whether, in the facts of this case, employees’ dues can take
precedence over the claim of the secured creditor in respect of the
proceeds from sale of secured assets of the Karkhana under the
SARFAESI Act.
Under the scheme of the SARFAESI Act, there is nothing to show that a priority is created in favour of banks, financial institutions, and other secured creditors as against a first charge specifically created under any other statute.
In view of the foregoing discussion, we summarize our findings as follows:
(i) Section 529A of the Companies Act, which gives workers’ dues a priority over all other debts, cannot be applied to the instant case in view of Section 167 of the Societies Act.
(ii) Merely by virtue of being recoverable as arrears of land revenue, the employees’ dues, in respect of which a recovery certificate had been issued by the Industrial Court, cannot be treated as a paramount charge in terms of Section 169(1) of the Land Revenue Code. Instead, under 169(2) of the Land Revenue Code, they would take precedence only over unsecured claims.
(iii) At the same time, the Appellant-Bank does not enjoy any paramount charge over the sale proceeds either. Instead, as per Section 13(7) of the SARFAESI Act, the sale letter dated 08.03.2010 and the sale certificate dated 14.09.2010 constitute a 22 contract which displaces the order of distribution stipulated under the said provision.
(iv) The cumulative effect of these documents is that the Appellant-Bank must pay the employees’ dues out of the sale proceeds from the auctioned property. To this extent, the recovery certificate issued by the Industrial Court on 08.08.2011 may be executed against the Appellant herein. Further, given the significant delay in payment of the salaries to the employees, such recovery shall be made by the Collector within a period of six months from the date of this order.
(v) All other dues in respect of the secured property, including any unpaid statutory dues in relation to employees (provident fund, gratuity, bonus, etc.) shall be paid by Respondent No.5 within a period of six months from the date of this order.
1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 232 OF 2016
The Maharashtra State Co-operative Bank Ltd. ...Appellant
Versus
Babulal Lade & Ors. …Respondents
J U D G M E N T
MOHAN M. SHANTANAGOUDAR, J.
1. This appeal arises out of judgment dated 01.12.2015 passed
by the Nagpur Bench of the High Court of Bombay in W.P. No.
3879/2012. Vide the impugned judgment, the Hon’ble High Court
has directed the issuance of a recovery certificate against the
Appellant herein, thereby modifying the order dated 08.08.2011
passed by the Bhandara Bench, Industrial Court, Maharashtra.
2. The brief facts giving rise to this appeal are as follows:
2.1 Registered under the Maharashtra Co-operative Societies
Act, 1960 (hereinafter ‘Societies Act’), Respondent No. 6 herein,
2
Vainganga Sahakari Sakhar Karkhana Ltd. (hereinafter
‘Karkhana’) had obtained credit facilities from the Appellant-Bank
and mortgaged its properties in return. When it defaulted on the
repayment of the loan, the Appellant-Bank initiated recovery
proceedings on 10.02.2005, by issuing a notice under Section
13(2) of the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 (hereinafter
‘SARFAESI Act’). Later, on 13.06.2005, the Appellant-Bank took
physical possession of the mortgaged properties of the Karkhana
as per Section 13(4) of the SARFAESI Act.
2.2 Owing to its poor financial condition, on 24.01.2006, the
Karkhana issued a notice to its employees directing them to
proceed on leave without salary w.e.f. 24.02.2006. This was
challenged by representatives of the Karkhana employees
(Respondent Nos. 1 to 3 herein) in ULPA No. 65/2006 filed under
Section 28 read with items 9 and 10 of Schedule IV of the
Maharashtra Recognition of Trade Unions & Prevention of Unfair
Labour Practices Act, 1971 (hereinafter ‘MRTU & PULP Act’). Vide
order dated 24.08.2006, the Industrial Court quashed the notice
and held that it amounted to an unfair labour practice. Further,
noting that Karkhana had not paid salaries to its employees since
3
July 2003, the Industrial Court directed the Karkhana to pay the
unpaid salaries on top priority basis from any funds that may
become available with it.
2.3 On the basis of this order, Respondent Nos. 1 to 3 filed a
miscellaneous application, ULPA No. 5/2007, seeking the issuance
of a recovery certificate against the Karkhana, its Managing
Director (Respondent No. 4 herein), and the Appellant-Bank under
Section 50 of the MRTU & PULP Act. It is to be noted that the
Appellant was arraigned as a party in this proceeding for the first
time. Vide order dated 27.04.2007, the Industrial Court held that
a recovery certificate for unpaid salaries of the Karkhana
employees could not be issued against the Appellant-Bank. It also
refused to issue such a certificate against the Karkhana and its
Managing Director in view of the precarious financial condition of
the Karkhana. However, the Karkhana was directed to pay the
unpaid salaries to the employees on top priority basis, as and when
funds were to become available.
2.4 In the challenge against this order in W.P. No. 4746/2007,
the High Court of Bombay, vide order dated 12.07.2010, held that
recovery could only be made against the Karkhana and not the
Appellant-Bank, as there was no employer-employee relationship
4
between the Bank and the employees. It was further held that the
Industrial Court had erred in relying upon the non-availability of
funds with the Karkhana to refuse the grant of a recovery
certificate, as the relevant consideration for issuance of such a
certificate is the entitlement of the applicants and not the financial
condition of the employer. In view of this, the High Court directed
the issuance of a recovery certificate against the Karkhana and its
Managing Director. Pursuant to this direction, the Industrial
Court, vide order dated 08.08.2011, disposed of ULPA No. 5/2007
by issuing a recovery certificate of Rs.13,89,84,334 against the
Karkhana and its Managing Director. However, the prayer to issue
a recovery certificate against the Appellant-Bank was rejected.
2.5 In the interim period, on 26.08.2010, one of the attached
properties of the Karkhana was auctioned and sold by the
Appellant-Bank to one Purti Power and Sugar Ltd. (Respondent
No. 5 herein). According to the terms and conditions of this sale,
the purchaser had accepted all encumbrances on the property as
agreed upon in the sale letter. It is found that the proceeds from
this sale were appropriated by the Appellant-Bank towards the
amount due to it from the Karkhana.
5
2.6 At the same time, aggrieved by the non-issuance of a
recovery certificate against the Appellant, Respondent Nos. 1 to 3
filed W.P. No. 3879/2012. During the pendency of this petition, on
19.01.2013, an order was passed by the competent authority
under the Societies Act directing the liquidation of the Karkhana.
Finally, vide the impugned judgment dated 01.12.2015, the High
Court disposed of W.P. No. 3879/2012. It was observed that in
terms of Section 50 of the MRTU & PULP Act, the recovery
certificate should have been issued to the Collector for recovering
the amount from the Karkhana and its Managing Director. Thus,
the order of the Industrial Court dated 08.08.2011 was modified
to this extent to clarify that the certificate is to be issued to the
Collector first, who would then proceed to recover the sum as per
the recovery certificate. On the question of whether the Collector
could effectuate such recovery from sale proceeds of the attached
property of the Karkhana, it was held that after the auction sale,
the Appellant-Bank held the proceeds in trust as per Section 13(7)
of the SARFAESI Act and did not have a first charge over them.
Further, it was found that upon the liquidation of the Karkhana
on 19.01.2013, Section 529A of the Companies Act, 1956
(hereinafter ‘Companies Act’) came into operation, thereby
6
according employees’ dues priority over all other dues in respect of
the sale proceeds. In light of this, it was held that the Collector
could recover the said amount of Rs.13,89,84,334 from the sale
proceeds held in trust by the Appellant-Bank. It is against this
order that the instant appeal has been filed.
3. Heard learned Counsel for both the parties.
4. Learned Senior Counsel for the Appellant argued that the
High Court erred in applying Section 529A of the Companies Act,
as Section 167 of the Societies Act specifically bars the application
of the Companies Act to co-operative societies, as is the case with
the Karkhana here. In any case, he submitted that Section 529A
of the Companies Act was misapplied, as the proviso to Section
13(9) of the SARFAESI Act requires the company to be “in
liquidation” at the time of the sale of secured assets for Section
529A to apply. Given that the Karkhana only went into liquidation
on 19.01.2013, i.e. after the sale of its properties in 2010, he
argued that the provision was wrongly applied. In light of this, he
also submitted that there is no other provision that makes
employees’ dues a paramount charge, and the Appellant-Bank,
being a secured creditor, should be given precedence over the
proceeds from the auction sale as per Section 13(7) of the
7
SARFAESI Act. It was also his contention that a claim for unpaid
salaries cannot lie against the Appellant, as there is no employeremployee relationship between the Appellant-Bank and the said
employees.
5. On the other hand, learned Senior Counsel for Respondent
Nos. 1 to 3 drew our attention to Section 50 of the MRTU & PULP
Act, under which the recovery certificate had been issued by the
Industrial Court on 08.08.2011. Noting that this provision makes
employees’ dues recoverable in the same manner as arrears of land
revenue, learned Senior Counsel referred us to Section 169(1) of
the Maharashtra Land Revenue Code, 1966 (hereinafter ‘Land
Revenue Code’), which makes arrears of land revenue a paramount
charge on the land. Relying on this, he submitted that the
employees’ dues, recoverable as arrears of land revenue, should be
given primacy over the claim of the Appellant-Bank while dealing
with the proceeds from the auction sale.
6. In addition to this, learned Counsel for Vainganga Sahakari
Sakhar Karkhana Mazdoor Sangh (Respondent No. 8 herein) relied
on the sale letter dated 08.03.2010, which was issued by the
Appellant-Bank prior to the sale of the properties of the Karkhana.
In this letter, the Appellant-Bank had stated that it would take
8
responsibility for employees’ dues. In light of this, it was argued
that the Appellant cannot be absolved of its liability towards the
payment of employees’ dues. Learned Counsel for the subsequent
purchaser of the property (Respondent No. 5 herein) similarly
relied on this letter to submit that the liability for the payment of
employees’ dues must be placed on the Appellant.
7. In view of the arguments raised and the material on record,
the issue that arises for our consideration in this appeal is
whether, in the facts of this case, employees’ dues can take
precedence over the claim of the secured creditor in respect of the
proceeds from sale of secured assets of the Karkhana under the
SARFAESI Act.
8. At the outset, we find merit in the argument raised by learned
Senior Counsel for the Appellant that the High Court erred in
applying Section 529A of the Companies Act to this case. It would
be apposite to refer to Section 167 of the Societies Act in this
regard:
“167. Companies Act not to apply – For the removal
of doubt, it is hereby declared that the provisions of the
Companies Act, 1956 shall not apply to societies
registered or deemed to be registered; under this Act.”
It is clear that Section 167 creates an express bar on the
applicability of the Companies Act to societies registered under the
9
Societies Act. Given that the Karkhana was a co-operative society
registered under the said Act, we find that Section 167 is squarely
applicable, and the High Court committed a grave error in relying
upon Section 529A of the Companies Act. Thus, the employees
cannot make use of Section 529A of the Companies Act to claim
priority over all other debts of the Karkhana.
9. Against this backdrop, the next question to be considered is
whether the employees’ dues can take priority over other claims by
virtue of being recoverable as arrears of land revenue. Section 50
of the MRTU & PULP Act and Section 169 of the Land Revenue
Code are relevant in this regard. Section 50 of the MRTU & PULP
Act reads as follows:
“50. Recovery of money due from employer – Where
any money is due to an employee from an employer
under an order passed by the Court under Chapter VI,
the employee himself or any other person authorized by
him in writing in this behalf, or in the case of death of
the employee, his assignee or heirs may, without
prejudice to any other mode of recovery, make an
application to the Court for the recovery of money due
to him, and if the Court is satisfied that money is so
due, it shall issue a certificate for the amount to the
Collector, who shall, proceed to recover the same in the
same manner as an arrear of land revenue…”
Section 169 of the Land Revenue Code is reproduced hereunder:
10
“169. Claims of State Government to have
precedence over all others– (1) The arrears of land
revenue due on account of land shall be a paramount
charge on the land and on every part thereof and shall
have precedence over any other debt, demand or claim
whatsoever, whether in respect of mortgage,
judgement-decree, execution or attachment, or
otherwise howsoever, against any land or the holder
thereof.
(2) The claim of the State Government to any monies
other than arrears of land revenue, but recoverable as a
revenue demand under the provisions of this Chapter,
shall have priority over all unsecured claims against any
land or holder thereof.”
10. From a reading of these provisions, it is evident that dues of
employees in respect of which an order has been made by a Court
under Chapter VI of the MRTU & PULP Act are recoverable in the
same manner as arrears of land revenue. It was argued by learned
Senior Counsel for Respondent Nos. 1 to 3 that such treatment of
employees’ dues as arrears of land revenue makes it a charge
paramount to all other claims in view of Section 169(1) of the Land
Revenue Code. In response, learned Senior Counsel for the
Appellant contended that the instant case falls under Section
169(2) of the Land Revenue Code, which deals with monies other
than arrears of land revenue but which is recoverable as a revenue
demand. Since Section 169(2) only accords priority over unsecured
claims, he submitted that the Appellant’s claim, being that of a
11
secured creditor, would still have priority over employees’ dues
recoverable as arrears of land revenue.
10.1 It is important to appreciate that there is a material
difference between arrears of land revenue due on account of land,
and amounts other than arrears of land revenue but recoverable
in the same manner as arrears of land. On a close reading of subsections (1) and (2) of Section 169 of the Land Revenue Code, it
becomes clear that Section 169(1) deals with the former category
of claims and makes them a paramount charge on the land over
all other claims. On the other hand, Section 169(2) deals with the
latter category and gives them priority only over unsecured claims.
10.2 This distinction has also been noted in SICOM Ltd. v.
State of Maharashtra & Anr., (2010) 6 Bom CR 749, where a
division Bench of the High Court of Bombay was called upon to
consider whether sales tax dues of a company in liquidation, which
were recoverable as arrears of land revenue under Section 38-B of
the Bombay Sales Tax Act, 1959, created a first charge. While
discussing the scheme of Section 169 of the Land Revenue Code,
the division Bench drew upon the reasoning of the Constitution
Bench of this Court in Builders Supply Corporation v. Union of
India, AIR 1965 SC 1061 and observed as follows:
12
“10. Perusal of the above quoted provisions shows that
the Maharashtra Land Revenue Code makes a clear
distinction between the sum which is recoverable as a
land revenue and sum which is recoverable as arrears
of land revenue. What creates paramount charge is the
sum which is the amount of land revenue and not the
sum which is recoverable as land revenue. The
Constitution Bench of the Supreme Court in its
judgment in the case of Builders Supply Corporation,
referred to above, in our opinion, has made the position
absolutely clear. Following observations in the case of
Builders Supply Corporation, in our opinion, are
relevant. They read as under:-
“We have referred to this decision, because it
brings out emphatically the real character of
the provisions prescribed by s. 46(2). Section
46(2) does not deal with the doctrine of the
priority of Crown debts at all; it merely
provides for the recovery of the arrears of tax
due from an assessee as if it were an arrear
of land revenue. This provisions cannot be
said to convert arrears of tax into arrears of
land revenue either, all that it purports to do
is to indicate that after receiving the
certificate from the Income-tax Officer, the
Collector has to proceed to recover the
arrears in question as if the said arrears were
arrears of land revenue. We have already
seen that other alternative remedies for the
recovery of arrears of land revenue are
prescribed by sub-sections (3) and (5) of s.
46. In making a provision for the recovery of
arrears of tax, it cannot be said that s. 46
deals with or provides for the principle of
priority of tax dues at all; and so, it is
impossible to accede to the argument that s.
46 in terms displaces the application of the
said doctrine in the present proceedings.”
(emphasis supplied)
13
This difference in the scope of sub-sections (1) and (2) of
Section 169 of the Land Revenue Code was again noted by the High
Court of Bombay in City Co-op Credit & Capital Ltd. & Anr. v.
Official Liquidator of Satwik Electric Controls Pvt Ltd., (2019)
4 Bom CR 274.
10.3 When we look to the facts of the instant case, it is seen that
the recovery certificate issued under Section 50 of the MRTU &
PULP Act only makes employees’ dues recoverable as arrears of
land revenue. Thus, in view of the foregoing discussion, it is clear
that such employees’ dues would fall under the category of claims
captured by Section 169(2), and can only take priority over
unsecured claims.
10.4 Further, as has been held by this Court in Central Bank
of India v. State of Kerala, (2009) 4 SCC 94, only expressly
created statutory first charges under Central and State laws can
take precedence over the claims of secured creditors under the
SARFAESI Act. It is not enough to merely provide for recovery of
dues as arrears of land revenue. Given that Section 50 of the MRTU
& PULP Act falls short of expressly making the employees’ dues a
‘first charge’, it cannot be said that such dues have priority over
the claims of the Appellant-Bank, which is a secured creditor.
14
Thus, we find that under the scheme of the Land Revenue Code
and the MRTU & PULP Act, the employees’ dues cannot claim
priority over the claim of the Appellant-Bank.
11. However, this does not mean that the Appellant-Bank
automatically holds a paramount charge over the proceeds from
the sale of the secured assets. Under the scheme of the SARFAESI
Act, there is nothing to show that a priority is created in favour of
banks, financial institutions, and other secured creditors as
against a first charge specifically created under any other statute.
This has been captured succinctly by this Court in Central Bank
(supra) as follows:
“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 recognized.
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
15
legal regime envisages transfer of secured assets to
private companies.”
Thus, in the absence of a paramount charge created in favour
of the employees’ dues under the MRTU & PULP Act, it cannot be
said that the Appellant-Bank automatically gets a first charge
under the SARFAESI Act.
12. In this light, what becomes relevant for the instant case is the
scheme of the SARFAESI Act in relation to the manner of
distributing the money received by the secured creditor through
the sale of secured assets. The following parts of Section 13 of the
SARFAESI Act are relevant in this regard:
13. Enforcement of security interest – (4) In case the
borrower fails to discharge his liability in full within the
period specified in sub-section (2), the secured creditor
may take recourse to one or more of the following
measures to recover his secured debt, namely:— (a) take
possession of the secured assets of the borrower
including the right to transfer by way of lease,
assignment or sale for realising the secured asset…
xxx
(7) Where any action has been taken against a borrower
under the provisions of sub-section (4), all costs,
charges and expenses which, in the opinion of the
secured creditor, have been properly incurred by him or
any expenses incidental thereto, shall be recoverable
from the borrower and the money which is received by
the secured creditor shall, in the absence of any
contract to the contrary, be held by him in trust, to be
applied, firstly, in payment of such costs, charges and
expenses and secondly, in discharge of the dues of the
16
secured creditor and the residue of the money so
received shall be paid to the person entitled thereto in
accordance with his rights and interests.
Section 13(4) of the SARFAESI Act allows a secured creditor
to take possession of the secured assets of a borrower-in-default,
including the right to transfer them by way of sale. What may be
done with the proceeds from such sale is provided under Section
13(7). In the absence of a contract to the contrary, such proceeds
are held by the secured creditor in trust and are to be applied first
towards payments of costs, charges, and expenses incurred with
respect to the sale; second, towards dues of the secured creditor;
and lastly, towards any person entitled to the residue money.
13. In the facts of the present case, in exercise of its powers under
Section 13(4)(a) of the SARFAESI Act, the Appellant-Bank had
taken possession of the property of the Karkhana on 13.06.2005.
Later, vide sale letter dated 08.03.2010, the Appellant-Bank had
offered to sell the said property to one M/s Vidarbha Realties Pvt.
Ltd. for a total consideration of Rs. 14.10 crores. Notably, this
letter stated that the Appellant-Bank would take responsibility for
employees’ dues, and all other liabilities including statutory
liabilities would rest solely on the purchaser. This letter was
followed by a sale certificate dated 14.09.2010 recording the sale
17
of the property by the Appellant-Bank in favour of M/s Wainganga
Sugar and Power Ltd. for a consideration of Rs. 14.10 crores.
13.1 Before delving into the applicability of the distribution of
the sale proceeds as per Section 13(7) of the SARFAESI Act, we
note that the sale letter dated 08.03.2010 can be relied upon by
this Court. The contention of the learned Senior Counsel for the
Appellant that the sale letter dated 08.03.2010 was addressed to
a different entity than the company mentioned in the sale
certificate dated 14.09.2010 cannot be accepted. It is found that
the addressee in the sale letter dated 08.03.2010, M/s Vidarbha
Realties Private Limited, had been renamed as M/s Wainganga
Sugar and Power Private Limited as notified on 05.04.2010.
Subsequently, on 03.06.2010, M/s Wainganga Sugar and Power
Private Limited was converted to a public limited company and its
name was changed to M/s Wainganga Sugar and Power Limited,
which is also the name of the purchaser indicated on the sale
certificate. These interim developments between March 2010 and
September 2010 explain why the sale letter dated 08.03.2010 and
the final sale certificate issued on 14.09.2010 reflect different
names. However, since it is only a case of change in name of the
company, we find that the two entities are the same and the
18
subsequent purchaser, Respondent No. 5 herein (successor of
Wainganga Sugar and Power Ltd.) would be bound by the terms of
the sale letter dated 08.03.2010.
13.2 Further, it cannot be said that the sale letter dated
08.03.2010 is an external document and cannot be relied upon to
interpret the sale certificate. This is because the sale certificate
specifically references the sale letter by providing that the
purchaser accepts “all the encumbrances presently there on the
property and may arise in future and agreed to to pay the same as
per the sale letter accepted by the purchaser”. In view of such
wording, we find that the parties intended that the sale letter dated
08.03.2010 be read harmoniously with the sale certificate
inasmuch as it appears that the same is a part of the sale
certificate. When a composite reading of the sale certificate dated
14.09.2010 and the sale letter dated 08.03.2010 is undertaken, it
is revealed that though the purchaser had accepted all
encumbrances on the property, this did not include employees’
dues in view of the specific undertaking by the Appellant-Bank
that it would pay them. Given that the certificate directly
references the prior sale letter, it is essential to give effect to its
terms. Hence, it can be concluded that the parties had agreed to
19
the Bank paying the employees’ dues and the subsequent
purchaser settling other liabilities, including statutory liabilities.
When read in this light, it becomes clear that the sale certificate
and the sale letter constitute a contract.
13.3 This brings us to the scheme of distribution of sale
proceeds under Section 13(7) of the SARFAESI Act. As mentioned
supra, this provision prescribes the manner in which money
received by the secured creditor pursuant to its action under
Section 13(4) should be distributed. However, such manner of
distribution is only applicable in the absence of a contract to the
contrary. In this case, the sale certificate and sale letter form a
contract, the cumulative effect of which is an agreement that only
the employees’ dues would be settled by the Appellant-Bank, and
all other liabilities would be settled by the subsequent purchaser.
Thus, it can be said that the contract between the parties diverges
from the order of distribution stipulated under Section 13(7) and
constitutes a contract to the contrary, which must necessarily be
given effect.
13.4 In this regard, we find that the clarification given by the
Appellant-Bank in its counter-affidavit before the High Court that
by the sale letter dated 08.03.2010 it had only accepted liability
20
towards the payment of provident fund of the employees, is
unsustainable. Upon perusing the record, it is clear that this
clarification is only a subsequent attempt by the Appellant to
escape its liability. If the Appellant genuinely intended to restrict
its liability to provident fund, it would have expressly stated so in
the sale letter, which clearly prescribes the terms and conditions
of the sale between the Appellant and the purchaser. It is
important to bear in mind that at the time of entering into this
sale, the Appellant-Bank was well aware of the unpaid salaries due
to the employees of the Karkhana in view of the orders of the
Industrial Court dated 24.08.2006 and 27.04.2007. Hence, it
cannot be said that the Appellant-Bank agreed to use the term
“employees’ dues” in the sale letter despite intending to limit it to
provident fund dues only.
13.5 Thus, on facts, we find that in terms of Section 13(7) of the
SARFAESI Act, the distribution of money received by the
Appellant-Bank should be done as per the sale contract with
Respondent No. 5. In other words, the Appellant-Bank is liable to
satisfy the employees’ dues as per its undertaking in the sale letter
dated 08.03.2010. However, in view of the fact that all other
liabilities, including statutory liabilities were agreed to be borne by
21
the subsequent purchaser, statutory liabilities in respect of
employees, such as provident fund, gratuity, bonus etc., would
have to be borne by Respondent No. 5 herein. We reiterate here
that a subsequent attempt by the Appellant-Bank to interpret the
sale contract in a manner that reduces the scope of its liability to
provident fund dues cannot be given effect.
14. In view of the foregoing discussion, we summarize our
findings as follows:
(i) Section 529A of the Companies Act, which gives
workers’ dues a priority over all other debts, cannot be applied to
the instant case in view of Section 167 of the Societies Act.
(ii) Merely by virtue of being recoverable as arrears of land
revenue, the employees’ dues, in respect of which a recovery
certificate had been issued by the Industrial Court, cannot be
treated as a paramount charge in terms of Section 169(1) of the
Land Revenue Code. Instead, under 169(2) of the Land Revenue
Code, they would take precedence only over unsecured claims.
(iii) At the same time, the Appellant-Bank does not enjoy
any paramount charge over the sale proceeds either. Instead, as
per Section 13(7) of the SARFAESI Act, the sale letter dated
08.03.2010 and the sale certificate dated 14.09.2010 constitute a
22
contract which displaces the order of distribution stipulated under
the said provision.
(iv) The cumulative effect of these documents is that the
Appellant-Bank must pay the employees’ dues out of the sale
proceeds from the auctioned property. To this extent, the recovery
certificate issued by the Industrial Court on 08.08.2011 may be
executed against the Appellant herein. Further, given the
significant delay in payment of the salaries to the employees, such
recovery shall be made by the Collector within a period of six
months from the date of this order.
(v) All other dues in respect of the secured property,
including any unpaid statutory dues in relation to employees
(provident fund, gratuity, bonus, etc.) shall be paid by Respondent
No.5 within a period of six months from the date of this order.
15. The instant appeal is disposed of accordingly.
…..…………................................J.
(MOHAN M. SHANTANAGOUDAR)
….…………………………...............J.
(KRISHNA MURARI)
New Delhi;
December 4, 2019
Under the scheme of the SARFAESI Act, there is nothing to show that a priority is created in favour of banks, financial institutions, and other secured creditors as against a first charge specifically created under any other statute.
In view of the foregoing discussion, we summarize our findings as follows:
(i) Section 529A of the Companies Act, which gives workers’ dues a priority over all other debts, cannot be applied to the instant case in view of Section 167 of the Societies Act.
(ii) Merely by virtue of being recoverable as arrears of land revenue, the employees’ dues, in respect of which a recovery certificate had been issued by the Industrial Court, cannot be treated as a paramount charge in terms of Section 169(1) of the Land Revenue Code. Instead, under 169(2) of the Land Revenue Code, they would take precedence only over unsecured claims.
(iii) At the same time, the Appellant-Bank does not enjoy any paramount charge over the sale proceeds either. Instead, as per Section 13(7) of the SARFAESI Act, the sale letter dated 08.03.2010 and the sale certificate dated 14.09.2010 constitute a 22 contract which displaces the order of distribution stipulated under the said provision.
(iv) The cumulative effect of these documents is that the Appellant-Bank must pay the employees’ dues out of the sale proceeds from the auctioned property. To this extent, the recovery certificate issued by the Industrial Court on 08.08.2011 may be executed against the Appellant herein. Further, given the significant delay in payment of the salaries to the employees, such recovery shall be made by the Collector within a period of six months from the date of this order.
(v) All other dues in respect of the secured property, including any unpaid statutory dues in relation to employees (provident fund, gratuity, bonus, etc.) shall be paid by Respondent No.5 within a period of six months from the date of this order.
1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 232 OF 2016
The Maharashtra State Co-operative Bank Ltd. ...Appellant
Versus
Babulal Lade & Ors. …Respondents
J U D G M E N T
MOHAN M. SHANTANAGOUDAR, J.
1. This appeal arises out of judgment dated 01.12.2015 passed
by the Nagpur Bench of the High Court of Bombay in W.P. No.
3879/2012. Vide the impugned judgment, the Hon’ble High Court
has directed the issuance of a recovery certificate against the
Appellant herein, thereby modifying the order dated 08.08.2011
passed by the Bhandara Bench, Industrial Court, Maharashtra.
2. The brief facts giving rise to this appeal are as follows:
2.1 Registered under the Maharashtra Co-operative Societies
Act, 1960 (hereinafter ‘Societies Act’), Respondent No. 6 herein,
2
Vainganga Sahakari Sakhar Karkhana Ltd. (hereinafter
‘Karkhana’) had obtained credit facilities from the Appellant-Bank
and mortgaged its properties in return. When it defaulted on the
repayment of the loan, the Appellant-Bank initiated recovery
proceedings on 10.02.2005, by issuing a notice under Section
13(2) of the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 (hereinafter
‘SARFAESI Act’). Later, on 13.06.2005, the Appellant-Bank took
physical possession of the mortgaged properties of the Karkhana
as per Section 13(4) of the SARFAESI Act.
2.2 Owing to its poor financial condition, on 24.01.2006, the
Karkhana issued a notice to its employees directing them to
proceed on leave without salary w.e.f. 24.02.2006. This was
challenged by representatives of the Karkhana employees
(Respondent Nos. 1 to 3 herein) in ULPA No. 65/2006 filed under
Section 28 read with items 9 and 10 of Schedule IV of the
Maharashtra Recognition of Trade Unions & Prevention of Unfair
Labour Practices Act, 1971 (hereinafter ‘MRTU & PULP Act’). Vide
order dated 24.08.2006, the Industrial Court quashed the notice
and held that it amounted to an unfair labour practice. Further,
noting that Karkhana had not paid salaries to its employees since
3
July 2003, the Industrial Court directed the Karkhana to pay the
unpaid salaries on top priority basis from any funds that may
become available with it.
2.3 On the basis of this order, Respondent Nos. 1 to 3 filed a
miscellaneous application, ULPA No. 5/2007, seeking the issuance
of a recovery certificate against the Karkhana, its Managing
Director (Respondent No. 4 herein), and the Appellant-Bank under
Section 50 of the MRTU & PULP Act. It is to be noted that the
Appellant was arraigned as a party in this proceeding for the first
time. Vide order dated 27.04.2007, the Industrial Court held that
a recovery certificate for unpaid salaries of the Karkhana
employees could not be issued against the Appellant-Bank. It also
refused to issue such a certificate against the Karkhana and its
Managing Director in view of the precarious financial condition of
the Karkhana. However, the Karkhana was directed to pay the
unpaid salaries to the employees on top priority basis, as and when
funds were to become available.
2.4 In the challenge against this order in W.P. No. 4746/2007,
the High Court of Bombay, vide order dated 12.07.2010, held that
recovery could only be made against the Karkhana and not the
Appellant-Bank, as there was no employer-employee relationship
4
between the Bank and the employees. It was further held that the
Industrial Court had erred in relying upon the non-availability of
funds with the Karkhana to refuse the grant of a recovery
certificate, as the relevant consideration for issuance of such a
certificate is the entitlement of the applicants and not the financial
condition of the employer. In view of this, the High Court directed
the issuance of a recovery certificate against the Karkhana and its
Managing Director. Pursuant to this direction, the Industrial
Court, vide order dated 08.08.2011, disposed of ULPA No. 5/2007
by issuing a recovery certificate of Rs.13,89,84,334 against the
Karkhana and its Managing Director. However, the prayer to issue
a recovery certificate against the Appellant-Bank was rejected.
2.5 In the interim period, on 26.08.2010, one of the attached
properties of the Karkhana was auctioned and sold by the
Appellant-Bank to one Purti Power and Sugar Ltd. (Respondent
No. 5 herein). According to the terms and conditions of this sale,
the purchaser had accepted all encumbrances on the property as
agreed upon in the sale letter. It is found that the proceeds from
this sale were appropriated by the Appellant-Bank towards the
amount due to it from the Karkhana.
5
2.6 At the same time, aggrieved by the non-issuance of a
recovery certificate against the Appellant, Respondent Nos. 1 to 3
filed W.P. No. 3879/2012. During the pendency of this petition, on
19.01.2013, an order was passed by the competent authority
under the Societies Act directing the liquidation of the Karkhana.
Finally, vide the impugned judgment dated 01.12.2015, the High
Court disposed of W.P. No. 3879/2012. It was observed that in
terms of Section 50 of the MRTU & PULP Act, the recovery
certificate should have been issued to the Collector for recovering
the amount from the Karkhana and its Managing Director. Thus,
the order of the Industrial Court dated 08.08.2011 was modified
to this extent to clarify that the certificate is to be issued to the
Collector first, who would then proceed to recover the sum as per
the recovery certificate. On the question of whether the Collector
could effectuate such recovery from sale proceeds of the attached
property of the Karkhana, it was held that after the auction sale,
the Appellant-Bank held the proceeds in trust as per Section 13(7)
of the SARFAESI Act and did not have a first charge over them.
Further, it was found that upon the liquidation of the Karkhana
on 19.01.2013, Section 529A of the Companies Act, 1956
(hereinafter ‘Companies Act’) came into operation, thereby
6
according employees’ dues priority over all other dues in respect of
the sale proceeds. In light of this, it was held that the Collector
could recover the said amount of Rs.13,89,84,334 from the sale
proceeds held in trust by the Appellant-Bank. It is against this
order that the instant appeal has been filed.
3. Heard learned Counsel for both the parties.
4. Learned Senior Counsel for the Appellant argued that the
High Court erred in applying Section 529A of the Companies Act,
as Section 167 of the Societies Act specifically bars the application
of the Companies Act to co-operative societies, as is the case with
the Karkhana here. In any case, he submitted that Section 529A
of the Companies Act was misapplied, as the proviso to Section
13(9) of the SARFAESI Act requires the company to be “in
liquidation” at the time of the sale of secured assets for Section
529A to apply. Given that the Karkhana only went into liquidation
on 19.01.2013, i.e. after the sale of its properties in 2010, he
argued that the provision was wrongly applied. In light of this, he
also submitted that there is no other provision that makes
employees’ dues a paramount charge, and the Appellant-Bank,
being a secured creditor, should be given precedence over the
proceeds from the auction sale as per Section 13(7) of the
7
SARFAESI Act. It was also his contention that a claim for unpaid
salaries cannot lie against the Appellant, as there is no employeremployee relationship between the Appellant-Bank and the said
employees.
5. On the other hand, learned Senior Counsel for Respondent
Nos. 1 to 3 drew our attention to Section 50 of the MRTU & PULP
Act, under which the recovery certificate had been issued by the
Industrial Court on 08.08.2011. Noting that this provision makes
employees’ dues recoverable in the same manner as arrears of land
revenue, learned Senior Counsel referred us to Section 169(1) of
the Maharashtra Land Revenue Code, 1966 (hereinafter ‘Land
Revenue Code’), which makes arrears of land revenue a paramount
charge on the land. Relying on this, he submitted that the
employees’ dues, recoverable as arrears of land revenue, should be
given primacy over the claim of the Appellant-Bank while dealing
with the proceeds from the auction sale.
6. In addition to this, learned Counsel for Vainganga Sahakari
Sakhar Karkhana Mazdoor Sangh (Respondent No. 8 herein) relied
on the sale letter dated 08.03.2010, which was issued by the
Appellant-Bank prior to the sale of the properties of the Karkhana.
In this letter, the Appellant-Bank had stated that it would take
8
responsibility for employees’ dues. In light of this, it was argued
that the Appellant cannot be absolved of its liability towards the
payment of employees’ dues. Learned Counsel for the subsequent
purchaser of the property (Respondent No. 5 herein) similarly
relied on this letter to submit that the liability for the payment of
employees’ dues must be placed on the Appellant.
7. In view of the arguments raised and the material on record,
the issue that arises for our consideration in this appeal is
whether, in the facts of this case, employees’ dues can take
precedence over the claim of the secured creditor in respect of the
proceeds from sale of secured assets of the Karkhana under the
SARFAESI Act.
8. At the outset, we find merit in the argument raised by learned
Senior Counsel for the Appellant that the High Court erred in
applying Section 529A of the Companies Act to this case. It would
be apposite to refer to Section 167 of the Societies Act in this
regard:
“167. Companies Act not to apply – For the removal
of doubt, it is hereby declared that the provisions of the
Companies Act, 1956 shall not apply to societies
registered or deemed to be registered; under this Act.”
It is clear that Section 167 creates an express bar on the
applicability of the Companies Act to societies registered under the
9
Societies Act. Given that the Karkhana was a co-operative society
registered under the said Act, we find that Section 167 is squarely
applicable, and the High Court committed a grave error in relying
upon Section 529A of the Companies Act. Thus, the employees
cannot make use of Section 529A of the Companies Act to claim
priority over all other debts of the Karkhana.
9. Against this backdrop, the next question to be considered is
whether the employees’ dues can take priority over other claims by
virtue of being recoverable as arrears of land revenue. Section 50
of the MRTU & PULP Act and Section 169 of the Land Revenue
Code are relevant in this regard. Section 50 of the MRTU & PULP
Act reads as follows:
“50. Recovery of money due from employer – Where
any money is due to an employee from an employer
under an order passed by the Court under Chapter VI,
the employee himself or any other person authorized by
him in writing in this behalf, or in the case of death of
the employee, his assignee or heirs may, without
prejudice to any other mode of recovery, make an
application to the Court for the recovery of money due
to him, and if the Court is satisfied that money is so
due, it shall issue a certificate for the amount to the
Collector, who shall, proceed to recover the same in the
same manner as an arrear of land revenue…”
Section 169 of the Land Revenue Code is reproduced hereunder:
10
“169. Claims of State Government to have
precedence over all others– (1) The arrears of land
revenue due on account of land shall be a paramount
charge on the land and on every part thereof and shall
have precedence over any other debt, demand or claim
whatsoever, whether in respect of mortgage,
judgement-decree, execution or attachment, or
otherwise howsoever, against any land or the holder
thereof.
(2) The claim of the State Government to any monies
other than arrears of land revenue, but recoverable as a
revenue demand under the provisions of this Chapter,
shall have priority over all unsecured claims against any
land or holder thereof.”
10. From a reading of these provisions, it is evident that dues of
employees in respect of which an order has been made by a Court
under Chapter VI of the MRTU & PULP Act are recoverable in the
same manner as arrears of land revenue. It was argued by learned
Senior Counsel for Respondent Nos. 1 to 3 that such treatment of
employees’ dues as arrears of land revenue makes it a charge
paramount to all other claims in view of Section 169(1) of the Land
Revenue Code. In response, learned Senior Counsel for the
Appellant contended that the instant case falls under Section
169(2) of the Land Revenue Code, which deals with monies other
than arrears of land revenue but which is recoverable as a revenue
demand. Since Section 169(2) only accords priority over unsecured
claims, he submitted that the Appellant’s claim, being that of a
11
secured creditor, would still have priority over employees’ dues
recoverable as arrears of land revenue.
10.1 It is important to appreciate that there is a material
difference between arrears of land revenue due on account of land,
and amounts other than arrears of land revenue but recoverable
in the same manner as arrears of land. On a close reading of subsections (1) and (2) of Section 169 of the Land Revenue Code, it
becomes clear that Section 169(1) deals with the former category
of claims and makes them a paramount charge on the land over
all other claims. On the other hand, Section 169(2) deals with the
latter category and gives them priority only over unsecured claims.
10.2 This distinction has also been noted in SICOM Ltd. v.
State of Maharashtra & Anr., (2010) 6 Bom CR 749, where a
division Bench of the High Court of Bombay was called upon to
consider whether sales tax dues of a company in liquidation, which
were recoverable as arrears of land revenue under Section 38-B of
the Bombay Sales Tax Act, 1959, created a first charge. While
discussing the scheme of Section 169 of the Land Revenue Code,
the division Bench drew upon the reasoning of the Constitution
Bench of this Court in Builders Supply Corporation v. Union of
India, AIR 1965 SC 1061 and observed as follows:
12
“10. Perusal of the above quoted provisions shows that
the Maharashtra Land Revenue Code makes a clear
distinction between the sum which is recoverable as a
land revenue and sum which is recoverable as arrears
of land revenue. What creates paramount charge is the
sum which is the amount of land revenue and not the
sum which is recoverable as land revenue. The
Constitution Bench of the Supreme Court in its
judgment in the case of Builders Supply Corporation,
referred to above, in our opinion, has made the position
absolutely clear. Following observations in the case of
Builders Supply Corporation, in our opinion, are
relevant. They read as under:-
“We have referred to this decision, because it
brings out emphatically the real character of
the provisions prescribed by s. 46(2). Section
46(2) does not deal with the doctrine of the
priority of Crown debts at all; it merely
provides for the recovery of the arrears of tax
due from an assessee as if it were an arrear
of land revenue. This provisions cannot be
said to convert arrears of tax into arrears of
land revenue either, all that it purports to do
is to indicate that after receiving the
certificate from the Income-tax Officer, the
Collector has to proceed to recover the
arrears in question as if the said arrears were
arrears of land revenue. We have already
seen that other alternative remedies for the
recovery of arrears of land revenue are
prescribed by sub-sections (3) and (5) of s.
46. In making a provision for the recovery of
arrears of tax, it cannot be said that s. 46
deals with or provides for the principle of
priority of tax dues at all; and so, it is
impossible to accede to the argument that s.
46 in terms displaces the application of the
said doctrine in the present proceedings.”
(emphasis supplied)
13
This difference in the scope of sub-sections (1) and (2) of
Section 169 of the Land Revenue Code was again noted by the High
Court of Bombay in City Co-op Credit & Capital Ltd. & Anr. v.
Official Liquidator of Satwik Electric Controls Pvt Ltd., (2019)
4 Bom CR 274.
10.3 When we look to the facts of the instant case, it is seen that
the recovery certificate issued under Section 50 of the MRTU &
PULP Act only makes employees’ dues recoverable as arrears of
land revenue. Thus, in view of the foregoing discussion, it is clear
that such employees’ dues would fall under the category of claims
captured by Section 169(2), and can only take priority over
unsecured claims.
10.4 Further, as has been held by this Court in Central Bank
of India v. State of Kerala, (2009) 4 SCC 94, only expressly
created statutory first charges under Central and State laws can
take precedence over the claims of secured creditors under the
SARFAESI Act. It is not enough to merely provide for recovery of
dues as arrears of land revenue. Given that Section 50 of the MRTU
& PULP Act falls short of expressly making the employees’ dues a
‘first charge’, it cannot be said that such dues have priority over
the claims of the Appellant-Bank, which is a secured creditor.
14
Thus, we find that under the scheme of the Land Revenue Code
and the MRTU & PULP Act, the employees’ dues cannot claim
priority over the claim of the Appellant-Bank.
11. However, this does not mean that the Appellant-Bank
automatically holds a paramount charge over the proceeds from
the sale of the secured assets. Under the scheme of the SARFAESI
Act, there is nothing to show that a priority is created in favour of
banks, financial institutions, and other secured creditors as
against a first charge specifically created under any other statute.
This has been captured succinctly by this Court in Central Bank
(supra) as follows:
“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 recognized.
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
15
legal regime envisages transfer of secured assets to
private companies.”
Thus, in the absence of a paramount charge created in favour
of the employees’ dues under the MRTU & PULP Act, it cannot be
said that the Appellant-Bank automatically gets a first charge
under the SARFAESI Act.
12. In this light, what becomes relevant for the instant case is the
scheme of the SARFAESI Act in relation to the manner of
distributing the money received by the secured creditor through
the sale of secured assets. The following parts of Section 13 of the
SARFAESI Act are relevant in this regard:
13. Enforcement of security interest – (4) In case the
borrower fails to discharge his liability in full within the
period specified in sub-section (2), the secured creditor
may take recourse to one or more of the following
measures to recover his secured debt, namely:— (a) take
possession of the secured assets of the borrower
including the right to transfer by way of lease,
assignment or sale for realising the secured asset…
xxx
(7) Where any action has been taken against a borrower
under the provisions of sub-section (4), all costs,
charges and expenses which, in the opinion of the
secured creditor, have been properly incurred by him or
any expenses incidental thereto, shall be recoverable
from the borrower and the money which is received by
the secured creditor shall, in the absence of any
contract to the contrary, be held by him in trust, to be
applied, firstly, in payment of such costs, charges and
expenses and secondly, in discharge of the dues of the
16
secured creditor and the residue of the money so
received shall be paid to the person entitled thereto in
accordance with his rights and interests.
Section 13(4) of the SARFAESI Act allows a secured creditor
to take possession of the secured assets of a borrower-in-default,
including the right to transfer them by way of sale. What may be
done with the proceeds from such sale is provided under Section
13(7). In the absence of a contract to the contrary, such proceeds
are held by the secured creditor in trust and are to be applied first
towards payments of costs, charges, and expenses incurred with
respect to the sale; second, towards dues of the secured creditor;
and lastly, towards any person entitled to the residue money.
13. In the facts of the present case, in exercise of its powers under
Section 13(4)(a) of the SARFAESI Act, the Appellant-Bank had
taken possession of the property of the Karkhana on 13.06.2005.
Later, vide sale letter dated 08.03.2010, the Appellant-Bank had
offered to sell the said property to one M/s Vidarbha Realties Pvt.
Ltd. for a total consideration of Rs. 14.10 crores. Notably, this
letter stated that the Appellant-Bank would take responsibility for
employees’ dues, and all other liabilities including statutory
liabilities would rest solely on the purchaser. This letter was
followed by a sale certificate dated 14.09.2010 recording the sale
17
of the property by the Appellant-Bank in favour of M/s Wainganga
Sugar and Power Ltd. for a consideration of Rs. 14.10 crores.
13.1 Before delving into the applicability of the distribution of
the sale proceeds as per Section 13(7) of the SARFAESI Act, we
note that the sale letter dated 08.03.2010 can be relied upon by
this Court. The contention of the learned Senior Counsel for the
Appellant that the sale letter dated 08.03.2010 was addressed to
a different entity than the company mentioned in the sale
certificate dated 14.09.2010 cannot be accepted. It is found that
the addressee in the sale letter dated 08.03.2010, M/s Vidarbha
Realties Private Limited, had been renamed as M/s Wainganga
Sugar and Power Private Limited as notified on 05.04.2010.
Subsequently, on 03.06.2010, M/s Wainganga Sugar and Power
Private Limited was converted to a public limited company and its
name was changed to M/s Wainganga Sugar and Power Limited,
which is also the name of the purchaser indicated on the sale
certificate. These interim developments between March 2010 and
September 2010 explain why the sale letter dated 08.03.2010 and
the final sale certificate issued on 14.09.2010 reflect different
names. However, since it is only a case of change in name of the
company, we find that the two entities are the same and the
18
subsequent purchaser, Respondent No. 5 herein (successor of
Wainganga Sugar and Power Ltd.) would be bound by the terms of
the sale letter dated 08.03.2010.
13.2 Further, it cannot be said that the sale letter dated
08.03.2010 is an external document and cannot be relied upon to
interpret the sale certificate. This is because the sale certificate
specifically references the sale letter by providing that the
purchaser accepts “all the encumbrances presently there on the
property and may arise in future and agreed to to pay the same as
per the sale letter accepted by the purchaser”. In view of such
wording, we find that the parties intended that the sale letter dated
08.03.2010 be read harmoniously with the sale certificate
inasmuch as it appears that the same is a part of the sale
certificate. When a composite reading of the sale certificate dated
14.09.2010 and the sale letter dated 08.03.2010 is undertaken, it
is revealed that though the purchaser had accepted all
encumbrances on the property, this did not include employees’
dues in view of the specific undertaking by the Appellant-Bank
that it would pay them. Given that the certificate directly
references the prior sale letter, it is essential to give effect to its
terms. Hence, it can be concluded that the parties had agreed to
19
the Bank paying the employees’ dues and the subsequent
purchaser settling other liabilities, including statutory liabilities.
When read in this light, it becomes clear that the sale certificate
and the sale letter constitute a contract.
13.3 This brings us to the scheme of distribution of sale
proceeds under Section 13(7) of the SARFAESI Act. As mentioned
supra, this provision prescribes the manner in which money
received by the secured creditor pursuant to its action under
Section 13(4) should be distributed. However, such manner of
distribution is only applicable in the absence of a contract to the
contrary. In this case, the sale certificate and sale letter form a
contract, the cumulative effect of which is an agreement that only
the employees’ dues would be settled by the Appellant-Bank, and
all other liabilities would be settled by the subsequent purchaser.
Thus, it can be said that the contract between the parties diverges
from the order of distribution stipulated under Section 13(7) and
constitutes a contract to the contrary, which must necessarily be
given effect.
13.4 In this regard, we find that the clarification given by the
Appellant-Bank in its counter-affidavit before the High Court that
by the sale letter dated 08.03.2010 it had only accepted liability
20
towards the payment of provident fund of the employees, is
unsustainable. Upon perusing the record, it is clear that this
clarification is only a subsequent attempt by the Appellant to
escape its liability. If the Appellant genuinely intended to restrict
its liability to provident fund, it would have expressly stated so in
the sale letter, which clearly prescribes the terms and conditions
of the sale between the Appellant and the purchaser. It is
important to bear in mind that at the time of entering into this
sale, the Appellant-Bank was well aware of the unpaid salaries due
to the employees of the Karkhana in view of the orders of the
Industrial Court dated 24.08.2006 and 27.04.2007. Hence, it
cannot be said that the Appellant-Bank agreed to use the term
“employees’ dues” in the sale letter despite intending to limit it to
provident fund dues only.
13.5 Thus, on facts, we find that in terms of Section 13(7) of the
SARFAESI Act, the distribution of money received by the
Appellant-Bank should be done as per the sale contract with
Respondent No. 5. In other words, the Appellant-Bank is liable to
satisfy the employees’ dues as per its undertaking in the sale letter
dated 08.03.2010. However, in view of the fact that all other
liabilities, including statutory liabilities were agreed to be borne by
21
the subsequent purchaser, statutory liabilities in respect of
employees, such as provident fund, gratuity, bonus etc., would
have to be borne by Respondent No. 5 herein. We reiterate here
that a subsequent attempt by the Appellant-Bank to interpret the
sale contract in a manner that reduces the scope of its liability to
provident fund dues cannot be given effect.
14. In view of the foregoing discussion, we summarize our
findings as follows:
(i) Section 529A of the Companies Act, which gives
workers’ dues a priority over all other debts, cannot be applied to
the instant case in view of Section 167 of the Societies Act.
(ii) Merely by virtue of being recoverable as arrears of land
revenue, the employees’ dues, in respect of which a recovery
certificate had been issued by the Industrial Court, cannot be
treated as a paramount charge in terms of Section 169(1) of the
Land Revenue Code. Instead, under 169(2) of the Land Revenue
Code, they would take precedence only over unsecured claims.
(iii) At the same time, the Appellant-Bank does not enjoy
any paramount charge over the sale proceeds either. Instead, as
per Section 13(7) of the SARFAESI Act, the sale letter dated
08.03.2010 and the sale certificate dated 14.09.2010 constitute a
22
contract which displaces the order of distribution stipulated under
the said provision.
(iv) The cumulative effect of these documents is that the
Appellant-Bank must pay the employees’ dues out of the sale
proceeds from the auctioned property. To this extent, the recovery
certificate issued by the Industrial Court on 08.08.2011 may be
executed against the Appellant herein. Further, given the
significant delay in payment of the salaries to the employees, such
recovery shall be made by the Collector within a period of six
months from the date of this order.
(v) All other dues in respect of the secured property,
including any unpaid statutory dues in relation to employees
(provident fund, gratuity, bonus, etc.) shall be paid by Respondent
No.5 within a period of six months from the date of this order.
15. The instant appeal is disposed of accordingly.
…..…………................................J.
(MOHAN M. SHANTANAGOUDAR)
….…………………………...............J.
(KRISHNA MURARI)
New Delhi;
December 4, 2019
