2009 (4) TMI 441 - HC - Companies Law

ESI Corporation appeal dismissed, Official Liquidator decisions upheld. Lack of diligence cited. Compliance with statutory requirements ordered.

The court dismissed the appeal filed by the ESI Corporation, upholding the Official Liquidator's decisions on the validity of proof of debt, interest ... Validity of the notice of admission/rejection of proof of debt passed by the Official Liquidator in Form No. 69 on 30-9-2008, admitting a sum of ₹ 74,366.54 as an unsecured debt of M/s. Kera Sinter Ltd., towards the appellant-Corporation questioned Held that:- The facts in this case reveal the lazy and laid back approach of the corporation. By its own conduct, it had committed a default in recovering contributions from the employer, which form the backbone for the ultimate benefits and purpose for which the fund was required to be expended. For all its failure, the corporation cannot now indulge in a cover up action by attempting to pass belatedly orders under section 85B of the Act. One wonders whether such sums can be recovered at all after lapse of several years, in disregard of the period of limitation provided for any such recoveries. Much has been left to be desired in the entire matter. Since there could be possibly several other instances of similar wilful default, let a copy of this order be marked to the Accountant General, Andhra Pradesh, Hyderabad, as well as to the Ministry of Labour, Employment and Training, Government of India, New Delhi, who would be exercising the necessary control under sections 34 and 35 of the ESI Act and ensure a corrective measure. For all the aforesaid reasons, the appeal preferred by the ESI Corporation fails and is accordingly, dismissed. Issues Involved:1. Validity of the notice of admission/rejection of proof of debt.2. Claim of interest beyond the date of winding up.3. Claim of damages under section 85B of the ESI Act.4. Priority of debts payable to the ESI Corporation.Detailed Analysis:1. Validity of the Notice of Admission/Rejection of Proof of Debt:The appeal was filed by the Regional Director of the ESI Corporation challenging the notice of admission/rejection of proof of debt issued by the Official Liquidator on 30-9-2008. The Official Liquidator admitted Rs. 74,366.54 as unsecured debt towards the appellant-Corporation and rejected the remaining claim of Rs. 69,863.46. The court noted that the Official Liquidator had invited claims from creditors, and the ESI Corporation filed its claim on 28-2-2007. The notice of admission/rejection was based on documents produced by the appellant-Corporation. The court treated the application as an appeal under rule 164 of the Companies (Court) Rules, 1959.2. Claim of Interest Beyond the Date of Winding Up:The appellant-Corporation claimed interest up to 31-12-2004, but the Official Liquidator admitted interest only up to the date of winding up, i.e., 28-6-1999. The court upheld the Official Liquidator's decision, stating that under rule 154 of the Companies (Court) Rules, 1959, the value of debts should be estimated as at the time of the winding-up order. Rule 179 allows payment of interest for the period after winding up only if there is a surplus after paying all admitted claims. Therefore, the interest claim beyond the winding-up date was rightly rejected.3. Claim of Damages Under Section 85B of the ESI Act:The appellant-Corporation's claim for damages under section 85B of the ESI Act was rejected by the Official Liquidator. The court noted that section 85B requires determination and quantification of damages, and the employer must be given a reasonable opportunity to be heard. The ESI Corporation had not completed this exercise before lodging the claim. The subsequent determination of damages on 12-11-2008 was also found to be illegal as the show-cause notice was not properly served. The court emphasized that any additional liabilities created after the winding-up order must involve the Official Liquidator, not the former Managing Director. Hence, the order passed on 9-3-2009 was also unsustainable.4. Priority of Debts Payable to the ESI Corporation:The court rejected the appellant-Corporation's contention that its debts should have priority over other debts. The Supreme Court's judgment in Union of India v. SICOM Ltd. was cited, which held that the Crown's preferential right is confined to unsecured creditors and does not extend over secured creditors. Section 94 of the ESI Act deems ESI debts to be included among those set out under section 530 of the Companies Act, 1956, which does not override the priorities under section 529A for workmen's dues and secured creditors. Therefore, the ESI Corporation's debt does not have precedence over secured creditors.Conclusion:The court dismissed the appeal, noting the ESI Corporation's failure to act diligently in recovering contributions and the improper procedure followed in determining damages. The judgment highlighted the need for the Corporation to exercise greater vigilance and comply with statutory requirements. A copy of the order was directed to be sent to the Accountant General, Andhra Pradesh, and the Ministry of Labour, Employment and Training, Government of India, for corrective measures. The appeal was dismissed without costs.