TaxTMI 
TaxTMI 
2017 (3) TMI 487
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....er 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 defaulted in making repayment of the loan. As such the petitioner-bank was constrained to initiate action for recovery of dues. 3) The petitioner bank through its authorized officer issued notice under section 13 (2) on 6th June, 2011 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) (for short, SARFAESI Act, 2002) calling upon the Company to repay an amount of Rs. 4,30,51,432.51 ps within a period of 60 days from the 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 again....
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.... of such debts rank under clause (c) of the proviso to sub-section (1) of Section 529 (of the Companies Act, 1956) pari passu with such dues shall be paid in priority to 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. It is contended that since the Respondent- Company is under liquidation, the petitioner bank, as a secured creditor can stand out of the liquidation proceedings and enforce its security interests. Secondly, it is contended that respondent No.1 has an option to approach DRT for protection of its interests and cannot be permitted to proceed against the petitioner bank. 9) It is further contended that the action taken by the Respondent No.1 is in violation of provisions of Section 35 of the SARFAESI Act, 2002. It is also contended that sin....
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....creation of first charge in any Central Act for the time being in force, any amount of tax, penalty, interest, sum forfeited, fine or any other sum, payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer or, as the case may be, person. 38. Transfer to defraud revenue void. (1) Where, during the pendency of any proceedings under this Act or after the completion thereof, [the Commissioner has reason to believe that the liability 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 charge or transfer shall be void as against any claim in respect of any tax or other sum payable by the dealer as a result of the completion of such proceedings or otherwise: PROVIDED that, such charge or transfer shall ....
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....xt 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 exceeding four months within the twelve months next before the relevant date subject to the limit specified in sub- section (2); (c) all accrued holiday remuneration becoming payable to any employee, or in the case of his death to any other person in his right, on the termination of his employment before, or by the effect of, the winding up order or resolution; (d) unless the company is being wound up voluntarily merely for the purposes of reconstruction or of amalgamation 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....
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....arge. (6) 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 effects of the company within three months next before the date of a winding up order, the debts to which priority is given by this section shall be a first charge on the goods or effects so distrained on, or the proceeds of the sale thereof: Provided that, in respect of any money paid under any such charge, the landlord or other person shall have the same rights of priority as the person to whom the payment is made. (8) For the purposes of this section- (a) any remuneration in respect 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 holi....
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....or that matter priority over the statutory first charge of respondent No.1 in respect of the sale tax liability. In the aforesaid matter, it was contended by the bank that there being a conflict under section 38-C of the Bombay Salex Act, 1959 and Section 35 of the SARFAESI Act, 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 Bench of this Court has considered the contentions and has recorded the negative finding as has been specified above. 13) The judgment of the Division Bench of this Court in the matter of Thane Janata Sahakari Bank was a subject to challenge along with the other Special Leave Petitions, the first one being presented by the Central Bank of India against the State of Kerala & Ors to the Hon'ble Supreme Court reported in (2009....
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.... words, if there is no provision in the other enactments which are inconsistent with the DRT Act or the Securitisation Act, the provisions contained in those Acts cannot override other legislations. Section 38-C of the Bombay Act and Section 26-B of the Kerala Act also contain non obstante clauses and give statutory recognition to the priority of the State's charge over other debts, which was recognised by Indian High Courts even before 1950. In other words, these sections and similar provisions contained in other State legislations not only create first charge on the property of the dealer or any 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 workmen's dues and shall be paid in priority to all other debts. In paragraph 126 of the judgment ....
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.... 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 of the Companies Act, 1956. The Division Bench of this Court considered the arguments raised on behalf of the State relying upon the judgment in the matter of the Thane Janata Sahakari Bank Ltd. v. The Commissioner of Sales Tax & Anr and recorded its conclusions in paragraph Nos.11 and 12 of the Judgment as recorded below : 11. The learned Counsel appearing for the State Government relied on observations made in the judgment of the Division Bench in The Thane Janata Sahakari Bank 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....
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....f the Companies Act no doubt contains a non obstante clause but in construing the provisions thereof, it is necessary to determine the purport and object for which the same was enacted. 35. In terms of Section 529 of the Companies Act, as it stood prior to its amendment, the dues 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 confined to the legislative policy. Only because the dues of the workmen and the debts due to the secured creditors are treated pari passu with each other, the same by itself, in our considered view, would not lead to the conclusion that the concept of inter se priorities amongst the secured creditors had thereby been intended to be given a total go-by. 37. A non obstante clause must be given effect to, to the extent Parliame....
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....er Section 46-B of the State Financial Corporations Act, 1951. Since the 1956 Act is a Central Legislation and 1959 Act is a State Legislation, and the former legislation is subsequent in point of time, the non obstante clause contained in Section 529 A of the 1956 Act will override the non obstante clause contained in Section 38-C of the State Act. Even from the plain language of Section 38-C of the 1959 Act, it is clear that the non obstante clause contained therein operates subject to any other provision contained in the Central Act by which the first charge is created. Section 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 the judgment delivered by the Supreme Court in the matter of Allahabad Bank Vs. Canara Bank & Ors (2000) 4 SCC 406. The Supreme Court has observed in ....
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....rs 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) Rs. 1 lakh and the debt due to all secured creditors is Rs. 3 lakhs, the total amount due to all of them comes to Rs. 4 lakhs. Therefore, the workmen's share come to 25% (Rs. 1 lakh out of Rs. 4 lakhs). Now if the value of the security of a secured creditor (like Canara Bank) is Rs. 1 lakh, the 'workmen's portion' will be Rs. 25,000 which is the pro-rata amount to be shared by the said secured creditor. By virtue of Section 529A(1)(b) his priority over all others out of other monies available in the Tribunal is restricted to Rs. 25,000 only. 19) Coming to the facts of the instant matter, it is open 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 ....
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.... security interest and for matters connected therewith or incidental thereto. Inter-alia, one of the main objects of this Act is to clothe the banks and financial institutions in India with 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 of various eventualities such as when the borrower company is under liquidation for which proviso to sub-section (9) of Section 13 contains clear mandate keeping in view the provisions of Section 529 and 529A of the Companies Act, 1956. Since significant amendments were introduced in Section 529 while inserting Section 529A through Amendment Act 35 of 1985, effective from 24.5.1985 and with the aid of a non obstante clause in sub-section (1) of Section 529A workmen's dues were given preference over other dues an....
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....ved by the secured creditor and it does not create first charge in favour of the secured creditor. Though in normal course in view of Section 35 of the SARFAESI Act, 2002 no priority can be claimed by the bank or financial institutions over the State's statutory first charge in the matter of recovery of dues of sales tax etc. However, in respect of company under liquidation, in view of the provisions of Section 529-A of the Companies Act, a distinction has to be made and as has been laid down by the Division Bench of this Court in the matter of SICOM Ltd, which view has been upheld by the Supreme Court, the claim of the secured creditor in respect of the company being under liquidation shall have the priority in view of the language applied in Section 529-A of the Companies Act, 1956. It also must be taken note of that there is statutory recognition of priority claim of the secured creditor in view of the amendment brought into effect by virtue of Act No.44 of 2016 thereby introducing section 26E providing for priority to secured creditor over all other debts and all taxes, cess and other rates payable to Central Government or the State Government or the Local Authority. The a....