2018 (12) TMI 1933 - HC - Indian Laws

Secured creditor wins priority over employee gratuity claim in landmark ruling

Maharashtra State Cooperative Versus Gangapur Sahakari Sakhar Kharkhana Ltd.

The court ruled in favor of the petitioner, a secured creditor under the SARFAESI Act, in a dispute regarding the priority of claim between the creditor ... Jurisdiction - Attachment of land owned by respondent No.1 - power and jurisdiction of respondent Nos.3 and 4 to attach the immovable property of respondent No.1, that is mortgaged with the petitioner bank - non-compliance with the notice issued under Section 13(2) of the SARFAESI Act - non-performing assets - HELD THAT:- In the present case, the petitioner and respondent No.1 are the Cooperative Societies, registered under the Maharashtra Cooperative Societies Act. There is no provision under the Maharashtra Cooperative Societies Act similar to Sections 529 and 529A of the Companies Act. There cannot be any dispute with the proposition that the welfare legislation will have to be liberally construed and the payment of gratuity would be a part of welfare legislation as has been held by the Apex Court in the case of All India Allahabad Bank Retired Employees Association [2009 (12) TMI 1024 - SUPREME COURT]. In the said case, the question before the Apex Court was whether the retired employees of the appellant Bank therein were entitled for the payment of gratuity under the provisions of Payment of Gratuity Act. In that context, the Apex Court had observed that the said remedial statute will have to be liberally construed. In the present case, the dispute would be about the priority of claim, whether the claim of the petitioner bank would have a priority over the claim under the Payment of Gratuity Act visavis the provisions of the SARFAESI Act. The Apex Court in the case of UNION OF INDIA VERSUS SICOM LTD. [2008 (12) TMI 53 - SUPREME COURT] has unequivocally held that considering the statutory right of the Financial Corporation under the State Financial Corporations Act and the non obstante clause occurring therein, the Corporation had a preferential claim. The SARFAESI Act has also been amended and Section 26E is introduced with the non obstante clause giving a priority claim over all other debts - The recovery certificate has been legitimately and validly issued. However, pursuant to the said recovery certificate, the secured assets of respondent No.1 with the petitioner bank cannot be attached under the said recovery certificate and as observed above, after the sale of the assets of respondent No.1 and realisation of the dues of the petitioner, if certain amount remains, then respondent Nos.5 to 62 would be entitled for the same. The attachment over the secured assets with the petitioner bank i.e. the properties of respondent No.1 bearing Gat Nos.44/1, 44/2 and 44/3 is quashed and set aside. However, the prayer of the petitioner for quashing recovery certificate is rejected - Application disposed off. Issues:1. Priority of claim between a secured creditor under the SARFAESI Act and employees claiming gratuity under the Payment of Gratuity Act.2. Jurisdiction of authorities to attach secured assets of a defaulting entity.Analysis:1. The petitioner, a secured creditor, invoked SARFAESI Act against a defaulting entity, taking possession of secured assets and issuing auction notices. Meanwhile, employees (respondent Nos.5 to 62) claimed gratuity under the Payment of Gratuity Act, seeking recovery through a revenue certificate. The petitioner argued its priority as a secured creditor, citing precedents like Union of India v. SICOM Limited and Tata Metaliks Limited v. Union of India. The employees contended that gratuity, being a social welfare due, should be treated as arrears of land revenue, superseding the petitioner's claim. They relied on cases such as Allahabad Bank v. All India Allahabad Bank Retired Employees Association and Employees Provident Fund Commissioner v. Esskay Pharmaceuticals Limited.2. The court acknowledged the petitioner's status as a secured creditor under SARFAESI Act, having taken possession of the assets in question. The dispute centered on whether authorities (respondent Nos.3 and 4) could attach the same assets for gratuity recovery. The court noted that the Payment of Gratuity Act allows gratuity recovery as arrears of land revenue, but emphasized the apex court's stance in SICOM Limited case, prioritizing secured creditor claims over crown debts. It distinguished the EPF Act's provisions from the Gratuity Act, asserting the latter's lack of similar priority clauses.3. The court highlighted that cooperative societies like the petitioner and the defaulting entity were not governed by provisions akin to Companies Act's Sections 529 and 529A. It stressed the liberal construction of welfare legislation, citing All India Allahabad Bank Retired Employees Association case. Ultimately, the court ruled in favor of the petitioner, quashing the attachment over the secured assets while upholding the validity of the recovery certificate. It directed that employees could claim gratuity from any surplus post-petitioner's dues realization, emphasizing the priority of the petitioner's claim under SARFAESI Act amendments.4. The judgment clarified the interplay between the SARFAESI Act, Payment of Gratuity Act, and precedence of claims in cases of secured assets possession and recovery proceedings. It provided a nuanced analysis of the legal principles governing secured creditor rights, welfare legislation interpretation, and the hierarchy of claims in such complex financial and social welfare scenarios.