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2017 (3) TMI 487 - BOMBAY HIGH COURT

2017 (3) TMI 487 - BOMBAY HIGH COURT - TMI - Recovery of tax dues under MVAT - priority of banks over statutory dues - The petitioner bank extended the financial assistance to the respondent No.2 - Company and in order to secure the finances the Company mortgaged its immovable property as well as hypothecated its assets in favour of petitioner-bank - default in repayment of loan - auction sale - The petitioner contends that the petitioner bank being a secured creditor has preferential claim over .....

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for the petitioner to stand outside the winding up proceedings and claim enforcement of its Security Interest. If the petitioner instead 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 .....

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utory 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 Chavan, AGP for Respondent No.1. None for Respondent No.2. JUDGMENT (PER : R.M. BORDE, J) 1) The petitioner Axis bank Ltd., is seeking qu .....

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ing to the petitioner, one M/s. Jay Mechanical Pvt. Ltd., (represented by the Official Liquidator, in the instant petition as respondent No.2), approached the petitioner in the year 2008 with a request to extend financial assistance. The petitioner bank extended the financial assistance to the respondent No.2 - Company and in order to secure the finances the Company mortgaged its immovable property as well as hypothecated its assets in favour of petitioner-bank. The respondent No.1 Company defau .....

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he date of the notice. In addition to the initiation of proceedings under the provisions of SARFAESI Act, 2002, the Bank has also presented proceedings before the Debt Recovery Tribunal (DRT) under Section 19 of the Recovery of Debts due to Banks Act, 1993 (for short, RDDB Act,1993 ). The amount claimed in the Original Application No. 464 of 2013 by the petitioner Bank as against the Respondent No.2 Company is to the tune of ₹ 2,81,43,918.17 ps. 4) The Company failed to honour t .....

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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 .....

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undertaken by the said Company. The petitioner received two notices issued by respondent No.1 on 12th August, 2013 and 19th September, 2013 respectively calling upon the petitioner to deposit an amount of ₹ 46,49,317/- with the respondent No.1. 7) The petitioner contends that the petitioner bank being a secured creditor has preferential claim over the secured assets and is entitled to take appropriate steps for realization of the amount due and recoverable from Respondent No.2 .....

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o all other debts. Where a secured creditor, instead of relinquishing his security and proving his debt, opts to realize his security interest such dues shall be paid in priority to all other debts. 8) It is contended that the respondent No.2 company is under liquidation and an application was moved to the Company Court in Company Petition No. 340 of 2011 and the Company was ordered to be wound up by an order dated 19th November, 2014 and an Official Liquidator came to be appointed. I .....

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he SARFAESI Act, 2002. It is also contended that since the lis is pending provisions of Section 26-E (inserted by Act 44 of 2016) shall apply and the petitioner shall have priority claim over the claim of the respondent-State. In short, it is contended that Section 26-E of the SARFAESI Act, 2002 is in the nature of a statutory recognition of priority claim of the secured creditor i.e. the petitioner herein. 10) The contentions raised in the petition and the relief claimed is strenuous .....

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I 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 prece .....

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Bombay Sales Tax Act, 1959. It is further contended that the petitioner was aware of the Sales Tax proceedings and the Salex Tax demand before the property was attached and sold in auction. 11) It would be appropriate to refer to Section 37 and 38 of the MVAT Act, 2002. The relevant provisions are quoted below :- 37. Liability under this Act to be the first charge - Notwithstanding anything contained in any contract to the contrary, but subject to any provision .....

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iability of the dealer to pay tax or any other sum payable under this Act, is likely to be in excess of rupees twenty-five thousand and the dealer] creates a charge on, or parts with the possession by any mode of transfer whatsoever, including sale, mortgage, gift or exchange of any of the assets of his business valued at rupees ten thousand or more in favour of any other person with intent to defraud revenue, then, notwithstanding anything contained in any Act or contract to the contrary such c .....

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pendency of any proceeding under this Act 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, aft .....

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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 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 clau .....

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) 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 subsection (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 .....

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with another company, all amounts due, in respect of contributions payable during the twelve months next before the relevant date, by the company as the employer of any persons, under the Employees' State Insurance Act, 1948 (34 of 1948), or any other law for the time being in force; (e) 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 .....

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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), .....

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ight, on account of accrued holiday remuneration, out of money advanced by some person for that purpose, the person by whom the money was advanced shall, in a winding up, have a right of priority in respect of the money so advanced and paid, up to the amount by which the sum in respect of which the employee or other person in his right, would have been entitled to priority in the winding up has been diminished by reason of the payment having been made. (5) The foregoing debts shall-

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Subject to the retention of such sums as may be necessary for the costs and expenses of the winding up, the foregoing debts shall be discharged forthwith so far as the assets are sufficient to meet them, and in the case of the debts to which priority is given by clause (d) of sub- section (1), formal proof thereof shall not be required except in so far as may be otherwise prescribed. (7) In the event of a landlord or other person distraining or having distrained on any goods or effect .....

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espect of a period of holiday or of absence from work through sickness or other good cause shall be deemed to be wages in respect of services rendered to the company during that period; (b) the expression" accrued holiday remuneration" includes, in relation to any person, all sums which, by virtue either of his contract of employment or of any enactment (including any order made or direction given under any enactment), are payable on account of the remuneration which would, .....

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ppointment 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 befor .....

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2-company with the petitioner bank. There is also apparently no controversy that the notice is issued under Section 38 of the MVAT Act and Respondent No.1 claimed tax liability against respondent No.2 Company to the tune of ₹ 42,49,317/-. The respondent placing reliance on the judgment in the matter of Thane Janata Sahakari Bank Ltd Vs. The Commissioner of Sales Tax (Writ Petition No. 6383 of 2005) decided on 18th April, 2006, has strenuously contended that Section 35 of the SARFAESI Act, .....

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2002, being the Central Act, must prevail. (i) Even otherwise SARFAESI Act being the later enactment having been enacted in the year 2002 must prevail over the Bombay Sales Tax Act,1959 and under Section 169 of the Maharashtra Land Revenue Code, 1966 the State Government can claim priority over the unsecured debts but the bank being the secured creditor, the bank has first and exclusive charge over the properties of the Company and has priority over the sales tax dues. The Division B .....

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t delivered the common 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 att .....

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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 in .....

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and are disposed of by the secured creditors in accordance with Section 13 thereof. 116. The non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act give overriding effect to the provisions of those Acts only if there is anything inconsistent contained in any other law or instrument having effect by virtue of any other law. In other words, if there is no provision in the other enactments which are inconsistent with the DRT Act or the Sec .....

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y other person liable to pay sales tax, etc. but also give them overriding effect over other laws. 15) The Hon'ble Apex Court has taken note of the provisions of Section 529-A of the Companies Act, 1956 in respect of Company in liquidation and has observed that the legislator has insured the priority given to the claim of the workers vis-a-vis secured creditors like banks. Section 529-A (b) refers to debts due to secured creditors and such claim is parri passu with such dues like .....

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rs 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 .....

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l have to be considered in preference to the decision in the matter of Allahabad Bank Vs. Canara Bank & Ors (2000) 4 SCC 406. In the instant matter, the question is not simplicitor relating to priority of claims based on appreciation of Section 37 of the MVAT Act and Section 35 of the SARFAESI Act. However, distinguishing feature is that the Respondent company is under liquidation and as such provisions of Section 35 of the SARFAESI Act are attracted which lends precedence to the claim of a .....

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n 38C of the Bombay Sales Tax Act statutorily the State Government becomes a secured creditor and therefore is entitled to payment of its dues along with secured creditor and the workers. The contention raised by the State Government was upheld by the learned Single Judge relying upon the judgment of the Supreme Court in the matter of Central Bank of India v. State of Kerala & Ors (2009) 4 SCC 94. The appellants before the Division Bench were covered by the provisions of Section 529A and 530 .....

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Ltd's case, in that case the Court was not considering the situation whether the provisions of Section 529A of the Companies Act operate. The Division Bench in that case was considering the question whether in view of the provisions of the Securitisation Act 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 d .....

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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 and also for exclusion of the claim .....

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ld : 32. 'Allahabad Bank' therefore, is not an authority for the proposition that in terms of Section 529A of the Companies Act the distinction between two classes of secured creditors does no longer survive. The High Court, thus, in our considered opinion, was not correct in that behalf. 33. In fact in Allhabad Bank it was categorically held that the adjudication officer would have such powers to distribute the sale proceeds to the banks and financial in .....

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es of the workmen were not treated pari passu with the secured creditors as a result whereof innumerable instances came to the notice of the Court that 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 529A was enacted. 36. The non obstante nature of a provision although may be of wide amplitude, the interpretative process thereof must be kept .....

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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 j .....

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Appeal (CC 1965/2011) decided on 4th March, 2011. The Hon'ble Apex Court while dismissing the Special Leave Petition has observed thus : We have heard learned counsel for the petitioner and perused the record. In Central bank of India vs. State of Kerala (2009) 4 SCC 94, this Court interpreted Section 38-C of the 1959 Act and similar provisions contained in Sales Tax Legislations of other States and held that the first charge created by the legislator will prevail over .....

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the ratio of the judgment of Division Bench of the Kerala High Court in Recovery Officer as Assistant Provident Fund Commissioner vs. Kerala Financial Corporation ILR (2002) 3 Ker 4, which held that the primacy of the first charge created under Section 11(2) of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 will prevail over the primacy of the first charge created under Section 46-B of the State Financial Corporations Act, 1951. Since the 1956 Act is a Central Leg .....

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529-A of the 1956 Act declares that notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, for the winding up of a company, the dues of the workers shall be paid in priority to all other dues. In view of the above, we do not find any valid ground to interfere with the judgment under challenge. The special leave petition is, accordingly, dismissed. - 18) It would be appropriate to refer to t .....

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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 benef .....

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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 .....

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bears to the value of the security, the same proportion which the amount of the workmen's dues bears to the aggregate of (a) workmen's dues and (b) the amounts of the debts due to all the creditors. This is explained in the illustration under the said provision. If the workmen's dues in all are (say) ₹ 1 lakh and the debt due to all secured creditors is ₹ 3 lakhs, the total amount due to all of them comes to ₹ 4 lakhs. Therefore, the workmen's share come to 25% .....

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oner to stand outside the winding up proceedings and claim enforcement of its Security Interest. If the petitioner instead 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 under Section 529-A(i) (b) read with proviso (c) to Section 529 (I) having overriding preferential claim and o .....

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ana 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 Pegasus Assets Reconstruction Pvt. Ltd. (supra) is as below : Whether the Company Court enjoys supervisory jurisdictio .....

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Megnostar Telecommunications (P) Ltd reported in (2012) 193 DLT 371, delivered by the Delhi High Court, as under: 26. If it were to be held that the Official Liquidator (who acts under the dictates of the Company Court) is to be also associated with the sale, it will naturally open up the fora of the Company Court also for entertaining matters relating to such sale and which as aforesaid is not only likely to lead to conflicts but is also contrary to the spirit of the SARFAESI Act of .....

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power to take possession of securities and sell them. All its significant provisions have been noted in detail in Mardia Chemicals in which vires of this Act were examined and upheld. 23. A reading of Sections 9 and 13 of the SARFAESI Act leaves no manner of doubt that for enforcement of its security interest, a secured creditor has been not only vested with powers to do so without the intervention of the court or tribunal but detailed procedure has also been prescribed to take care .....

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ce 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 .....

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require notice upon the borrower or his agent at different stages. For sale of immovable secured assets, as per Rule 8, the authorized officer can take possession by delivering a Possession Notice to the borrower and by affixing Possession Notice on the outer door or at some conspicuous place of the property. Before the sale also, the authorized officer is required to serve to the borrower a notice of 30 days. Thus the Rules also ensure that the Official Liquidator is in knowledge of the procee .....

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or the respondent State is justified in contending in normal circumstances in view of the provisions of SARFAESI Act (Unamended) primacy can be extended to the provisions like Section 38-C of the Bombay Sales Tax Act or Section 37 of the MVAT Act. Section 13 envisages application of money received by the secured creditor and by adopting any of the measures specified in Section 13 (4) merely regulates distribution of money received by the secured creditor and it does not create first charge in fa .....

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