IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 02/07/2010 CORAM THE HON'BLE MR. JUSTICE P.JYOTHIMANI Company Application Nos.1459 and 1460 of 2009 in Company Petition No.164 of 2007 ORDER
Few of the interesting points which arise for consideration in this case, which have been dealt with in extenso by the Apex Court as well as a Division Bench of this Court and which have come again for consideration, are:
(i)Whether the Crown Debt claimed in the form of arrears of commercial tax payable as per the provisions of the Tamil Nadu General Sales Tax Act, 1959 by a company under liquidation, in the absence of any specific provision under the Tamil Nadu General Sales Tax Act, 1959, creating first charge over the assets of the company under liquidation can have priority?
(ii)About the priority of the claim by the Employees’ State Insurance Corporation for the non payment of contribution? and
(iii)The right of the secured creditor like a bank which has obtained an order for recovery from the Debts Recovery Tribunal, Chennai, pursuant to which an order of attachment, however sale could not be effected and in the meantime, the assets vest with the Official Liquidator by orders of the Company Court?
2.1. The brief facts which are relevant to decide the above said issues are that the first respondent, stated to be an unsecured creditor of the second respondent company, has filed the above C.P.No.164 of 2007 for winding up under Sections 433(e) and 433(f) read with Sections 434(1)(a) and 439(1)(b) of the Companies Act, 1956 on the allegation of non payment of debt due under High Sea Sale Agreements date 6.8.2004 and 2.9.2004 to the extent of Rs.79,69,263/- and Rs.15,67,207/- relating to the sale of Stainless Steel Coils stated to have been made by the unsecured creditor to the second respondent (company under liquidation). By an order dated 25.3.2008 passed in the Company Petition for winding up, this Court has appointed the Official Liquidator as Provisional Liquidator to take charge of the assets and effects of the company. The learned Official Liquidator was informed by the bankers, especially the applicant/Bank that they prefer to stand outside the liquidation proceedings, thus not willing to give up the status of secured creditor.
2.2. When the Official Liquidator proceeded to take possession of the assets of the second respondent (company under liquidation), it was found that the applicant/bank had granted the following credit facilities to the second respondent on 25.8.2001:
a.
Export Packing credit
–
Rs.6.00 Crores
b.
Foreign documentary bill limit (Non-LC)
–
Rs.2.00 Crores
c.
Foreign documentary bill Limit (LC)
–
Rs.1.00 Crore
d.
Letters of Credit Limit
–
Rs.1.00 Crore
e.
Bank guarantee limit
–
Rs.0.30 Crore
f.
Corporate Loan
–
Rs.1.50 Crores
in respect of which the company under liquidation has created an equitable mortgage over the properties described in the schedule to the Judge’s summons, which are:
(i)Factory building and ground bearing door Nos.4 and 6, Powder Mill Road, Perambur Bararcks, Pulianthope, Vepery Village, Chennai 600 012; and
(ii)Factory building and ground bearing door No.5, Powder Mills Road, Perambur Barracks, Pulianthope, Vepery Village, Chennai 600 012.
2.3. When the second respondent (company under liquidation) failed to repay the mortgage debt, the applicant/bank has approached the Debts Recovery Tribunal-II, Chennai by filing O.A.No.52 of 2005 for recovery of Rs.10,71,97,610.99 along with future interest. The said Original Application is stated to have been filed on 31.3.2005. The Tribunal has passed final order on 16.10.2007 against the second respondent (company under liquidation) and other defendants therein to jointly and severally make such payment to the applicant/bank. It is stated that pursuant to the final order passed by the Tribunal, the schedule mentioned properties were attached and brought for public auction. However, for want of bidders, the auction proceedings came to be cancelled. It is stated that since the third respondent is occupying a portion of the schedule mentioned property as tenant and is not vacating the same, no bidders are coming forward to purchase the same.
2.4. In the meantime, by virtue of the orders passed by the Company Court in the Company Petition No.164 of 2007, dated 25.3.2008, the assets were handed over to the Official Liquidator and it is also stated that in the Company Application in C.A.No.1960 of 2008, this Court, by order dated 15.12.2008, has directed the third respondent to continue to deposit the rent with the Official Liquidator. Therefore, the applicant/ bank could not proceed with the auction of the property.
2.5. On the basis that the applicant/bank has obtained final order from the competent Tribunal for recovery in respect of the secured loan received by the second respondent much before the order passed by the Company Court, which was on 25.3.2008, and that even before the winding up order the applicant/bank has attached the property, the applicant/bank has come forward with the above said applications seeking permission for sale of the schedule mentioned properties through the Recovery Officer, Debts Recovery Tribunal, Chennai in pursuance of the certificate in DRC No.516 of 2007 and for a direction against the third respondent to deposit the rents to the credit of loan account of the second respondent company with the applicant/bank till auction process is completed.
3.1. In the report of the learned Official Liquidator, while the facts stated above are not much disputed, it is stated that the premises in question was occupied by tenants as detailed below:
i)M/s.M.R.Poly Packers (third respondent) occupying 3700 sq.ft. carrying on business of poly packs.
ii)Mr.Jhon occupying 2200 sq.ft. carrying on business of recycling old plastic items.
iii)Mr.J.Pushparaj occupying remaining 1200 sq.ft. doing recycling of old plastic items.
It is stated that based on the letter of the Official Liquidator, all the tenants are paying rents to the Official Liquidator.
3.2. The learned Official Liquidator, in his report, has further stated that the rent collected by him is available to meet out the liquidation expenses related to the winding up proceedings and therefore, there cannot be a direction against the tenants to pay the rent to the applicant/bank. However, in respect of the prayer for selling the property of the second respondent (company under liquidation) through Debts Recovery proceedings, it is stated that the Official Liquidator has no objection, provided the Official Liquidator is associated during each and every stage of the sale process and the amount due to the workmen creditors in terms of Section 529A of the Companies Act, 1956 is segregated.
4.1. The Employees’ State Insurance Corporation, which was impleaded as fifth respondent in these applications, is stated to have attached the factory premises of the second respondent-company under liquidation on 22.11.2006 for non payment of contribution of Rs.3,94,228/-, which order came to be revoked subsequently by the Company Court’s order in the above Company Petition, since the possession has been handed over to the Official Liquidator.
4.2. As it is seen in the affidavit filed on behalf of the Employees’ State Insurance Corporation, the second respondent is liable to pay by way of contribution an amount of Rs.5,79,770/- with further interest, as detailed hereunder:
S.No.
Date of Claim
Nature of claim
Period of Claim
Amount
1
16.12.2004
C-19(1)
10/02 to 01/04
Rs.2,838/-
2
08.03.2005
C-19
04/00 to 03/03
Rs.84,238/-
3
08.03.2005
D-19
10/02 to 01/04
Rs.26,389/-
4
08.09.2005
C-19
04/04 to 09/04
Rs.2,83,501/-
It is stated that the second respondent has admitted the liability in the letter dated 27.4.2005 and the Employees’ State Insurance Corporation has, in fact, recovered Rs.62,119/- towards employers contribution for the period from 04/04 to 09/04.
4.3. The Employees’ State Insurance Corporation makes a claim that in respect of the recovery of the amount due under the liability of contribution by the second respondent under the Employees’ State Insurance Act, 1948, the Official Liquidator is deemed to have been keeping the said amount in trust and therefore, the claim of the Employees’ State Insurance Corporation should be considered on priority basis by referring to Section 94 of the Employees’ State Insurance Act, 1948 read with Section 66 of the Indian trusts Act, 1882. It is claimed that in the event of the applicant/bank or the Official Liquidator selling the property, it should be given priority in payment.
5.1. Likewise, the Commercial Tax Department, which was impleaded as fourth respondent, in the affidavit has stated that the second respondent (company under liquidation) has been in sales tax arrears to the extent of Rs.8,71,70,424/-, which are due under the Tamil Nadu General Sales Tax Act as well as the Central Sales Tax Act for the assessment years from 2001-2002 to 2005-2006 as per the following calculation:
Sl.No.
Act
Year
Tax
S.C./ A.S.C.
Penalty
Total
1
TNGST
01-02
117661
176490
294151
02-03
1059079
1588617
2647696
03-04
544513
45594
12(3)b
1000837
12(3)c
2683
1593627
04-05
12784204
636780
27314382
4788604
45523970
05-06
679475
34874
1098524
1812873
1
CST
2000-01
919
919
04-05
14160875
21241313
35402188
Total
87275424
Since Collected by way of B6 issued
105000
87170424
5.2. Based on Section 26 of the Tamil Nadu General Sales Tax Act, 1959, it is stated that the said section imposes an obligation on the part of the person from whom money is due or may become due to the dealer or to any person who has become liable to pay any amount due under the Commercial Taxes Acts to pay the Department and accordingly, a notice was issued by the Commercial Tax Department on 30.3.2010 in Form B6 attaching the rent payable to the defaulter by the applicant and requesting to pay the rental amount to the department.
5.3. The fourth respondent, on the basis of the Crown Debt, has made a priority of claim by treating the liability as arrears of land revenue and on the basis of the Transfer of Property Act, it is stated that the same creates a charge by operation of law. By relying upon various judicial precedents, it is stated that the Commercial Tax Department has a first charge for recovery of sales tax dues and the banks and financial institutions can recover the amount only from the residuary.
6. On the above said admitted factual scenario, the counsel appearing for various parties have relied upon various judgments, including the judgment of the Apex Court in Central Bank of India v. State of Kerala and others, [2009] 4 SCC 94 and a latest Division Bench judgment of this Court in W.P.Nos.8696 of 2009 and batch, dated 7.6.2009, apart from the judgment of this Court in Tamilnad Mercantile Bank Ltd. v. The Commercial Tax Officer, 2009 [2] CTC 806.
7.1. As far as the claim of the Commercial Tax Department, namely the fourth respondent, the priority of claim is made based on Section 24(2) of the Tamil Nadu General Sales Tax Act, 1959, which is as follows:
“Section 24: Payment and recovery of tax.–
(1) ….
(2) Any tax assessed on or has become payable by, or any other amount due under this Act from a dealer or person and any fee due from him under this Act, shall, subject to the claim of the Government in respect of land revenue and the claim of the Land Development Bank in regard to the property mortgaged to it under Section 28(2) of the Tamil Nadu Co-operative Land Development Banks Act, 1934 (Tamil Nadu Act X of 1934), have priority over all other claims against the property of the said dealer or person and the same may without prejudice to any other mode of collection be recovered, —
(a) as land revenue, or
(b) on application to any Magistrate, by such Magistrate as if it were a fine imposed by him:
Provided that no proceedings for such recovery shall be taken or continued as long as he has, in regard to the payment of such tax, other amount or fee, as the case may be, complied with an order by any of the authorities to whom the dealer or person has appealed or applied for revision, under Sections 31, 31-A, 33, 35, 36, 37 or 38.”
A reference to the said provision makes it clear that in respect of the arrears of tax, the Tamil Nadu General Sales Tax Act, 1959 does not create any charge over the properties of the defaulting assessee.
7.2. In fact, it was in the context of a specific first charge having been created under the Rajasthan Sales Tax Act, 1954, under Section 11-AAAA, which is as follows:
“Section 11-AAAA. Liability under this Act to be the first charge – Notwithstanding anything to the contrary contained in any law for the time being in force, any amount of tax, penalty, interest and any other sum, if any, payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer, or such person.”,
the Supreme Court has held in State Bank of Bikaner and Jaipur v. National Iron and Steel Rolling Corporation and others, [1995] 2 SCC 19 based on the concept of Crown Debt that there would be priority in respect of the arrears of sales tax.
7.3. The relevance of such charge over a property in contradistinction with the mortgage of the property was at the earliest point of time dealt with by the Hon’ble Apex Court in Dattatreya Shanker Mote v. Anand Chintaman Datar, [1974] 2 SCC 799. In that case, an observation was made that charge is wider in its character when compared to a mortgage, holding that every mortgage is a charge but every charge need not be a mortgage. When an argument was advanced before the Hon’ble Apex Court in State Bank of Bikaner and Jaipur case, supra, that the bank’s claim will have precedence over the claim of sales tax authorities, by referring to the above said provisions of the Rajasthan Sales Tax Act, namely Section 11-AAAA, which is in pari materia with Section 38-C of the Bombay Sales Tax Act and Section 26-B of the Kerala Sales Tax Act, and also Section 100 of the Transfer of Property Act, the Apex Court has held as follows:
“7. Section 100 of the Transfer of Property Act deals with charges on an immoveable property which can be created either by an act of parties or by operation of law. It provides that where immoveable property of one person is made security for the payment of money to another, and the transaction does not amount to a mortgage, a charge is created on the property and all the provisions in the Transfer of Property Act which apply to a simple mortgage shall, so far as may be, apply to such charge. A mortgage on the other hand, is defined under Section 58 of the Transfer of Property Act as a transfer of an interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced as set out therein. The distinction between a mortgage and a charge was considered by this Court in the case of Dattatreya Shanker Mote v. Anand Chintaman Datar, [1974] 2 SCC 799. The Court has observed that a charge is a wider term as it includes also a mortgage, in that, every mortgage is a charge, but every charge is not a mortgage. The Court has then considered the application of the second part of Section 100 of the Transfer of Property Act which inter alia deals with a charge not being enforceable against a bona fide transferee of the property for value without notice of the charge. It has held that the phrase “transferee of property” refers to the transferee of entire interest in the property and it does not cover the transfer of only an interest in the property by way of a mortgage.”
(emphasis supplied)
7.4. In Central Bank of India v. State of Kerala and others, [2009] 4 SCC 94, before a Three Judge Bench of the Supreme Court, when it was argued that the view expressed in State Bank of Bikaner and Jaipur case, supra, requires reconsideration on the basis that it was based on misrepresentation of the judgment of Dattatreya Shanker Mote case, supra, the Supreme Court has ultimately held that there is no contradiction requiring reconsideration in the following words:
“174. In our opinion, the judgments in State Bank of Bikaner & Jaipur v. National Iron & Steel Rolling Corporation, [1995] 2 SCC 19, and R.M. Arunachalam v. Commissioner of Income Tax, [1997] 7 SCC 698 are based on a correct reading of the ratio of the Dattatreya Shanker Mote v. Anand Chintaman Datar, [1974] 2 SCC 799 and the propositions laid down therein do not call for reconsideration. At the cost of repetition, we consider it appropriate to observe that in Dattatreya’s case the Court was not dealing with the statutory first charge created in favour of the State.”
7.5. Therefore, inasmuch as there is no first charge or charge created under the Tamil Nadu General Sales Tax Act, 1959 in respect of the arrears of tax, it is not possible to accept the contention of Mrs.Bhavani Subramaniam, learned Special Government Pleader appearing for the fourth respondent that the sales tax arrears should be given priority over the secured creditors.
8.1. Now, we shall deal with the claim of the fifth respondent, Employees’ State Insurance Corporation. Under Section 94 of the Employees’ State Insurance Act, 1948, a right of priority has been given in respect of contribution, which is as follows:
“Section 94. Contributions, etc., due to Corporation to have priority over other debts.-
There shall 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 any law relating to insolvency in force in the territories which, immediately before the 1st November, 1956 were comprised in a Part B State, or under section 530 of the Companies Act, 1956 (1 of 1956) are, in the distribution of the property of the insolvent or in the distribution of the assets of a company being wound up, to be paid in priority to all other debts, the amount due in respect of any contribution or any other amount payable under this Act the liability wherefor accrued before the date of the order of adjudication of the insolvent or the date of the winding up, as the case may be.”
8.2. An attempt is sought to be made that by virtue of Section 66 of the Indian Trusts Act, 1882, which is as follows:
“Section: 66. Right incase of blended property – Where the trustee wrongfully mingles the trust-property with his own, the beneficiary is entitled to a charge on the whole fund for the amount due to him.”
read with Section 94 of the Employees’ State Insurance Act, 1948 that when a company is wound up, the Employees’ State Insurance Corporation has priority in claim and if the Official Liquidator spends the amount towards different claims it would amount to wrongful mingling of the property and therefore, the Employees’ State Insurance Corporation will have a charge, in which event the charge can be enforced.
8.3. In the judgment rendered by a Division Bench of this Court presided over by P.K.Misra,J. (as His Lordship then was) and R.Subbiah,J., in W.P.Nos.8696 of 2009 and batch, dated 7.6.2009, while dealing with various claims of the banks as secured creditors, including the Employees’ State Insurance Corporation’s claim, when a similar submission was made, it was held that inasmuch as the mortgage of the property with the bank as a security was prior in time than the claim of the Employees’ State Insurance Corporation, such secured creditor will have priority in the matter of adjustment over the Employees’ State Insurance Corporation’s claim. In this regard, it is relevant to refer to paragraph [31] of the Division Bench judgment, which is as follows:
“31. Though it is true that no formal opportunity of hearing had been given to the Recovery Officer under the E.S.I. Corporation, apparently because only a letter had been sent by E.S.I. Corporation and no formal claim had been filed. The fact that the property had been mortgaged to the State Bank of India on 3.3.1999 has not been challenged by the present petitioner. The attachment was effected by the E.S.I. Corporation Act only by virtue of subsequent orders passed by the Recovery Officer of the E.S.I. Corporation on 27.11.2000, 6.6.2002, and 5.3.2003. Therefore, in view of the analysis made that the amount payable under the E.S.I. Act has not been made a first charge on the property and since the mortgage in favour of the State Bank of India is undisputedly earlier, we do not think it is necessary to send the matter for reconsideration inasmuch as State Bank of India being the secured creditor will have priority in the matter of adjustment of the amount due to the State Bank of India and the surplus if any can only be appropriated by the E.S.I. Corporation.”
8.4. It is no doubt true that the Division Bench has given such finding on the factual matrix in that case, namely that there was no liquidation proceedings ever commenced and therefore, the question of priority has not arisen at that time. But, on the facts of the present case, the liquidation proceedings has already commenced and therefore, it is no doubt true that under Section 94 of the Employees’ State Insurance Act, 1948, there will be a priority of claim towards the Employees State Insurance Corporation in the context of the object of the said Act to provide certain benefits to employees in case of sickness, maternity and employment injury.
8.5. As per the scheme of the Employees’ State Insurance Act, 1948, one of the basic purposes for which the fund is directed to be spent, as contemplated under Section 28(i) of the Act, is as follows:
“Section 28. Purposes for which the fund may be expended.- Subject to the provisions of this Act and of any rules made by the Central Government in that behalf, the Employees’ State Insurance Fund shall be expended only for the following purposes, namely:–
(i) payment of benefits and provision of medical treatment and attendance to insured persons and, where the medical benefit is extended to their families, the provision of such medical benefit to their families, in accordance with the provisions of this Act and defraying the charges and costs in connection therewith.”
8.6. The Employees’ State Insurance Act, 1948 contemplates the contribution by the employer and employee, as it is seen under Section 39(1) of the Act, which is as follows:
“Section 39. Contributions. – (1) The contribution payable under this Act in respect of an employee shall comprise contribution payable by the employer (hereinafter referred to as the employer’s contribution) and contribution payable by the employee (hereinafter referred to as the employee’s contribution) and shall be paid to the Corporation.”
Such contributions, of course on the happening of the events, are recoverable as land revenue under Section 45B of the Act, which is as follows:
“Section 45B. Recovery of contributions. – Any contribution payable under this Act may be recovered as an arrear of land revenue.”
8.7. The Employees’ State Insurance Act, 1948 being a beneficial legislation for the benefit of the workmen, on liquidation of a company, as per Section 94 of the Act, the claim of the Corporation is having priority over other debts, is statutorily recognized and ultimately, the claim is for the benefit of the workmen. It is in such circumstances, Section 529A of the Companies Act, 1956, which is as follows, confers an undisputable priority right to the claim of the workman.
“Section 529A. Overriding preferential payment.-
(1) 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.”
8.8. Therefore, as pointed out by the learned Official Liquidator, if relating to the contribution for the benefit of the workmen under the Employees’ State Insurance Act, 1948 any claim is made, in my considered view, the same has to be considered on priority basis under the category “workmen’s dues” as per Section 529A of the Companies Act, 1956. If there is no claim from the workmen in this regard as adjudicated by the Official Liquidator along with the other claims of workmen as per Section 529A(1)(a) of the Companies Act, 1956, it is then open to the applicant, as a secured creditor, to appropriate the amount due after such sale by depositing the balance amount with the Official Liquidator.
9.1. As far as the right of the secured creditor, the Supreme Court has confirmed its priority right in no uncertain terms in Central Bank of India case, supra, holding that in the absence of any statutory first charge to the State as a Crown Debt for the reasons stated above, the claim of the applicant bank has to be dealt with in accordance with Section 529A of the Companies Act, 1956. In the event of any claim relating to workmen, which as per this order includes any claim of employees’ state insurance contributions as per the Employees’ State Insurance Act, 1948, then Section 529 of the Companies Act, 1948, which applies the rules of insolvency in winding proceedings, as illustrated in the said section, which is as follows, have to be followed.
“Illustration: The value of the security of a secured creditor of a company is Rs.1,00,000. The total amount of the workmen’s dues is Rs.1,00,000. The amount of the debts due from the company to its secured creditors is Rs.3,00,000. The aggregate of the amount of workmen’s dues and of the amounts of debts due to secured creditors is Rs.4,00,000. The workmen’s portion of the security is, therefore, one-fourth of the value of the security, that is Rs.25,000.”
9.2. While dealing with the claim of a secured creditor like the applicant/bank opting to stand outside the winding up proceedings, in the context of Section 19(19) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Supreme Court in Allahabad Bank v. Canara Bank and another, [2000] 4 SCC 406 held as follows:
“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 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, 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 clause (c) of the proviso to Section 529(1) and it is necessary to understand the scope of the said provision.”
In such view of the matter, the applications are disposed of with the following directions:
(i)the applicant/bank is permitted to sell the schedule mentioned properties through Recovery Officer, Debts Recovery Tribunal, Chennai in execution of DRC No.516 of 2007;
(ii)on realization of the sale proceeds, the Official Liquidator shall appropriate the amounts in accordance with Section 529A of the Companies Act, 1956 between the workmen’s dues, which includes the claim of Employees’ State Insurance Corporation, and the applicant/bank being the secured creditor;
(iii)the claim of the fourth respondent/Commercial Tax Department shall be considered along with the unsecured creditors;
(iv)the Official Liquidator shall be entitled to receive the rental amounts from the tenants in occupation of the schedule mentioned properties till confirmation of the sale in favour of the purchasers is effected in the manner known to law; and
(v)the Official Liquidator shall make appropriate applications in this regard.
sasi