TMI Blog2004 (2) TMI 364X X X X Extracts X X X X X X X X Extracts X X X X ..... these companies in liquidation. All Company Applications, except Company Application No. 264 of 2003, have been filed by the State of Maharashtra, whereas Company Application No. 264 of 2003 has been taken out by the State of Karnataka. In Company Application Nos. 312 of 2001, 347 of 2001, 447 of 2001, 493 of 2002 and 600 of 2002, the State of Maharashtra, the Applicant therein, is claiming recovery of dues, which were receivable from the Company in liquidation under the provisions of the Bombay Sales Tax Act, 1959 and Central Sales Tax Act, 1956; and whereas, in Company Application Nos. 135 of 2002, 421 of 2001, 278 of 2002 and 540 of 2002, it is claiming recovery of dues receivable from the Company in liquidation under the provisions of the Bombay Sales Tax Act, 1959; and whereas in Company Application No. 101 of 2002, recovery of dues receivable from the Company in liquidation under the provisions of the Maharashtra Sales Tax on Works Contract Act, 1989 is claimed. In Company Application No. 264 of 2003, the State of Karnataka, Applicant therein, is claiming recovery of dues receivable from the Company in liquidation under the provisions of the Karnataka Sales Tax, Act, 1957 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ari passu basis ? To address this question, it will be apposite to advert to the relevant provisions of the Companies Act, 1956. Section 529, as amended in 1985 and as applicable in the present case, reads thus : "529. Application of insolvency rules in winding up of insolvent companies. (1) In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to ( a )debts provable; ( b )the valuation of annuities and future and contingent liabilities; and ( c )the respective rights of secured and unsecured creditors; as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent : Provided that the security of every secured creditors shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen s portion therein, and, where a secured creditor, instead of relinquishing his security and proving his debt, opts to realise his security, ( a )the liquidator shall be entitled to represent the workmen and enforce such charge; ( b )any amount realised by the liquidator by way of enforcement of such charge shall be applied rateably ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther 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 under the said Act in respect of the death or disablement of any workman of the company; ( iv )all sums due to any workman from a provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the workmen, maintained by the company; ( c ) workmen s portion , in relation to the security of any secured creditor of a company, means the amount which bears to the value of the security the same proportion as the amount of the workmen s dues bears to the aggregate of ( i )the amount of workmen s dues; and ( ii )the amounts of the debts due to the secured creditors. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate Tax on Works Contract Act, 1989. It is, therefore, necessary to advert the scheme of the respective legislations to ascertain as to whether the State of Maharashtra can be treated as secured creditor by operation of law. 7. We shall first advert to the provisions of the Bombay Sales Tax Act, 1959. It is appropriate to advert to sections 38(5), 38B(1) and 38C of the Bombay Sales Tax Act, as introduced by the Maharashtra Act No. XVII of 1999. The said provisions read thus : "38. Payment of tax and deferred payment of tax, etc. (1) to (4)****** (5) Any tax, penalty, interest or sum forfeited, which remains unpaid after the service of notice under sub-section (4), or any instalment not duly paid, shall be recoverable as an arrears of land revenue ." (Emphasis Supplied) "38B. Special powers of Sales Tax authorities for recovery of tax as arrears of land revenue. (1) For the purpose of effecting recovery of the amount of tax, penalty, interest and amount forfeited, due and recoverable from any dealer or other person by or under the provisions of this Act, as arrears of land revenue , ( i )the Commissioner of Sales Tax shall have and exercise all the powers and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the Bombay Sales Tax Act by treating the same as "first charge" on the property in question. The provision, however, also takes into account that in case there is any provision regarding first charge in any Central Act, that would obviously override the arrangement directed by virtue of section 38C of the Bombay Sales Tax Act. In other words, if there was any provision in any Central Act regarding first charge, that would prevail over the first charge of the State of Maharashtra on the self-same property by virtue of section 38C of the Bombay Sales Tax Act. In the present case, the argument canvassed on behalf of the secured creditors of the company in liquidation is that section 529A of the Companies Act is a provision which recognises their first charge over the property of the Company in liquidation. To my mind, section 529A of the Companies Act is only a provision of giving precedence to the disbursement or payment of the dues to the workers along with the secured creditors on pari passu basis. This view is fortified by the enunciation of the Apex Court, to which I shall make reference little later. In the present case, emphasis is placed on section 38C of the Bombay Sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsolvency governing the field will have to be applied. In that sense, it will be safe to advert to the definition of "creditor" as provided in section 2( a ) of the Presidency Towns Insolvency Act, 1909. The same reads thus: " Creditor includes a decree holder;" In section 2(1)( a ) of the Provincial Insolvency Act, 1920, "creditor" is defined thus : " creditor includes a decree-holder, debt includes a judgment-debt, and debtor includes a judgment-debtor;" Now, we would advert to the definition of "secured creditor" in the aforesaid Insolvency Acts. In section 2( g ) of the Act of 1909, "secured creditor" is defined thus: " secured creditor includes a landlord who under any enactment for the time being in force has a charge on land for the rent of that land;" In section 2(1)( e ) of the Act of 1920, "secured creditor" is defined thus: " secured creditor means a person holding a mortgage, charge or lien on the property of the debtor or any part thereof as a security for a debt due to him from the debtor;" (Emphasis Supplied) 11. Applying the above provisions, it will have to be held that the State of Maharashtra is a secured creditor qua the company in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e dues recoverable by the State of Maharashtra under the provisions of the Bombay Sales Tax Act, 1959. A priori the claim of the State of Maharashtra for recovery of the dues under the provisions of the Bombay Sales Tax Act will have to be considered along with the other secured creditors and workers on pari passu basis by virtue of section 529A of the Companies Act. 13. To get over this position, stout reliance was placed by the Counsel appearing for the secured creditors on the decision of this Court in the case of Syndicate Bank v. Official Liquidator, Wester Works Engg. Ltd. [1999] 98 Comp. Cas. 487 wherein it has been held that the tax liabilities of the Company in liquidation cannot have any preference over the claim of the secured creditors and workers. Indeed, such observation is made in this decision. But, on careful reading of the said decision, to my mind, it is an authority on the proposition, as was canvassed before that Court that the tax liability would get preference over the claim of secured creditors and workers of the Company in liquidation. That was as extreme proposition considered. However, as is rightly contended by the Counsel for the State of Maha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehalf of the secured creditors of the Company in liquidation in the case of Polyelefins Industries Ltd. v. Kosmek Plastics Mfg. Co. Ltd. [1999] 98 Comp. Cas. 481 (Bom.). Even in this decision, the extreme proposition was canvassed - that the amount towards outstanding income-tax was recoverable in preference to the claim of the workmen of the Company in liquidation, which contention has been negatived. As mentioned earlier, that is not the point in issue in the present case. 16. Now, we shall advert to the provisions of the Maharashtra Sales Tax on Works Contract (Re-enacted) Act, 1989 to find out as to what is the efficacy of the outstanding amount due and payable under the provisions of the said Act. It is apposite to refer to section 9 of the said Act, which is relevant for our purposes. The same reads thus : "(1) Subject to the other provisions of this Act and the rules made thereunder, the authorities for the time being empowered to assess, re-assess, collect and enforce payment of any tax under the Bombay Sales Tax Act shall assess, re-assess, collect and enforce payment of tax, including any interest or penalty payable by a dealer under this Act as if the tax or in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 reads thus : "9. Levy and collection of tax and penalties. (1) The tax payable by any dealer under this Act on sales of goods effected by him in the course of inter-State trade or commerce, whether such sales fall within the clause ( a ) or clause ( b ) of section 3, shall be levied by the Government of India and the tax so levied shall be collected by that Government in accordance with the provisions of sub-section (2), in the State from which the movement of the goods commenced : Provided that, in the case of a sale of goods during their movement from one State to another, being a sale subsequent to the first sale in respect of the same goods and being also a sale which does not fall within sub-section (2) of section 6, the tax shall be levied and collected ( a )where such subsequent sale has been effected by a registered dealer, in the State from which the registered dealer obtained or, as the case may be, could have obtained, the form prescribed for the purposes of clause ( a ) of sub-section (4) of section 8 in connection with the purchase of such goods, and ( b )where such subsequent sale has been effected by an unregistered dealer, in the State from which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealer under this Act is not paid in time, the dealer shall be liable to pay interest for delayed payment of such tax and all the provisions relating to due date for payment of tax, rate of interest for delayed payment of tax and assessment and collection of interest for delayed payment of tax, of the general sales tax law of each State, shall apply in relation to due date for payment tax, rate of interest of delayed payment of tax, and assessment and collection of interest for delayed payment of tax under this Act in such States as if the tax and the interest payable under this Act were a tax and an interest under such sales tax law. (3) The proceeds in any financial year of any tax, including any interest or penalty, levied or collected under this Act in any State (other than a Union Territory) on behalf of the Government of India shall be assigned to that State and shall be retained by it; and the proceeds attributable to Union territories shall form part of the Consolidated Fund of India." [Emphasis supplied] Section 17 of the Central Sales Tax Act reads thus : "17. Company in Liquidation. (1) Every person ( a )who is the liquidator of any company which is being wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd severally. (6) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force." 19. By virtue of section 9, in particular, sub-section (2) thereof, the scheme for recovery of dues arising under the Central Sales Tax Act, is the same, as is applicable by virtue of the provisions of the Bombay Sales Tax Act. If that is so, for recovery of dues even under this Act, if it were to be treated as arrears of land revenue by virtue of section 169(1) of the Maharashtra Land Revenue Code, the State of Maharashtra will have "paramount charge" over the assets of the Company in liquidation. Moreover, it is possible to take the view that the provisions of section 38C of the Bombay Sales Tax can also be invoked, so that the State of Maharashtra will have "charge" over the assets of the Company in liquidation. Even in that case, on the self-same reasoning indicated herein above, while construing the provisions of the Bombay Sales Tax Act, the State of Maharashtra, being in charge of the recovery of dues under the Central Sales Tax Act, 1956, will have to be treated as secured creditor of the Company in liquid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to above, is an obiter, even so, the obiter of the Apex Court would bind this Court. Understood thus, it is not open either to contend or even to examine the plea that the State of Maharashtra cannot be treated as secured creditor of the Company in liquidation. 20. On the above reasoning, the claim of the State of Maharashtra, or, for that matter, the State of Karnataka, arising under the provisions of the Central Sales Tax Act will have to be considered along with other secured creditors and workers of the Company in liquidation on pari passu basis on the assumption that the State of Maharashtra, or, the State of Karnataka, as the case may be, are secured creditors of the Company in liquidation. 21. That takes me to the claim of the State of Karnataka in Company Application No. 264 of 2003. The claim is split in three components. The first is on the basis of dues payable by the Company in liquidation under the provisions of the Karnataka Tax on Entry of Goods Act, 1979. The second is on the basis of the provisions of the Karnataka Sales Tax Act, 1959; and lastly, on the basis of the provisions of the Central Sales Tax Act, 1956. We shall first refer to the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anguage of section 8(2), it is seen that dues payable under the provisions of this Act shall become immediately due and shall be a "charge" on the property of the person or persons liable to pay tax under this Act. If that is so, the claim of State of Karnataka for recovery of dues which were payable by the Company in liquidation under the provisions of this Act will have to be treated as one of the secured creditor of the Company in liquidation. Suffice it to observe that the reasons already indicated in the earlier part of this judgment in relation to the provisions of the Bombay Sales Tax Act as to the efficacy of "charge" on the property of the Company in liquidation will apply proprio vigore even to this legislation. Understood thus, the claim of the State of Karnataka in relation to the provisions of the Karnataka Entry on Goods Act, 1979, will have to be treated as one of the secured creditors, so as to be considered along with the claim of other secured creditors and workers of the Company in liquidation on pari passu basis by virtue of section 529A of the Companies Act. 23. We shall now advert to the provisions of the Karnataka Sales Tax Act, 1957. Section 13 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n accordance with such rules as may be prescribed; ( aaa )as if it were an arrear of excise revenue under the Karnataka Excise Act, 1965 (Karnataka Act 21 of 1966), in the case of a dealer engaged in the manufacture or sale of liquor including beer, spirit and alcohol; or ( b )notwithstanding anything contained in the Code of Criminal Procedure, 1973 (Central Act 2 of 1974), on application to any Magistrate, by such Magistrate as if it were a fine imposed by him : Provided that where a dealer or other person who has appealed or applied for revision of any order made under this Act and has complied with an order made by the Appellate or the revising authority in regard to the payment of the tax or other amount, no proceedings for recovery under this sub-section shall be taken or continued until the disposal of such appeal or application for revision. (4) The High Court may either suo motu or on an application by the Commissioner or any person aggrieved by the order revise any order made by a Magistrate under clause ( b ) of sub-section (3)." [Emphasis supplied] Sub-section (2) of section 13 of this Act is similar to the provisions contained in the Karnataka Entry Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Acts and in the light of the observations made in the abovesaid reported decision of the Apex Court, the State of Karnataka will have to be treated as any other "secured creditor" of the Company in liquidation by operation of law. Once that conclusion is reached, the State of Karnataka would be entitled for consideration of its claim arising under the provisions of the Karnataka Sales Tax Act, along with the claim of other secured creditors and workers of the Company in liquidation on pari passu basis by virtue of section 529A of the Companies Act. 26. In so far as the status of the State of Karnataka in relation to the claim under the provisions of the Central Sales Tax Act is concerned, the reasons which are already indicated above while considering the claim of the State of Maharashtra in relation to the provisions of the Central Sales Tax Act would apply proprio vigore. Even this claim of the State of Karnataka will have to be treated as claim of any other secured creditor of the Company in liquidation along with the workers and other secured creditors under section 529A of the Companies Act. 27. That takes me to the additional argument canvassed on behalf of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bench of the Apex Court. The Apex Court considered the provisions of section 11-AAAA of the Rajasthan Sales Tax Act, which is similar to the provisions of the Maharashtra Act. The Apex Court has observed that the State of Rajasthan will have first charge on the property in question and proceeded to answer the issue in favour of the State of Rajasthan. It is relevant to note that in paragraph 8 of this decision, the Apex Court went on to observe that even an earlier private mortgage cannot defeat the statutory right accrued to the State of Rajasthan of first charge in relation to the property in question. The observations made in paragraph 10 of this decision are also useful. It is not necessary to elaborate on this decision for the view that I have already taken that the provisions of the Maharashtra Act, as well as the Karnataka Act, render the status of State of Maharashtra, or, the State or Karnataka, as the case may be, as that of a "secured creditor" of the Company in liquidation. 29. Reliance was also placed on another decision of the Apex Court in the case of Board of Trustees, Port of Mumbai v. Indian Oil Corpn. [1998] 2 Comp. LJ 377. In this decision, the Court h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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