THE MAHARASHTRA STATE CO-OPERATIVE BANK LTD.V. BABULAL LADE & ORS. versus BABULAL LADE & ORS. on 4 December 2019

THE MAHARASHTRA STATE CO-OPERATIVE BANK LTD.

v.

BABULAL LADE & ORS.

(Civil Appeal No. 232 of 2016)

DECEMBER 04, 2019

[MOHAN M. SHANTANAGOUDAR ANDKRISHNA MURARI, JJ.]

Securitisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002: s.13(7) – Whetheremployees dues can take precedence over the claim of securedcreditor – In the instant case, respondent no.6-Society (Karkhana)obtained credit facilities from appellant-Bank and mortgaged itsproperties in return – Default in repayment of loan amount –Recovery proceedings by appellant-Bank under s.13(2) againstKarkhana – Owing to its poor financial condition, Karkhana issuednotice to the employees to proceed on leave without pay –Representatives of the employees-respondent no.1 to 3 successfullychallenged the notice before Industrial Court and obtained orderwhereby Karkhana was directed to pay unpaid salaries to itsemployees on top priority basis – Relying on the said order,respondent no.1 to 3 sought issuance of recovery certificate againstKarkhana and appellant-Bank – Industrial Court held that recoverycertificate for unpaid salaries of Karkhana employees could notbe issued against the appellant-Bank – It also refused to issue sucha certificate against the Karkhana in view of its precarious financialcondition – However, Karkhana was directed to pay the unpaidsalaries to the employees on top priority basis as and when thefunds were available – In challenge against the order, High Courtdirected issuance of recovery certificate against Karkhana –Meanwhile, one of the attached properties of Karkhana wasauctioned and sold by appellant-bank and proceeds appropriatedby appellant-bank towards the amount due to it from Karkhana –Aggrieved by non-issuance of a recovery certificate against theappellant-bank, respondent Nos. 1 to 3 filed writ petition – Duringthe pendency of this petition, the competent authority under theSocieties Act directed liquidation of the Karkhana – Finally, High

A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

ACourt disposed of writ petition observing that in terms of s.50 ofthe MRTU & PULP Act, the recovery certificate should have beenissued to the Collector for recovering the amount from the Karkhanaand its Managing Director – Further, it held that upon the liquidationof the Karkhana, s.529A of the Companies Act, 1956 came intooperation, thereby according employees’ dues priority over all otherBdues in respect of the sale proceeds – In light of this, it was heldthat the Collector could recover the amount from the sale proceedsheld in trust by appellant-Bank – Instant appeal filed against thisorder – Held: s.529A of the Companies Act, which gives workers’dues a priority over all other debts, cannot be applied to the instantCcase in view of s.167 of the Societies Act which bars applicabilityof Companies Act to societies registered under the Societies Act – Itis clear from s.50 of the MRTU & PULP Act and s.169 of the LandRevenue Code that dues of employees in respect of which an orderhas been made by a Court under Chapter VI of the MRTU & PULPAct are recoverable in the same manner as arrears of land revenueD– There is a material difference between arrears of land revenuedue on account of land, and amounts other than arrears of landrevenue but recoverable in the same manner as arrears of land –s.169(1) deals with the former category of claims and makes them aparamount charge on the land over all other claims – On the otherEhand, s.169(2) deals with the latter category and gives them priorityonly over unsecured claims – In the facts of the instant case, therecovery certificate issued under s.50 of the MRTU & PULP Actonly makes employees’ dues recoverable as arrears of land revenue– Thus, such employees’ dues would fall under the category of claimscaptured by s.169(2), and can only take priority over unsecuredFclaims – Given that s.50 of the MRTU & PULP Act falls short ofexpressly making the employees’ dues a ‘first charge’, it cannot besaid that such dues have priority over the claims of the Appellant-Bank, which is a secured creditor – Thus, under the scheme of theLand Revenue Code and the MRTU & PULP Act, the employees’Gdues cannot claim priority over the claim of the Appellant-Bank –At the same time, the Appellant-Bank does not enjoy any paramountcharge over the sale proceeds either – Instead, as per s.13(7) of theSARFAESI Act, the sale letter and the sale certificate constitute acontract which displaces the order of distribution stipulated underthe said provision – The cumulative effect of these documents isH

THE MAHARASHTRA STATE CO-OPERATIVE BANK LTD. v.BABULAL LADE

that the Appellant-Bank must pay the employees’ dues out of thesale proceeds from the auctioned property – To this extent, therecovery certificate issued by the Industrial Court may be executedagainst the Appellant – Maharashtra Co-operative Societies Act,1960 – s.167 – Maharashtra Recognition of Trade Unions andPrevention of Trade Unions and Prevention of Unfair LabourPractices Act, 1971 – s.50 – Companies Act – s.529A.

Securitisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002: s.13(4) – Manner ofdistributing the money received by the secured creditor through thesale of secured assets – s.13(4) of the SARFAESI Act allows a securedcreditor to take possession of the secured assets of a borrower-in-default, including the right to transfer them by way of sale – Mannerof distributing proceeds from such sale is provided under s.13(7) –In the absence of a contract to the contrary, such proceeds are heldby the secured creditor in trust and are to be applied first towardspayments of costs, charges, and expenses incurred with respect tothe sale; second, towards dues of the secured creditor; and lastly,towards any person entitled to the residue money.

Disposing of the appeal, the Court

Conclusion

Disposing of the appeal, the Court

HELD: 1. Section 167 of the Maharashtra Co-operativeSocieties Act, 1960 creates an express bar on the applicability ofthe Companies Act to societies registered under the SocietiesAct. Given that the Karkhana was a co-operative societyregistered under the said Act, Section 167 is squarely applicable,and the High Court committed a grave error in relying uponSection 529A of the Companies Act. Thus, the employees cannotmake use of Section 529A of the Companies Act to claim priorityover all other debts of the Karkhana. [Paras 7, 8][496-D]

2.1 Whether the employees’ dues can take priority overother claims by virtue of being recoverable as arrears of landrevenue.

It is clear from Section 50 of the MRTU & PULP Act andSection 169 of the Land Revenue Code that dues of employeesin respect of which an order has been made by a Court underChapter VI of the MRTU & PULP Act are recoverable in the AB

C

D

E

F

G

H

Asame manner as arrears of land revenue. There is a materialdifference between arrears of land revenue due on account ofland, and amounts other than arrears of land revenue butrecoverable in the same manner as arrears of land. Section 169(1)deals with the former category of claims and makes them aparamount charge on the land over all other claims. On the otherBhand, Section 169(2) deals with the latter category and gives thempriority 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 issuedunder Section 50 of the MRTU & PULP Act only makesCemployees’ dues recoverable as arrears of land revenue. Thus,such employees’ dues would fall under the category of claimscaptured by Section 169(2), and can only take priority overunsecured claims. Further, only expressly created statutory firstcharges under Central and State laws can take precedence overDthe claims of secured creditors under the SARFAESI Act. It isnot enough to merely provide for recovery of dues as arrears ofland revenue. Given that Section 50 of the MRTU & PULP Actfalls short of expressly making the employees’ dues a ‘firstcharge’, it cannot be said that such dues have priority over theclaims of the Appellant-Bank, which is a secured creditor. Thus,Eunder the scheme of the Land Revenue Code and the MRTU &PULP Act, the employees’ dues cannot claim priority over theclaim of the Bank. However, this would not mean that theAppellant-Bank automatically holds a paramount charge over theproceeds from the sale of the secured assets. Under the schemeFof the SARFAESI Act, there is nothing to show that a priority iscreated in favour of banks, financial institutions, and othersecured creditors as against a first charge specifically createdunder any other statute. [Paras 10.3, 10.4 and 11] [499-D-F]

3.1 Manner of distributing the money received by theGsecured creditor through the sale of secured assets. Section 13(4)of the SARFAESI Act allows a secured creditor to take possessionof the secured assets of a borrower-in-default, including the rightto transfer them by way of sale. What may be done with theproceeds from such sale is provided under Section 13(7). In theabsence of a contract to the contrary, such proceeds are held byH

the secured creditor in trust and are to be applied first towardspayments of costs, charges, and expenses incurred with respectto the sale; second, towards dues of the secured creditor; andlastly, towards any person entitled to the residue money. In thefacts of the present case, in exercise of its powers under Section13(4)(a) of the SARFAESI Act, the Appellant-Bank had takenpossession of the property of the Karkhana on 13.06.2005. Later,by sale letter dated 08.03.2010, the Appellant-Bank had offeredto sell the said property to one M/s Vidarbha Realties Pvt. Ltd.for a total consideration of Rs. 14.10 crores. Notably, this letterstated that the Appellant-Bank would take responsibility foremployees’ dues, and all other liabilities including statutoryliabilities would rest solely on the purchaser. This letter wasfollowed by a sale certificate dated 14.09.2010 recording the saleof the property by the Appellant-Bank in favour of M/s WaingangaSugar 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 dated08.03.2010 was addressed to a different entity than the companymentioned in the sale certificate dated 14.09.2010 cannot beaccepted. It is found that the addressee in the sale letter dated08.03.2010, M/s Vidarbha Realties Private Limited, had beenrenamed as M/s Wainganga Sugar and Power Private Limited asnotified on 05.04.2010. Subsequently, M/s Wainganga Sugar andPower Private Limited was converted to a public limited companyand its name was changed to M/s Wainganga Sugar and PowerLimited, which is also the name of the purchaser indicated on thesale certificate. These interim developments between March2010 and September 2010 explain why the sale letter dated08.03.2010 and the final sale certificate issued on 14.09.2010reflect different names. However, since it is only a case of changein name of the company, the two entities are the same and thesubsequent purchaser, Respondent No. 5 (successor ofWainganga Sugar and Power Ltd.) would be bound by the termsof the sale letter dated 08.03.2010. [Paras 11, 12, 13, 13.1][500-D; 501-B-H; 502-A-B]

3.2 Further, it cannot be said that the sale letter dated08.03.2010 is an external document and cannot be relied upon to

AB

CDE

FG

H

Ainterpret the sale certificate. This is because the sale certificatespecifically references the sale letter by providing that thepurchaser accepts “all the encumbrances presently there on theproperty and may arise in future and agreed to pay the same asper the sale letter accepted by the purchaser”. In view of suchwording, the parties intended that the sale letter dated 08.03.2010Bbe read harmoniously with the sale certificate inasmuch as itappears that the same is a part of the sale certificate. When acomposite reading of the sale certificate dated 14.09.2010 andthe sale letter dated 08.03.2010 is undertaken, it is revealed thatthough the purchaser had accepted all encumbrances on theCproperty, this did not include employees’ dues in view of thespecific 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 concludedthat the parties had agreed to the Bank paying the employees’dues and the subsequent purchaser settling other liabilities,Dincluding statutory liabilities. When read in this light, it becomesclear that the sale certificate and the sale letter constitute acontract. [Para 13.2][502-C-E]

4.1 Scheme of distribution of sale proceeds under Section

4.1 Scheme of distribution of sale proceeds under Section 13(7) of the SARFAESI Act.Section 13(7) prescribes the mannerEin which money received by the secured creditor pursuant to itsaction under Section 13(4) should be distributed. However, suchmanner of distribution is only applicable in the absence of acontract to the contrary. In this case, the sale certificate and saleletter form a contract, the cumulative effect of which is anFagreement that only the employees’ dues would be settled bythe Appellant-Bank, and all other liabilities would be settled bythe subsequent purchaser. Thus, it can be said that the contractbetween the parties diverges from the order of distributionstipulated under Section 13(7) and constitutes a contract to the contrary, which must necessarily be given effect. [Para 13.3][502-GF-H; 503-A]

4.2 The clarification given by the Appellant-Bank in itscounter-affidavit before the High Court that by the sale letterdated 08.03.2010 it had only accepted liability towards the H

payment of provident fund of the employees, is unsustainable.This clarification is only a subsequent attempt by the Appellantto escape its liability. If the Appellant genuinely intended torestrict its liability to provident fund, it would have expresslystated so in the sale letter, which clearly prescribes the termsand conditions of the sale between the Appellant and thepurchaser. At the time of entering into this sale, the Appellant-Bank was well aware of the unpaid salaries due to the employeesof the Karkhana in view of the orders of the Industrial Court.Hence, it cannot be said that the Appellant-Bank agreed to usethe term “employees’ dues” in the sale letter despite intendingto limit it to provident fund dues only. Thus, on facts, in terms ofSection 13(7) of the SARFAESI Act, the distribution of moneyreceived by the Appellant-Bank should be done as per the salecontract with Respondent No. 5. In other words, the Appellant-Bank is liable to satisfy the employees’ dues as per itsundertaking in the sale letter dated 08.03.2010. However, in viewof the fact that all other liabilities, including statutory liabilitieswere agreed to be borne by the subsequent purchaser, statutoryliabilities in respect of employees, such as provident fund, gratuity,bonus etc., would have to be borne by Respondent No. 5. Asubsequent attempt by the Appellant-Bank to interpret the salecontract in a manner that reduces the scope of its liability toprovident fund dues cannot be given effect. [Paras 13.4 and13.5][503-B-F]

Central Bank of India v. State of Kerala (2009) 4 SCC94 : [2009] 3 SCR 735 – relied on.

SICOM Ltd. v. State of Maharashtra & Anr., (2010) 6Bom 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 AIR1965 SC 1061 : [1965] SCR 289 – referred to.

Case Law Reference

(2010) 6 Bom CR 749[1965] SCR 289

A

B

C

D

E

F

G

H

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 232 of2016.

B

From the Judgment and Order dated 01.12.2015 of the HighCourt of Judicature at Bombay, Nagpur Bench at Nagpur in Writ PetitionNo. 3879 of 2012.

B. S. Patil, Sr. Adv., M. Y. Deshmukh, Ms. Manjeet Kirpal,Chinmay Deshpande, Geet Ahuja, Advs. for the Appellant.C

Dr. Manish Singhvi, Sr. Adv., Dharmendra Kumar Sinha,Ms. Shweta Sand, Arpit Parkash, Prakash Meghe, Satyajit A. Desai,Ms. Laxmi Malewar, Ms. Anagha S. Desai, Rahul Chitnis, AadityaA. Pande, Chander Shekhar Ashri, Advs. for the Respondents.

DThe Judgment of the Court was delivered by MOHAN M. SHANTANAGOUDAR, J.

1. This appeal arises out of judgment dated 01.12.2015 passed bythe Nagpur Bench of the High Court of Bombay in W.P. No. 3879/2012.EVide the impugned judgment, the Hon’ble High Court has directed theissuance of a recovery certificate against the Appellant herein, therebymodifying the order dated 08.08.2011 passed by the Bhandara Bench,Industrial Court, Maharashtra.

2. The brief facts giving rise to this appeal are as follows:F

2.1 Registered under the Maharashtra Co-operative Societies Act,1960 (hereinafter ‘Societies Act’), Respondent No. 6 herein, VaingangaSahakari Sakhar Karkhana Ltd. (hereinafter ‘Karkhana’) had obtainedcredit facilities from the Appellant-Bank and mortgaged its properties inreturn. When it defaulted on the repayment of the loan, the Appellant-GBank initiated recovery proceedings on 10.02.2005, by issuing a noticeunder Section 13(2) of the Securitisation and Reconstruction of FinancialAssets and Enforcement of Security Interest Act, 2002 (hereinafter‘SARFAESI Act’). Later, on 13.06.2005, the Appellant-Bank tookphysical possession of the mortgaged properties of the Karkhana as perSection 13(4) of the SARFAESI Act.

H

2.2 Owing to its poor financial condition, on 24.01.2006, theKarkhana issued a notice to its employees directing them to proceed onleave without salary w.e.f. 24.02.2006. This was challenged byrepresentatives of the Karkhana employees (Respondent Nos. 1 to 3herein) in ULPA No. 65/2006 filed under Section 28 read with items 9and 10 of Schedule IV of the Maharashtra Recognition of Trade Unions& Prevention of Unfair Labour Practices Act, 1971 (hereinafter ‘MRTU& PULP Act’). Vide order dated 24.08.2006, the Industrial Court quashedthe notice and held that it amounted to an unfair labour practice. Further,noting that Karkhana had not paid salaries to its employees since July2003, the Industrial Court directed the Karkhana to pay the unpaid salarieson top priority basis from any funds that may become available with it.

2.3 On the basis of this order, Respondent Nos. 1 to 3 filed amiscellaneous application, ULPA No. 5/2007, seeking the issuance of arecovery certificate against the Karkhana, its Managing Director(Respondent No. 4 herein), and the Appellant-Bank under Section 50 ofthe MRTU & PULP Act. It is to be noted that the Appellant was arraignedas a party in this proceeding for the first time. Vide order dated 27.04.2007,the Industrial Court held that a recovery certificate for unpaid salariesof the Karkhana employees could not be issued against the Appellant-Bank. It also refused to issue such a certificate against the Karkhanaand its Managing Director in view of the precarious financial conditionof the Karkhana. However, the Karkhana was directed to pay the unpaidsalaries to the employees on top priority basis, as and when funds wereto become available.

2.4 In the challenge against this order in W.P. No. 4746/2007, theHigh Court of Bombay, vide order dated 12.07.2010, held that recoverycould only be made against the Karkhana and not the Appellant-Bank,as there was no employer-employee relationship between the Bank andthe employees. It was further held that the Industrial Court had erred inrelying upon the non-availability of funds with the Karkhana to refusethe grant of a recovery certificate, as the relevant consideration forissuance of such a certificate is the entitlement of the applicants and notthe financial condition of the employer. In view of this, the High Courtdirected the issuance of a recovery certificate against the Karkhanaand its Managing Director. Pursuant to this direction, the Industrial Court,vide order dated 08.08.2011, disposed of ULPA No. 5/2007 by issuing arecovery certificate of Rs.13,89,84,334 against the Karkhana and its AB

C

D

E

F

G

H

AManaging Director. However, the prayer to issue a recovery certificateagainst the Appellant-Bank was rejected.

2.5 In the interim period, on 26.08.2010, one of the attachedproperties of the Karkhana was auctioned and sold by the Appellant-Bank to one Purti Power and Sugar Ltd. (Respondent No. 5 herein).BAccording to the terms and conditions of this sale, the purchaser hadaccepted all encumbrances on the property as agreed upon in the saleletter. It is found that the proceeds from this sale were appropriated bythe Appellant-Bank towards the amount due to it from the Karkhana.

2.6 At the same time, aggrieved by the non-issuance of a recoveryCcertificate against the Appellant, Respondent Nos. 1 to 3 filed W.P. No.3879/2012. During the pendency of this petition, on 19.01.2013, an orderwas passed by the competent authority under the Societies Act directingthe liquidation of the Karkhana. Finally, vide the impugned judgmentdated 01.12.2015, the High Court disposed of W.P. No. 3879/2012. Itwas observed that in terms of Section 50 of the MRTU & PULP Act,Dthe recovery certificate should have been issued to the Collector forrecovering the amount from the Karkhana and its Managing Director.Thus, the order of the Industrial Court dated 08.08.2011 was modified tothis extent to clarify that the certificate is to be issued to the Collectorfirst, who would then proceed to recover the sum as per the recoveryEcertificate. On the question of whether the Collector could effectuatesuch recovery from sale proceeds of the attached property of theKarkhana, it was held that after the auction sale, the Appellant-Bankheld the proceeds in trust as per Section 13(7) of the SARFAESI Actand did not have a first charge over them. Further, it was found thatupon the liquidation of the Karkhana on 19.01.2013, Section 529A of theFCompanies Act, 1956 (hereinafter ‘Companies Act’) came intooperation, thereby according employees’ dues priority over all other duesin respect of the sale proceeds. In light of this, it was held that theCollector could recover the said amount of Rs.13,89,84,334 from thesale proceeds held in trust by the Appellant-Bank. It is against this orderGthat the instant appeal has been filed.

3. Heard learned Counsel for both the parties.

4. Learned Senior Counsel for the Appellant argued that the HighCourt erred in applying Section 529A of the Companies Act, as Section167 of the Societies Act specifically bars the application of the Companies H

Act to co-operative societies, as is the case with the Karkhana here. Inany case, he submitted that Section 529A of the Companies Act wasmisapplied, as the proviso to Section 13(9) of the SARFAESI Act requiresthe company to be “in liquidation” at the time of the sale of securedassets for Section 529A to apply. Given that the Karkhana only wentinto liquidation on 19.01.2013, i.e. after the sale of its properties in 2010,he argued that the provision was wrongly applied. In light of this, he alsosubmitted that there is no other provision that makes employees’ dues aparamount charge, and the Appellant-Bank, being a secured creditor,should be given precedence over the proceeds from the auction sale asper Section 13(7) of the SARFAESI Act. It was also his contention thata claim for unpaid salaries cannot lie against the Appellant, as there is noemployer-employee relationship between the Appellant-Bank and thesaid employees.

5. On the other hand, learned Senior Counsel for RespondentNos. 1 to 3 drew our attention to Section 50 of the MRTU & PULP Act,under which the recovery certificate had been issued by the IndustrialCourt on 08.08.2011. Noting that this provision makes employees’ duesrecoverable in the same manner as arrears of land revenue, learnedSenior Counsel referred us to Section 169(1) of the Maharashtra LandRevenue Code, 1966 (hereinafter ‘Land Revenue Code’), which makesarrears of land revenue a paramount charge on the land. Relying on this,he submitted that the employees’ dues, recoverable as arrears of landrevenue, should be given primacy over the claim of the Appellant-Bankwhile dealing with the proceeds from the auction sale.

6. In addition to this, learned Counsel for Vainganga SahakariSakhar Karkhana Mazdoor Sangh (Respondent No. 8 herein) relied onthe sale letter dated 08.03.2010, which was issued by the Appellant-Bank prior to the sale of the properties of the Karkhana. In this letter,the Appellant-Bank had stated that it would take responsibility foremployees’ dues. In light of this, it was argued that the Appellant cannotbe absolved of its liability towards the payment of employees’ dues.Learned Counsel for the subsequent purchaser of the property(Respondent No. 5 herein) similarly relied on this letter to submit thatthe liability for the payment of employees’ dues must be placed on theAppellant.

7. In view of the arguments raised and the material on record, theissue that arises for our consideration in this appeal is whether, in the AB

C

D

E

F

G

H

Afacts of this case, employees’ dues can take precedence over the claimof the secured creditor in respect of the proceeds from sale of securedassets of the Karkhana under the SARFAESI Act.

8. At the outset, we find merit in the argument raised by learnedSenior Counsel for the Appellant that the High Court erred in applyingBSection 529A of the Companies Act to this case. It would be apposite torefer to Section 167 of the Societies Act in this regard:

“167. Companies Act not to apply – For the removal of doubt,it is hereby declared that the provisions of the Companies Act,1956 shall not apply to societies registered or deemed to beCregistered; under this Act.”

It is clear that Section 167 creates an express bar on theapplicability of the Companies Act to societies registered under theSocieties Act. Given that the Karkhana was a co-operative societyregistered under the said Act, we find that Section 167 is squarelyDapplicable, and the High Court committed a grave error in relying uponSection 529A of the Companies Act. Thus, the employees cannot makeuse of Section 529A of the Companies Act to claim priority over allother debts of the Karkhana.

9. Against this backdrop, the next question to be considered isEwhether the employees’ dues can take priority over other claims byvirtue of being recoverable as arrears of land revenue. Section 50 of theMRTU & PULP Act and Section 169 of the Land Revenue Code arerelevant in this regard. Section 50 of the MRTU & PULP Act reads asfollows:

F“50. Recovery of money due from employer – Where anymoney is due to an employee from an employer under an orderpassed by the Court under Chapter VI, the employee himself orany other person authorized by him in writing in this behalf, or inthe case of death of the employee, his assignee or heirs may,without prejudice to any other mode of recovery, make anGapplication to the Court for the recovery of money due to him,and if the Court is satisfied that money is so due, it shall issue acertificate for the amount to the Collector, who shall, proceed torecover the same in the same manner as an arrear of landrevenue…”

H

Section 169 of the Land Revenue Code is reproduced hereunder:

“169. Claims of State Government to have precedence overall others-– (1) The arrears of land revenue due on account ofland shall be a paramount charge on the land and on every partthereof and shall have precedence over any other debt, demandor claim whatsoever, whether in respect of mortgage, judgement-decree, execution or attachment, or otherwise howsoever, againstany land or the holder thereof.

(2) The claim of the State Government to any monies other thanarrears of land revenue, but recoverable as a revenue demandunder the provisions of this Chapter, shall have priority over allunsecured claims against any land or holder thereof.”

10. From a reading of these provisions, it is evident that dues ofemployees in respect of which an order has been made by a Courtunder Chapter VI of the MRTU & PULP Act are recoverable in thesame manner as arrears of land revenue. It was argued by learnedSenior Counsel for Respondent Nos. 1 to 3 that such treatment ofemployees’ dues as arrears of land revenue makes it a charge paramountto all other claims in view of Section 169(1) of the Land Revenue Code.In response, learned Senior Counsel for the Appellant contended thatthe instant case falls under Section 169(2) of the Land Revenue Code,which deals with monies other than arrears of land revenue but which isrecoverable as a revenue demand. Since Section 169(2) only accordspriority over unsecured claims, he submitted that the Appellant’s claim,being that of a secured creditor, would still have priority over employees’dues recoverable as arrears of land revenue.

10.1 It is important to appreciate that there is a material differencebetween arrears of land revenue due on account of land, andamounts other than arrears of land revenue but recoverable inthe same manner as arrears of land. On a close reading of sub-sections (1) and (2) of Section 169 of the Land Revenue Code, itbecomes clear that Section 169(1) deals with the former categoryof claims and makes them a paramount charge on the land overall other claims. On the other hand, Section 169(2) deals with thelatter category and gives them priority only over unsecured claims.

10.2 This distinction has also been noted in SICOM Ltd. v. Stateof Maharashtra & Anr., (2010) 6 Bom CR 749, where a division A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

Bench of the High Court of Bombay was called upon to considerwhether sales tax dues of a company in liquidation, which wererecoverable as arrears of land revenue under Section 38-B of theBombay Sales Tax Act, 1959, created a first charge. Whilediscussing the scheme of Section 169 of the Land Revenue Code,the division Bench drew upon the reasoning of the ConstitutionBench of this Court in Builders Supply Corporation v. Union ofIndia, AIR 1965 SC 1061 and observed as follows:

“10. Perusal of the above quoted provisions shows thatthe Maharashtra Land Revenue Code makes a clear distinctionbetween the sum which is recoverable as a land revenue and sumwhich is recoverable as arrears of land revenue. What createsparamount charge is the sum which is the amount of land revenueand not the sum which is recoverable as land revenue. TheConstitution Bench of the Supreme Court in its judgment in thecase of Builders Supply Corporation, referred to above, in ouropinion, has made the position absolutely clear. Followingobservations in the case of Builders Supply Corporation, in ouropinion, are relevant. They read as under:-

“We have referred to this decision, because it brings outemphatically the real character of the provisions prescribed bys. 46(2). Section 46(2) does not deal with the doctrine of thepriority of Crown debts at all; it merely provides for the recoveryof the arrears of tax due from an assessee as if it were anarrear of land revenue. This provisions cannot be said to convertarrears of tax into arrears of land revenue either, all that itpurports to do is to indicate that after receiving the certificatefrom the Income-tax Officer, the Collector has to proceed torecover the arrears in question as if the said arrears werearrears of land revenue.We have already seen that otheralternative remedies for the recovery of arrears of land revenueare prescribed by sub-sections (3) and (5) of s. 46. In makinga provision for the recovery of arrears of tax, it cannot be saidthat s. 46 deals with or provides for the principle of priority oftax dues at all; and so, it is impossible to accede to the argumentthat s. 46 in terms displaces the application of the said doctrinein the present proceedings.”

(emphasis supplied)

This difference in the scope of sub-sections (1) and (2) of Section169 of the Land Revenue Code was again noted by the High Court ofBombay in City Co-op Credit & Capital Ltd. & Anr. v. OfficialLiquidator of Satwik Electric Controls Pvt Ltd., (2019) 4 Bom CR274.

10.3 When we look to the facts of the instant case, it is seen thatthe recovery certificate issued under Section 50 of the MRTU &PULP Act only makes employees’ dues recoverable as arrearsof land revenue. Thus, in view of the foregoing discussion, it isclear that such employees’ dues would fall under the category ofclaims captured by Section 169(2), and can only take priority overunsecured claims.

10.4 Further, as has been held by this Court in Central Bank ofIndia v. State of Kerala, (2009) 4 SCC 94, only expressly createdstatutory first charges under Central and State laws can takeprecedence over the claims of secured creditors under theSARFAESI Act. It is not enough to merely provide for recoveryof dues as arrears of land revenue. Given that Section 50 of theMRTU & PULP Act falls short of expressly making theemployees’ dues a ‘first charge’, it cannot be said that such dueshave priority over the claims of the Appellant-Bank, which is asecured creditor. Thus, we find that under the scheme of the LandRevenue Code and the MRTU & PULP Act, the employees’ duescannot claim priority over the claim of the Appellant-Bank.

11. However, this does not mean that the Appellant-Bankautomatically holds a paramount charge over the proceeds from the saleof the secured assets. Under the scheme of the SARFAESI Act, thereis nothing to show that a priority is created in favour of banks, financialinstitutions, and other secured creditors as against a first chargespecifically created under any other statute. This has been capturedsuccinctly by this Court in Central Bank (supra) as follows:

“126. While enacting the DRT Act and the Securitisation Act,Parliament was aware of the law laid down by this Court whereinpriority of the State dues was recognized. If Parliament intendedto create first charge in favour of banks, financial institutions, orother secured creditors on the property of the borrower, then itwould have incorporated a provision like Section 529-A of the

A

BC

D

E

F

G

H

A

ACompanies Act or Section 11(2) of the EPF act and ensured thatnotwithstanding series of judicial pronouncements, dues of banks,financial institutions and other secured creditors should havepriority over the State’s statutory first charge in the matter ofrecovery of the dues of sales tax, etc. However, the fact of thematter is that no such provision has been incorporated in either ofBthese enactments despite conferment of extraordinary power uponthe secured creditors to take possession and dispose of the securedassets without the intervention of the court or Tribunal. The reasonfor this omission appears to be that the new legal regime envisagestransfer of secured assets to private companies.”

C

Thus, in the absence of a paramount charge created in favour ofthe employees’ dues under the MRTU & PULP Act, it cannot be saidthat the Appellant-Bank automatically gets a first charge under theSARFAESI Act.

12. In this light, what becomes relevant for the instant case is theDscheme of the SARFAESI Act in relation to the manner of distributingthe money received by the secured creditor through the sale of securedassets. The following parts of Section 13 of the SARFAESI Act arerelevant in this regard:

13. Enforcement of security interest – (4) In case theborrower fails to discharge his liability in full within the periodspeci-fied in sub-section (2), the secured creditor may takerecourse to one or more of the follow-ing measures to recoverhis secured debt, namely:— (a) take possession of the securedassets of the borrower including the right to transfer by way oflease, assignment or sale for realising the secured asset…

E

F

xxx

(7) Where any action has been taken against a borrower underthe provisions of sub-section (4), all costs, charges and expenseswhich, in the opinion of the secured creditor, have been properlyincurred by him or any expenses incidental thereto, shall berecoverable from the borrower and the money which is receivedby the secured creditor shall, in the absence of any contract tothe contrary, be held by him in trust, to be applied, firstly, inpayment of such costs, charges and expenses and secondly, indischarge of the dues of the secured creditor and the residue G

H

of the money so received shall be paid to the person entitledthereto in accordance with his rights and interests.

Section 13(4) of the SARFAESI Act allows a secured creditor totake possession of the secured assets of a borrower-in-default, includingthe right to transfer them by way of sale. What may be done with theproceeds from such sale is provided under Section 13(7). In the absenceof a contract to the contrary, such proceeds are held by the securedcreditor in trust and are to be applied first towards payments of costs,charges, and expenses incurred with respect to the sale; second, towardsdues of the secured creditor; and lastly, towards any person entitled tothe residue money.

13. In the facts of the present case, in exercise of its powersunder Section 13(4)(a) of the SARFAESI Act, the Appellant-Bank hadtaken possession of the property of the Karkhana on 13.06.2005. Later,vide sale letter dated 08.03.2010, the Appellant-Bank had offered to sellthe said property to one M/s Vidarbha Realties Pvt. Ltd. for a totalconsideration of Rs. 14.10 crores. Notably, this letter stated that theAppellant-Bank would take responsibility for employees’ dues, and allother liabilities including statutory liabilities would rest solely on thepurchaser. This letter was followed by a sale certificate dated 14.09.2010recording the sale of the property by the Appellant-Bank in favour of M/s Wainganga Sugar and Power Ltd. for a consideration of Rs. 14.10crores.

13.1 Before delving into the applicability of the distribution of thesale proceeds as per Section 13(7) of the SARFAESI Act, wenote that the sale letter dated 08.03.2010 can be relied upon bythis Court. The contention of the learned Senior Counsel for theAppellant that the sale letter dated 08.03.2010 was addressed toa different entity than the company mentioned in the sale certificatedated 14.09.2010 cannot be accepted. It is found that the addresseein the sale letter dated 08.03.2010, M/s Vidarbha Realties PrivateLimited, had been renamed as M/s Wainganga Sugar and PowerPrivate Limited as notified on 05.04.2010. Subsequently, on03.06.2010, M/s Wainganga Sugar and Power Private Limitedwas converted to a public limited company and its name waschanged to M/s Wainganga Sugar and Power Limited, which isalso the name of the purchaser indicated on the sale certificate.These interim developments between March 2010 and September A

B

C

DE

F

G

H

A

B

C

D

E

F

G

H

2010 explain why the sale letter dated 08.03.2010 and the finalsale certificate issued on 14.09.2010 reflect different names.However, since it is only a case of change in name of the company,we find that the two entities are the same and the subsequentpurchaser, Respondent No. 5 herein (successor of WaingangaSugar and Power Ltd.) would be bound by the terms of the saleletter dated 08.03.2010.

13.2 Further, it cannot be said that the sale letter dated 08.03.2010is an external document and cannot be relied upon to interpret thesale certificate. This is because the sale certificate specificallyreferences the sale letter by providing that the purchaser accepts“all the encumbrances presently there on the property andmay arise in future and agreed to to pay the same as per thesale letter accepted by the purchaser”. In view of such wording,we find that the parties intended that the sale letter dated08.03.2010 be read harmoniously with the sale certificate inasmuchas it appears that the same is a part of the sale certificate. Whena composite reading of the sale certificate dated 14.09.2010 andthe sale letter dated 08.03.2010 is undertaken, it is revealed thatthough the purchaser had accepted all encumbrances on theproperty, this did not include employees’ dues in view of the specificundertaking by the Appellant-Bank that it would pay them. Giventhat the certificate directly references the prior sale letter, it isessential to give effect to its terms. Hence, it can be concludedthat the parties had agreed to the Bank paying the employees’dues and the subsequent purchaser settling other liabilities, includingstatutory liabilities. When read in this light, it becomes clear thatthe sale certificate and the sale letter constitute a contract.

13.3 This brings us to the scheme of distribution of sale proceedsunder Section 13(7) of the SARFAESI Act. As mentioned supra,this provision prescribes the manner in which money received bythe secured creditor pursuant to its action under Section 13(4)should be distributed. However, such manner of distribution isonly applicable in the absence of a contract to the contrary. Inthis case, the sale certificate and sale letter form a contract, thecumulative effect of which is an agreement that only theemployees’ dues would be settled by the Appellant-Bank, and allother 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) andconstitutes a contract to the contrary, which must necessarilybe given effect.

13.4 In this regard, we find that the clarification given by theAppellant-Bank in its counter-affidavit before the High Court thatby the sale letter dated 08.03.2010 it had only accepted liabilitytowards the payment of provident fund of the employees, isunsustainable. Upon perusing the record, it is clear that thisclarification is only a subsequent attempt by the Appellant to escapeits liability. If the Appellant genuinely intended to restrict its liabilityto provident fund, it would have expressly stated so in the saleletter, which clearly prescribes the terms and conditions of thesale between the Appellant and the purchaser. It is important tobear in mind that at the time of entering into this sale, the Appellant-Bank was well aware of the unpaid salaries due to the employeesof the Karkhana in view of the orders of the Industrial Courtdated 24.08.2006 and 27.04.2007. Hence, it cannot be said thatthe Appellant-Bank agreed to use the term “employees’ dues” inthe sale letter despite intending to limit it to provident fund duesonly.

13.5 Thus, on facts, we find that in terms of Section 13(7) of theSARFAESI Act, the distribution of money received by theAppellant-Bank should be done as per the sale contract withRespondent No. 5. In other words, the Appellant-Bank is liable tosatisfy the employees’ dues as per its undertaking in the sale letterdated 08.03.2010. However, in view of the fact that all otherliabilities, including statutory liabilities were agreed to be borne bythe subsequent purchaser, statutory liabilities in respect ofemployees, such as provident fund, gratuity, bonus etc., wouldhave to be borne by Respondent No. 5 herein. We reiterate herethat a subsequent attempt by the Appellant-Bank to interpret thesale contract in a manner that reduces the scope of its liability toprovident fund dues cannot be given effect.

14. In view of the foregoing discussion, we summarize our findingsas follows:

(i) Section 529A of the Companies Act, which gives workers’dues a priority over all other debts, cannot be applied to the instant casein view of Section 167 of the Societies Act.

A

B

C

D

EF

G

H

A

(ii) Merely by virtue of being recoverable as arrears of landrevenue, the employees’ dues, in respect of which a recovery certificatehad been issued by the Industrial Court, cannot be treated as a paramountcharge in terms of Section 169(1) of the Land Revenue Code. Instead,under 169(2) of the Land Revenue Code, they would take precedenceonly over unsecured claims.

B

(iii) At the same time, the Appellant-Bank does not enjoy anyparamount charge over the sale proceeds either. Instead, as per Section13(7) of the SARFAESI Act, the sale letter dated 08.03.2010 and thesale certificate dated 14.09.2010 constitute a contract which displacesthe order of distribution stipulated under the said provision.

C

(iv) The cumulative effect of these documents is that the Appellant-Bank must pay the employees’ dues out of the sale proceeds from theauctioned property. To this extent, the recovery certificate issued by theIndustrial Court on 08.08.2011 may be executed against the Appellantherein. Further, given the significant delay in payment of the salaries toDthe employees, such recovery shall be made by the Collector within aperiod of six months from the date of this order.

(v) All other dues in respect of the secured property, includingany unpaid statutory dues in relation to employees (provident fund, gratuity,bonus, etc.) shall be paid by Respondent No.5 within a period of sixEmonths from the date of this order.

15. The instant appeal is disposed of accordingly.

F

Devika Gujral

Appeal disposed of.

G

H