Tax Management India. Com
Law and Practice  :  Digital eBook
Research is most exciting & rewarding


  TMI - Tax Management India. Com
Follow us:
  Facebook   Twitter   Linkedin   Telegram

TMI Blog

Home

2017 (3) TMI 487

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ead of deciding to stand outside preferred to go before the Company Court for decision, it would become necessary to relinquish its security in accordance with Insolvency Rules mentioned in Section 529. The petitioner is a Secured Creditor in accordance with IInd clause u/s 529-A(i) (b) read with proviso (c) to Section 529 (I) having overriding preferential claim and opts to stand outside winding up to realize its security. In view of clause (c) to the proviso to Section 529 (I) the priority of the Secured Creditor who stand outside the winding up is confined to workmens portion as defined in Section 529 (iii) (c). The petitioner who stands outside the winding up proceedings in view of provisions of Section 529-A can surely have priority over the claim of the State in respect of statutory dues. The petitioner bank has a priority claim over the statutory dues claimed by respondent no.1. - petition allowed - decided in favor of petitioner. - WRIT PETITION No. 1796 OF 2015 - - - Dated:- 7-3-2017 - R.M. BORDE A.S. GADKARI, JJ. Mr. Venkatesh Dhond, Senior Counsel a/with Mr. Rohit Gupta and Mr. Nikhil Rajani i/by V. Deshpande and Co. for the petitioner. Mrs. Jyoti C .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... , 2011 in two news papers on 23rd December, 2011. The petitioner received a copy of the Prohibitory Order issued by respondent No.1 to Respondent No.2 Company under Section 38 of the Maharashtra Value Added Tax Act, 2002 (for short, MVAT Act, 2002) restraining it from transferring and/or alienating any of the assets of the Company. There was no demand made by Respondent No.1 in respect of the taxes in the notice. 5) Petitioner No.1 through its authorized officer took over physical possession of the property and thereafter in observance of the SARFAESI Act, said property was put to public auction and sale under sale notices dated 19th and 20th June, 2012. The auction sale was conducted on 8th February, 2013 and one M/s Vinals Precisions Pvt. Ltd., being the highest bidder for an amount of ₹ 3,25,25,000/-the property was sold in its favour. A sale certificate came to be issued on 18th March, 2013 in favour of the auction purchaser. 6) The petitioner thereafter on 22nd July, 2013 received a notice under Section 38 of the MVAT Act, 2002 issued to Respondent No.2 Company a copy of which was marked to the petitioner calling upon the petitioner to intimate respondent No.1 .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... erein. 10) The contentions raised in the petition and the relief claimed is strenuously resisted on behalf of the respondent- State. It is contended that in view of the provisions of Section 37 of the MVAT Act, 2002, the State has the first charge on the property belonging to respondent No.2 in preference to the claim of the petitioner bank. It is contended that in the matter of Thane Janta Sahakari Bank Ltd. Vs. Commissioner of Sales Tax Ors reported in 148 STC 32, (Writ petition No. 6383 of 2005 decided on 18th April, 2006) it has been held that Section 35 of the SARFAESI Act has no effect whatsoever in operation of Section 38C of the Bombay Sales Tax Act, 1959. Section 35 of the SARFAESI Act, 2002 does not override Section 38C of the Bombay Sales Tax Act, 1959 and, therefore, based on Section 35 of the SARFAESI Act, the bank shall not have precedence or for that matter priority over the statutory first charge under Section 38C of the Bombay Sales Tax Act, 1959. Rather the statutory first charge under Section 38C of the Bombay Sales Tax Act has precedence over the bank's charge based on contract. The judgment of the Division Bench of this Court was carried in .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... t or after completion thereof, created a charge on or parted with possession by any mode of transfer including sale, mortgage, gift or exchange of any of his assets in favour of any other person and the Commissioner, is of the opinion that such charge or transfer becomes void under sub-section (1), then the Commissioner shall issue a notice and hold enquiry and decide whether the charge or transfer became void under sub-section (1). (3) If, after holding such enquiry the Commissioner is satisfied that the charge or transfer is void, he shall make an order declaring such charge or transfer to be void for the purposes of this Act. Explanation: In this section, assets include land, building, machinery, plant, shares, securities and fixed deposits in banks, to the extent to which any of the assets aforesaid does not form part of the stock-in-trade of the business of the assessee. __ Section 38-C of the Bombay Sales Tax Act,1959 is pari-materia to Section 37 of MVAT Act, 2002. Section 529A and Section 530 of the Companies Act, 1956 read thus : Section 529A. :- Overriding preferential payment. - Notwithstanding anything contained in any other p .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... due in respect of any compensation or liability for compensation under the said Act in respect of the death or disablement of any employee of the company; (f) all sums due to any employee from a provident fund, a pension fund a gratuity fund- or any other fund for the welfare of the employees, maintained by the company; and (g) the expenses of any investigation held in pursuance of section 235 or 237, in so far as they are payable by the company. (2) The sum to which priority is to be given under clause (b) of sub-section (1), shall not, in the case of any one claimant, [exceed such sum as may be notified by the Central Government in the Official Gazette]. (3) Where any compensation under the Workmen's Compensation Act, 1923 (8 of 1923), is a weekly payment, the amount due in respect thereof shall, for the purposes of clause (e) of sub-section (1), be taken to be the amount of the lump sum for which the weekly payment could, if redeemable, be redeemed if the employer made an application for that purpose under the said Act. (4) Where any payment has been made to any employee of a company,-- (i) on account of wages or salary; or ( .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... tment (including any order made or direction given under any enactment), are payable on account of the remuneration which would, in the ordinary course, have become payable to him in respect of a period of holiday, had his employment with the company continued until he became entitled to be allowed the holiday. (bb) [the expression employee does not include a workman;] and] (c) the expression the relevant date means- (i) in the case of a company ordered to be wound up compulsorily, the date of the appointment (or first - appointment) of a provisional liquidator, or if no such appointment was made, the date of the winding up order, unless in either case the company had commenced to be wound up voluntarily before that date; and (ii) in any case where sub-clause (i) does not apply, the date of the passing of the resolution for the voluntary winding up of the company. (9) This section shall not apply in the case of a winding up where the date referred to in sub- section (5) of section 230 of the Indian Companies Act, 1913, (7 of 1913.) occurred before the commencement of this Act, and in such a case, the provisions relating to preferential payment .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... on judgment in the matter of Central Bank of India v. State of Kerala reported in (2009) 4 SCC 94 and in paragraph 158 of the judgment observed that, the DRT Act and the Securitisation Act do not create first charge in favour of banks, financial institutions and other secured creditors and the provisions contained in Section 38-C of the Bombay Act and Section 26-B of the Kerala Act are not inconsistent with the provisions of the DRT Act and the Securitisation Act so as to attract non obstante clauses contained in Section 34 (1) of the DRT Act or Section 35 of the Securitisation Act. It would be relevant to refer to paragraphs 114 to 116 of the Judgment, which read thus : 114. By enacting 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- a-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 wit .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... dia vs. State of Kerala, the Apex Court has observed thus : 126. While enacting the DRT Act and the Securitisation Act, Parliament was aware of the law laid down by this Court wherein priority of the State dues was recognised. If Parliament intended to create first charge in favour of banks, financial institutions 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. 16) .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... and D.R.T. Act, the provisions of Section 38C apply. The Court held that the provisions of the Securitisation Act do not create any first charge in favour of the Banks and financial institutions. In other words, the Securitisation Act does not have any provisions which will displace operation of the provisions of Section 38C of the Bombay Sales Tax Act. The Division Bench, thereafter, held that because Section 38C operates, the amount of sales-tax is elevated to the level of dues of land revenue and therefore under the Maharashtra Revenue Code it becomes paramount charge. The Division Bench in this case was not considering the case, where Section 38C does not operate. So far as the judgment of the Supreme Court in Central bank of India is concerned, there also the Supreme Court was considering the provisions of the Securitisation Act visa- vis the provisions of Section 38C of the Bombay Sales Tax Act and other para meteria provisions. In our opinion, paragraph 148 of that judgment makes the position clear. 148. After decree of the suit, the appellant along with IFCI and IDBI filed an application before the Company Judge for consideration of their claim on pro rata basis an .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... se must be given effect to, to the extent Parliament intended and not beyond the same. 38. Section 529A 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. 12. The above observations make it clear that by operation of Section 529A, priority is given to the dues of the secured creditors and workers over State first statutory charge. In this view of the matter, therefore, in our opinion, the learned single Judge was not justified in holding that dues of the State Government are recoverable pari passu with the dues of the Appellant. 17) It is, thus, clear that in view of provisions of Section 529A of the Companies Act, priority is given to the dues of the secured creditor and the workers over the statutory charge claimed by the State. The Judgment delivered by the Division Bench of this Court in the matter of SICOM Ltd. was subject to challenge by the State before the Supreme Court in Special Leave to Appeal (CC 1965/2011) decided on 4th March, 2011. The Hon'ble Apex Court while dismissing the .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... preme Court in the matter of Allahabad Bank Vs. Canara Bank Ors (2000) 4 SCC 406. The Supreme Court has observed in paragraph 62 of the Judgment in the matter of Allahabad Bank's case that the 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 observations made in paragraphs 63 to 65 are relevant for the purposes those are as below : 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, the Canara Bank has not made it clear whether it wants to come und .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... fore the Company Court for decision, it would become necessary to relinquish its security in accordance with Insolvency Rules mentioned in Section 529. The petitioner is a Secured Creditor in accordance with IInd clause under Section 529-A(i) (b) read with proviso (c) to Section 529 (I) having overriding preferential claim and opts to stand outside winding up to realize its security. In view of clause (c) to the proviso to Section 529 (I) the priority of the Secured Creditor who stand outside the winding up is confined to workmens portion as defined in Section 529 (iii) (c). The petitioner who stands outside the winding up proceedings in view of provisions of Section 529-A can surely have priority over the claim of the State in respect of statutory dues. In the matter of Pegasus Assets Reconstruction Pvt. Ltd. Vs. Haryana Concast Ltd Anr reported in (2016) 4 SCC 47 the Hon'ble Supreme Court considered the provisions of Section 529-A together with 529 of the Companies Act and the aspect of overriding effect of the provisions of Section 529-A concerning liability of the workmen of the Company. 20) The main question of law framed for consideration in the matter of Pegas .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... hile inserting Section 529A through Amendment Act 35 of 1985, effective from 24.5.1985 and with the aid of a non obstante clause in sub-section (1) of Section 529A workmen's dues were given preference over other dues and made to stand pari passu with dues of the secured creditors, in case of apparent conflict, this Court through various judgments has upheld the proceedings under the RDB Act as it happens to be a later Act with overriding effect over other laws. The interest of the workmen in respect of dues payable to them as per Section 529 and 529A of the Companies Act has been protected by permitting, wherever necessary, association of the Official Liquidator with the proceedings before the Debts Recovery Tribunal under the RDB Act. In our considered judgment, the same view is required to be taken in context of SARFAESI Act also, for the additional reason that Section 13 requires notice to the borrower at various stages which in the case of a company under winding up being a borrower would mean requirement of notice to the Official Liquidator. The Security Interest (Enforcement) Rules, 2002 (for brevity, 'the Rules') framed under the provisions of the SARFAESI Act al .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... .44 of 2016 thereby introducing section 26E providing for priority to secured creditor over all other debts and all taxes, cess and other rates payable to Central Government or the State Government or the Local Authority. The applicability of provisions of Section 31-B of RDB Act which is pari materia to Section 26E of the SARFAESI Act was subject matter for consideration before the Full Bench of the Madras High Court in the matter of Assistant Commissioner (CT) Chennai vs. the Indian Overseas Bank decided on 11.11.2016 and the Full Bench has observed in paragraph 4 of the Judgment that the law having now been come into force naturally it would govern the rights of the parties in respect of even lis pendence We do not propose to analyse the Full Bench judgment delivered by the Madras High Court. 23) However, for the reasons recorded in the foregoing paragraphs of the instant judgment, we are of the opinion that the petitioner bank has a priority claim over the statutory dues claimed by respondent no.1. 24) The impugned notices dated 12th August, 2013 and 19th September, 2013 deserve to be quashed and set aside and those are accordingly quashed and set aside. As .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

 

 

 

 

Quick Updates:Latest Updates