2011 (11) TMI 533
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.... SLP(C) No. 7642/2011. 5. Messrs Esskay Pharmaceuticals Limited is a company registered under the Companies Act. It falls within the definition of 'employer' under Section 2(e) of the EPF Act. On account of the company's failure to pay the dues under the EPF Act for the periods from March 1998 to May 1999 and June 1999 to August 2001, the competent authority passed two orders under Section 7A of the EPF Act and held that it was liable to pay Rs. 14,96,751/-. The company appears to have paid a sum of Rs. 4,02,126/-but did not pay the remaining amount despite the issue of demand notices dated 12.4.2001 and 19.4.2001 by the competent authority. The orders passed under Section 8F of the EPF Act, which were communicated to the bankers of the company also did not yield the desired result. The competent authority then issued warrant for attachment of the company's property. This was followed by sale notice dated 20.9.2001. 6. Although, it is not clear from the record as to what happened to the sale notice, but this much is evident that after 2 years and about 4 months, the Enforcement Officer informed the appellant that the Gujarat High Court has passed order dated 11.3.2004 for winding....
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.... any other provision of the Act or any other law for the time being in force". A true understanding of Section-529(A) would make clear that the provisions of Section-529(A) shall override the provisions contained in Section-530. Not only this, the provisions contained in Section-529(A) shall override the provisions contained in the ESI Act because the ESI Act is an Act of 1948, while the amendment in the Companies Act has been made in the year 1985 and with the fullest knowledge that it was to override the provisions contained in Section-530. If Section-94 of the ESI Act and Section-530 of the Companies Act are made subordinate to Section-529(A), then, Section-529(A) shall march over the rights of others to which the others are entitled either under the special laws or under Section-530 of the Companies Act. A combined/conjoint reading of Section-529(A) of the Companies Act would make clear that in a matter of winding up, the workmen's dues and the debts due to the secured creditors to the extent such debts rank under clause (c) of the proviso to Sub-section (l) of Section-529(A) pari passu with such dues, shall be paid in priority to all other debts. If such dues and debts are pai....
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....to the dues of the employees under the EPF Act. He further argued that the non obstante clause contained in the subsequent legislation, i.e. Section 529A(1) of the Companies Act would prevail over similar clause contained in the earlier legislation, i.e. Section 11(2) of the EPF Act. In support of this argument, Shri Agrawal relied upon the judgment of this Court in Maharashtra Tubes Ltd. v. State Industrial & Investment Corpn. of Maharashtra Ltd. [1993] 2 SCC 144. 13. We have considered the respective arguments. For deciding the question arising in these appeals, it will be useful to notice the relevant statutory provisions. The EPF Act 14. Section 11 (unamended) of the EPF Act was as under: "11. Priority of payment of contributions over other debts.-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 applies in respect of any contribution payable to the Fund, damages recoverable under Section 14-B, 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....
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....pril, 1980 to review the working of the Employees' Provident Funds Organisation and to suggest improvements. The Committee had made a number of recommendations involving amendment of the Act. The Central Board of Trustees, Employees' Provident Fund had also, from time to time, made certain recommendations for amendment of the Act. The Standing Labour Committee had at its meeting held in September, 1986 considered inter alia the question of enhancement of the rate of provident fund contribution and recommended suitable enhancement. 3. Based on the above recommendations, it is proposed to carry on certain amendments in the Act. Some of the more important amendments are:- (i) to (v)** ** ** (vi) a provision is being made for treating the entire amount of arrears of provident fund dues as first charge on the assets of an establishment in the event of its liquidation; ** ** **" 17. Section 11, as it stands after the amendment of 1988, reads as under: "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 ....
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....ebts. Section 11(1) relates to an employer who is adjudged insolvent or being a company against whom an order of winding up is made. It lays down that the amount due from the employer 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 Section 15(2) or any charges payable by him under any other provision of the Act or the Scheme or the Insurance Scheme shall 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. Section 11(2) contains a non obstante clause and lays down that if any amount is due from an employer whether in respect of the employee's contribution deducted from the wages of the employees or the employer's contribution, the same 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. To put it differently, sub-section (2) of Section 11 not only declares that the amount due from an employer towar....
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....n invisible but easily perceivable part of the capital of the company are not deprived of their legitimate right to participate in the produce of their labour and effort. It is accordingly proposed to amend Sections 529 and 530 of the Companies Act and also to incorporate a new section in the Act, namely, Section 529-A (vide clauses 4, 5 and 6 of the Bill)." 20. Sections 529(1) and (3) and 529A and the relevant parts of Section 530, as they stand after the 1985 amendments read as under: "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 creditor 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 s....
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....he winding up of a company- (a) workmen's dues; and (b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of section 529 pari passu with such dues, shall be paid in priority to all other debts. (2) The debts payable under clause (a) and clause (b) of sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions. 530. Preferential payments.-(1) In a winding up subject to the provisions of section 529A, there shall be paid in priority to all other debts- (a) all revenues taxes, cesses and rates due from the company to the Central or a State Government or to a local authority at the relevant date as defined in clause (c) of the sub-section (8), and having become due and payable within the twelve months next before that date; (b) all wages or salary (including wages payable for time or piece work and salary earned wholly or in part by way of commission) of any employee, in respect of services rendered to the company and due for a period not exceeding four months within the twelve months next before the relevant date subject to the limit spec....
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....en to the workmen's dues and debts due to secured creditors over all other dues. 22. The EPF Act is a social welfare legislation intended to protect the interest of a weaker section of the society, i.e. the workers employed in factories and other establishments, who have made significant contribution in economic growth of the country. The workers and other employees provide services of different kinds and ensure continuous production of goods, which are made available to the society at large. Therefore, a legislation made for their benefit must receive a liberal and purposive interpretation keeping in view the Directive Principles of State Policy contained in Articles 38 and 43 of the Constitution. In Organo Chemical Industries v. Union of India [1979] 4 SCC 573, this Court negatived challenge to the constitutionality of Section 14-B of the EPF Act. In the main judgment delivered by him, A.P. Sen, J. referred to the Statement of Objects and Reasons contained in the Bill presented before Parliament, which led to the enactment of Amendment Act No. 40/1973 and observed: "Each word, phrase or sentence is to be considered in the light of general purpose of the Act itself. A bare mecha....
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.... justice to the working class. It is intended to give social security to industrial workers at the end of their careers. The E.P.F. and M.P. Act requires every employer to deduct certain prescribed amounts from the wages payable to employees along with prescribed contribution by the employer and deposit such contributions in the Provident Fund. The Provident is administered by the Central and Regional Provident Fund Commissioners, who are statutory authorities. What is of importance to us is that section 11 of E.P.F. and M.P. Act, declares the priority of payment of contributions under the Act over other debts. Sub-section (1) of section 11 of E.P.F. and M.P. Act deals with the question of priority where an employer is adjudicated insolvent or being a company subjected to an order of winding up. Sub-section (2) of section 11 deals with other types of priorities and reads as under: '11(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 contribution, the amount so due shall be deemed to be the first charge on the assets of the est....
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....im for priority in the present proceedings had been alerted could not be upheld. (iii) The basic justification for the claim for priority of government debts rests on the well-recognised principle that the State is entitled to raise money by taxation, otherwise it will not be able to function as a sovereign Government at all. This consideration emphasises the necessity and wisdom of conceding to the State the right to claim priority in respect of its tax dues." [Emphasis supplied] 26. The ratio of the judgment in Builders Supply Corpn. case (supra) was applied to the cases in which statutory first charge was created in favour of the State in the matter of recovery of tax, penalty, interest etc. - State Bank of Bikaner & Jaipur v. National Iron and Steel Rolling Corpn. [1995] 2 SCC 19, Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. [2000] 5 SCC 694 and State of M.P. v. State Bank of Indore [2002] 10 SCC 441. In the last mentioned judgment, i.e. State Bank of Indore's case (supra), this Court considered the question whether statutory first charge created under Section 33-C of the M.P. General Sales Tax Act, 1958 would prevail over the bank's charge and held: "Section 33-C creates ....
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....of that sub-section, a secured creditor can enforce security interest without intervention of the court or tribunal and if the borrower has created any mortgage of the secured asset, the mortgagee or any person acting on his behalf cannot sell the mortgaged property or appoint a Receiver of the income of the mortgaged property or any part thereof in a manner which may defeat the right of the secured creditor to enforce security interest. This provision was enacted in the backdrop of Chapter VIII of the Narasimham Committee's Second Report in which specific reference was made to the provisions relating to mortgages under the Transfer of Property Act. In an apparent bid to overcome the likely difficulty faced by the secured creditor which may include a bank or a financial institution, Parliament incorporated the non obstante clause in Section 13 and gave primacy to the right of secured creditor vis-Ã-vis other mortgagees who could exercise rights under Section 69 or 69-A of the Transfer of Property Act. However, this primacy has not been extended to other provisions like Section 38-C of the Bombay Act and Section 26-B of the Kerala Act by which first charge has been created i....
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....ons or other secured creditors on the property of the borrower, then it would have incorporated a provision like Section 529-A of the Companies Act or Section 11(2) of the EPF Act and ensured that notwithstanding series of judicial pronouncements, dues of banks, financial institutions and other secured creditors should have priority over the State's statutory first charge in the matter of recovery of the dues of sales tax, etc. However, the fact of the matter is that no such provision has been incorporated in either of these enactments despite conferment of extraordinary power upon the secured creditors to take possession and dispose of the secured assets without the intervention of the court or Tribunal. The reason for this omission appears to be that the new legal regime envisages transfer of secured assets to private companies. The definition of "secured creditor" includes securitisation/ reconstruction company and any other trustee holding securities on behalf of bank/financial institution. The definition of "securitisation company" and "reconstruction company" in Sections 2(1)(za) and (v) shows that these companies may be private companies registered under the Companies Act, ....
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....vis-Ã-vis Section 38-C of the Bombay Act and Section 26-B of the Kerala Act and similar other State legislations only if there was a specific provision in the two enactments creating first charge in favour of the banks, financial institutions and other secured creditors but as Parliament has not made any such provision in either of the enactments, the first charge created by the State legislations on the property of the dealer or any other person, liable to pay sales tax, etc., cannot be destroyed by implication or inference, notwithstanding the fact that banks, etc. fall in the category of secured creditors." [Emphasis supplied] 29. In Maharashtra State Co-operative Bank Ltd.'s case (supra ), the Court was called upon to consider whether dues payable by the employer under Section 11 of the EPF Act will have priority over debts due to the bank. The facts of that case were that Kannad Sahakari Sakhar Karkhana Ltd. and Gangapur Sahakari Sakhar Karkhana Ltd. had pledged sugar bags in favour of the appellant bank as security for repayment of the loan and interest. The respondent initiated proceedings for recovery of the dues payable under the EPF Act. The appellant bank questio....
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....of secured creditor. 31. We may now notice some judgments which have bearing on the interpretation of Sections 529 or 529A of the Companies Act. The scope of proviso to sub-section (1) of Section 529 (as inserted by Amendment Act No.35 of 1985) was examined in UCO Bank's case (supra). The facts of that case were that in Company Petition No.27 of 1971, the learned Company Judge of the Bombay High Court made an order dated 15.11.1972 for winding up of M/s. Glass Carboys and Pressedwares Limited. The Official Liquidator took possession of the assets of the company. Appellant - UCO Bank, which was a secured creditor of the company obtained a decree on 22.4.1976 for recovery of its debt. Thereafter, the High Court's Commissioner for taking accounts was directed to sell certain movables of the company. In the meantime, the Companies Act was amended by Act No.35 of 1985 and Sections 529 and 530 were amended and Section 529A was inserted. It was argued on behalf of the appellant that the amendment was not applicable to its case because the decree had been passed before the amendment and being a secured creditor, it was entitled to realize its debt in priority to other dues. The learned Co....
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....iple equating the legitimate dues of the workmen with the debts of the secured creditors of the company. To achieve this purpose, it is necessary that the amended provision must apply to all available securities which form part of the assets of the company in liquidation on the date of the amendment. The conclusion reached by the Division Bench of the High Court is supported by this reason." [Emphasis supplied] 32. In Allahabad Bank's case (supra), a two-Judge Bench was called upon to consider the question whether an application can be filed under the Companies Act, 1956 during the pendency of proceedings under the DRT Act. The facts of that case show that Allahabad Bank filed an OA before the Delhi Bench of the DRT under Section 19. The same was decreed on 13.1.1998. The debtor company filed an appeal before DRAT, Allahabad. Canara Bank also filed application under Section 19 before DRT, Delhi. During the pendency of its application, Canara Bank filed an interlocutory application before the Recovery Officer for impleadment in the proceedings arising out of the OA filed by Allahabad Bank. That application was dismissed on 28.9.1998. In the auction conducted by the Recovery Officer....
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....ise their security. Inasmuch as Section 19(19) permits distribution to secured creditors only in accordance with Section 529-A, 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 529-A(1) but it is restricted only to the extent specified in clause (b) of Section 529-A(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." 33. The judgment in Allabahad Bank's case (supra) was distinguished by a two-Judge Bench judgment in ICICI Bank Ltd. v. SIDCO Leathers Ltd. [2006] 67 SCL 383 (SC). In that case, the appellant and Punjab National Bank had advanced loans to respondent No. 1 for setting up a plant for manufacture of leather boards and for providing working capital funds respectively. Respondent No.1 created first charge in favour of the appellant along with other financial in....
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....t the workers may not get anything after discharging the debts of the secured creditors. It is only with a view to bring the workmen's dues pari passu with the secured creditors, that Section 529-A was enacted. The non obstante nature of a provision although may be of wide amplitude, the interpretative process thereof must be kept confined to the legislative policy. Only because the dues of the workmen and the debts due to the secured creditors are treated pari passu with each other, the same by itself, in our considered view, would not lead to the conclusion that the concept of inter se priorities amongst the secured creditors had thereby been intended to be given a total go-by. A non obstante clause must be given effect to, to the extent Parliament intended and not beyond the same. Section 529-A of the Companies Act does not ex facie contain a provision (on the aspect of priority) amongst the secured creditors and, hence, it would not be proper to read there into things, which Parliament did not comprehend." 34. In A.P. State Financial Corpn.'s case (supra), the Court rejected the argument that the proceedings initiated by the Financial Corporation under Section 29 of the Sta....
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....ecurities forming part of the assets of the company in liquidation. However, the propositions laid down in these judgments are of little assistance in deciding the question raised in these appeals because in none of the cases the Court considered the so called conflict in the non obstante clauses contained in Section 11(2) of the EPF Act and Section 529A of the Companies Act. 36. The argument of Shri Gaurav Agrawal that the non obstante clause contained in the subsequent legislation, i.e. Section 529A(1) of the Companies Act should prevail over similar clause contained in an earlier legislation, i.e. Section 11(2) of the EPF Act sounds attractive, but if the two provisions are read in the light of the objects sought to be achieved by the legislature by enacting the same, it is not possible to agree with the learned counsel. As noted earlier, the object of the amendment made in the EPF Act by Act No.40 of 1973 was to treat the dues payable by the employer as first charge on the assets of the establishment and to ensure that the same are recovered in priority to other debts. As against this, the amendments made in the Companies Act in 1985 are intended to create a charge pari passu ....
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....nies Act, 1949 and the Displaced Persons (Debts Adjustment) Act, 1951. Both the enactments contained provisions giving overriding effect to the provisions of the enactment over any other law. After noticing the relevant provisions, the Court observed: "Each enactment being a special Act, the ordinary principle that a special law overrides a general law does not afford any clear solution in this case." "It is, therefore, desirable to determine the overriding effect of one or the other of the relevant provisions in these two Acts, in a given case, on much broader considerations of the purpose and policy underlying the two Acts and the clear intendment conveyed by the language of the relevant provisions therein." 40. In Kumaon Motor Owners' Union Ltd. v. State of Uttar Pradesh [1966] 2 SCR 121, there was conflict between the provisions contained in Rule 131(2) (g) and (i) of the Defence of India Rules, 1962 and Chapter IV-A of the Motor Vehicles Act, 1939. Section 68-B gave overriding effect to the provisions of Chapter IV-A of the Motor Vehicles Act whereas Section 43 of the Defence of India Act, 1962, gave overriding effect to the provisions contained in the Defence of India Rule....
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.... Parliament intended to create first charge in favour of the secured creditors and give priority to the debts due to secured creditors over the amount due from the employer under the EPF Act. 43. At the cost of repetition, we would emphasize that 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 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 (thi....