Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002: s.13(7) – Whether employees dues can take precedence over the claim of secured creditor – In the instant case, respondent no.6-Society (Karkhana) obtained credit facilities from appellant-Bank and mortgaged its properties in return – Default in repayment of loan amount – Recovery proceedings by appellant-Bank under s.13(2) against Karkhana – Owing to its poor financial condition, Karkhana issued notice to the employees to proceed on leave without pay – Representatives of the employees-respondent no.1 to 3 successfully challenged the notice before Industrial Court and obtained order whereby Karkhana was directed to pay unpaid salaries to its employees on top priority basis – Relying on the said order, respondent no.1 to 3 sought issuance of recovery certificate against Karkhana and appellant-Bank – Industrial Court held that recovery certificate for unpaid salaries of Karkhana employees could not be issued against the appellant-Bank – It also refused to issue such a certificate against the Karkhana in view of its precarious financial condition – However, Karkhana was directed to pay the unpaid salaries to the employees on top priority basis as and when the funds were available – In challenge against the order, High Court directed issuance of recovery certificate against Karkhana – Meanwhile, one of the attached properties of Karkhana was auctioned and sold by appellant-bank and proceeds appropriated by appellant-bank towards the amount due to it from Karkhana – Aggrieved by non-issuance of a recovery certificate against the appellant-bank, respondent Nos. 1 to 3 filed writ petition – During the pendency of this petition, the competent authority under the Societies Act directed liquidation of the Karkhana – Finally, High Court disposed of writ petition observing that in terms of s.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 – Further, it held that upon the liquidation of the Karkhana, s.529A of the Companies Act, 1956 came into operation, thereby 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 amount from the sale proceeds held in trust by appellant-Bank – Instant appeal filed against this order – Held: s.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 s.167 of the Societies Act which bars applicability of Companies Act to societies registered under the Societies Act – It is clear from s.50 of the MRTU & PULP Act and s.169 of the Land Revenue Code 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 – 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 – s.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, s.169(2) deals with the latter category and gives them priority only over unsecured claims – In the facts of the instant case, the recovery certificate issued under s.50 of the MRTU & PULP Act only makes employees’ dues recoverable as arrears of land revenue – Thus, such employees’ dues would fall under the category of claims captured by s.169(2), and can only take priority over unsecured claims – Given that s.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 AppellantBank, which is a secured creditor – Thus, 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 – At the same time, the Appellant-Bank does not enjoy any paramount charge over the sale proceeds either – Instead, as per s.13(7) of the SARFAESI Act, the sale letter and the sale certificate constitute a contract which displaces the order of distribution stipulated under the said provision – 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 may be executed against the Appellant – Maharashtra Co-operative Societies Act, 1960 – s.167 – Maharashtra Recognition of Trade Unions and Prevention of Trade Unions and Prevention of Unfair Labour Practices Act, 1971 – s.50 – Companies Act – s.529A.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002: s.13(4) – Manner of distributing the money received by the secured creditor through the sale of secured assets – s.13(4) of the SARFAESI Act allows a secured creditor to take possession of the secured assets of a borrower-indefault, including the right to transfer them by way of sale – Manner of distributing proceeds from such sale is provided under s.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.
Disposing of the appeal, the Court
HELD: 1. Section 167 of the Maharashtra Co-operative Societies Act, 1960 creates an express bar on the applicability of the Companies Act to societies registered under the Societies Act. Given that the Karkhana was a co-operative society registered under the said Act, 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. [Paras 7, 8][496-D]
2.1 Whether the employees’ dues can take priority over other claims by virtue of being recoverable as arrears of land revenue.
It is clear from Section 50 of the MRTU & PULP Act and Section 169 of the Land Revenue Code 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. 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. 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. [Paras 9, 10, 10.1][496-E; 497-D, F-G]
2.2 In the facts of this case, the recovery certificate issued under Section 50 of the MRTU & PULP Act only makes employees’ dues recoverable as arrears of land revenue. Thus, such employees’ dues would fall under the category of claims captured by Section 169(2), and can only take priority over unsecured claims. Further, 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. Thus, under the scheme of the Land Revenue Code and the MRTU & PULP Act, the employees’ dues cannot claim priority over the claim of the Bank. However, this would 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. [Paras 10.3, 10.4 and 11] [499-D-F]
3.1 Manner of distributing the money received by the secured creditor through the sale of secured assets. 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. 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, by 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 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. The sale letter dated 08.03.2010 can be relied upon by this Court. The contention 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, 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, the two entities are the same and the subsequent purchaser, Respondent No. 5 (successor of Wainganga Sugar and Power Ltd.) would be bound by the terms of the sale letter dated 08.03.2010. [Paras 11, 12, 13, 13.1][500D; 501-B-H; 502-A-B]
3.2 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 pay the same as per the sale letter accepted by the purchaser”. In view of such wording, 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 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. [Para 13.2][502-C-E]
4.1 Scheme of distribution of sale proceeds under Section 13(7) of the SARFAESI Act. Section 13(7) 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. [Para 13.3][502F-H; 503-A]
4.2 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 towards the payment of provident fund of the employees, is unsustainable. 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. At the time of entering into this sale, the AppellantBank was well aware of the unpaid salaries due to the employees of the Karkhana in view of the orders of the Industrial Court. 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. Thus, on facts, 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 AppellantBank 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 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. 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. [Paras 13.4 and 13.5][503-B-F]
Central Bank of India v. State of Kerala (2009) 4 SCC
94 : [2009] 3 SCR 735 – relied on.
SICOM Ltd. v. State of Maharashtra & Anr., (2010) 6 Bom CR 749; City Co-op Credit & Capital Ltd. & Anr. v. Official Liquidator of Satwik Electric Control Pvt Ltd. (2019) 4 Bom CR 274 – approved.
Builders Supply Corporation v. Union of India AIR 1965 SC 1061 : [1965] SCR 289 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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