2004 (2) TMI 364 - HC - Companies Law

States of Maharashtra and Karnataka Recognized as Secured Creditors in Liquidation Process

State of Maharashtra Versus Official Liquidator, Reliance Heat Transfer (P.) Ltd.

State of Maharashtra Versus Official Liquidator, Reliance Heat Transfer (P.) Ltd. - [2004] 53 SCL 158 (BOM.) , [2004] 135 STC 567 (Bom) Issues Involved:1. Whether the Applicants (State of Maharashtra and State of Karnataka) can be treated as 'secured creditors' by operation of law.2. The precedence of the State's claims over the claims of secured creditors and workers.3. The applicability of the provisions of the respective Sales Tax Acts and the Companies Act.4. The effect of the location of the properties/assets of the Company in liquidation on the State of Karnataka's claims.Detailed Analysis:1. Whether the Applicants (State of Maharashtra and State of Karnataka) can be treated as 'secured creditors' by operation of law:The court examined whether the States of Maharashtra and Karnataka can be considered as secured creditors by operation of law for the recovery of their dues under various Sales Tax Acts. The court referred to the provisions of the Bombay Sales Tax Act, 1959, Maharashtra Sales Tax on Works Contract Act, 1989, Karnataka Sales Tax Act, 1957, and the Central Sales Tax Act, 1956, which provide that any unpaid tax, penalty, or interest is recoverable as arrears of land revenue and creates a charge on the property of the defaulter.The court concluded that by virtue of these provisions, the States have a charge on the property of the company in liquidation, making them secured creditors by operation of law. This conclusion was supported by the definition of 'secured creditor' under the Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920, which includes a person holding a charge on the property of the debtor.2. The precedence of the State's claims over the claims of secured creditors and workers:The court addressed the argument that the State's claims should have precedence over the claims of secured creditors and workers. The court referred to Section 529A of the Companies Act, 1956, which provides that in the winding up of a company, the dues of workers and secured creditors shall be paid in priority to all other debts on a pari passu basis. The court held that the State's claims, being secured by operation of law, should be considered along with the claims of other secured creditors and workers on a pari passu basis, rather than having precedence over them.3. The applicability of the provisions of the respective Sales Tax Acts and the Companies Act:The court examined the relevant provisions of the Bombay Sales Tax Act, 1959, Maharashtra Sales Tax on Works Contract Act, 1989, Karnataka Sales Tax Act, 1957, and the Central Sales Tax Act, 1956, which provide for the recovery of unpaid tax, penalty, or interest as arrears of land revenue and create a charge on the property of the defaulter. The court also referred to Section 529A of the Companies Act, 1956, which provides for the priority of payment of dues to workers and secured creditors in the winding up of a company.The court concluded that the provisions of the respective Sales Tax Acts and the Companies Act should be read together to determine the status of the State as a secured creditor. The court held that the State's claims, being secured by operation of law, should be considered along with the claims of other secured creditors and workers on a pari passu basis.4. The effect of the location of the properties/assets of the Company in liquidation on the State of Karnataka's claims:The court addressed the argument that the provisions of the Karnataka Acts cannot be invoked in relation to the assets or properties of the company in liquidation situated outside the State of Karnataka. The court held that the claim of the State of Karnataka is not on the properties of the company in liquidation as such, but on the corpus available in the hands of the Official Liquidator for disbursement of the claims. The court concluded that the State of Karnataka's claim should be considered along with the claims of other secured creditors and workers on a pari passu basis, regardless of the location of the properties/assets of the company in liquidation.Judgment:The court directed the Official Liquidator to reckon the claims of the States of Maharashtra and Karnataka as secured creditors of the company in liquidation along with the other secured creditors and workers on a pari passu basis in terms of Section 529A of the Companies Act. The court also directed the Official Liquidator to re-compute the claims of the respective secured creditors by including the claims of the States of Maharashtra and Karnataka as secured creditors and to disburse the amounts accordingly.