TMI Blog2011 (11) TMI 533X X X X Extracts X X X X X X X X Extracts X X X X ..... of secured creditors. 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. Priority given to the dues payable by an employer under Section 11 of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 is not subject to Section 529A of the Companies Act, 1956 in terms of which the workmen's dues and debts due to secured creditors are required to be paid in priority to all other debts - C.A. No. 9630, 9631, 9632, 9633 OF 2011(Arising out of S.L.P. (Civil) No. 7642 7644, 7645, 7646 of 2011 - - - Dated:- 8-11-2011 - G.S. SINGHVI AND H.L. DATTU, JJ. Ms. Aparna Bhat for the Appellant. Gaurav Agrawal for the Respondent. JUDGMENT G.S. Singhvi, J - Delay condoned. 2. Leave granted. 3. The question which arises for consideration in these appeals is whether priority given to the dues payable by an employer under Section 11 of the Employees' Provident Funds and Mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is plea that the amount due from the employer is first charge on the assets of the company and is payable in priority to all other dues. The Division Bench relied upon the judgment of the co-ordinate Bench and held that the learned Company Judge did not commit any error by dismissing the application filed by the appellant. 9. Since the impugned judgment and the order passed by the learned Company Judge are entirely based on the order passed by another Division Bench in Company Application No. 216/1997 in Company Petition No. 205/1996, it will be appropriate to notice the ratio of that order. The same is as under: "Section-530, Sub-section (1), clearly observes that in a winding up matter, subject to the provisions of Section-529(A), there shall be paid in priority to all other debts, dues of the Government, which are in the form of revenues, tax, etc. When Section-530 is made subordinate to Section-529(A), then, a Court is obliged to look into the material provisions as contained under Section-529(A). Section-529(A) clearly provides that notwithstanding anything contained in any other provision of the Companies Act or any other law for the time being in force, in the winding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ms. Aparna Bhat, learned counsel for the appellant relied upon the judgment in Maharashtra State Co-operative Bank Ltd. v. Assistant Provident Fund Commissioner [2009] 10 SCC 123 and argued that the impugned judgment and the order of the learned Company Judge are liable to be set aside because the High Court's interpretation of Section 11 of the EPF Act is contrary to the law laid down by this Court. She submitted that even though Section 529A of the Companies Act also contains a non obstante clause, the provisions contained therein cannot override Section 11(2) of the EPF Act in terms of which the amount due from an employer in respect of the employees contribution is treated as first charge on the assets of the company and is payable in priority to all other debts. Ms. Bhat further argued that the EPF Act is a special legislation for institution of various types of funds and the schemes and in view of the non obstante clause contained in Section 11(2), priority given to the dues payable by an employer will prevail over the priority given under Section 529A of the Companies Act to the workmen's dues and debts due to secured creditors. 12. Shri Gaurav Agrawal, learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or under Section 61 of the Provincial Insolvency Act, 1920 or under Section 230 of the Indian Companies Act, 1913, 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." 15. The EPF Act was amended by Act Nos. 40 of 1973, 19 of 1976 and 33 of 1988. By Act No. 40 of 1973, Section 11 was renumbered as Section 11(1) and a new sub-section was added as Section 11(2) and it was declared that any amount due from an employer in respect of the employees' contribution shall be deemed to be the first charge on the assets of the establishment and shall be paid in priority to all other debts. The scope of Section 11(2) was enlarged by Act No. 33 of 1988 by including the employer's contribution. 16. The background in which Amendment Act No.33 of 1988 was passed is discernible from the Statement of Objects and Reasons appended to the Employees' Provident Funds and Miscellaneous Provisions (Amendment) Bill, 1988, the relevant portions of which are extracted below: "The Employees' Provident Funds and Miscellaneous Provisions Act, 1952 provides for the institution of Compulsory Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion payable by him towards the 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 this Act, or under any of the conditions specified under section 17, shall, where the liability therefore 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. Explanation. - In this sub-section and in section 17, "insurance fund" means any fund established by an employer under any scheme for providing benefits in the nature of life insurance to employees, whether linked to their deposits in provident fund or not, without payment by the employees of any separate contribution or premium in that behalf. (2) Without prejudice to the provisions of sub-se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company. This is subject to the rider that in the case of insolvent companies, law of insolvency will be applicable in accordance with the provisions of the Companies Act. Section 529 deals with application of insolvency rules in winding up of insolvent companies. Section 530, as it existed prior to the amendment of the Companies Act by Act No.35 of 1985, gave priority to revenue of the State and local authorities and various amounts payable to employees including the dues payable from a provident fund, a pension fund, a gratuity fund or any other fund maintained by the company for the welfare of the employees. By the Companies (Amendment) Act No.35 of 1985, proviso was added to Section 529(1). By the same amendment, Sections 529(3) and 529A were inserted in the Companies Act. Simultaneously, the expression "subject to the provisions of Section 529A" was inserted in Section 530(1). Paragraph 2 of the Statement of Objects and Reasons contained in the Companies (Amendment) Bill, 1985 reads as under: "2. Another announcement made by the Finance Minister in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this section, section 529A and section 530, ( a ) "workmen", in relation to a company, means the employees of the company, being workmen within the meaning of the Industrial Disputes Act, 1947 (14 of 1947); ( b ) "workmen's dues", in relation to a company, means the aggregate of the following sums due from the company to its workmen, namely:- ( i ) 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 workman, in respect of services rendered to the company and any compensation payable to any workman under any of the provisions of the Industrial Disputes Act, 1947 (14 of 1947); ( ii ) all accrued holiday remuneration becoming payable to any workman, 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; ( iii ) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n winding up proceedings. The object of this amendment is to place the legitimate dues of workers at par with those of secured creditors. This is also a legislative recognition of the fact that the workmen contribute to the growth of the capital and industry and in the event of winding up of the company, they are entitled to get their legitimate share in the assets of the company by being treated at par with other secured creditors. With the insertion of Section 529(3)( a ), the definition of the term 'workmen' contained in the Industrial Disputes Act, 1947 has been incorporated in the Companies Act for the purposes of Sections 529, 529A and 530. The expression "workmen's dues" has been defined in Section 529(3)( b ) to mean 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 workman in respect of services rendered to the company and any compensation payable to any workman under the Industrial Disputes Act, 1947, all accrued holiday remuneration payable to any workman, or in the case of his death to any other person in his right upon the termination of his employment before the passing of winding up orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting, by deducting from the workers' wages, completing it with his own equal share and duly making over the gross sums to the Fund. If the employer neglects to remit or diverts the moneys for alien purposes the Fund gets dry and the retirees are denied the meagre support when they most need it. This prospect of destitution demoralises the working class and frustrates the hopes of the community itself. The whole project gets stultified if employers thwart contributory responsibility and this wider fall-out must colour the concept of 'damages' when the court seeks to define its content in the special setting of the Act. For, judicial interpretation must further the purpose of a statute. In a different context and considering a fundamental treaty, the European Court of Human Rights, in the Sunday Times Case, observed: The Court must interpret them in a way that reconciles them as far as possible and is most appropriate in order to realise the aim and achieve the object of the treaty. A policy-oriented interpretation, when a welfare legislation falls for determination, especially in the context of a developing country, is sanctioned by principle and precedent and is implicit in Art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n force, such debt shall be paid in priority to all other debts. Both these provisions bring out the intention of Parliament to ensure the social benefit as contained in the legislation. There are other provisions in the Act rendering the amounts of Provident Fund payable immune from attachment of Civil Court's decree, which also indicate such intention of Parliament." 24. The ratio of the afore-mentioned judgment has been noticed in Central Bank of India v. State of Kerala [2009] 4 SCC 94 and Maharashtra State Cooperative Bank Ltd.'s ( supra ). 25. The nature of priority given to the taxes payable to the State over other debts was considered by the Constitution Bench in Builders Supply Corpn. v. Union of India [1965] 56 ITR 91 (SC). After noticing the judgments of the Bombay and Madras High Courts, the Constitution Bench held: "( i ) The common law doctrine of the priority of Crown debts had a wide sweep but the question in the present appeal was the narrow one whether the Union of India was entitled to claim that the recovery of the amount of tax due to it from a citizen must take precedence and priority over unsecured debts due from the said citizen to his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat were then in force and gave sales tax dues precedence over them." [Emphasis supplied] 27. At this juncture, it will be apposite to mention that the nature of statutory first charge and the rule of priority of the State's dues were considered in Builders Supply Corpn. case ( supra ), State Bank of Bikaner Jaipur's case ( supra ), Dena Bank's case ( supra ) and State Bank of Indore's case ( supra ) in the context of contra claim made by unsecured creditors. The question whether first charge created by taxing statutes enacted by State legislatures will prevail over the debts due to secured creditors was considered by a three Judge Bench in Central Bank of India's case ( supra ) and answered in affirmative. In that case, this Court was called upon to consider whether the first charge created on the property of the dealer by the legislations enacted by State legislatures for levy and collection of sales tax would prevail over the debts due to banks, financial institutions and other secured creditors, which could be recovered under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and/or the Securitisation and Reconstruction of Financial Assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting 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- -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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose sought to be achieved by their enactment, it becomes clear that the two legislations, are intended to create a new dispensation for expeditious recovery of dues of banks, financial institutions and secured creditors and adjudication of the grievance made by any aggrieved person qua the procedure adopted by the banks, financial institutions and other secured creditors, but the provisions contained therein cannot be read as creating first charge in favour of banks, etc. If Parliament intended to give priority to the dues of banks, financial institutions and other secured creditors over the first charge created under State legislations then provisions similar to those contained in Section 14-A of the Workmen's Compensation Act, 1923, Section 11(2) of the EPF Act, Section 74(1) of the Estate Duty Act, 1953, Section 25(2) of the Mines and Minerals (Regulation and Development) Act, 1957, Section 30 of the Gift Tax Act, and Section 529-A of the Companies Act, 1956 would have been incorporated in the DRT Act and the Securitisation Act. Undisputedly, the two enactments do not contain provision similar to the Workmen's Compensation Act, etc. In the absence of any specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereinabove as also the judgments in UCO Bank v. Official Liquidator, High Court of Bombay [1994] 2 SCL 276 (SC), A.P. State Financial Corpn. v. Official Liquidator [2000] 7 SCC 291, Textile Labour Association v. Official Liquidator [2004] 51 SCL 791 (SC) and held: "The priority given to the dues of provident fund, etc. in Section 11 is not hedged with any limitation or condition. Rather, a bare reading of the section makes it clear that the amount due is required to be paid in priority to all other debts. Any doubt on the width and scope of Section 11 qua other debts is removed by the use of expression "all other debts" in both the sub-sections. This would mean that the priority clause enshrined in Section 11 will operate against statutory as well as non-statutory and secured as well as unsecured debts including a mortgage or pledge. Sub-section (2) was designedly inserted in the Act for ensuring that the provident fund dues of the workers are not defeated by prior claims of secured or unsecured creditors. This is the reason why the legislature took care to declare that irrespective of time when a debt is created in respect of the assets of the establishment, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that "the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen". The effect of the proviso is to create, by statute, a charge pari passu in favour of the workmen on every security available to the secured creditors of the employer company for recovery of their debts at the time when the amendment came into force. This expression is wide enough to apply to the security of every secured creditor which remained unrealised on the date of the amendment. The clear object of the amendment is that the legitimate dues of workers must rank pari passu with those of secured creditors and above even the dues of the Government. This literal construction of the proviso is in consonance with, and promotes, the avowed object of the amendment made. On the contrary, the construction of the proviso suggested by the learned counsel for the appellant, apart from being in conflict with the plain language of the proviso also defeats the object of the legislation. A debt due to a secured creditor, when recovered by realisation of the security after commencement of the winding up proceedings, results in depletion of the assets in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 442 and 537 of the Companies Act for stay of the proceedings of Recovery Case No. 9 of 1998 instituted by Allahabad Bank. By an order dated 9.3.1999, the learned Company Judge stayed further sale of the assets of the company. The Allahabad Bank challenged the order of the learned Company Judge and pleaded that in view of the amendment made in Section 19(19) of the DRT Act, Section 529A is attracted for a limited purpose, i.e. recovery of the dues of workmen. While dealing with this plea, the Court observed as under: "The respondent's contention that Section 19(19) gives priority to all 'secured creditors' to share in the sale proceeds before the Tribunal/ Recovery Officer cannot, in our opinion, be accepted. The said words are qualified by the words 'in accordance with the provision of Section 529-A'. Hence, it is necessary to identify the above limited class of secured creditors who have priority over all others in accordance with Section 529-A. 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 first category of secured creditors mentioned above are those who go before the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to and subservient to charges in favour of IFCI, IDBI and ICICI. On an application filed by respondent No.1, the Allahabad High Court passed winding up order and appointed Official Liquidator. Thereafter, the appellant filed a suit for recovery of the amount credited to respondent. In due course, the suit was transferred to Debts Recovery Tribunal, Bombay. During the pendency of the proceedings before the Tribunal, the Official Liquidator was granted permission to continue the proceedings of the suit. Civil Judge, Fatehpur before whom the suit was pending, ordered sale of the assets of the company. At that stage, the appellants, IFCI and IDBI jointly filed an application before the Company Judge for considering their claim on pro rata basis and also for exclusion of the claim of the Punjab National Bank. The learned Company Judge accepted the first prayer of the appellant but rejected 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 Section 529A of the Companies Act. On further appeal, this Court distinguished the judgment in Allahabad Bank's case ( supra ) by relying up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oost up industrialisation and also recovery of such financial assistance if it becomes bad and similarly the Companies Act deals with companies including winding up of such companies. The proviso to sub-section (1) of Section 529 and Section 529-A being a subsequent enactment, the non obstante clause in Section 529-A prevails over Section 29 of the Act of 1951 in view of the settled position of law . We are, therefore, of the opinion that the above proviso to sub-section (1) of Section 529 and Section 529-A will control Section 29 of the Act of 1951. In other words the statutory right to sell the property under Section 29 of the Act of 1951 has to be exercised with the rights of pari passu charge to the workmen created by the proviso to Section 529 of the Companies Act. Under the proviso to sub-section (1) of Section 529, the liquidator shall be entitled to represent the workmen and force ( sic enforce) the above pari passu charge. Therefore, the Company Court was fully justified in imposing the above conditions to enable the Official Liquidator to discharge his function properly under the supervision of the Company Court as the new Section 529-A of the Companies Act confe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wanted to create first charge in respect of the workmen's dues, as defined in Sections 529(3)( b ) and 529A and debts due to the secured creditors. 37. It is a well recognized rule of interpretation that every part of the statute must be interpreted keeping in view the context in which it appears and the purpose of legislation. In RBI v. Peerless General Finance Investment Co. Ltd. [1987] 1 SCC 424, Chinnappa Reddy, J. highlighted the importance of the rule of contextual interpretation in the following words : "Interpretation must depend on the text and the context. They are the bases of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first as a whole and then section by section, clause by clause, phrase by phrase and word by word. If a statute is looked at, in the context of its enactment, with the glasses of the statute-maker, provided by such context, its scheme, the sections, claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This Court also looked into object behind the two statutes, namely, Defence of India Act and Motor Vehicles Act and on that basis also it was held that the provisions contained in the Defence of India Rules would have an overriding effect over the provisions of the Motor Vehicles Act. 41. In Ashoka Marketing Limited v. Punjab National Bank 1991 AIR SC 855, the Constitution Bench considered some of the precedents on the interpretation of statutes and observed : "The principle which emerges from these decisions is that in the case of inconsistency between the provisions of two enactments, both of which can be regarded as special in nature, the conflict has to be resolved by reference to the purpose and policy underlying the two enactments and the clear intendment conveyed by the language of the relevant provisions therein." [Emphasis supplied] 42. It is also important to bear in mind that even before the insertion of proviso to Sections 529(1), 529(3) and Section 529A and amendment of Section 530(1), all sums due to any employee from a provident fund, a pension fund, a gratuity fund or any other fund established for welfare of the employees were payable in priority to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ope 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. 44. In view of what we have observed above on the interpretation of Section 11 of the EPF Act and Sections 529, 529A and 530 of the Companies Act, the judgment of the Division Bench of the Gujarat High Court, which turned on the interpretation of Section 94 of the Employees' State Insurance Act and Sections 529A and 530 of the Companies Act and on which reliance has been placed by the learned Company Judge and the Division Bench of the High Court while dismissing the applications filed by the appellant, cannot be treated as laying down the correct law. 45. In the result, the appeals are allowed. The impugned judgment a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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