M/S. A.I. Potia And Co. vs Union Of India
2022 Latest Caselaw 3139 Tel

       THE HONOURABLE Dr. JUSTICE G. RADHA RANI

                     Writ Petition No.5183 of 2018

ORDER:

This writ petition is filed by the petitioner to issue Writ of

Mandamus by declaring the order dated 11-01-2018 passed by the 2nd

respondent vide TS/RO/HYD/18629/R.cell/C2-5/Spl PDRC1, 2/2017 &

Spl RC 2/18/2017 as illegal, arbitrary and irrational.

2. Heard the learned counsel for the petitioner and the learned

Standing Counsel for EPFO, the respondents 1 and 2.

3. The learned counsel for the petitioner submitted that the petitioner

was a proprietary concern having its office at Mumbai, the petitioner

was engaged in the business of dismantling plant and machineries along

with trading in ferrous and non-ferrous scrap and other allied activities

in relation thereto. One Vybra Automet Limited, (the "borrower")

defaulted in repayment of loans obtained from Banks leading to a

classification of 'Non-Performing Assets' under the SARFAESI Act

2002. On such classification of being an NPA, the lender Bank assigned

its rights and interests to the Asset Reconstruction Company, the

Respondent No. 3 (the "ARC"). Subsequently in compliance with the Dr.GRR,J ::2:: wp_5183_2018

provisions of SARFAESI Act 2002, a public notice for Sale dated 24-

12-2014 was issued by the ARC, for sale of secured assets of the

borrower company. However, the ARC was not able to find any buyer

and was constrained to issue a second public notice on 15-7-2016,

however again failed to find any purchaser. In third attempt the ARC

issued public notice dated 10-10-2016, however for the third time also

the ARC was not able to attract any purchaser for sale of secured assets

of the borrower company. The ARC was under severe pressure as the

charges and the other allied expenses were mounting. In view of the

failed attempts to securitize the secured asset, the ARC was constrained

to explore other options viz. sale by private treaty. The petitioner and

the ARC mutually arrived at an agreement with reference to the

purchase of movable assets (specifically mentioned as Lot II and Lot

III).

3.1 The ARC vide its letter dated 13-12-2016 bearing reference

No.EdelARC/3018/2016-17, wherein the Authorized Officer of ARC

acting in the capacity as trustee of EARC Trust-SC 6 (EARC) agreed to

accept the petitioner's offer dated 13-12-2016 for purchase of movable

assets of Vybra Automet Limited and conditionally confirmed the sale

upon payment of 25% of the sale consideration amounting to Dr.GRR,J ::3:: wp_5183_2018

Rs.2,90,00,000/- and upon payment of entire sale consideration of

Rs.11,60,00,000/-, the sale certificate under the SARFAESI Act 2002

was contracted to be issued in favour of the petitioner. The ARC

requested the petitioner, in compliance of the terms of the private treaty,

to make the remaining payment of Rs. 8,70,00,000/- on completion of

sale.

3.2 After confirmation of sale in favour of the petitioner, the

proprietor of the petitioner deputed his officials to the site to ascertain

the status and environment prevailing there. It was learnt that total 148

workers of the borrower were members of Centre of Indian Trade Union

("CITU") and it would be impossible to remove any machinery from the

site without the co-operation of the workers or the Union. In order to

avoid any obstructions or hindrance that might be caused by the workers

while removing and transporting the plant and machinery from the

premises of borrower, the petitioner entered into a Memorandum of

Settlement dated 5-2-2017 with the Worker's Union of Vybra Automet

Limited, wherein the petitioner agreed to pay Rs.2,30,00,000/- in full

and final settlement, on satisfaction and discharge of claims with respect

to sale of Lot II and Lot III more particularly described in the public

notice dated 10-10-2016 of the ARC without any admission of liability Dr.GRR,J ::4:: wp_5183_2018

to compensate the workers or their labour dues. By way of the

Memorandum of Settlement dated 5-2-2017, the petitioner attempted to

hedge any uncertainty, workers agitation or obstruction being created

while removing the goods from the site. Being assured of no

improbability from the workers and their Union, the petitioner remitted

the entire sale consideration of Rs.11,60,00,000/- to the ARC. By way

of letter dated 15-2-2017 bearing reference no. EdelARC/3709/2016-17,

the ARC confirmed receipt of entire sale consideration of

Rs.11,60,00,000/- complying the terms of sale with respect to movable

assets (specifically mentioned as Lot II & Lot III). Subsequently, a

Sale Certificate dated 16-2-2017 was issued in favour of petitioner by

the ARC and by way of letter dated 22-2-2017, the actual and physical

possession of the movable assets were also handed over.

3.3 The Petitioner was provided by the Worker's Union with a

Warrant of Attachment dated 23-01-2015 of Respondent No.2 attaching

four CNC machines which would form part of the movable assets

purchased by the petitioner. The petitioner had obtained a list of

defaulters as on 31-12-2010, issued by the Respondent No. 2 wherein

it was evident that the borrower had defaulted the statutory labour dues Dr.GRR,J ::5:: wp_5183_2018

prior to the year 2010. The Respondent No.2 thereafter issued a demand

notice dated 24-04-2017 upon the ARC claiming an amount of Rs.

41,13,525/-. The Enforcement Officer of Respondent No. 2, visited the

site on 12-05-2017. The said officer drew a panchnama and attached the

immovable property of the borrower. The copy of the order of

attachment was for the arrears of Rs.1,23,43,686/-. The said order of

attachment was affixed to the outer door in respect of the attached

immovable property. The petitioner issued a letter dated 16-05-2017 to

the Respondent No. 2 and requested to resolve the issue with the ARC.

In any event the immovable property therein was in possession of the

ARC which had also been attached by the Respondent No. 2, therefore

the part-attachment on the part of movable property being the 4 CNC

Machines ought to be withdrawn.

3.4 The Assistant Provident Fund Commissioner adjudicated upon the

proceedings commenced under Section 7A of the Employees Provident

Fund and Miscellaneous Provisions Act, 1952 by way of an order dated

29-05-2017. The Assistant Provident Fund Commissioner determined a

sum of Rs.88,35,440/- ought to be paid by the employer, Vybra Automet

Limited on account of its defaults. The petitioner issued a letter dated 9-

10-2017 to the Respondent No. 2 requesting to withdraw the attachment Dr.GRR,J ::6:: wp_5183_2018

on 4 CNC machines as a buyer was identified by the petitioner. The

petitioner also mentioned the timelines granted by the ARC to lift the

movables from the site. The Respondent No. 2 replied to the petitioner's

letter dated 17-5-2017 by way of letter dated 7-12-2017 wherein the

Respondent No. 2 directed the petitioner to remit an amount of

Rs.2,11,79,126/-towards the PF dues. The Respondent No.2 issued the

impugned order dated 11-1-2018 directing the petitioner to remit the

statutory dues for the period from March 1998 to May 2013 amounting

to Rs.2,11,79,126/- towards the PF dues of Vybra Automet Limited.

Surprised that the Respondent No.2 arrived at such a peculiar finding

without any factual basis, the petitioner was compelled to file this writ

petition.

4. The learned Standing Counsel for the respondents No.1 & 2

submitted that the employer M/s.Vybra Automet Ltd., was due an

amount of Rs.41,13,525/- against assessment of Levy of Damages under

Section 14B & Interest on account of belated remittances of EPF &

other allied dues in arrears for the period from 03/2008 to 05/2012, as

such a Notice of Demand was issued in accordance with the provisions

of Section 8B to 8G of the EPF & MP Act, 1952 vide Notice

dt.24.04.2017. As part of the recovery process under Section 8 of the Dr.GRR,J ::7:: wp_5183_2018

Act, the squad of Enforcement Officers attached the movable and

immovable property of defaulting establishment vide panchanama dated

12-5-2017 with specification of the movable property which were

already attached under Section 32 of CPC vide letter

No.AP/RO/HYD/AP/18629/C-II/T-5/2015 dated 23-01-2015 towards

the due amount of Rs.1,23,43,686/-. The Sub Registrar, Bibi Nagar

acknowledged the copy of panchanama dated 12-5-2017 and placed the

property in the prohibited list of property.

4.1 The learned Standing Counsel for respondent Nos.1 & 2 further

submitted that the property was attached by Employee's Provident Fund

Organisation, Regional Office, Hyderabad and duly intimated to Sub

Registrar Office Bibinagar, as such the property ought not to have been

auctioned by M/s. Edelweiss (ARC) & M/s.A.I.Potia& Co., (Purchaser),

as EPFO was striving to recover the dues for eventually making

payments to the employees of the defaulting establishment.

M/s.Edelweiss (ARC) & petitioner going ahead with the auction without

prior intimation or permission of the Respondent No.2 office was

blatantly wrong, null and void. The dues under Employees Provident

Fund Organisation had priority over the other dues as per the provisions

under Section 11 of EPF & MP Act, 1952.

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                                  ::8::                         wp_5183_2018

4.2 He further submitted that the notice of demand was issued in

accordance with the provisions of Section 8B to 8G of EPF &MP Act,

1952 vide notice dated 12-4-2018. The petitioners, the purchasers of the

property in auction should have made sincere efforts to know the factual

position of the defaulting establishment's statutory liabilities before

entering into any auction purchase. The Respondent office vide letter

dated 07.12.2017 informed the petitioner that EPFO was responsible to

the employee class with respect to their Provident Fund contributions

deducted from their wages by the defaulting establishment M/s.Vybra

Automet Ltd and that the petitioner should have followed due diligence

by inquiring whether the land was attached or not before conduct of

auction. The respective bank or M/s.Edelweiss (ARC) & petitioner as

secured creditor could enforce its right over the property after clearing

the liabilities of the defaulting establishments towards EPFO, as PF dues

of contributions were deducted from the hard earned wages of the

employees and would comprise utmost priority over all other dues.

4.3 As a part of recovery of due, notice under Section 8F(3)(x) of

EPF & MP Act, 1952 dated 5-6-2018 was issued to the petitioners.

Proper information had been passed to the petitioners about dues

payable to various government departments. Neither the purchaser nor Dr.GRR,J ::9:: wp_5183_2018

the Respondent No.3 deposited the dues to the office. The dues towards

penal damages would carry highest priority over all other dues as per the

provisions under Section 11 of EPF & MP Act, 1952. The Hon'ble

Apex Court in various judgments categorically highlighted the

provisions of Section 11 of EPF & MP Act, 1952 and prioritized the

EPF dues over other dues. In the interest of the employees, the

immovable assets were attached so as to proceed with auction of the

property and for eventual payment to the employees. The petitioner

illegally proceeded with purchasing the already attached property

without prior intimation or permission to their office, as such the

purchase/auction need to be cancelled and had to be treated as null and

void and prayed to dismiss the petition.

5. Perused the record. The petitioner purchased the movable assets

(specifically mentioned as Lot II and Lot III) of Vybra Automet Ltd., by

making payment of entire sale consideration of Rs.11,60,00,000/- from

the authorized officer of ARC as per letter dated 15-2-2017. A sale

certificate 16-2-2017 was issued by ARC in favour of the petitioner by

letter dated 22-2-2017 and also handed over the actual and physical

possession of the movable assets. The petitioner also entered into

Memorandum of Settlement dated 5-2-2017 with the workers union of Dr.GRR,J ::10:: wp_5183_2018

Vybra Automet Ltd., and agreed to pay Rs.2,30,00,000/- in full and final

settlement of their labour dues apart from the above amount paid to the

ARC. The Enforcement Officers of the respondent's squad attached the

movable and immovable properties of M/s. Vybra Automet Ltd., as per

the panchanama dated 12-5-2017 towards the due amount of

Rs.1,23,43,686/-.

6. Section 11 of EPF & MP Act, 1952 speaks about the priority of

the dues under Employees Provident Fund Origination over all other

dues. It reads as follows:-

"11. Priority of payment of contributions over other debts.--

(1) Where any employer is adjudicated insolvent or, being a company, an order for winding up is made, the amount due-- (a) from the employer in relation to an establishment to which any Scheme or the Insurance Scheme applies in respect of any contribution payable to the Fund or, as the case may be, the Insurance Fund, damages recoverable under section 14B, accumulations required to be transferred under sub- section (2) of section 15 or any charges payable by him under any other provision of this Act or of any provision of the Scheme or the Insurance Scheme; or (b) from the employer in relation to an exempted establishment in respect of any contribution to the Provident Fund or any Insurance Fund (in so far it relates to exempted employees), under the rules of the Provident Fund or any Insurance Fund, any contribution payable by him towards the Family Pension Fund under sub-section (6) of section 17, damages recoverable under section 14B or any charges payable by him to the appropriate Government under any provision of Dr.GRR,J ::11:: wp_5183_2018

this Act or under any of the conditions specified under section 17. shall, where the liability thereof has accrued before the order of adjudication or winding up is made, be deemed to be included] among the debts which under section 49 of the Presidency-Towns Insolvency Act, 1909 (3 of 1909), or under section 61 of the Provincial Insolvency Act, 1920 (5 of 1920), or under section 530 of the Companies Act, 1956 (1 of 1956), are to be paid in priority to all other debts in the distribution of the property of the insolvent or the assets of the company being wound up, as the case may be.

(2) Without prejudice to the provisions of sub-section (1), if any amount is due from an employer whether in respect of the employee's contribution (deducted from the wages of the employee) or the employer's contributions, the amount so due shall be deemed to be the first charge on the assets of the establishment, and shall, notwithstanding anything contained in any other law for the time being in force, be paid in priority to all other debts."

7. The Hon'ble Apex Court in EPF Commissioner Vs Official

Liquidator of Esskay Pharmaceuticals Limited1 held as follows:

"43. In terms of Section 530(1), all revenues, taxes, cesses and rates due from the company to the Central or State Government or to a local authority, all wages or salary or any employee, in respect of the services rendered to the company and due for a period not exceeding 4 months all accrued holiday remuneration etc. and all sums due to any employee from provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the employees maintained by the company are payable in priority to all other debts. This provision existed when Section 11(2) was inserted in the EPF Act by Act No. 40 of 1973 and any amount due from

AIR 2012 SC 11 Dr.GRR,J ::12:: wp_5183_2018

an employer in respect of the employees' contribution was declared first charge on the assets of the establishment and became payable in priority to all other debts. However, while inserting Section 529A in the Companies Act by Act No.35 of 1985 Parliament, in its wisdom, did not declare the workmen's dues (this expression includes various dues including provident fund) as first charge. The effect of the amendment made in the Companies Act in 1985 is only to expand the scope of the dues of workmen and place them at par with the debts due to secured creditors and there is no reason to interpret this amendment as giving priority to the debts due to secured creditor over the dues of provident fund payable by an employer. Of course, after the amount due from an employer under the EPF Act is paid, the other dues of the workers will be treated at par with the debts due to secured creditors and payment thereof will be regulated by the provisions contained in Section 529(1) read with Section 529(3), 529A and 530 of the Companies Act."

8. The learned counsel for the respondents relied upon the judgment

of Hon'ble Apex Court in M/s.Rudra Estate Pvt Ltd., Vs Ravish

Gupta & ors2 wherein it was held that:

"The EPF dues rank in priority in terms of Section 11 of the Act. The auction sale, having been set aside, this Court directed the State of Uttar Pradesh to refund an amount of Rs.85 lakhs to the auction purchaser, together with interest. This, however, can furnish no justification for directing the RPFC to pay over the amount of Rs.49,90,432, which had already been disbursed by the Employees' Provident Fund Commissioner to the eligible beneficiaries. The State is entitled, in terms of the order passed by this Court initially on 17 May 2018 and subsequently on 16 July 2018, to pursue the recovery proceedings against the available assets. The State would be at liberty to do so. However, the sum which has been collected by the applicant

M.A. No. 2905/2018 dated 01.04.2019 Dr.GRR,J ::13:: wp_5183_2018

under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 will necessarily stand excluded. We accordingly set aside the direction which has been issued by the District Magistrate, Meerut to the applicant for refund of the amount. However, we leave it open to the State of Uttar Pradesh to take necessary steps for completing the exercise of re-determination of State dues in terms of the judgment and order of this Court dated 30 June 2014. This exercise shall be completed, in any event, within a period of four months from the date of this order and it would be open to the State to take necessary steps in accordance with law for realisation."

9. Thus the Hon'ble Apex Court in its various judgments highlighted

the provisions of Section 11 of EPF & MP Act, 1952 and prioritized the

EPF dues over other dues.

10. The learned counsel for the petitioner relied upon the judgment of

the Punjab and Haryana High Court in Regional Provident Fund

Commissioner Vs. Tayal Energy Limited and others3 which is based

upon Section 17-B of EPF & MP Act which deals with liability in case

of transfer of establishment. The same is extracted for a better

understanding. It reads as under:

"17B. Liability in case of transfer of establishment.--

Where an employer, in relation to an establishment, transfers that establishment in whole or in part, by sale, gift, lease or licence or in any other manner whatsoever, the employer and the person to whom the establishment is so transferred shall jointly and severally be liable

2011 SCC OnLine P&H 8081 Dr.GRR,J ::14:: wp_5183_2018

to pay the contribution and other sums due from the employer under any provision of this Act or the Scheme or the Pension Scheme or the Insurance Scheme, as the case may be, in respect of the period up to the date of such transfer: Provided that the liability of the transferee shall be limited to the value of the assets obtained by him by such transfer."

The High Court of Punjab & Haryana opined that:

"9. We are unable to accept the submissions made by learned counsel for the appellant. While there is no dispute that EPF Act is a welfare legislation to protect the weaker sections and has to be interpreted having regard to its objective, transferee by operation of law cannot be saddled with the liability of the previous owner unless the agreement or statute expressly or impliedly so provides. In the present case, the agreement does not expressly or impliedly render the transferee liable for the Provident Fund dues of the previous owner. Section 17B of the EPF Act is also not applicable to involuntary transfer.

10. Principle that transfer contemplated under section 17B is not involuntary transfer was formulated in Suburban Ply and Panels (P) Limited, thus:-

"6. A conjoint reading the provisions of Sections 2, 8 and 17-B of the EPF Act as quoted above gives a clear picture that the liability to pay contribution and other sums due from the employer on transfer of an establishment is specifically provided in Section 17-B of the EPF Act. The principle behind it is that the employer, who is liable to pay under Section 6 of the Act the contribution and other sums, cannot by reason of its owing or occupying the establishment on transfer be permitted to avoid such liability and therefore provision is made under section 17B of the Act, that the employer as well as the Dr.GRR,J ::15:: wp_5183_2018

transferee shall be jointly and severally liable to pay the contribution and other sums up to the date of transfer. This speaks that by reason of the transfer, the liability on the employer would not cease, but would continue to exist and would also be fastened upon the transferee, though limited to the value of the assets obtained by the transferee by such transfer. The transfer by the employer of the establishment contemplated under section 17B is an act by the employer. Here is a case where the transfer has not been made by the employer but after seizure of the unit/establishment, the same was transferred by the OSFC to the present petitioner. There is no indication that Section 17B contemplates transfers otherwise than by an employer as defined in the EPF Act in relation to an establishment. By a Court sale or otherwise a transfer takes place by operation of law and not by any transaction inter vivos. In that sense, it is an involuntary sale against the wishes of the person whose property is sold. That can hardly be called a transfer, as ordinarily understood which connotes a voluntary transaction entered into between two parties. In this connection it has also to be remembered that the provisions of the Transfer of Property Act generally dealing kinds of transfers do not affect transfer by operation of law, or by or in execution of a decree or order of a court of competent jurisdiction under section 2(d) of the Transfer of Property Act (see Angappa spinning Mills, Madurai v. Regional Commissioner Employees Provident Fund, Madras 1986 Lab IC 458 (Madras)."

11. We are in agreement with the above view which has also been followed in other judgments relied upon on behalf of the respondent. We respectfully dissent from the view of Calcutta High Court to the contrary."

Dr.GRR,J ::16:: wp_5183_2018

11. As can be seen from the ratio of the above case, the petitioners in

the present case also came into possession of the property by operation

of Law. The transfer was not made by the employer but by the ARC.

The agreement of sale by the petitioner with the ARC also do not

expressly or impliedly render the transfer liable for the Provident Fund

dues of the previous owner. This Court is also in agreement with the

proposition that Section 17B of the EPF Act is not applicable to

involuntary transfer. The order of the Assistant Provident Fund

Commissioner on 29.05.2017 and the attachment of the properties by

the Enforcement Officer of the respondent No.2 vide panchanama dated

12.05.2017 are subsequent to the sale by ARC to the petitioners on

15.02.2017. The respondent No.2 issued a demand notice on ARC on

24.04.2017. Thus, the respondent Nos.1 and 2 had not even brought to

the notice of the ARC about the provident fund dues of the borrower

until the sale with the petitioners was completed.

12. The petitioners, in good faith, purchased the movable assets that

were sold by ARC for a consideration of Rs.11,60,00,000/-.

Considering the environment prevailing at the site, as it would be

impossible to remove any machinery from the site without the co-

operation of workers or the union, they agreed to pay an amount of Dr.GRR,J ::17:: wp_5183_2018

Rs.2,30,00,000/- to the workers which was over and above their agreed

amount with the ARC. Any further amounts incurred by the petitioners

over and above the said consideration would be an unreasonable burden

on the petitioners. Hence, it is considered unjustifiable to burden the

petitioners any further. Since the 2nd respondent-E.P.F. authorities also

attached the immovable property apart from the machinery for their due

amount of Rs.1,23,43,686/-, the same can be satisfied from the sale

proceeds of immovable property which was already attached and

incorporated in the Prohibitory List by the Sub-Registrar, Bibinagar.

The claim of 2nd respondent can be satisfied from the said property. To

meet the ends of justice, it is considered equitable to allow the writ

petition.

13. In the result, the Writ Petition is allowed declaring the order dated

11.01.2018 passed by the 2nd respondent as illegal, arbitrary and

irrational. No costs.

14. As a sequel, miscellaneous applications pending if any in this

Writ Petition, shall stand closed.

_____________________ Dr. G. RADHA RANI, J Date: 29.06.2022 Ndr