their claim
under the Companies Act. It is interesting to
note that the provisos to sub-section (9) of
Section 13 do not deal with the companies
which fall in the category of borrower but
which are not in liquidation or are not being
wound up.
115. It is thus clear that provisos
referred to above are only part of the
distribution mechanism evolved by the
legislature and are intended to protect and
preserve the right of the workers of a
company in liquidation whose assets are
subjected to the provisions of the
Securitisation Act and are disposed of by the
secured creditors in accordance with Section
13 thereof.
20 /40 wp-1796-15.doc
116. The non obstante clauses
contained in Section 34(1) of the DRT Act and
Section 35 of the Securitisation Act give
overriding effect to the provisions of those
Acts only if there is anything inconsistent
contained in any other law or instrument
having effect by virtue of any other law. In
other words, if there is no provision in the
other enactments which are inconsistent with
the DRT Act or the Securitisation Act, the
provisions contained in those Acts cannot
override other legislations. Section 38-C of the
Bombay Act and Section 26-B of the Kerala
Act also contain non obstante clauses and give
statutory recognition to the priority of the
State's charge over other debts, which was
recognised by Indian High Courts even before
1950. In other words, these sections and
similar provisions contained in other State
legislations not only create first charge on the
property of the dealer or any other person
liable to pay sales tax, etc. but also give them
overriding effect over other laws."
15) The Hon'ble Apex Court has taken note of the
provisions of Section 529-A of the Companies Act, 1956 in
respect of Company in liquidation and has observed that the
21 /40 wp-1796-15.doc
legislator has insured the priority given to the claim of the
workers vis-a-vis secured creditors like banks. Section 529-A
(b) refers to debts due to secured creditors and such claim is
parri passu with such dues like workmen's dues and shall be
paid in priority to all other debts. In paragraph 126 of the
judgment in the matter of Central Bank of India vs. State of
Kerala, the Apex Court has observed thus :
126. "While enacting the DRT Act and the
Securitisation Act, Parliament was aware
of the law laid down by this Court wherein
priority of the State dues was recognised.
If Parliament intended to create first
charge in favour of banks, financial
institutions or other secured creditors on
the property of the borrower, then it would
have incorporated a provision like Section
529-A of the Companies Act or Section 11
(2) of the EPF Act and ensured that
notwithstanding series of judicial
pronouncements, dues of banks, financial
institutions and other secured creditors
should have priority over the State's
statutory first charge in the matter of
recovery of the dues of sales tax, etc.
However, the fact of the matter is that no
such provision has been incorporated in
either of these enactments despite
conferment of extraordinary power upon
the secured creditors to take possession
and dispose of the secured assets without
the intervention of the court or Tribunal.
The reason for this omission appears to be
that the new legal regime envisages
transfer of secured assets to private
companies."
22 /40 wp-1796-15.doc
16) The petitioner contends that judgment of the Supreme
Court delivered by three-Judges Bench in the matter of
Central Bank of India (supra) shall have to be considered in
preference to the decision in the matter of Allahabad Bank Vs.
Canara Bank & Ors (2000) 4 SCC 406. In the instant matter,
the question is not simplicitor relating to priority of claims
based on appreciation of Section 37 of the MVAT Act and
Section 35 of the SARFAESI Act. However, distinguishing
feature is that the Respondent company is under liquidation
and as such provisions of Section 35 of the SARFAESI Act are
attracted which lends precedence to the claim of a secured
creditor. An identical issue was raised in the matter of SICOM
Ltd vs. State of Maharashtra through the Assistant
Commissioner of Sales Tax and O.L. of Konkan Steel Ltd and
the Thane Janata Sahakari Bank Ltd Vs. State of Maharashtra
through the Asstt. Commissioner of Sales Tax and OL of United
Airtech Pvt Ltd. reported in 2010(6) Bombay Cases Reporter
537 in the matters arising before the Division Bench it was
claimed on behalf of the State Government that in view of
provisions of Section 38C of the Bombay Sales Tax Act
statutorily the State Government becomes a secured creditor
23 /40 wp-1796-15.doc
and therefore is entitled to payment of its dues along with
secured creditor and the workers. The contention raised by the
State Government was upheld by the learned Single Judge
relying upon the judgment of the Supreme Court in the matter
of Central Bank of India v. State of Kerala & Ors (2009) 4 SCC
94. The appellants before the Division Bench were covered by
the provisions of Section 529A and 530 of the Companies Act,
1956. The Division Bench of this Court considered the
arguments raised on behalf of the State relying upon the
judgment in the matter of the Thane Janata Sahakari Bank
Ltd. v. The Commissioner of Sales Tax & Anr and recorded its
conclusions in paragraph Nos.11 and 12 of the Judgment as
recorded below :
11. The learned Counsel appearing
for the State Government relied on
observations made in the judgment of the
Division Bench in The Thane Janata
Sahakari Bank Ltd's case, in that case the
Court was not considering the situation
whether the provisions of Section 529A of
the Companies Act operate. The Division
Bench in that case was considering the
24 /40 wp-1796-15.doc
question whether in view of the provisions
of the Securitisation Act and D.R.T. Act,
the provisions of Section 38C apply. The
Court held that the provisions of the
Securitisation Act do not create any first
charge in favour of the Banks and financial
institutions. In other words, the
Securitisation Act does not have any
provisions which will displace operation of
the provisions of Section 38C of the
Bombay Sales Tax Act. The Division Bench,
thereafter, held that because Section 38C
operates, the amount of sales-tax is
elevated to the level of dues of land
revenue and therefore under the
Maharashtra Revenue Code it becomes
paramount charge. The Division Bench in
this case was not considering the case,
where Section 38C does not operate. So far
as the judgment of the Supreme Court in
Central bank of India is concerned, there
also the Supreme Court was considering
the provisions of the Securitisation Act vis-
a-vis the provisions of Section 38C of the
Bombay Sales Tax Act and other para
meteria provisions. In our opinion,
paragraph 148 of that judgment makes the
position clear.
25 /40 wp-1796-15.doc
148. After decree of the suit, the
appellant along with IFCI and IDBI filed an
application before the Company Judge for
consideration of their claim on pro rata
basis and also for exclusion of the claim of
Punjab National Bank. The learned
Company Judge allowed the first prayer of
the appellant but declined the second one
by relying upon the judgment in Allahabad
Bank's case (supra). The intra-court appeal
was dismissed by the Division Bench by
relying upon the provisions of Section
529A. On further appeal, this Court
referred to the judgment in Allahabad
Bank's case (supra) as also Rajasthan
State Financial Corporation v. Official
Liquidator MANU/SC/1033/2005 : (2005)
8 SCC 190 and held :
32. 'Allahabad Bank' therefore, is
not an authority for the proposition that in
terms of Section 529A of the Companies
Act the distinction between two classes of
secured creditors does no longer survive.
The High Court, thus, in our considered
opinion, was not correct in that behalf.
33. In fact in Allhabad Bank it was
categorically held that the adjudication
officer would have such powers to
26 /40 wp-1796-15.doc
distribute the sale proceeds to the banks
and financial institutions, being secured
creditors, in accordance with inter se
agreement/arrangement between them
and to the other persons entitled thereto in
accordance with the priority in law.
34. Section 529A of the Companies
Act no doubt contains a non obstante
clause but in construing the provisions
thereof, it is necessary to determine the
purport and object for which the same was
enacted.
35. In terms of Section 529 of the
Companies Act, as it stood prior to its
amendment, the dues of the workmen were
not treated pari passu with the secured
creditors as a result whereof innumerable
instances came to the notice of the Court
that the workers may not get anything
after discharging the debts of the secured
creditors. It is only with a view to bring the
workmen's dues pari passu with the
secured creditors, that Section 529A was
enacted.
36. The non obstante nature of a
provision although may be of wide
amplitude, the interpretative process
thereof must be kept confined to the
27 /40 wp-1796-15.doc
legislative policy. Only because the dues of
the workmen and the debts due to the
secured creditors are treated pari passu
with each other, the same by itself, in our
considered view, would not lead to the
conclusion that the concept of inter se
priorities amongst the secured creditors
had thereby been intended to be given a
total go-by.
37. A non obstante clause must be
given effect to, to the extent Parliament
intended and not beyond the same.
38. Section 529A of the Companies
Act does not ex facie contain a provision
(on the aspect of priority) amongst the
secured creditors and, hence, it would not
be proper to read there into things, which
Parliament did not comprehend.
12. The above observations make it
clear that by operation of Section 529A,
priority is given to the dues of the secured
creditors and workers over State first
statutory charge. In this view of the
matter, therefore, in our opinion, the
learned single Judge was not justified in
holding that dues of the State Government
are recoverable pari passu with the dues of
the Appellant."
28 /40 wp-1796-15.doc
17) It is, thus, clear that in view of provisions of
Section 529A of the Companies Act, priority is given to the
dues of the secured creditor and the workers over the
statutory charge claimed by the State. The Judgment
delivered by the Division Bench of this Court in the matter of
SICOM Ltd. was subject to challenge by the State before the
Supreme Court in Special Leave to Appeal (CC 1965/2011)
decided on 4th March,2011. The Hon'ble Apex Court while
dismissing the Special Leave Petition has observed thus :
"We have heard learned counsel for the petitioner
and perused the record.
In Central bank of India vs. State of
Kerala (2009) 4 SCC 94, this Court
interpreted Section 38-C of the 1959 Act and
similar provisions contained in Sales Tax
Legislations of other States and held that the first
charge created by the legislator will prevail over
the dues of other secured creditors including the
Banks and Financial Institutions. In that case, the
three Judge Bench referred to large number of
precedents on the subject including the judgments
in State of Bank of Bikaner & Jaipur vs. National
Iron and Steel Rolling Corporation - (1995) 2 SCC
19; Dena Bank vs. Bhikhabhai Prabhudas Parekh
29 /40 wp-1796-15.doc
& Co. - (2002) 5 SCC 694; State of M.P.vs. State of
Bank of Indore (2002) 10 SCC 441; Allahabad
Bank vs. Canara Bank (2000) 4 SCC 406 and
approved the ratio of the judgment of Division
Bench of the Kerala High Court in Recovery Officer
as Assistant Provident Fund Commissioner vs.
Kerala Financial Corporation ILR (2002) 3 Ker 4,
which held that the primacy of the first charge
created under Section 11(2) of the Employees
Provident Fund and Miscellaneous Provisions Act,
1952 will prevail over the primacy of the first
charge created under Section 46-B of the State
Financial Corporations Act, 1951.
Since the 1956 Act is a Central
Legislation and 1959 Act is a State Legislation,
and the former legislation is subsequent in point of
time, the non obstante clause contained in Section
529 A of the 1956 Act will override the non
obstante clause contained in Section 38-C of the
State Act.
Even from the plain language of Section
38-C of the 1959 Act, it is clear that the non
obstante clause contained therein operates subject
to any other provision contained in the Central
Act by which the first charge is created. Section
529-A of the 1956 Act declares that
notwithstanding anything contained in any other
provision of this Act or any other law for the time
30 /40 wp-1796-15.doc
being in force, for the winding up of a company,
the dues of the workers shall be paid in priority to
all other dues.
In view of the above, we do not find any
valid ground to interfere with the judgment under
challenge.
The special leave petition is, accordingly,
dismissed."
---
18) It would be appropriate to refer to the judgment
delivered by the Supreme Court in the matter of Allahabad
Bank Vs. Canara Bank & Ors (2000) 4 SCC 406. The Supreme
Court has observed in paragraph 62 of the Judgment in the
matter of Allahabad Bank's case that the secured creditors fall
under two categories; those who desire to go before the
Company Court and those who like to stand outside the
winding up. The observations made in paragraphs 63 to 65 are
relevant for the purposes those are as below :
"63. The first category of secured creditors
mentioned above are those who go before
the Company Court for dividend by
relinquishing their security in accordance
with the insolvency rules mentioned in
Section 529. The insolvency rules are those
contained in Sections 45 to 50 of the
Provincial Insolvency Act. Section 47(2) of
that Act states that a secured creditor who
wishes to come before the official liquidator
31 /40 wp-1796-15.doc
has to prove his debt and he can prove his
debt only if he relinquishes his security for
the benefit of the general body of creditors.
In that event, he will rank with the
unsecured creditors and has to take his
dividend as provided in Section 529(2). Till
today, the Canara Bank has not made it
clear whether it wants to come under this
category.
64. The second class of secured creditors
referred to above are those who come
under Section 529A(1)(b) read with
proviso (c) to Section 529(1). These are
those who opt to stand outside the winding
up to realise their security. Inasmuch as
Section 19(19) permits distribution to
secured creditors only in accordance with
Section 529A, the said category is the one
consisting of creditors who stand outside
the winding up. These secured creditors in
certain circumstances can come before the
Company Court (here, the Tribunal)and
claim priority over all other creditors for
release of amounts out of the other monies
lying in the Company Court (here, the
Tribunal). This limited priority is declared
in Section 529A(1) but it is restricted only
to the extent specified in Clause (b) of
Section 529A(1). The said provision refers
to Sub-clause (c) of the proviso to Section
529(1) and it is necessary to understand
the scope of the said provision.
65. Under Sub-clause (c) of the proviso to
Section 529(1), the priority of the secured
creditor who stands outside the winding up
is confined to the "workmen's portion" as
defined in Section 529(3)(c). 'Workmen's
portion' means the amount which bears to
the value of the security, the same
32 /40 wp-1796-15.doc
proportion which the amount of the
workmen's dues bears to the aggregate of
(a) workmen's dues and (b) the amounts of
the debts due to all the creditors. This is
explained in the illustration under the said
provision. If the workmen's dues in all are
(say) Rs. 1 lakh and the debt due to all
secured creditors is Rs. 3 lakhs, the total
amount due to all of them comes to Rs. 4
lakhs. Therefore, the workmen's share
come to 25% (Rs. 1 lakh out of Rs. 4 lakhs).
Now if the value of the security of a secured
creditor (like Canara Bank) is Rs. 1 lakh,
the 'workmen's portion' will be Rs. 25,000
which is the pro-rata amount to be shared
by the said secured creditor. By virtue of
Section 529A(1)(b) his priority over all
others out of other monies available in the
Tribunal is restricted to Rs. 25,000 only.
19) Coming to the facts of the instant matter, it is open
for the petitioner to stand outside the winding up proceedings
and claim enforcement of its Security Interest. If the petitioner
instead of deciding to stand outside preferred to go before the
Company Court for decision, it would become necessary to
relinquish its security in accordance with Insolvency Rules
mentioned in Section 529. The petitioner is a Secured Creditor
in accordance with IInd clause under Section 529-A(i) (b) read
with proviso (c) to Section 529 (I) having overriding
preferential claim and opts to stand outside winding up to
realize its security. In view of clause (c) to the proviso to
33 /40 wp-1796-15.doc
Section 529 (I) the priority of the Secured Creditor who stand
outside the winding up is confined to workmens portion as
defined in Section 529 (iii) (c). The petitioner who stands
outside the winding up proceedings in view of provisions of
Section 529-A can surely have priority over the claim of the
State in respect of statutory dues. In the matter of Pegasus
Assets Reconstruction Pvt. Ltd. Vs. Haryana Concast Ltd &
Anr reported in (2016) 4 SCC 47 the Hon'ble Supreme Court
considered the provisions of Section 529-A together with 529
of the Companies Act and the aspect of overriding effect of the
provisions of Section 529-A concerning liability of the
workmen of the Company.
20) The main question of law framed for consideration
in the matter of Pegasus Assets Reconstruction Pvt. Ltd.
(supra) is as below :
"Whether the Company Court enjoys
supervisory jurisdiction to issue direction to a
securitisation company/secured creditor in
connection with a company in liquidation or
under winding up in the face of Section 13 of
the SARFAESI Act or securitisation company
opting to stand outside the winding up is
absolutely free to utilise the sale proceeds of
assets of the company in liquidation?"
34 /40 wp-1796-15.doc
21) While dealing with the question, the Hon'ble
Supreme Court has quoted, with agreement, the views
recorded in paragraph 26 of the Judgment in the matter of
Megnostar Telecommunications (P) Ltd reported in (2012)
193 DLT 371, delivered by the Delhi High Court, as under:
"26. If it were to be held that the
Official Liquidator (who acts under the
dictates of the Company Court) is to be
also associated with the sale, it will
naturally open up the fora of the
Company Court also for entertaining
matters relating to such sale and which
as aforesaid is not only likely to lead to
conflicts but is also contrary to the
spirit of the SARFAESI Act of sale being
without the intervention of the Court".
It is further observed by the Apex Court in paragraphs 22 and
23 of the judgment as quoted below:-
"22. In contrast, the SARFAESI Act was
enacted in 2002 to regulate securitization
and reconstruction of financial assets and
enforcement of security interest and for
matters connected therewith or incidental
thereto. Inter-alia, one of the main objects
35 /40 wp-1796-15.doc
of this Act is to clothe the banks and
financial institutions in India with power
to take possession of securities and sell
them. All its significant provisions have
been noted in detail in Mardia
Chemicals in which vires of this Act were
examined and upheld.
23. A reading of Sections 9 and 13 of
the SARFAESI Act leaves no manner of
doubt that for enforcement of its security
interest, a secured creditor has been not
only vested with powers to do so without
the intervention of the court or tribunal
but detailed procedure has also been
prescribed to take care of various
eventualities such as when the borrower
company is under liquidation for which
proviso to sub-section (9) of Section 13
contains clear mandate keeping in view
the provisions of Section 529 and 529A of
the Companies Act, 1956. Since significant
amendments were introduced in Section
529 while inserting Section 529A through
Amendment Act 35 of 1985, effective from
24.5.1985 and with the aid of a non
obstante clause in sub-section (1) of
Section 529A workmen's dues were given
preference over other dues and made to
36 /40 wp-1796-15.doc
stand pari passu with dues of the secured
creditors, in case of apparent conflict, this
Court through various judgments has
upheld the proceedings under the RDB Act
as it happens to be a later Act with
overriding effect over other laws. The
interest of the workmen in respect of dues
payable to them as per Section 529 and
529A of the Companies Act has been
protected by permitting, wherever
necessary, association of the Official
Liquidator with the proceedings before the
Debts Recovery Tribunal under the RDB
Act. In our considered judgment, the same
view is required to be taken in context of
SARFAESI Act also, for the additional
reason that Section 13 requires notice to
the borrower at various stages which in
the case of a company under winding up
being a borrower would mean requirement
of notice to the Official Liquidator. The
Security Interest (Enforcement) Rules,
2002 (for brevity, 'the Rules') framed
under the provisions of the SARFAESI Act
also require notice upon the borrower or
his agent at different stages. For sale of
immovable secured assets, as per Rule 8,
the authorized officer can take possession
37 /40 wp-1796-15.doc
by delivering a Possession Notice to the
borrower and by affixing Possession Notice
on the outer door or at some conspicuous
place of the property. Before the sale also,
the authorized officer is required to serve
to the borrower a notice of 30 days. Thus
the Rules also ensure that the Official
Liquidator is in knowledge of the
proceedings under the SARFAESI Act in
case the borrower happens to be a
company under winding up. As a borrower,
the Official Liquidator has ample
opportunity to get the details of the
workers dues as ascertained under the
Companies Act, placed before the
authorized officer and seek proper
distribution of the amount realised from
the sale of secured assets in accordance
with various provisos Under Sub-section
(9) of Section 13 of the SARFAESI Act."
22) Though the learned counsel appearing for the
respondent State is justified in contending in normal
circumstances in view of the provisions of SARFAESI Act
(Unamended) primacy can be extended to the provisions like
38 /40 wp-1796-15.doc
Section 38-C of the Bombay Sales Tax Act or Section 37 of the
MVAT Act. Section 13 envisages application of money received
by the secured creditor and by adopting any of the measures
specified in Section 13 (4) merely regulates distribution of
money received by the secured creditor and it does not create
first charge in favour of the secured creditor. Though in
normal course in view of Section 35 of the SARFAESI Act,
2002 no priority can be claimed by the bank or financial
institutions over the State's statutory first charge in the
matter of recovery of dues of sales tax etc. However, in respect
of company under liquidation, in view of the provisions of
Section 529-A of the Companies Act, a distinction has to be
made and as has been laid down by the Division Bench of this
Court in the matter of SICOM Ltd, which view has been upheld
by the Supreme Court, the claim of the secured creditor in
respect of the company being under liquidation shall have the
priority in view of the language applied in Section 529-A of the
Companies Act, 1956. It also must be taken note of that there
is statutory recognition of priority claim of the secured
creditor in view of the amendment brought into effect by
virtue of Act No.44 of 2016 thereby introducing section 26E
39 /40 wp-1796-15.doc
providing for priority to secured creditor over all other debts
and all taxes, cess and other rates payable to Central
Government or the State Government or the Local Authority.
The applicability of provisions of Section 31-B of RDB Act
which is pari materia to Section 26E of the SARFAESI Act was
subject matter for consideration before the Full Bench of the
Madras High Court in the matter of Assistant Commissioner
(CT) Chennai vs. the Indian Overseas Bank decided on
11.11.2016 and the Full Bench has observed in paragraph 4 of
the Judgment that "the law having now been come into force
naturally it would govern the rights of the parties in respect of
even lis pendence" We do not propose to analyse the Full
Bench judgment delivered by the Madras High Court.
23) However, for the reasons recorded in the foregoing
paragraphs of the instant judgment, we are of the opinion that
the petitioner bank has a priority claim over the statutory
dues claimed by respondent no.1.
24) The impugned notices dated 12th August, 2013 and
19th September, 2013 deserve to be quashed and set aside and
those are accordingly quashed and set aside. As a consequence
thereof the notices issued in Form No. 318 to the Reserve
40 /40 wp-1796-15.doc
Bank of India and the communication issued by the Reserve
Bank of India on 12th February, 2015 shall not be enforced.
25) Rule is accordingly made absolute.
26) In the facts and circumstances of the case, there
shall be no order as to costs.
(A.S. GADKARI,J) (R.M. BORDE, J.)
