Supreme Court

The Maharashtra State Co-operative Bank Ltd. Vs. Babulal Lade and Ors.

MANU/SC/1671/2019

04.12.2019

Banking

Only expressly created statutory first charges under Central and State laws can take precedence over claims of secured creditors

Present appeal arises out of judgment passed by High Court. Vide the impugned judgment, the High Court has directed the issuance of a recovery certificate against the Appellant herein, thereby modifying the order passed by the Industrial Court, Maharashtra. Learned Senior Counsel for the Appellant argued that, the High Court erred in applying Section 529A of the Companies Act, 1956 as Section 167 of the Societies Act, 1960 specifically bars the application of the Companies Act to co-operative societies, as is the case with the Karkhana in present case.

The issue that arises for consideration in this appeal is whether, in the facts of present case, employees' dues can take precedence over the claim of the secured creditor in respect of the proceeds from sale of secured assets of the Karkhana under the Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002. (SARFAESI Act).

The recovery certificate issued under Section 50 of the Maharashtra Recognition of Trade Unions & Prevention of Unfair Labour Practices Act, 1971 (MRTU & PULP Act) only makes employees' dues recoverable as arrears of land revenue. Thus, it is clear that such employees' dues would fall under the category of claims captured by Section 169(2), and can only take priority over unsecured claims.

Further, as has been held by this Court in Central Bank of India v. State of Kerala, 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 Appellant-Bank.

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. The Appellant-Bank 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 herein. 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.

Section 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 Section 167 of the Societies Act. Merely by virtue of being recoverable as arrears of land revenue, the employees' dues, in respect of which a recovery certificate had been issued by the Industrial Court, cannot be treated as a paramount charge in terms of Section 169(1) of the Land Revenue Code, 1966. Instead, under 169(2) of the Land Revenue Code, 1966, they would take precedence only over unsecured claims.

At the same time, the Appellant-Bank does not enjoy any paramount charge over the sale proceeds either. Instead, as per Section 13(7) of the SARFAESI Act, the sale letter dated 8th March, 2010 and the sale certificate dated 14th September, 2010 constitute a contract which displaces the order of distribution stipulated under the said provision.

The cumulative effect of 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. Further, given the significant delay in payment of the salaries to the employees, such recovery shall be made by the Collector within a period of six months. All other dues in respect of the secured property, including any unpaid statutory dues in relation to employees (provident fund, gratuity, bonus, etc.) shall be paid by Respondent No. 5 within a period of six months. The instant appeal is disposed of accordingly.

Relevant

Central Bank of India v. State of Kerala, MANU/SC/0306/2009

Tags : Sale Secured assets Proceeds

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