Head Notes Dismissing the appeals, the Court HELD: 1.

The framers of Indian Constitution were alive to the plight of the working class and particularly the unorganized labour employed in factories and other establishments. They were also conscious of the fact that the goals of justice - social, economic and political and equality of status and of opportunity proposed to be incorporated in the preamble to the Constitution would remain illusory for weaker sections of society unless the State takes affirmative legislative and administrative measures for ameliorating the conditions of those sections including the workers employed in factories etc. Therefore, specific provisions were incorporated in Part IV of the Constitution with the title "Directive Principles of State Policy" casting an obligation upon the State to apply these principles in making laws. Article 38 which has been renumbered as clause (1) thereof by the Constitution (Forty-fourth Amendment) Act, 1978 declares that the State shall strive to promote the welfare of the people by securing and protecting, as effectively as it may, a social order in which justice, social, economic and political, shall inform all the institutions of national life. Clause (2) of Article 38 mandates the State to strive to minimize the inequalities in income, and endeavour to eliminate inequalities in status, facilities and opportunities, not only amongst individuals but also amongst groups of people residing in different areas or engaged in different avocations. Article 43 casts a duty on the State to make efforts to secure by suitable legislation or economic organization or in any other way, to all workers, agricultural, industrial or otherwise, work, a living wage, conditions of work ensuring a decent standard of life and full enjoyment of leisure and social and cultural opportunities, and, in particular, social opportunities. [Para 16] [19-e-h; 20-a-d] Recovery Officer and Assistant Provident Fund Commissioner v. Kerala Financial Corporation (2002) 3 LLJ 643 Kerala; A.P. State Financial Corporation v. Official Liquidator (2000) SCC 291; Central Bank of India v. State of Kerala (2009) 4 SCC 94, referred to. 2.1. With a view to ensure that the employers religiously comply with the mandate of provisions enacted for benefit of the workers, the legislature has not only provided for imposition of penalty and damages but also made comprehensive provisions for recovery of the dues by way of attachment and sale of movable or immovable property of the establishment or the employer, as the case may be. Section 11 of Employees' Provident Funds and Miscellaneous Provisions Act, 1952 gives statutory priority to the payment of contributions over other debts. Sub-section (1) of Section 11 relates to priority qua an employer who is adjudged insolvent or being a company an order of winding up is made. It lays down that the amount due from the

employer in respect of any contribution payable to the Fund or, as the case may be, the Insurance Fund, damages recoverable under Section 14B, accumulations required to be transferred under Section 15(2) or any charges payable by him under any other provision of the Act or the Scheme or the Insurance Scheme shall be paid in priority to all other debts in the distribution of the property of the insolvent or the assets of the company being wound up, as the case may be. Sub-section (2) of Section 11 contains a non obstante clause and lays down that if any amount is due from the employer whether in respect of the employees' contribution deducted from the wages of the employee or the employer's contribution, the same shall be deemed to be the first charge on the assets of the establishment and shall, notwithstanding anything contained in any other law for the time being in force, be paid in priority to all other debts. [Para 18] [27-g-h; 28-a-h; 29-a] Organo Chemical Industries v. Union of India (1979) 4 SCC 573: Builders Supply Corporation v. Union of India 1965(2) SCR 289; State Bank of Bikaner and Jaipur v. National Iron and Steel Rolling Corporation (1995) 2 SCC 19; Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. (2000) 5 SCC 694; State of M.P. v. State Bank of Indore (2002) 10 SCC 441, referred to. 2.2. The priority given to the dues of provident fund etc. in Section 11 is not hedged with any limitation or condition. Rather, a bare reading of the section makes it clear that the amount due is required to be paid in priority to all other debts. Any doubt on the width and scope of Section 11 qua other debts is removed by the use of expression `all other debts' in both the sub-sections. This would mean that the priority clause enshrined in Section 11 will operate against statutory as well as non-statutory and secured as well as unsecured debts including a mortgage or pledge. Subsection (2) was designedly inserted in the Act for ensuring that the provident fund dues of the workers are not defeated by prior claims of secured or unsecured creditors. This is the reason why the legislature took care to declare that irrespective of time when a debt is created in respect of the assets of the establishment, the dues payable under the Act would always remain first charge and shall be paid first out of the assets of the establishment notwithstanding anything contained in any other law for the time being in force. [Para 20] [31-B] UCO Bank v. Official Liquidator, High Court Bombay and another (1994) 5 SCC 1; Textile Labour Association and another v. Official Liquidator and another (2004) 9 SCC 741; Recovery Officer and Assistant Provident Fund Commissioner v. Kerala Financial Corporation (2002) 2 KLT 723, referred to. 3. Section 11 gives statutory priority to the amount due from the employer vis--vis all other debts. Clause (a) of sub-section (1) of Section 11 is applicable to cases where an employer is adjudicated insolvent or, being a

company, an order of its winding up is made. Clause (b) is applicable to cases where the amount is due from the employer in relation to exempted establishment in respect of any contribution to the provident fund or any insurance fund in so far it relates to exempted employees under the rules of provident fund or any insurance fund, any contribution payable by him towards the Pension Fund under Section 17(6), damages recoverable under Section 14B or any charges payable by him to the appropriate Government under the Act or under any of the conditions specified in Section 17. This sub-section then lays down that such amount shall be paid in priority to all other debts in the distribution of the property of the insolvent or the assets of the company being wound up. Sub-section (2) lays down that any amount due from the employer whether in respect of the employees' contribution deducted from the wages of the employee or the employer's contribution shall be deemed to be the first charge on the assets of the establishment, and shall be paid in priority to all other debts. The expression "any amount due from an employer" appearing in sub-section (2) of Section 11 has to be interpreted keeping in view the object of the Act and other provisions contained therein including sub-section (1) of Section 11 and Sections 7A, 7Q, 14B and 15(2) which provide for determination of the dues payable by the employer, liability of the employer to pay interest in case the payment of the amount due is delayed and also pay damages, if there is default in making contribution to the Fund. If any amount payable by the employer becomes due and the same is not paid within the stipulated time, then the employer is required to pay interest in terms of the mandate of Section 7Q. Likewise, default on the employer's part to pay any contribution to the Fund can visit him with the consequence of levy of damages. Sub-section (2) was inserted in Section 11 by Amendment Act No.40 of 1973 with a view to ensure that payment of provident fund dues of the workers are not defeated by the prior claims of the secured and/or of the unsecured creditors. While enacting sub-section (2), the legislature was conscious of the fact that in terms of existing Section 11 priority has been given to the amount due from an employer in relation to an establishment to which any scheme or fund is applicable including damages recoverable under Section 14B and accumulations required to be transferred under Section 15(2). The legislature was also aware that in case of delay the employer is statutorily responsible to pay interest in terms of Section 17. Therefore, there is no plausible reason to give a restricted meaning to the expression `any amount due from the employer' and confine it to the amount determined under Section 7A or the contribution payable under Section 8. If interest payable by the employer under Section 7Q and damages leviable under Section 14 are excluded from the ambit of expression "any amount due from an employer", every employer would conveniently refrain from paying contribution to the Fund and other dues and resist the efforts of the concerned authorities to recover the dues as arrears of land revenue by contending that the movable or immovable property of the establishment is subject to other debts. Any such interpretation would frustrate the

damage or shrinkage unmistakably shows that the Sugar Mills continued to be owner of the sugar bags. [Para 31] [42-h. If the management of the Sugar Mills were to repay the dues of the appellant-bank within the time specified in the deeds of pledge. referred to. 56-a-h] 4. A careful reading of the deeds of pledge executed by the management of Sugar Mills show that even though the sugar bags which were available with the Sugar Mills at the relevant time were placed in the custody of the appellant-bank as security for repayment of loan together with interest. the latter was duty bound to lift its notional control over the sugar bags lying in the godowns of the Sugar Mills. the former continued to be owner thereof. 43-a-c. 5. State of Bihar (1972) 3 SCC 196. State of Karanataka (1998) 7 SCC 707. [Para 33] [44-g-h. Transcore v. . In case of default. distinguished. f-h] 5. the appellant-bank could recover its dues by selling the sugar bags. [Para 47] [55-a-h. Union of India (2008) 1 SCC 125. [Para 36] [49-d-e] Karnataka Pawnbrokers' Association v. The deeds of pledge executed by the management of the Sugar Mills as security for repayment of loan etc. did not have the effect of transferring of the ownership of the sugar bags to the appellant-bank and the Recovery Officer did not commit any illegality by attaching the same and the High Court was fully justified in directing payment of a portion of the sale price to the Assistant Commissioner for being appropriated towards the provident fund dues of the workers. The very fact that except giving the symbolic custody of the sugar bags to the appellant-bank by allowing it to put lock and key on the godowns. A pawn therefore is a security. Siriguppa Sugars & Chemicals Ltd. Rahmat Ali (1967) 2 SCR 233.1. 45-a-b] Lallan Prasad v.2. The two ingredients of a pawn or a pledge are: (1) that it is essential to the contract of pawn that the property pledged should be actually or constructively delivered to the pawnee and (2) a pawnee has only a special property in the pledge but the general property therein remains in the pawner and wholly reverts to him on discharge of the debt. all steps for preserving the goods and getting the same insured were taken by the management of the Sugar Mills which also agreed to take the responsibility of any shortage.object of introducing the deeming provision and non obstante clause in Section 11(2). Bank of Bihar v. Central Bank of India v. by contract a deposit of goods is made as security for a debt. In this sense a pawn or pledge is an intermediate between a simple lien and a mortgage which wholly passes the property in the thing conveyed. where. The right to property vests in the pledgee only so far as is necessary to secure the debt. (2007) 8 SCC 353.

Velchand Chhaganlal v.R. Nos. Mahipal.R. 6824 of 2005 WITH C. 1680 of 2007 @ Writ Petition No. Sanjeev Malhotra for the Respondents. Kuldip Singh (NP). referred to. Black's Law Dictionary (Eighth edition). referred to. Law of Personal Property: Ray Andrews Brown Second edition 1936.C. R. Dhamija. 633. A. Case Law Reference: (2002) 3 LLJ 643 (2000) SCC 291 (1998) 7 SCC 707 (2007) 8 SCC 353 (1972) 3 SCC 196 (2008) 1 SCC 125 (2009) 4 SCC 94 (1979) 4 SCC 573 1965(2) SCR 289 (1995) 2 SCC 19 (2000) 5 SCC 694 (2002) 10 SCC 441 (2009) 4 SCC 94 (1994) 5 SCC 1 (2004) 9 SCC 741 (2002) 2 KLT 723 (1967) 2 SCR 233 14 Bom.2007 of the High Court of Bombay in Civil Application No. Ashok H. Rakesh K. 38 Paras 35. Ramanatha Aiyar (Second edition).A. Singh. Kalra. 1952: . Desai Prashant Naik. Mulla's Treatise on the Transfer of Property. J. Subject Employees' Provident Funds and Miscellaneous Provisions Act. 37 Paras 14. Mussan 14 Bom. 6893 of 2009. Law Lexicon by P. Salmond's Jurisprudence. T. From the Judgment & Order dated 29.P.L.6. Sharma for the Appellant.P. 633 referred to referred to distinguished distinguished distinguished distinguished referred to referred to referred to referred to referred to referred to referred to referred to referred to referred to referred to referred to Para 13 Para 13 Paras 14. Malvika Trivedi.L. 45 Para 15 Para 19 Para 21 Para 22 Para 23 Para 24 Para 25 Para 26 Para 28 Para 29 Para 34 Para 41 CIVIL APPELLATE JURISDICTION : Civil Appeal No. 6894 of 2009. 38 Paras 14.

P.Such dues shall be paid in priority to all other debts .Discussed. held.e.Articles 38. sugar bags pledged by Sugar Mills in favour of appellant-bank as security for repayment of loan together with interest .On facts.11 operate against statutory as well as non-statutory and secured as well as unsecured debts including a mortgage or pledge .Interpretation of statutes.6893 OF 2009 (Arising out of S.Necessary ingredients ..Sugar bags could be attached and sold for realization of provident fund dues of the workers Constitution of India..15243 of 2007) Maharashtra State Co-operative Bank Ltd. The question which arose for consideration in these appeals was whether the sugar bags pledged by Sugar Mills in favour of the appellant-bank as security for repayment of the loan together with interest could be attached and sold for realization of the dues of provident funds etc. Purposive interpretation .Deeds of pledge executed did not have effect of transferring of ownership of sugar bags to bank .S.11 . Legislative intent behind enactment of the 1952 Act . 1950 .The 1952 Act is social welfare legislation Courts to give purposive interpretation to the provisions contained therein in view of Directive Principles of State Policy .Held: Would be first charge on assets of establishment . 43. 1952. (C) No.L. Appellant . payable by the employer i. Contract: Pawn or pledge . Judgement REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. .Provident funds dues payable by employer . the management of the Sugar Mills under the Employees' Provident Funds and Miscellaneous Provisions Act.Explained.Priority clause enshrined in s..

Versus The Assistant Provident Fund Commissioner and others WITH CIVIL APPEAL NO.6894 OF 2009 (Arising out of S.L.P. (C) No.20736 of 2007) Maharashtra State Co-operative Bank Ltd. Versus The Employees' Provident Fund Organization and others ... Respondents ... Appellant ... Respondents

J G.S. Singhvi, 1. 2. J.

U

D G M E N

T

Leave granted. Whether the sugar bags pledged by Kannad Sahakari

Sakhar Karkhana Ltd. and Gangapur Sahakari Sakhar Karkhana Ltd. in favour of the appellant-bank together with as security interest could for be

repayment

of the loan

attached and sold for realization of the dues of provident funds etc. payable by the employer i.e., the management of

the Sugar Mills under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (for short `the Act') is the question which arises for determination in these

appeals filed against order dated 29.6.2007 passed by the Division Bench of the and order Bombay 1681 dated in of High Court Writ in Civil Petition in Civil

Application

Nos.1680 and

2007 in

No.6824/2005 Application No.28/2004. 3.

19.7.2007 Letters

passed Patent

No.245/2007

Appeal

We shall first notice the facts from the record of

the appeal arising out of S.L.P.(C ) No.15243/2007. 4. During crushing season 2000-2001, the appellant

advanced loan of Rs.4000 lacs to Kannad Sahakari Sakhar Karkhana Mill'). Limited (hereinafter described as `the Sugar

For securing repayment of the loan and interest, of the deed Sugar of Mill pledge executed dated necessary the

the management documents including

5.3.2001,

relevant portions of which are extracted below:"We, the undersigned, Kannad Sahakari Sakhar Karkhana Ltd., Tal. Kannad, Aurangabad, member of Maharashtra State Co-operative Bank Limited (Incorporating the Vidarbha Co-operative Bank Ltd.) hereinafter referred to as "the said Bank" agree to take a loan from the said Bank on the pledge of stocks/goods/commodities on the following terms and conditions. The credit limit

will be Rs.400000000 and its period will be upto 31.10.2001. 1. The stocks/goods/commodities which we have at present placed in the custody of the said Bank as security or which we might so place from time to time will remain in the sole custody of the

be extended by the said Bank before the expiry of the extended period. quality. 7. we undertake to hire the godown in the name of the said Bank and to pay the rent from time to time. We undertake to insure the stocks/goods/commodities for their full value with an Insurance Company approved by the said Bank and will get the policy issued in the name of the said Bank. If the rent of the godown. The loan shall bear interest at ____ percent per annum. We shall hold ourselves responsible for any shortage. This interest shall be payable with half yearly rests on 30th June and 31st December or earlier immediately when the stocks/goods/commodities are relieved. 4. the expenses in connection with insurance and other expenses if any not paid by us. if any other amount is due to the said Bank by us exclusively or in partnership with anybody else. the same shall be debited to our loan account and shall bear interest at the same rate. Over and above the aforesaid dues. damage or shrinkage that may . conditions or safety of the stocks/goods/commodities given into its custody. 10. We undertake to repay the principal of the loan with interest and all expenses due by us by _____ as stipulated in para (2) hereof if the period. 6. If for any reason the godown is required to be changed or repaired. 5. we undertake to bear the expenses in that connection. We shall not in any way hold the said Bank responsible for the weight.said Bank and whatever action the said Bank will take for indicating its custody shall be agreeable to us. 8. If it is necessary to hire a godown. we agree that the stocks/goods/commodities kept in the custody of the said Bank will also be treated as security for such amount due by us. 3.

we undertake to insure the stocks/goods/commodities against any damage or loss by such riots or civil commotion. the said Bank shall so insure the stocks/goods/commodities for and on our behalf . If we fail to do so. If and when there is insecurity due to local riots or civil commotion.arise by any cause whatsoever. 13. etc.

e.and shall be entitled to debit the cost thereof to our account. If the proceeds of the sale do not fully meet the loan due by us interest or other expenses. 16. A (pages 119-122 of the SLP paper book) shows that the Assistant Provident Fund Commissioner. Though by this Agreement. the said Bank shall treat the loan as demand we undertake to repay the same as soon as the said Bank shall make a demand or the said Bank shall be at full liberty to recover all the dues payable by us.3.. the appellant has not given the details of the dues of provident fund payable by the employer. the management of the Sugar Mill also executed promissory note for payment of Rs. On the same day i.2001. 6. 5. we undertake to pay the balance so remaining with interest. a reading of the document marked Ex. Aurangabad (for short `the Assistant Commissioner') passed order dated 29. Accountant or other officer of the said Bank duly authorized we shall acknowledge its correctness.2003 under Section .9." 5. if so required by the said Bank. the date of repayment of the loan has been fixed as aforesaid. Though. it shall have the full right to recover its amount by sale of the stocks goods commodities by public auction or private treaty (though the said Bank is not bound so to sell the stocks/goods/commodities). In the event of breach of the aforesaid conditions and or if we fail to repay the loan within 24 hours. 15. On receipt of the Account of sale under the signature of the Manager.50% with half yearly rests.40 crores with interest @ 15.

7A of the Act whereby he held the employer liable to pay Rs.1,75,10,477/administrative towards charges, EPF EDLI contributions, contributions, EPF EDLI

Ins./administrative amount with

charges

and

directed

it to

pay the As the

interest @ 12%

within

10 days.

employer failed to comply with that order, Provident Fund Commissioner and

the Assistant Recovery Officer,

Employees' Provident Fund, Sub-Regional Office, Aurangabad (hereinafter referred to as `the Recovery Officer') issued warrant of attachment dated 11.3.2004 under Section 8B of the Act for recovery of 12% interest Rs.3,85,21,734/- which included with Rule 5 of the

payable in accordance

Second Schedule (Part I) of the Income-tax Act, 1961 read with Section 8G of the Act. executed by the Enforcement inventory of the The warrant of attachment was Officer sugar on bags 26.3.2004 lying by

preparing an

in the

godowns of the Sugar Mill and affixing paper seals on the same. 7. The appellant challenged the warrant of attachment

and consequential action taken by the Enforcement Officer in Writ Petition No.6824/2005, mainly on the ground that in view of the deed of pledge executed by the management of the Sugar Mill, the sugar bags which were lying under its lock and key, could not have been attached for realization of the dues of provident fund etc. During the pendency of

the writ petition, the Assistant Commissioner filed Civil

Application No.2739/2006 for sale of the sugar bags. the hearing of that application, learned counsel appearing for the appellant-bank referred to the orders passed in

At

sugar bags.08.9.511/- towards the dues of provident fund etc. The successful bidder will draw a Demand Draft or a Banker's Cheque in the name of the Registrar General of this Court.75. the employer is liable to pay .477/. Once the amount is deposited with the Registrar of this Court.77.Writ Petition No.7.e. shall be completed within a period of three months by floating public tenders calling for bids and by accepting tender of the highest bidder. the relevant portions of which are as under:"We accordingly allow this application and direct that the sugar bags attached by the petitioner as well as the Assistant Provident Fund Commissioner shall be jointly auctioned and the sale proceeds shall be deposited with the Registrar of this Court. In compliance of the aforementioned order.. the Division Bench of the High Court passed order dated 1.254/-.24. After taking note of his submission.2006.3413/2005 and connected cases for conducting joint auction of the attached goods i. by asserting that in addition to Rs. Thereafter.46.10.1680/2007 for permission to withdraw a sum of Rs. liberty to apply for withdrawal of the said amount.12.1." 8.payable under Section 7A with interest @ 12%. It is further ordered that the auction sale undertaken jointly. the Assistant Commissioner filed Civil Application No. the sugar bags lying in the godowns of the Sugar Mill were auctioned for a sum of Rs.

02.in terms of order dated 27.6.36.3. It appears that during the pendency of the .Rs.034/.2007 passed under Section 14B read with Section 7Q of the Act. 9.

446/.67.20. the amount of Rs.1681/2007 with the prayer that attachment effected by the Assistant Commissioner may be vacated. (b) Out of the remaining amount. the management of the Sugar Mill filed Civil Application No. then the Registrar General will re-deposit and/or renew the said amount on yearly basis with MSC Bank till final disposal of the said appeal.1. Bombay for a period of 1 year.4. the Assistant Commissioner passed another order whereby he attached the bank account and movable and immovable properties of the Sugar Mill along with 69. the High Court disposed of the applications and issued various directions including the following:"(a) Out of the amount of Rs.61.969/-) be paid to the Assistant Provident Fund Commissioner so as to appropriate towards the provident fund dues of the workers of the sugar factory.08.56.75.45.(Principal amount Rs.000 sugar bags. (d) The information in respect of the number. Therefore.24. .litigation. both By the impugned order.10.065/be deposited initially for a period of 1 year with the MSC Bank in the name of the Registrar General.1.743/.254/-.56.plus interest Rs.3. 10. High Court.9. the appeal filed by the Petitioner with the Appellate Tribunal under the Provident Fund Act is not disposed of.2.79.477/. the amount of Rs.shall be paid to the MSC Bank which MSC Bank shall appropriate towards the dues of the Sugar Factory.46. If within the period of 1 year. (c) The remaining amount of Rs.

pendency or disposal of the Appeal shall be given by the Sugar Factory to the Registrar General when the said Appeal is disposed of. (e) In case the said appeal filed by the Sugar Factory is dismissed by the Appellate authority, then the amount of Rs.3,56,79,065/- will have to

be transferred to the Assistant Provident Fund Commissioner and the Registrar General is hereby directed, accordingly, to transfer it. (f) In case the appeal is allowed and thereby the sugar factory becomes entitled to the amount of Rs.3,56,79,065/-, then the MSC Bank is at liberty to appropriate the said amount towards the dues of the Sugar Factory. (g) In view of the above directions and the disbursement of the amount, the order passed by the Assistant Provident Fund Commissioner attaching the assets, Bank Accounts and sugar bags etc. of the Sugar Factory is hereby quashed and set aside and the Sugar Factory is at liberty to deal with the said assets in accordance with their own Resolution and decisions keeping in mind the directions." 11. We may now notice some facts from the record of the

other appeal. 12. The appellant advanced Rs.2000 lacs to Gangapur

Sahakari Sakhar Karkhana Ltd. during crushing season 200203. of For securing the payment of the loan, the management the Sugar Mill executed three deeds on 2.1.2003,

6.2.2003 and 4.4.2003 and pledged the sugar bags lying in the godowns. Simultaneously, three promissory notes were

executed for payment of the amounts specified therein with interest at the rate of 13.5 per cent per annum with half yearly rests. The terms and conditions of these deeds are

similar to deed of pledge dated 5.3.2001 executed by the

management

of Kannad Sahakari

Sakhar

Karkhana

Ltd. On

account of failure of the employer to pay the dues of provident fund etc., the competent authority passed orders under Sections 7A, 7Q and 14B of the Act and held it liable

State Financial Corporation v.2003.7. 13.2006.9. Kerala Financial Corporation (2002) 3 LLJ 643 Kerala and of this Court in A. 3656/2003. Thereafter.11.towards the dues of provident fund.72. The appellant challenged the warrant of attachment in Writ Petition No.245/2007 . letters patent appeal. the Assistant Commissioner filed Civil Application No.21/2006 for sale of the sugar bags lying in the godown of the employer. During the pendency of the the Assistant Commissioner filed Civil Application No. interest and damages. The letters patent appeal preferred by the appellant-bank was transferred to the Principal Seat of the High Court at Mumbai. the High Court granted By an order dated the prayer of the Assistant Commissioner and directed that the sale amount be deposited with the Registrar General.2003 by relying upon the judgments of the Kerala High Court in Recovery Officer and Assistant Provident Fund Commissioner v. the Assistant Commissioner issued warrant of attachment dated 15.9.2003 which was duly executed by the Enforcement Officer on 22.9.10.892/.to pay total sum of Rs. 18. which was dismissed by the learned Single Judge of the High Court (Aurangabad Bench) vide his order dated 3. After some time. Official Liquidator (2000) 7 SCC 291.P.

disposed of by the Division Bench vide The same was order dated .for permission to withdraw the amount lying deposited with the Registrar General of the High Court.

and argued that even though under Section 11(2) of the Act. we find no reason to take a different stand. the payment of which is secured by the deeds of pledge executed by the management of the Sugar Mills. same had Learned with the senior counsel relied upon the judgments of this Court in Karnataka Pawnbrokers' Association v. Shri Ashok H. the same cannot have priority or precedence over the dues of the appellant-bank. the operative portion of which reads as under:"In view of the fact that this Court has taken a consistent view that the amounts recovered from sugar factories by disposing of sugar against recovery made by co-operative banks for the secured creditors can be appropriated towards payment of Provident Fund dues. and allow the application in terms of prayer clause (a). the amount due from an employer is treated as first charge on the assets of the establishment.7. Desai. Central Bank of India v. (2007) 8 SCC 353.2007. Siriguppa Sugars & Chemicals Ltd. State of Karanataka (1998) 7 SCC 707. Shri Desai referred to ." 14. because the appellant-bank. with no order as to costs. learned senior counsel appearing for the appellant assailed the impugned orders and argued that the sugar bags lying in the godowns of the Sugar Mills could not have been attached and sold at the instance of the Assistant Commissioner for realization of the dues of already been provident pledged fund etc.19.

various clauses of the deeds of pledge and submitted that for all practical purposes. power or authority to attach the . the appellant-bank had become owner of the sugar bags and the Recovery Officer did not have the jurisdiction.

Malvika Trivedi. Union of India (2008) 1 SCC 125. Another argument of the learned senior counsel is that. Learned counsel submitted that the expression `any amount due' appearing in Section 11(2) includes the amount .C. learned for the respondents argued that notwithstanding execution of the deeds of pledge by the management of Sugar Mills in favour of the appellant-bank. counsel Shri R. at best.same. In support of this argument. the Recovery Officer was not entitled to attach the same for realizing the dues of provident fund etc. "assets" Learned used senior in counsel emphasized of the that the term Act means Section 11(2) unencumbered property of the establishment and argued that as the sugar bags pledged with the appellant-bank had become its property. the amount determined under Section 7A can be treated as first charge on the assets of the establishment but the interest payable under Section 7Q and damages levied under Section 14B cannot be recovered by invoking Section 11(2) of the Act. Kalra and Ms. 15. the sugar bags continued to be the property of the Sugar Mills and the same could be sold for realization of the dues of provident fund. Shri Desai placed reliance on paragraphs 67 and 73 of the judgment of this Court in Transcore v.

determined under Section 7A. interest payable on such amount in terms of Section 7Q and damages levied under Section 14B. Learned counsel then argued that by virtue of .

(C) No. Malvika Trivedi pointed out that notice in the SLPs filed by the appellant was issued primarily in view of the assertions contained therein that similar issue is under consideration in S. State of Kerala and others and submitted that the appeals are liable to be dismissed in view of the judgment titled Central Bank of India v.95 of 2005 .P. some of the big industrial employers introduced schemes of provident funds for welfare of their workers. Ms. 16.Central Bank of India v. . did the workers not get similar of small benefits did not industrial because introduce establishments employers of those establishments voluntary schemes of provident funds. In pre-independence era. However. We have considered the respective submissions. The framers of the Constitution were very much alive to the plight of the working class and particularly the unorganized labour They were employed in factories and other establishments. State of Kerala (2009) 4 SCC 94.the deeming provision and non obstante clause contained in Section 11(2).L. any amount due from an employer in respect of the employees' contribution or employer's contribution is the first charge on the assets of the establishment and the same is required to be paid in priority qua all other debts.

also conscious of the fact that the goals of justice social. economic and political and equality of status and of opportunity proposed to be incorporated in the preamble .

to or all economic workers. Therefore. shall inform all the institutions of national life. a social order in which justice. specific provisions were incorporated in Part IV of the Constitution with the title "Directive Principles of State Policy" casting an obligation making clause upon laws. as effectively as it may. efforts to in different areas or engaged in different Article 43 casts a duty on the State to make secure or in by suitable any other legislation way. organization . and endeavour to eliminate inequalities in status. social. not only amongst individuals but also amongst groups of people residing avocations.to the Constitution of society and will unless remain the illusory State takes for for weaker sections legislative the affirmative ameliorating the workers administrative of those sections measures conditions including employed in factories etc. Clause (2) of Article 38 mandates the State to strive to minimize the inequalities in income. facilities and opportunities. (1) the Article by State 38 the to apply has these been principles renumbered (Forty-fourth in as which thereof Constitution Amendment) Act. economic and political. 1978 declares that the State shall strive to promote the welfare of the people by securing and protecting.

industrial or otherwise. leisure in particular. opportunities. and social social and cultural opportunities. a living wage. conditions of work ensuring a decent standard of life and full enjoyment of and. work. .agricultural.

Section 2(aa) of the Act defines the term "authorized officer" to mean the Central Provident Fund Commissioner.1951. which belongs to the family of legislations enacted by the Parliament in furtherance of the mandate of Articles 38 and 43 of the Constitution and is intended to give social security to the workers employed in the factories and other establishments. Regional Provident Fund Commissioner or such other officer as may be authorised by the Central Government. the employers of the factories and specified establishments to deduct certain amount from the wages payable to the employees which and also make contribution by the Central to various funds. pension fund and deposit-linked insurance fund in factories and other establishments. and Regional It requires are administered Provident Fund Commissioners. the Employees the Provident Government of India promulgated Funds Ordinance on 15. Soon after enforcement of the Constitution.11. The Act provides for institution of provident funds. Additional Central Provident Fund Commissioner. which was replaced by the Act. by .The State is also required to make special endeavour to promote cottage industries on an individual or cooperative basis in rural areas. Deputy Provident Fund Commissioner. 17.

The term "Fund" has been defined in Section 2(h) to mean the provident fund established under a Scheme.notification in the Official Gazette. The term "Recovery Officer" has been defined in Section 2(kd) to mean any officer of .

Employees' Pension Section 6A(1) postulates framing of Scheme for the purpose of providing superannuation pension. State Government or the Board of Trustees constituted under Section 5A. who may be authorised by the Central Government. Section 5(1) lays down that the Central Government may. to exercise the powers of a Recovery Officer under the Act. section further lays down that soon after framing of the Scheme. Section 6 speaks of the contribution required to be made by the employer and employees to the Fund. Section 6A(2) lays down that notwithstanding anything .the Central Government. by notification in the Official Gazette. by notification in the Official Gazette. children pension or orphan pension payable to the beneficiaries of such employees. a Fund shall be established in accordance with the provisions of the Act and the Scheme. retiring pension or permanent total disablement pension to the employees of any establishment or class of establishments to which this Act applies and widow or widower's pension. frame a Scheme to be called the Employees' Provident Funds Scheme for the establishment of provident funds under this Act for employees or for any class of employees and specify the establishments or class of This establishments to which the said Scheme shall apply.

there shall be established. a pension fund to which a specified sum should be paid from the employer's contribution under Section 6. as soon as may be after framing of the Pension Scheme.contained in Section 6. Section 6C(1) .

Section 7Q declares that the employer shall be liable to pay simple interest at the rate of twelve per cent per annum or at such higher rate as may be specified in the Scheme on any amount due from him under the Act from the date on which the amount has become so due till the date of its actual payment. the Scheme or the Pension Scheme or the Insurance Scheme. as the case may be. Section 6C(2) provides for establishment of a Deposit-linked Insurance Fund into which the employer is required to pay a specified amount in respect of every employee. Proviso to this Section lays down that higher rate of interest specified in the Scheme shall not exceed the lending rate of interest charged by any scheduled bank.postulates framing of Employees' Deposit-linked Insurance Scheme for the purpose of providing life insurance benefits to the employees of any establishment or class of establishments to which the Act applies. Section 8 specifies the Section 8B mode of recovery of moneys due from employers. the authorized officer may issue a certificate to the . the competent authority to decide Section 7A empowers dispute regarding applicability of the Act to an establishment as also the amount due from any employer under the provisions of the Act. lays down that where any amount is in arrear under Section 8.

Recovery Officer specifying therein the amount of arrears and on receipt of the certificate. the Recovery Officer shall proceed to recover the particular amount from the establishment or the employer by adopting one or more of .

Section 11 speaks of priority of payment of contributions over other debts. may. Section 14B provides for recovery of damages. 8B. or (b) from the employer in relation to an exempted establishment in respect of any damages recoverable under section 14B or any charges payable by him to the appropriate Government under any provision of this Act or under any of the conditions specified under section 17 or in respect of the contribution payable by him towards the Pension Scheme under the said section 17. (1) Where any amount is in arrear under section 8. Some of these provisions which have direct bearing on the decision of these appeals are reproduced below: 8. be recovered in the manner specified in sections 8B to 8G. Issue of certificate to the Recovery Officer. the authorised officer may issue. a certificate under his signature specifying the amount of arrears and the Recovery Officer. on receipt of such certificate. Mode of recovery of moneys due from employer . if the amount is in arrear. the Insurance Fund damages recoverable under section 14B. as the case may be. as .Any amount due-(a) from the employer in relation to an establishment to which any Scheme or the Insurance Scheme applies in respect of any contribution payable to the Fund or. Section 8F specifies other modes of recovery. shall proceed to recover the amount specified therein from the establishment or. to the Recovery Officer. accumulations required to be transferred under sub-section (2) of section 15 or under sub-section (5) of section 17 or any charges payable by him under any other provision of this Act or of any provision of the Scheme or the Insurance Scheme.the modes specified in that section.

the employer by one or more of the modes mentioned below:-(a) attachment and sale of the movable or immovable property of the establishment or. as .the case may be.

the case may be. (2) The authorised officer may issue a certificate under sub-section (1). Other modes of recovery. 8F. (2) xxx xxx xxx xxx xxx xxx (3)(i) to (ix) xxx (x) If the person to whom a notice under this . the employer: Provided that the attachment and sale of any property under this section shall first be effected against the properties of the establishment and where such attachment and sale is insufficient for recovering the whole of the amount of arrears specified in the certificate. (b) arrest of the employer and his detention in prison. as the case may be. (1) Notwithstanding the issue of a certificate to the Recovery Officer under section 8B. the employer. (c) appointing a receiver for the management of the movable or immovable properties of the establishment or. the Recovery Officer may take such proceedings against the property of the employer for recovery of the whole or any part of such arrears. the Central Provident Fund Commissioner or any other officer authorised by the Central Board may recover the amount by any one or more of the modes provided in this section. notwithstanding that proceedings for recovery of the arrears by any other mode have been taken.

in the manner provided in .sub-section is sent fails to make payment in pursuance thereof to the Central Provident Fund Commissioner or the officer so authorized he shall be deemed to be an employer in default in respect of the amount specified in the notice and further proceedings may be taken against him for the realization of the amount as if it were an arrear due from him.

as the case may be. Application of certain provisions of Incometax Act . (4) xxx xxx xxx xxx (5) The Central Provident Fund Commissioner or any officer not below the rank of Assistant Provident Fund Commissioner may. Provided that any reference in the said provisions and the rules to the "assessee" shall be construed as a reference to an employer as defined in this Act. (l) Where any employer is adjudicated insolvent or. shall apply with necessary modifications as if the said provisions and the rules referred to the arrears of the amount mentioned in section 8 of this Act instead of to the Income-tax.sections 8B to 8E and the notice shall have the same effect as an attachment of a debt by the Recovery Officer in exercise of his powers under section 8B.Priority of payment of contributions over other debts.The provisions of the Second and Third Schedules to the Income-tax Act. 1961 (43 of 1961). the amount due-(a) from the employer in relation to an establishment to which any Scheme or the Insurance Scheme applies in respect of any contribution payable to the Fund or. if so authorised by the Central Government by general or special order. as the case may be. from the establishment by distraint and sale of his or its movable property in the manner laid down in the Third Schedule to the Income-tax Act. 1961 (43 of 1961) and the Income-tax (Certificate Proceedings) Rules. 1962. being a company. recover any arrears of amount due from an employer or. 8G. 11. as in force from time to time. damages recoverable . the Insurance Fund. an order for winding up is made.

under section 14B. or . accumulations required to be transferred under sub-section (2) of section 15 or any charges payable by him under any other provision of this Act or of any provision of the Scheme or the Insurance Scheme.

Power to recover damages. 14B. or under section 61 of the Provincial Insolvency Act. under the rules of the provident fund or any insurance fund. be paid in priority to all other debts. . shall. be deemed to be included among the debts which under section 49 of the Presidency-towns Insolvency Act. any contribution payable by him towards the Pension Fund under sub-section (6) of section 17. damages recoverable under section 14B or any charges payable by him to the appropriate Government under any provision of this Act or under any of the conditions specified under section 17. 1920 (5 of 1920) or under section 530 of the Companies Act. "insurance fund" means any fund established by an employer under any scheme for providing benefits in the nature of life insurance to employees.(b) from the employer in relation to an exempted establishment in respect of any contribution to the provident fund or any insurance fund (in so far it relates to exempted employees). notwithstanding anything contained in any other law for the time being in force. whether linked to their deposits in provident fund or not. if any amount is due from an employer whether in respect of the employees' contribution (deducted from the wages of the employee) or the employer's contribution. (2) Without prejudice to the provisions of subsection (1). and shall. without payment by the employees of any separate contribution or premium in that behalf. where the liability therefor has accrued before the order of adjudication or winding up is made. Explanation: In this sub-section and in section 17. as the case may be. 1956 (1 of 1956) are to be paid in priority to all other debts in the distribution of the property of the insolvent or the assets of the company being wound up. 1909 (3 of 1909). the amount so due shall be deemed to be the first charge on the assets of the establishment.

the Pension Fund or the Insurance Fund or in the transfer of accumulations required to be transferred by him under sub-section (2) of section 15 or subsection (5) of section 17 or in the payment of any charges payable under any other provision of .Where an employer makes default in the payment of any contribution to the Fund.

as may be specified in the scheme: Provided that before levying and recovering such damages. 18. the employer shall be given a reasonable opportunity of being heard: Provided further that the Central Board may reduce or waive the damages levied under this section in relation to an establishment which is a sick industrial company and in respect of which a scheme for rehabilitation has been sanctioned by the Board for Industrial and Financial Reconstruction established under section 4 of the Sick Industrial Companies (Special Provisions) Act. by notification in the Official Gazette. An analysis of the above provisions shows that for providing financial benefits to the workers who contribute to the growth of the industries and industrialization of the country. With of Funds under a view Sections 5(1). 6A(2) and the employers to ensure that religiously comply with the mandate of provisions enacted for benefit of the workers. the legislature has not only .this Act or of any Scheme or Insurance Scheme or under any of the conditions specified under section 17. the Central Provident Fund Commissioner or such other officer as may be authorised by the Central Government. in this behalf may recover from the employer such damages. not exceeding the amount of arrears. the legislature has made provision for framing of various schemes under Sections 5(1). 1985 (1 of 1986). subject to such terms and conditions as may be specified in the Scheme. 6A(1) and 6C(1) and establishment 6C(2).

provided for imposition of penalty under Sections 14. 14A. but also made comprehensive provisions for recovery of the dues by way of attachment and sale of movable or immovable property of the . 14AA and damages under Section 14B.

gives statutory priority to the payment of contributions over other debts. By Section 8G some of the provisions contained in Income-tax Act. 8 lays down that if the amount is in arrear. 1962 have been made applicable to the arrears of the amount mentioned in Section 8.40 of 1973. Section 8B provides for issue of certificate by Section the authorised officer in respect of the amount due to the Recovery Officer so as to enable him to recover the amount specified therein by attachment and sale of movable or immovable property of the establishment or the employer or by arrest of the employer and his detention in prison or by appointing a receiver for the management of the movable or immovable properties of the establishment or the employer. as the case may be. the same can be recovered in the manner specified in Sections 8B to G. It lays down that the amount due from . 1961 and the Income-tax (Certificate Proceedings) Rules. Section 8F specifies other modes of recovery of any amount due from the establishment or the employer.establishment or the employer. as the case may be. The original Section 11 was renumbered Section 11 as sub-section (1) by an amendment made vide Act No. This sub-section relates to priority qua an employer who is adjudged insolvent or being a company an order of winding up is made.

as the case may be. the Insurance Fund. damages recoverable under Section 14B. accumulations required to be transferred under Section 15(2) or any charges payable by .the employer in respect of any contribution payable to the Fund or.

by notification in the Official Gazette to recover from the defaulting employer damages . notwithstanding anything contained in any other law for the time being in force. which was added to Section 11 by Act No. declares that sub-section the amount due from the employer contribution under the Act shall be treated as the first charge on the assets of the establishment. but also lays down that notwithstanding anything contained in any other law. such dues shall be paid in priority to all other debts. be paid in priority to all other (2) of debts. the same shall be deemed to be the first charge on the assets of the establishment and shall. Sub-section (2).40 of 1973 contains a non obstante clause and lays down that if any amount is due from the employer whether in respect of the employees' contribution deducted from the wages of the employee or the employer's contribution. Section To 11 put it not only towards differently.him under any other provision of the Act or the Scheme or the Insurance Scheme shall be paid in priority to all other debts in the distribution of the property of the insolvent or the assets of the company being wound up. as the case may be. Section 14B empowers the Central Provident Fund Commissioner or such other officer as may be authorized by the Central Government.

First proviso to this section casts a duty on the concerned officer to give the employer reasonable opportunity of hearing before imposing and recovering damages. Second proviso thereto empowers .which shall not exceed the arrears.

we may usefully notice the following observations made by Krishna Iyer. In this context. i. it is imperative for the courts to give a purposive interpretation to the provisions contained therein keeping in view the Directive Principles of State Policy embodied in Articles 38 and 43 of the Constitution.. public frustration from the failure of the project and psychic demoralisation of the miserable beneficiaries whey they find their wages deducted and the employer get away with it even after default in his own contribution and malversation of the workers' share. "Damages" have a wider socially semantic connotation than pecuniary loss of interest on non-payment when a social welfare scheme suffers mayhem on account of the injury. 19. the scheme would be damnified by traumatic starvation of the Fund. the workers employed in factories and other establishments.the Central Board to reduce or waive damages levied in relation to establishment which is a sick industrial company and in respect of which a scheme for rehabilitation has been sanctioned by the Board of Financial and Industrial Reconstruction. Union of India (1979) 4 SCC 573: "The pragmatics of the situation is that if the stream of contributions were frozen by employers' defaults after due deduction from the wages and diversion for their own purposes. Since the Act is a social welfare legislation intended to protect the interest of a weaker section of the society. in Organo Chemical Industries v. Law expands concepts to embrace .e. J.

the working class during the superannuated winter of their life. The measure was enacted for the support of a weaker sector viz.social needs so as to become functionally effectual. The financial reservoir for the distribution of benefits is .

the concept of `damages' when the court seeks to define its content in the special setting of the Act. observed: The Court must interpret them in a way that reconciles them as far as possible and is most appropriate in order to realise the aim and achieve the object of the treaty. by deducting from the workers' wages. fulfilling meaning. judicial interpretation must further the purpose of a statute. part of the State." 20. This prospect of destitution demoralises the working class and frustrates the hopes of the community itself. in a sense. completing it with his own equal share and duly making over the gross sums to the Fund. If the employer neglects to remit or diverts the moneys for alien purposes the Fund gets dry and the retirees are denied the meagre support when they most need it. in the Sunday Times Case. pledge. the European Court of Human Rights. The priority given to the dues of provident fund etc. in Section 11 is not hedged with any . We shall now consider the question whether the provision contained in Section 11(2) of the Act operates against other debts like mortgage. this question is clearly discernible Answer to from the plain language of Section 11. So it is reasonable to assign to "damages" a larger. The whole project gets stultified if employers thwart contributory responsibility and this wider fall-out must colour. is sanctioned by principle and precedent and is implicit in Article 37 of the Constitution since the judicial branch is. For. A policy-oriented interpretation. especially in the context of a developing country. In a different context and considering a fundamental treaty.filled by the employer collecting. when a welfare legislation falls for determination. etc.

Any doubt on the width and scope of Section 11 qua other debts is removed by . a bare reading of the section makes it clear that the amount due is required to be paid in priority to all other debts. Rather.limitation or condition.

reasonable to take the view that the statutory first charge created on the assets of the establishment by sub-section (2) of Section 11 and priority given to the payment of any amount due from an employer will operate against all types of debts.the use of expression `all other debts' in both the subsections. the dues payable under the Act would always remain first charge and shall be paid first out of the assets of the establishment This is notwithstanding anything contained in any other law for the time being in force. therefore. 21. It is. The view we have taken on the interpretation of Section 11(2) is in tune with a series of decisions of this Court in statutes which giving the provisions to the contained dues in different priority of the State and . designedly inserted in the provident fund dues of the workers are not defeated by prior claims of secured or unsecured creditors. This would mean that the priority clause enshrined in Section 11 will operate against statutory as well as non-statutory and secured as well as unsecured Sub-section (2) was Act for ensuring that the debts including a mortgage or pledge. the reason why the legislature took care to declare that irrespective of time when a debt is created in respect of the assets of the establishment.

Builders Supply Corporation v. the Constitution Bench considered the question whether . we may In refer to some decisions relating to dues of the State. Union of India 1965(2) SCR 289. In the first place.workers have been interpreted.

In other words. After making reference to some judgments of the Bombay and Madras High Courts.tax payable to the Union of India has priority over other debts. 3. where the welfare State enters into commercial fields which cannot be regarded as an essential and integral part of the basic government functions of the State and seeks to recover debts from its debtors arising out of such commercial activities the applicability of the doctrine of priority shall be open for consideration. 1954 in favour of the State will have priority over the . There is a consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts. The doctrine may not apply in respect of debts due to the State if they are contracted by citizens in relation to commercial activities which may be undertaken by the State for achieving socio-economic good. The basic justification for the claim for priority of State debts is the rule of necessity and the wisdom of conceding to the State the right to claim priority in respect of its tax dues. The common law doctrine about priority of Crown debts which was recognised by Indian High Courts prior to 1950 constitutes "law in force" within the meaning of Article 372(1) and continues to be in force. 2. 22. In State Bank of Bikaner and Jaipur v. National Steel Rolling Corporation (1995) 2 SCC 19. 4. a Iron and three-Judge Bench considered whether statutory first charge created by Section 11-AAAA of the Rajasthan Sales Tax Act. the Constitution Bench laid down the following propositions: 1.

debts of the bank which had been secured by the borrower by creating mortgage of its factory and answered the same in affirmative by making the following observations: .

so far as may be. It provides that where immoveable property of one person is made security for the payment of money to another. and the transaction does not amount to a mortgage. In the present case we have to consider whether the statutory first charge which is created under Section 11-AAAA of the Rajasthan Sales Tax Act over the property of the dealer or a person liable to pay sales tax and/or other dues under the Rajasthan Sales Tax Act. The Court has observed (at pages 806-807) that a charge is a wider term as it includes also a mortgage. a charge is created on the property and all the provisions in the Transfer of Property Act which apply to a simple mortgage shall. but every charge is not a mortgage. In other words. is created in respect of the entire interest in the property or only the mortgagor's interest in the property when the dealer has created a mortgage on the property. The distinction between a mortgage and a charge was considered by this Court in the case of Dattatreya Shanker Mote v. Anand Chintaman Datar (1974) 2 SCC 799. will the statutory first charge have priority over an earlier . every mortgage is a charge. It has held that the phrase "transferee of property" refers to the transferee of entire interest in the property and it does not cover the transfer of only an interest in the property by way of a mortgage. A mortgage on the other hand. is defined under Section 58 of the Transfer of Property Act as a transfer of an interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced as set out therein. in that."Section 100 of the Transfer of Property Act deals with charges on an immoveable property which can be created either by an act of parties or by operation of law. apply to such charge. The Court has then considered the application of the second part of Section 100 of the Transfer of Property Act which inter alia deals with a charge not being enforceable against a bona fide transferee of the property for value without notice of the charge.

learned counsel for the appellant-bank that at the time when the statutory first charge came into existence. It was urged by Mr. was equity of redemption . the only property which was possessed by the dealer and/or person liable to pay tax or other dues under the Rajasthan Sales Tax Act. Therefore. there was already a mortgage in respect of the same property.mortgage. Tarkunde.

therefore. only on the equity of redemption. an interest in the property is carved out in favour of the mortgagee. as set out in Dattatreya Shanker Mote case (1974) 2 SCC 799 a charge is a wider term than a mortgage. undoubtedly. will have to be rejected. The mortgagor is entitled to redeem his property on payment of the mortgage dues. Where a mortgage is created in respect of any property. however. thus clearly giving priority to the statutory charge over all other charges on the property including a mortgage. therefore. that the statutory first charge created by Section 11-AAAA of the Rajasthan Sales Tax Act can operate only over the equity of redemption. when a statutory first charge is created on the property of the dealer. It would cover within its ambit a mortgage also. The interest of the mortgagee is not excluded from the first charge. In the present case. mean that the property ceases to be the property of the mortgagor. cannot be accepted. The title to the property remains with the mortgagor. therefore. What is meant by a "first charge"? Does it have precedence over an earlier mortgage? Now. The charge operates on the entire property of the dealer including the interest of the mortgagee therein. Looked at a little differently. Therefore. The first charge would operate. that charge will have precedence over an existing . the property subjected to the first charge is the entire property of the dealer. the section creates a first charge on the property. which is created under Section 11-AAAA of the Rajasthan Sales Tax Act will operate on the property as a whole and not only on the equity of redemption as urged by Mr. The submission. The argument though ingenious. The first charge. the statute has created a first charge on the property of the dealer. when a first charge is created by operation of law over any property. This does not.in respect of that property. Tarkunde. Therefore.

a two-Judge Bench reiterated .mortgage. the (2000) 5 SCC 694. In Dena Bank v." (emphasis supplied) 23. Bhikhabhai Prabhudas Parekh & Co.

the State claimed priority in the matter of recovery of dues of sales tax vis-`-vis the dues of the bank. bank. decree. v. dues. . but also extends its applicability over private debts forming the subject matter of mortgage. execution or attachment of the like. the borrower executed a promissory note and pledged certain machinery. charge created under Section 33-C of the M. The trial Court and the High Court rejected the plea The High Court observed that the bank's of the State.P. In State of M. judgment. State Bank of Indore (2002) 10 this Court considered whether statutory first SCC 441. 24.principles Union of enunciated India (supra) in Builders and Supply to Corporation observe v. 1958 would prevail over the bank's charge. Thereafter. General Sales Tax Act. The facts of that case were that for securing repayment of the loan obtained from the State Bank of Indore. that proceeded Section 158(1) of the Karnataka Land Revenue Act not only gives a statutory recognition to the doctrine of State's priority for recovery of debts. The bank sued the borrower for recovery of its During the pendency of the case instituted by the Section 33-C was inserted in the State Act.P.

charge on the machinery was prior to the insertion of Section 33-C in the State Act and the subsequent loans taken in 1979 do not alter the position in favour of the State. The High Court then proceeded to hold that the .

Kerala slightly Recently. There is no question of retrospectivity here. on the date when it was introduced." 25. 1963 and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act. State of in had a SCC the issue was The considered perspective. Therefore. the charge thereby created in favour of the State in respect of the sales tax dues of the second respondent prevail over the charge created in favour of the Bank in respect of the loan taken by the second respondent. 2002. 2009(4) different in Central 94. 1963. as. whereby first charge was created on the property of the dealer or the person liable to pay tax by contending that the same was beyond the legislative competence of the State and was also inconsistent with the provisions contained in the Recovery of Debts Due to Banks and Financial Institutions Act. .charge created in favour of the Bank remains valid and operative till repayment of the loan. In the connected appeals. Section 33-C operated in respect of all charges that were then in force and gave sales tax dues precedence over them. Bank of India v. appellant-bank challenged the vires of Section 26-B of the Kerala General Sales Tax Act. This Court reversed the judgments of the trial Court and the High Court and held: "Section 33-C creates a statutory first charge that prevails over any charge that may be in existence.

1959 was challenged various on similar of the grounds.vires of Section 38C of the Bombay Sales Tax Act. challenge This and Court held considered that the facets provisions contained in the Sales Tax Act were not beyond .

The Court noted that the object of the amendment was to protect the interest of the workers and to place them at par with secured creditors and held: "The proviso to sub-section (1) of Section 529 inserted by the Amending Act clearly provides that "the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen". a charge pari passu in favour of the workmen on every security available to the secured creditors of the employer company for recovery of their debts at the time when the amendment came into force. 1985. by statute. We shall now notice some decisions in which statutes giving parity or priority to the workers claim have been interpreted. this Court considered the scope of proviso to Section 529(1) of the Companies Act as inserted by the Companies (Amendment) Act.the legislative competence of the State. High Court Bombay and another (1994) 5 SCC 1. Official Liquidator. This expression is wide enough to apply to the security of every secured creditor which remained unrealised on the date of . In UCO Bank v. 26. The Court further held that there is no inconsistency between the provisions of the State and Central Acts and the non obstante clauses contained in the Central legislations will not override the provisions of the State legislations by which first charge was created in favour of the State in the matter of recovery of the dues of sales tax. The effect of the proviso is to create.

the avowed object of the amendment made. The clear object of the amendment is that the legitimate dues of workers must rank pari passu with those of secured creditors and above even the dues of the Government. On the contrary. the .the amendment. and promotes. This literal construction of the proviso is in consonance with.

The workmen contribute to the growth of the capital and must get their legitimate share in the assets of the company when the situation arises for its closure and distribution of its assets first among the secured creditors due to winding up of the company." (emphasis supplied) 27. In view of the nature of workmen's dues being similar to those of secured creditors. State Financial Corporation v. In A. The conclusion reached by the Division Bench of the High Court is supported by this reason. results in depletion of the assets in the hands of the Official Liquidator. when recovered by realisation of the security after commencement of the winding up proceedings. The aforesaid amendment made in the Act is a statutory recognition of this principle equating the legitimate dues of the workmen with the debts of the secured creditors of the company. 1951 . the purpose of this provision is to place the workmen on a par with the secured creditors and create a statutory charge in their favour on all available securities forming part of the assets of the company in liquidation so that the workmen also share the securities pari passu with the secured creditors. this Court considered the inter-play of Section 29(1) of the State Financial Corporations Act. it is necessary that the amended provision must apply to all available securities which form part of the assets of the company in liquidation on the date of the amendment.construction of the proviso suggested by the learned counsel for the appellant. A debt due to a secured creditor. Official Liquidator (supra). apart from being in conflict with the plain language of the proviso also defeats the object of the legislation. To achieve this purpose. This provision is intended to protect the interests of the workmen in proceedings for winding up.P.

which is pari materia to Section 11(2) of the Act. 1956.and Section 529A of the Companies Act. and held: "The Act of 1951 is a special Act for grant of financial assistance to industrial concerns with a view to boost up industrialisation and also .

The proviso to sub-section (1) of Section 529 and Section 529-A being a subsequent enactment. The legislature has amended the Companies Act in 1985 with a social purpose viz. the non obstante clause in Section 529A prevails over Section 29 of the Act of 1951 in view of the settled position of law. this Official Liquidator and another (2004) 9 SCC Court again interpreted the scope of Section 529-A of the Companies Act. In Textile Labour Association and another 741. 1956 and held: ." (emphasis supplied) 28. In other words the statutory right to sell the property under Section 29 of the Act of 1951 has to be exercised with the rights of pari passu charge to the workmen created by the proviso to Section 529 of the Companies Act. to protect dues of the workmen. of the opinion that the above proviso to sub-section (1) of Section 529 and Section 529A will control Section 29 of the Act of 1951. v. the Company Court was fully justified in imposing the above conditions to enable the Official Liquidator to discharge his function properly under the supervision of the Company Court as the new Section 529-A of the Companies Act confers upon a Company Court the duty to ensure that the workmen's dues are paid in priority to all other debts in accordance with the provisions of the above section. Therefore. the liquidator shall be entitled to represent the workmen and force (sic enforce) the above pari passu charge.recovery of such financial assistance if it becomes bad and similarly the Companies Act deals with companies including winding up of such companies. We are. therefore. Under the proviso to sub-section (1) of Section 529. If conditions are not imposed to protect the right of the workmen there is every possibility that the secured creditor may frustrate the above pari passu right of the workmen.

If there is no secured creditor then the workmen of the company become unsecured preferential creditors under Section 529-A to the extent of the workmen's dues."The effect of Sections 529 and 529-A is that the workmen of the company become secured creditors by operation of law to the extent of the workmen's dues provided there exists secured creditor by contract. The purpose of .

He also attached 37 cents of land which the company had mortgaged to the State Financial Corporation. In that case. in the backdrop of the argument that the provision contained in Section 46-B of the State Financial Corporations Act. will override the provisions of the Act. the Recovery Officer appointed under the Act made an application for recovery of the dues of provident fund payable by the employer-company. Under Section 529-A the dues of the workers and debts due to the secured creditors are to be treated pari passu and have to be treated as prior to all other dues. This section overrides preferential claims under Section 530 also." 29. The primacy of first charge created under Section 11(2) of the Act was considered by a Division Bench of the Kerala High Court in Recovery Officer and Assistant Provident Fund Commissioner v.Section 529-A is to ensure that the workmen should not be deprived of their legitimate claims in the event of the liquidation of the company and the assets of the company would remain charged for the payment of the workers' dues and such charge will be pari passu with the charge of the secured creditors. Kerala Financial Corporation (2002) 2 KLT 723. 1951 which also contains a non obstante clause. The latter challenged the action of the Recovery Officer by filing writ petition under Article 226 of the Constitution. A learned Single Judge of the . There is no other statutory provision overriding the claim of the secured creditors except Section 529-A.

High Court allowed the writ petition and declared that the company's land could not have been attached for recovery of dues payable under the Act because the same stood mortgaged in favour of the State Financial Corporation. The Division .

Second. which also indicate such intention of Parliament. There are other provisions in the Act rendering the amounts of provident fund immune from attachment of civil court's decree.Bench reversed the order of the learned Single Judge and held: "." The Division Bench of the High Court then considered the argument that the non obstante clause contained in Section 46-B of the State Financial Corporations Act has overriding effect qua Section 11(2) of the Act and negatived the same by making the following observations: "The contention of the first respondent based on the overriding effect of Section 46-B of the SFC Act has no substance in our judgment. declaring that the amount due as contribution to the employees . Sub-section (2) of Section 11 of the EPF and MP Act has two facets. Undoubtedly. the intention of Parliament in enacting Section 46-B in the year 1956 was to ensure that a State Financial Corporation could quickly and effectively recover the amounts due by taking possession of the property of the defaulter instead of having resort to the cumbersome method of recovery through a court of law.. Both these provisions bring out the intention of Parliament to ensure the social benefit as contained in the legislation. it declares that the amount due from the employer towards contribution under the EPF and MP Act shall be deemed to be the first charge on the assets of the establishment. it also declares that notwithstanding anything contained in any other law for the time being in force. such debt shall be paid in priority to all other debts. First. While this was the law.. Parliament amended Section 11 of the EPF and MP Act by specifically enacting sub-section (2) thereof.

it shall be paid in priority against all other debts.provident fund has first charge on the assets of the establishment and that. the second facet of Section 11(2) of the EPF and MP Act goes one step further than what is provided in Section . notwithstanding anything contained in any other law for the time being in force. In fact.

since it is a matter of terminal social security benefit made available by statute to the working class. his client had become owner of the sugar bags and the same could not have been attached and sold for . we must ascribe to Parliament the intention to override the earlier legislation also. the provident fund payable to workers is of greater moment." 30. we shall now examine the tenability or otherwise of the argument of the learned senior counsel appearing on behalf of the appellant-bank that by virtue of the deeds of pledge executed by the Sugar Mills. In the light of the above analysis of the relevant provisions of the Act and precedents. the legislature took care to declare that irrespective of when a debt is created. Taking into consideration that the EPF and MP Act is a social benefit legislation. the dues under the EPF and MP Act would always remain first charge and shall be paid first out of the assets of the establishment. We are also not impressed by the contention of the first respondent that upon usage of non obstante clause in Section 46-B of the SFC Act. both Section 46-B of the SFC Act and Section 11(2) of the EPF and MP Act declare their intent by usage of the non obstante clause. clear that Section 11(2) of the EPF and MP Act overrides all provisions of other enactments including Section 46-B of the SFC Act. and the evil consequences of provident fund dues being defeated by prior claims of secured or unsecured creditors. Sub-section (2) of Section 11 of the EPF Act is of subsequent date. It is. While the State Financial Corporation would have to be helped to recover the debts due to it from a defaulting debtor. therefore. The reason for this is obvious.46-B of the SFC Act. But. since Section 11(2) of the EPF and MP Act has been enacted later. No doubt.

A careful reading of the deed of of pledge Kannad dated Sahakari 5.2001 executed by the management .realization of the amount due under the Act. 31.3.

2003 executed by the management of the other Sugar Mill are substantially similar) shows that even though the sugar bags which were available with the Sugar Mills at the relevant time were placed in the custody of the appellant-bank as security for repayment of loan together with interest. (the terms of three deeds dated 2.4. To put it differently.2003.1.2.2003 and 4. If the sugar bags had become property of the appellant-bank simply because the same were pledged by the management of the Sugar Mills for securing repayment of the loan etc. the former continued to be owner thereof. there was no occasion . the latter was duty bound to lift its notional control over the sugar bags lying in the godowns of the Sugar Mills. title of the property remained with the Sugar Mills and only limited interest therein was passed on to the appellant-bank as security for repayment of the loan etc.Sakhar Karkhana Ltd. case of default. 6.. the appellant-bank could recover its dues by selling the sugar bags. the appellant-bank could mechanism for In adjudicatory recovery of the balance amount. was less resort to than the amount other appropriate If the price of the sugar bags due. If the management of the Sugar Mills were to repay the dues of the appellantbank within the time specified in the deeds of pledge.

pay rent thereof and get the goods insured.for the latter to take the responsibility of hiring godowns on behalf of the appellant-bank. there was no reason for the management of the Sugar Mills to take the responsibility of . Equally.

of Personal Property" by Ray Andrews Brown (Second edition 1936). the term "pledge" has been described in the following words: . "pledge" is a formal promise or undertaking. the very fact that except giving the symbolic custody of the sugar bags to the appellant-bank by allowing it to put lock and key on the godowns. damage or shrinkage and insure the goods against any damage or loss or riots or civil commotion. all steps for preserving the goods and getting the same insured were taken by the management of the Sugar Mills of any which also agreed damage to take the responsibility shortage. the act of providing something as security for a debt or obligation. a bailment or other deposit of personal property In the to "Law a creditor as security for debt or obligation. or shrinkage unmistakably shows that the Sugar Mills continued to be owner of the sugar bags. quality. 32. conditions or safety of the goods and take upon itself the responsibility for any shortage. As per Black's Law Dictionary (Eighth edition). In our considered view.changing or repairing the godowns and bear its cost or confer immunity upon the bank in the matter of weight.

"A pledge is a bailment of personal property to secure an obligation of the bailor. then the Courts will hold the transaction a pledge." . even though in form it may be a sale or other out-and-out transfer. If the purpose of the transaction is to transfer property for security only.

Under the common law a pawn or a pledge is a bailment of personal property as a security for some debt or engagement. A Pawnee has no right of foreclosure since he never had absolute ownership at law and his equitable title cannot exceed what is specifically granted by law. by contract a deposit of goods is made as ." (underlining is ours) 33. The two ingredients of a pawn or a pledge are: (1) that it is essential to the contract of pawn that the property pledged should be actually or constructively delivered to the pawnee and (2) a pawnee has only a special property in the pledge but the general property therein remains in the pawner and wholly reverts to him on discharge of the debt. A pawn therefore is a security.In Mulla's Treaties on the Transfer of Property. where. Possession is given and the transaction involves a transfer of special property in the subject of the security. A pawner is one who being liable to an engagement gives to the person to whom he is liable a thing to be held as security for payment of his debt or the fulfilment of his liability. the following description has been given to the term "pledge": "A pledge is a bailment of movable property by way of security. In a pledge the pledge is in possession of and has a special property in the goods which he is entitled to detain to secure repayment.

The right to property vests in the pledgee only so far as is necessary to secure the debt. In this sense a pawn or pledge is an intermediate between a simple lien and a mortgage which wholly passes the property .security for a debt.

.. He has a right of action for his debt notwithstanding possession by him of the goods pledged.. The pawner has an absolute right to redeem the property pledged upon tender of the amount advanced but that right would be lost if the pawnee has in the meantime lawfully sold the property pledged. But delivery and advance need not be simultaneous and a pledge may be perfected by delivery after the advance is made. Court referred to the above noted common law principles and observed: ".. Satisfaction of the debt or engagement extinguishes the pawn and the pawnee on such satisfaction is bound to redeliver the property. Rahmat Ali (1967) 2 SCR 233. The pawnee's right of sale is derived from an implied authority from the pawner and such a sale is for the benefit of both the parties.in the thing conveyed..A contract to pawn a chattel even though money is advanced on the faith of it is not sufficient in itself to pass special property in the chattel to the pawnee. this In Lallan Prasad v. The pawner however has a right to redeem the property pledged until the sale. A contract of pawn thus carries with it an implication that the security is available to satisfy the debt and under this implication the pawnee has the power of sale on default in payment where time is fixed for payment and where there is no such stipulated time on demand for payment and on notice of his intention to sell after default. 34. Delivery of the chattel pawned is a necessary element in the making of a pawn. the sale proceeds are the pawner's monies to be so applied and the pawnee must pay to the pawner any surplus after satisfying the debt. he must appropriate the proceeds of the sale towards the pawner's debt. But if the pawner tenders payment of the debt the pawnee has to ... for. If the pawnee sells.

return the property pledged. This being the position under the common law. v. If by his default the pawnee is unable to return the security against payment of the debt. the pawner has a good defence to the action. Dixon-Johnson that if a creditor holding security sues for the debt. it was observed in Trustees of the Property of Ellis & Co. he is under an obligation on payment of the debt to hand .

over the security. as the sale does not take place the pawner is entitled to redeem the goods on payment of the debt. But as aforesaid the pawnee is bound to apply the sale proceeds towards satisfaction of the debt and pay the surplus. though he is entitled to retain the goods he is bound to return them on payment of the debt. It follows therefore that where a pawnee files a suit for recovery of debt. if any. Section 173 entitles a pawnee to retain the goods pledged as security for payment of a debt and under Section 175 he is entitled to receive from the pawner any extraordinary expenses he incurs for the preservation of the goods pledged with him. as codified in Sections 172 to 176 of the Contract Act and held: "Under Section 172 a pledge is a bailment of the goods as security for payment of a debt or performance of a promise. and that if. however. So long. to the pawner." (underlining is ours) The Court further observed that there is no difference between Common Law of England and the law with regard to the pledge. Section 176 deals with the rights of a pawnee and provides that in case of default by the pawner the pawnee has (1) the right to sue upon the debt and to retain the goods as collateral security and (2) to sell the goods after reasonable notice of the intended sale to the pawner. Once the pawnee by virtue of his right under Section 176 sells the goods the right of the pawner to redeem them is of course extinguished. The right to sue on the debt assumes that he is in a position to redeliver the goods on payment of the debt and . having improperly made away with the security he is unable to return it to the debtor he cannot have judgment for the debt.

therefore if he has put himself in a position where he is not able to redeliver the goods he cannot obtain a decree. If it were otherwise. The . the result would be that he would recover the debt and also retain the goods pledged and the pawner in such a case would be placed in a position where he incurs a greater liability than he bargained for under the contract of pledge.

In Bank of Bihar v.. and it is found that he was given possession of the goods pledged and had retained the same. the pawner has the right to redeem the goods so pledged by payment of the debt..81." 35. in the alternative. Where the value of the pledged property is less than the debt and in a suit for recovery of debt by the pledgee.. If the debt is ordered to be paid he has to return the goods or if the goods are sold with or without the assistance of the court appropriate the sale proceeds towards the debt... for recovery of Rs.700. could seize and sell the sugar which was already pledged with the appellant-bank as security for the advances made by it to the company.93 with interest . If the pawnee is not in a position to redeliver the goods he cannot have both the payment of the debt and also the goods. State of Bihar (1972) 3 SCC 196.pawnee therefore can sue on the debt retaining the pledged goods as collateral security. The appellant-bank sued the State of Bihar and others including the Cane Commissioner and the company for return of 1818 bags of 27D quality of sugar and. the pledgee denies the pledge or is otherwise not in a position to return the pledged goods he has to give credit for the value of the goods and would be entitled then to recover only the balance. this Court considered the question whether the Cane Commissioner.1. who was an unsecured creditor of the Sugar Mill named Jagdishpur Zamindari Company Limited and did not have any right of priority over other creditors and in particular the secured creditors of the company. But if he sues on the debt denying the pledge.

It held that even though the order of seizure of the stock of sugar was valid.by way of damages or illegal removal and detention of sugar or price thereof. the plaintiff's right as pledgee could not . The trial Court decreed the suit.

The High Court allowed the appeal filed by the State of Bihar and others and held that the plaintiff-bank had not been wrongfully deprived of the sugar.be extinguished by such seizure. As the act of the Government resulted in deprivation of the amount to which the plaintiff was entitled it was bound to reimburse the plaintiff for such amount which the plaintiff in ordinary course would have realized by sale of the goods pledged with it on the pawnor making a default in payment of debt. The Cane Commissioner who was an unsecured creditor could not have any higher rights than the . "The pawnee has special property and a lien which is not of ordinary nature on the goods and so long as his claim is not satisfied no other creditor of the pawnor has any right to take away the goods or its price. The plaintiff's right as a pawnee could not be extinguished by the seizure of the goods in its possession inasmuch as the pledge of the goods was not meant to replace the liability under the cash credit agreement. But by a mere act of lawful seizure the Government could not deprive the plaintiff of the amount which was secured by the pledge of the goods to it. After the goods had been seized by the Government it was bound to pay the amount due to the plaintiff and the balance could have been made available to satisfy the claim of other creditors of the pawnor. in particular. It was intended to give the plaintiff a primary right to sell the goods in satisfaction of the liability of the pawnor. The approach of the trial court was unexceptionable. this Court noted did not have any right of the Cane Commissioner priority over the other creditors of the company and. the secured creditors and reversed the judgment of the High Court by recording the following observations. that In para 4 of the judgment.

in The ratio of the above noted two judgments is that a contract of pawn the property pledged should be .pawnor and was entitled only to the surplus money after satisfaction of the plaintiff's dues." 36.

hold that the deeds of pledge executed by the management of the Sugar Mills as security for repayment of loan etc. We. we may refer to the judgments on which reliance has been placed by the learned senior question counsel which appearing fell for for the appellant-bank. therefore. State of Karnataka (supra). 1959 read with the Tamil Nadu Pawnbrokers Act.actually or constructively delivered to the pawnee and pawnee has only a special property in the pledge but the general property remains with the pawner and wholly reverts to him on discharge of debt. in The consideration Karnataka Pawnbrokers' Association v. Before leaving this issue. was whether pawnbroker is a dealer and carries on business within the meaning of Tamil Nadu General Sales Tax Act. The right to property vests in the pledgee only so far as necessary to secure his debt. 1943 and . did not have the effect of transferring of the ownership of the sugar bags to the appellant-bank and the Recovery Officer did not commit any illegality by attaching the same and the High Court was fully justified in directing payment of a portion of the sale price to the Assistant Commissioner for being appropriated towards the provident fund dues of the workers. 37.

Rules as also the Karnataka Sales Tax Act. 1961 and Rules. The Court referred to the decisions of the . 1957 read with Karnataka Pawnbrokers Act. when it caused sale of unredeemed goods occasioned by the default of the pawnor.

1 . The Labour Commissioner had passed an order under Section 33-C of the Industrial . the special right in the pledge but also passes on his right to transfer the general property right in the pledge in the event of the pledge remaining unredeemed resulting in the sale of the pledge by public auction through an approved auctioneer. the natural consequence will be that it is the pawnee who holds not only the absolute special property right in the pledge but also the conditional general property interest in the pledge. Bench Bank (supra). the condition being that he can pass on that general property only in the event of the pledge being brought to sale by public auction in accordance with the Act and the Rules framed thereunder. In Central Ltd." (underlining is ours) 38. a right higher than a mere right of detention of goods but a right lesser than general property right in the goods.Division Benches of Karnataka and Madras High Courts and held: "It cannot be and it is not disputed that the pawnbroker has special property rights in the goods pledged. came up for consideration before this Court. the pawnor at the time of the pledge not only transfers to the pawnee. To put it differently. by the Karnataka High directing disbursement of certain amount realized from sale of stocks of sugar owned by respondent no. The position being what is stated above. of of India v. an interim Siriguppa Sugars & Chemicals Division order passed Court.company. which was held under pledge by the appellant-bank.

1 . same was challenged by respondent no. The Cane Commissioner also passed orders for The recovery of the amount due from respondent no.1. by filing a writ petition.Disputes Act in respect of the dues of the workmen.company .

the Division Bench made an interim order directing disbursement of a portion of the sale proceeds to the Labour Commissioner and Cane Commissioner for being paid to the employees The bank of the company the and sugarcane order by cultivators. the sugarcane During the growers pendency for of the cane the writ supplied petition. dismissed by the learned Single Judge. this Court held: "Thus. writ petition the High Court was finally thereof. including After making reference to various judgments Bank of Bihar v. its value directed by sale As the stock of sugar was likely to lose being stored The indefinitely. challenged interim contending that as the sugar was pledged with it. the concerned authority took possession of the stock of sugar which was pledged with the appellant-bank. During the pendency of the appeal. the High Court could not have ordered disbursement of a portion of the price. going by the principles governing the matter propounded by this Court. State of Karnataka (supra). State of Bihar (supra) and Karnataka Pawnbrokers' Association v. The appellant-bank got itself impleaded as party to the writ petition. there cannot be any doubt that the rights of the appellant Bank over the pawned sugar had precedence over the claims of the Cane Commissioner and that of the .for being paid by to them.

There is no dispute that the sugar was pledged with the appellant Bank for securing a loan of the first respondent and the loan had not been repaid. in error in passing an interim order to pay parts of the proceeds to the Cane Commissioner and to the Labour Commissioner for disbursal to the cane growers and to the employees. The High Court was.workmen. therefore. The goods were .

in neither of the cases.. As per Black's Law Dictionary (Eighth edition). the word `asset' means. . stand only as unsecured creditors and their rights cannot prevail over the rights of the pawnee of the goods. the appellant Bank. 41. the rights of the appellant Bank as pawnee cannot be affected by the orders of the Cane Commissioner or the demands made by him or the demands made on behalf of the workmen. a provision analogous to Section 11 of the Act was considered by the Court. the bank in whose favour the goods had been pledged/mortgaged. the Court dealt with the right of unsecured creditors vis-`-vis secured creditors i.forcibly taken possession of at the instance of the revenue recovery authority from the custody of the pawnee." (underlining is ours) 39. Moreover. Both the Cane Commissioner and the workmen in the absence of a liquidation. The above referred judgments do not have any bearing on these appeals because in both the cases. The next point which requires with consideration is whether the sugar bags pledged the appellant-bank constitute assets of the establishment within the meaning of Section 11(2) of the Act. an item that is owned and has value. In view of the fact that the goods were validly pawned to the appellant Bank.e. 40.

the entries on a balance sheet showing the items of property owned. all the property of a person available for paying debts or for distribution. accounts receivable and goodwill. inventory. . including cash. real estate. equipment.

A man's property is This usage however. the word `assets' has been described as the property in the hands of an heir. the word "property" means . property includes a person's legal rights. executor. Mussan 14 Bom. In a second and narrower sense.in its widest sense. considered as applicable to the payment of his debts. though it is common enough in the older books. a man's property of whatever kind which may be used to satisfy debts or demands existing against him. administrator or trustee which is legally or equitably chargeable with the or obligations with such heir. 633.L. but only his proprietary as opposed to his personal rights. 42. is obsolete at the present day. which can be made available for the payment of debts. property in general all that one owns.R.In Law Lexicon by P. whether belonging to the estate of a deceased person or not. required to discharge. Ramanatha Aiyar (Second edition). v. administrator Everything trustee is. it In Velchand Chhaganlal was held that the word `assets' means. all that is his in law. as such. as. The former constitutes his . of whatever description. his assets are much greater than his liabilities. As per Salmond's Jurisprudence. property includes not all a person's rights. an executor.

shares and the debts due to him are his property.estate or property. In this sense a man's land. In a third ... but not his life or liberty or reputation. chattel.. while the latter constitute his status or personal condition.

the law of proprietary rights in personam being distinguished from it as the law of obligations. is property. but a debt or the benefit or a contract is not.. or a patent or The law of property copyright. We have already held that even though symbolic custody of the sugar bags was given to the appellant-bank as security for repayment of loan etc. bags pledged with the In other words. which is that adopted (here) the terms includes not even all proprietary rights but only those which are both proprietary and in rem. it includes nothing more than corporeal property that is to say. the right of ownership in a material object. freehold or leasehold estate According to this usage a in land. is the right of proprietary rights in rem. it has to be seen whether the sugar bags pledged with the appellant-bank constituted assets of the establishment for the purpose of Section 11(2) of the Act. the Sugar Mills continued to be owner thereof. Finally. 43. In the light of the above dictionary and legal meanings of the word `assets' and jurisprudential concept of the word `property'. the sugar appellant-bank continued to be . or that object itself.application. in the narrowest use of the term.

which could be attached and sold by the Recovery Officer in terms of Section 8B or by adopting alternative modes of recovery enumerated in Section 8F.movable property i. assets of the establishment.e. .

.44. the Recovery Officer or any other authorized officer has to take recourse to the provisions contained in Section 8 read with Sections 8B and 8F. For recovery of the amount due from an employer which is treated as arrear of land revenue. section (2) thereof declares that any amount due from an employer shall be deemed to be first charge on the assets of the establishment and shall be paid in priority to all other debts. 1961. 45. The recovery can be effected by attachment or sale of the movable or immovable property of the establishment or. The judgment in Transcore v. Union of India (supra) on which reliance has been placed by Shri Desai. as the case may be. In paragraph 62 of that judgment. At the cost of repetition. the employer or by taking action in the manner laid down in the Third Schedule to the Income-tax Act. the Court merely referred to Snell's Principles of Equity. the employer. or by arrest of the employer and his detention in prison or by appointing a receiver for the management of the movable or immovable properties of the establishment or. does not have any bearing on any of the facets of the question raised in these appeals. as the case may be. it is apposite to Sub- mention that Section 11 is declaratory in nature.

In paragraph 73. the Court explained the distinction between symbolic and physical possession and observed that the Securitisation and Reconstruction of Financial Assets .

and namely. 47. (a) of sub-section (1) of Section 11 is applicable to cases where an employer is adjudicated insolvent or. 46.and Enforcement of Security Interest Act. the securities under which the secured obtains the Bank/Financial Institution interest in the property concerned. learned We shall now deal with the last argument of the senior counsel for the appellant-bank that the interest payable in terms of Section 7Q and damages imposed under Section 14B of the Act cannot be treated as first charge on the assets of the establishment payable in priority to all other debts within the meaning of Section 11(2). the amount due from the employer in relation to an establishment to which any Scheme or the Insurance Scheme applies in respect of any contribution payable to . Section 11 gives statutory priority to the amount Clause due from the employer vis-`-vis all other debts. situation.. being In that a company. 2002 basically deals with the securities by which the creditor obtains ownership of or interest in the property concerned i.e. mortgages creditor. an order of its winding up is made.

the Fund damages or. accumulations recoverable Section required to be transferred under Section 15(2) or any other charges payable by him under any other provision of this . the Insurance Fund. 14B. as the case may under be.

damages recoverable under Section 14B or any charges payable by him to the appropriate Government under the Act or under any of the conditions specified in Section 17. The expression "any amount due from an employer" appearing in sub-section (2) of Section 11 has to be interpreted keeping in view the object of the Act and other provisions contained therein including sub-section . This sub-section then lays down that such amount shall be paid in priority to all other debts in the distribution of the property of the insolvent or the assets of the company being wound up. Clause (b) is applicable to cases where the amount the in employer in relation to exempted to the is due from establishment respect of any contribution provident fund or any insurance fund in so far it relates to exempted employees under the rules of provident fund or any insurance fund. and shall be paid in priority to all other debts. Sub-section (2) lays down that any amount due from the employer whether in respect of the employees' contribution deducted from the wages of the employee or the employer's contribution shall be deemed to be the first charge on the assets of the establishment.Act or of any provision of the Scheme or the Insurance Scheme. any contribution payable by him towards the Pension Fund under Section 17(6).

7Q.(1) of Section 11 and Sections 7A. 14B and 15(2) which provide for determination of the dues payable by the employer. liability of the employer to pay interest in case the payment of the amount due is delayed and also pay .

damages, if there is default in making contribution to the Fund. If any amount payable by the employer becomes due

and the same is not paid within the stipulated time, then the employer is required to pay interest in terms of the mandate of Section 7Q. Likewise, default on the employer's

part to pay any contribution to the Fund can visit him with the consequence of levy of damages. As mentioned earlier,

sub-section (2) was inserted in Section 11 by Amendment Act No.40 of 1973 with a view to ensure that payment of

provident fund dues of the workers are not defeated by the prior claims creditors. of the secured and/or of the unsecured

While enacting sub-section (2), the legislature

was conscious of the fact that in terms of existing Section 11 priority employer in has been given to the amount due to from an which any

relation

to an establishment

scheme or fund is applicable including damages recoverable under Section 14B and accumulations required to be

transferred under Section 15(2).

The legislature was also

aware that in case of delay the employer is statutorily responsible Therefore, to there pay is interest no in plausible terms of Section to give 17. a

reason

restricted meaning to the expression `any amount due from the employer' and confine it to the amount determined under

Section 7A or the contribution payable under Section 8. interest payable by the employer under Section 7Q

If and

damages leviable under Section 14 are excluded from the ambit of expression "any amount due from an employer",

every

employer

will

conveniently

refrain

from

paying

contribution to the Fund and other dues and resist the efforts of the concerned authorities to recover the dues as arrears of land revenue by contending that the movable or immovable property of the establishment is subject to other debts. of Any such interpretation would frustrate the object the deeming provision and non obstante

introducing

clause in Section 11(2).

Therefore, it is not possible to

agree with the learned senior counsel for the appellantbank that the amount of interest payable under Section 7Q and damages leviable under Section 14B do not form part of the amount due from an employer for the purpose of Section 11(2) of the Act.

48.

In the result, the appeals are dismissed.

49.

Although, while issuing notice in the special leave

petitions and passing order of status quo, the Court had made it clear that in the event of dismissal of the special leave petitions, the amount shall be paid by the petitioner (appellant herein) with interest at the rate which may be fixed by the Court, we do not consider it just and proper to saddle the appellant-bank with the liability of interest

because price of the sugar sold pursuant to the High Court's order remained deposited with its Registrar General and the appellant-bank did not have the benefit of utilizing the same. .

..... 456 thereof once an order for winding up is made the liquidator has to take into custody the properties... present or future are admissible to proof against the company.. 714-H] ........... effects and actionable claims to which the company is or appears to be entitled....... Once the property is sold. S... 457 of the Companies Act. 713.....J............ Companies Act or any other law does not impose any additional obligation upon the purchaser to make an enquiry with regard to the liabilities of the companies other than those which would impede its value... October 8... Next case Head Notes Allowing the appeal.. [B.......S............J. the assets of the company are required to be distributed to the creditors in order of preference..... AGRAWAL] .. SINGHVI] ...1 All claims against the companies were required to be filed before the liquidator until the property was sold as provided for under s. [AFTAB ALAM] New Delhi... 528 provides that all debts payable on a contingency and all claims against the company......... S... In terms of s. [G.......... the Court HELD: 1.... 2009..N. [Paras 15 and 20] [ 717-B-E..... Section 530 provides for certain priorities to secured creditors and other unsecured creditors... 529 provides for the same rule as in force for the time being under the law of insolvency with respect to the estates of person adjudged insolvent.......J...

Such a contract to the contrary must be express and not implied.2 If the property tax was merely a statutory dues without creating any encumbrance on the property which had cast a duty upon all the auction purchasers to make an investigation. Encumbrance must be capable of being found out either on inspection of the land or the office of Registrar or a statutory authority.1. [Paras 9 and 10] [ 711-E-F. Section 55 refers to a contract only. It did not stand in queue to get the same recovered and/or adjusted from the sale proceeds. It must be given a purposive meaning. as a result whereof the meaning of term encumbrance would be expanded. The manner in which the claim of a creditor in respect of the dues of the company in liquidation is to be realized has been laid down in ss. Respondent-Municipality did not file its claim before the official liquidator. 713-E. when a property is sold in auction. 712-H. it shall not constitute any encumbrance. The word `encumbrance' in relation to the word `immovable property' carries a distinct meaning. Dues in relation to the Municipal Tax in terms of the provisions of the said Act do not create any encumbrance on the property. Encumbrance thus must be a charge on the property. Black's Law Dictionary referred to. the rights and obligations of the parties to a sale would be as indicated in s. The facts that the company went in liquidation was given due publicity. Unless there is a contract to the contrary. 55. 2. Respondent-Municipality was a unsecured creditor and not a preferential creditor. 529 and 529A. Supreme Court on Words and Phrases. Advanced Law Lexicon.55(1) (g) of the Transfer of Property Act. It was directed to be wound up. The official liquidator indisputably took charge of both movable and immovable assets of the company. It ordinarily cannot be assigned a genera and/ or dictionary meaning. It does not create any charge.1 The Company went in liquidation. A charge. If by a reason of the statute no such burden on the title which diminishes the value of the land is created. [Para 12 and 13] [712-G. It is considered to be a personal liability. 713-A] Stroud's Judicial Dictionary of Words and Phrases 5th edition. It must run with the property.3 The terms and conditions of the sale must be read as a whole. In that capacity it cannot stand on a higher footing than an ordinary unsecured creditor who is required to stand in queue with all . the seller is bound to pay all public charges due in respect of the property upto the date of sale. [Para 19] [ 716-F] 1. burden or any other thing which impairs the use of the land or depreciates in its value may be a mortgage or a deed of trust or a lien or an easement. it would mean that he must try to find out all the liabilities of the company in liquidation in their entirety.2 In terms of the s. 711-G] 2.

Dues in relation to municipal tax does not create any encumbrance or charge on property . As the respondent-Municipality was not a secured creditor. Ghosh. Union of India and Ors.3 Dues of the Municipality would also not even otherwise come within the purview of the crown debt.Claim of arrears of property tax by Municipality from purchaser for period prior to date of purchase . 1956 . Himanshu Shekhar for the Appellant.referred to.Held: Not sustainable . Ghosh. Brijesh Kumar for the Respondent.2008 of the High Court of Calcutta in ACO No. Abhijeet Guha Roy. Case Law Reference AIR 1971 SC 1201 Referred to. Sibajit Sen. Sanjay K.Municipality was unsecured creditor and not preferential creditor . the impugned judgment cannot be sustained.05. 529A and 530 . Rauf Rahim. 2009 (1) SCALE 10 Referred to. 529. Sicom Ldtd. Para 15 Para 21 Para 23 CIVIL APPELLATE JURISDICTION : Civil Appeal No. 717-E] 2.Sale of assets of company in liquidation . Haji Abdul AIR 1971 SC 1201. 716-H. Y. Shiv Shankar Banerjee. Bansal. Rupali S. [Paras 14. 25 of 2008. vs. 2009 (1) SCALE 10 . 19 and 20] [ 713-G. The advertisement did not specify that all public charges have to be paid. Bihar State Electricity Board and Anr. Avijit Bhattacharjee. 1995 (2) SCC 648 Referred to. Subject Companies Act.It is considered to be a personal liability . Even a crown debt could be discharged only after the secured creditors stand discharged. 1995 (2) SCC 658.High Court holding that tax payable to Municipality was encumbrance and it could not avoid payment for not making enquiry . Sunil Kumar.others similarly situated for the purpose of realization of their dues from the sale proceeds. Isha Marbles vs.Municipality did not file its claim before official liquidator nor stood in queue to get the same recovered/adjusted from sale . 1118 of 2009 From the Judgement and Order dated 15. [Para 22] [ 718-D] Ahmedabad Municipality vs. Abhay Prakash Sahay. and Anr.ss.Fact that company went in liquidation was given due publicity . Awanish Sinha.

55. Words and phrases: `Encumbrance' . . Respondents JUDGMENT .. advertisement did not specify that all public charges have to be paid . encumbrance etc. Thereafter. Both the Single Judge as also the Division Bench of the High Court held that since the inventory was made on "as is where is and whatever there is" basis. respondentMunicipality served a notice to appellant claiming payment of arrears of property tax.. Appellant took out chambers summons for clarification that sale confirmed in their favour would make them liable for payment of property tax only on and from the date of confirmation of sale and not for any period prior thereto.15285 of 2008) AI Champdany Industries Limited Versus The Official Liquidator & Anr.Transfer of Property Act.. The company judge confirmed the sale.More so.. 1882 . the offerer was to satisfy themselves in regard to the physical inspection of the assets/properties as to the title. Appellant . Appellant purchased the assets of the company.Meaning of. 1118 OF 2009 (Arising out of SLP (C) No. A company went in liquidation. Hence the present appeal.s. Judgement REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. of the assets of the company in liquidation.proceeds .

J. 2.03.000/-. Appellant purchased assets of the company in liquidation in a court sale for a consolidated sum of Rs. 1. Sinha. . Sale was confirmed by the learned Company Judge by an Order dated 15th September.S.7.B.00. Wool-Combers of India Limited (the company) went in liquidation. 2006. Leave granted.

Appellant on receipt of the said notice took out a Chamber Summons praying.597. (b) Order dated 15th September." 4. 12.2 3. Appellant contends that it has no liability to pay the said dues and the same has to be adjusted from the sale proceeds.597. 15th September.47. Appellant was served with a notice dated 15-02-2007 by Bhatpara Municipality claiming payment of arrears of property tax amounting to Rs. 2006 would make the applicant liable for payment of property tax only on and from the date of confirmation of sale i. inter alia. West Ghoshpara Road.e.19/.19/.59. 2006 and not for any period prior thereto. . Ward No. It is furthermore stated that on and from the date of purchase it had paid all municipal rates and taxes subsequent to the date of sale. stating : "that before adopting the said stringent measure for realizing the arrear property tax once again give you and opportunity to pay all arrear property tax in respect of the said holdings being 1/.59.for the period from 1991-1992 and 2006-2007. for the following reliefs : "(a) Necessary clarification be made that Sale confirmed in favour of applicant by order dated 15th September.47.plus statutory interest within seven days from the receipt thereof. 2006 be suitably modified and/or clarified in terms of prayers above. amounting to Rs.

By reason of an order dated 7th February. 2 from giving any effect and/or further effect to the notice dated 15th February. (e) Injunction restraining the respondent no. the condition. (d) Direction be given to the respondent no. exists. 2 from claiming any alleged arrear property tax for period prior to 15th September. 2007 being Annexures "E" and "G" respectively to the affidavit in support of this summons. called upon the bidders to satisfy themselves regarding title and encumbrance attached to the said asset. 2007 and 6th March. 2006. quality and the quantity in which the assets sold. (f) Ad-interim orders in terms of prayers above. it was incumbent upon . the said application has been dismissed. It does not take into account the liabilities attached to the assets sold. The terms and conditions of sale. 2006. 2008. (h) Such further and/or other order or orders as this Hon'ble Court may deem fit and proper. however. Encumbrance would include the liability attached to the asset including the tax payable.3 (c) Injunction restraining the respondent no. Therefore. stating : "Having considered the submissions of the parties the terms "as is where is basis and whatever there is basis" signifies. 2. (g) Costs of and/or incidental to this application be paid by the respondent no." 5. 2 lodge its claim before the Official Liquidator for any alleged claim on account of property tax for period prior to 15th September.

Mr. An intra court appeal preferred thereagainst has been dismissed by a Division Bench of the said court. would draw our attention to the advertisement for sale to contend that the appellant had a duty to make an enquiry in regard to the Company's encumbrance as also in terms of the provisions of Sections 55(1) and 55(2)(g) of the Transfer of Property Act. if any. 7. learned senior counsel. Sunil Kumar." 6. The learned counsel appearing on behalf of the official liquidator would support the said contention. in support of this appeal. learned senior counsel appearing on behalf of the respondent-Municipal Corporation. The tax payable to the municipality is one such encumbrance and for not making enquiry the petitioner cannot avoid payment. on the other hand.4 the purchaser to make enquiry regarding liabilities (to be read as encumbrance) attached to the asset before making the offer. was to have its claim satisfied from the sale proceeds in terms of Sections 529 and 529A of the Companies Act. Mr. would contend that a purchaser is not liable to pay the property tax prior to the date of purchase and remedy of the respondent municipality. . 1956. Sibaji Sen. 8.

The sale will be held as per inventory made by the Valuer on "As is Where is And Whatever There is" basis and subject to confirmation by the Hon'ble High Court at Calcutta. It does not create any charge. On the aforementioned premise. It reads as under : "1. quantity or specification of the assets sold. we have to construe the terms and conditions of sale. Respondent-Municipality did not file its claim before the official liquidator. measurement. It did not stand in queue to get the same recovered and/or adjusted from the sale proceeds. boundary. Dues in relation to the Municipal Tax in terms of the provisions of the said Act do not create any encumbrance on the property.5 9. It is considered to be a personal liability. 1956. quality or quantity of . encumbrance. description etc. It was directed to be wound up. 10. The company went in liquidation. of the Company (in Liquidation) and the purchasers will be deemed to offer with full knowledge as to the defects. The Offerers/Bidders are to satisfy themselves in this regard after physical inspection of the assets/properties as to the title. The Official Liquidator shall not provide any guarantee and/or warranty as to the quality. area. The fact that the company went in liquidation was given due publicity. The official liquidator indisputably took charge of both movable and immovable assets of the company. Indisputably the manner in which the claim of a creditor in respect of the dues of the company in liquidation is to be realized has been laid down in Sections 529 and 529A of the Companies Act. if any in the descriptions.

Sibaji Sen. encumbrance. Any mistake in the notice inviting tender shall not vitiate the sale. of the assets of the company in liquidation and the purchaser would be deemed to be offering his prices therefor with full knowledge as to the defects containing the descriptions. The Official Liquidator shall not entertain any complaint in this regard after the sale is over.6 the assets sold. measurement. quality or quantity of the assets sold. 12. It ordinarily cannot be assigned a general and/or dictionary meaning. description etc. boundary. It must be given a purposive meaning. area. The word `encumbrance' in relation to the word `immovable property' carries a distinct meaning. the appellant was bound to make an investigation in regard to the liabilities of the company in liquidation. Both the learned Single Judge as also the Division Bench of the High Court held that having regard to the fact that an inventory was made on "as is where is and whatever there is" basis and furthermore in view of the fact that a duty was cast upon the offerer to satisfy themselves in regard to the physical inspection of the assets/properties as to the title. We may however notice some dictionary meanings of the said word as reliance thereupon has been placed by Mr. . The terms and conditions of the sale must be read as a whole." 11.

Encumbrance thus must be a charge on the property. attached to property'. ." In Supreme Court on Words and Phrases it is stated that "the word `encumbrance' means a burden or charge upon property or a claim or lien upon an estate or on the land. It must run with the property. as assignee for value of a reversionary interest." In Advanced Law Lexicon Encumbrance is defined as "an infringement of another's right or intrusion on another's property. but consistent with the passing of the fee. must be capable of being found out either on inspection of the land or the office of Registrar or a statutory authority. against a person coming in under a subsequent title. therefore." 13. `a claim. it shall not constitute any encumbrance. land which may subsist in another to diminution of its value.7 In Stroud's Judicial Dictionary of Words and Phrases 5th Edition Encumbrance is defined as "being. burden or any other thing which impairs the use of the land or depreciates in its value may be a mortgage or a deed of trust or a lien or an easement." which was. lien. or liability. and this definition is wide enough to cover the plaintiff's claim. or interest in." In Black's Law Dictionary Encumbrance is defined as "any right to. Encumbrance. A charge. If by a reason of the statute no such burden on the title which diminishes the value of the land is created.

Haji Abdul [AIR 1971 SC 1201] wherein it was held : "The plaintiff purchased the property in November. Respondent-Municipality was an unsecured creditor. Companies Act or any other law does not impose any additional obligation upon the purchaser to make an enquiry with regard to the liabilities of the companies other than those which would impede its value. Sen on a decision reported in Ahmedabad Municipality Vs. If the property tax was merely a statutory dues without creating any encumbrance on the property which had cast a duty upon all the auction purchasers to make an investigation.8 14. 15. According to Section 61 of the Provincial Insolvency Act. Reliance has been placed by Mr." . In that capacity it cannot stand on a higher footing than an ordinary unsecured creditor who is required to stand in queue with all others similarly situated for the purpose of realization of their dues from the sale proceeds. it would mean that he must try to find out all the liabilities of the company in liquidation in their entirety. 1954 and in our opinion it could not have reasonably been expected by him that the receivers would not have paid to the municipal corporation. 1920 the debts due to a local authority are given priority. being bracketed along with the debts due to the State. since 1949 the taxes and other dues which were charged on this property by statute.

There cannot. save as otherwise expressly provided by any law for the time being in force.Charges . It is in that view of the matter Section 100 of the Transfer of Property Act was found to be capable of being invoked therein. no charge shall be enforced against any property in the hands of a person to whom such property has been transferred for consideration and without notice of the charge. and. apply to such charge. thus." 16. Nothing in this section applies to the charge of a trustee on the trust-property for expenses properly incurred in the execution of his trust. be any doubt or dispute that a provision of law must expressly provide for an enforcement of a charge against the property in the hands of the transferee for value without notice to the charge and not merely create a charge.Where immoveable property of one person is by act of parties or operation of law made security for the payment of money to another. and the transaction does not amount to a mortgage. the latter person is said to have a charge on the property. and all the provisions hereinbefore contained which apply to a simple mortgage shall. so far as may be.9 We may notice that Section 141 of the Bombay Provincial Municipal Corporation Act provides that the property taxes to be a first charge on the premise for which they are assessed. In Ahemdabad Municipality itself it was held : "According to the submission it is not necessary for the saving provision to expressly provide for the . which reads as under : "100. 17.

The real core of the saving provision of law must be not mere enforceability of the charge against the property charged but enforceability of the charge against the said property in the hands of a transferee for consideration without notice of the charge. what is enacted in the second half of Section 100 of Transfer of Property Act is the general prohibition that no charge shall be enforced against any property in the hands of a transferee for consideration without notice of the charge and the exception to this general rule must be expressly provided by law. According to this decision the question of constructive notice is a question of fact which falls to be determined on the evidence and circumstances of each case. Agra. This submission is unacceptable because. The second contention accordingly fails and is repelled. ILR (1943). as already observed.10 enforceability of the charge against the property in the hands of a transferee for consideration without notice of the charge. that principle being that all intending purchasers of the property in municipal areas where the property is subject to a municipal tax which has been made a charge on the property by statute have a constructive knowledge of the tax and of the possibility of some arrears being due with the result that it becomes their duty before acquiring the property to make enquiries as to the amount of tax which is due or which may be due and if they fail to make this enquiry such failure amounts to a wilful abstention or gross negligence within the meaning of Section 3 of the . But that Court felt that there was a principle on which question of constructive notice could rest. The Municipal Board. All 453 = (AIR 1943 All 115 (FB)). Section 141 of the Bombay Municipal Act is clearly not such a provision." It was further more held : "Reliance was next placed on a Full Bench decision of the Allahabad High Court in Nawal Kishore V.

therefore." 18. Such a contract to . Unless there is a contract to the contrary. the rights and obligations of the parties to a sale would be as indicated in Section 55. In terms of the aforementioned provisions. the buyer and the seller of immoveable property respectively are subject to the liabilities. mentioned in the rules next following.11 Transfer of Property Act and notice must be imputed to them. except where the property is sold subject to encumbrances." 19. Section 55 refers to a contract only. and have the rights. or such of them as are applicable to the property sold:(1) The seller is bound (g) to pay all public charges and rent accrued due in respect of the property up to the date of the sale. the seller is bound to pay all public charges due in respect of the property upto the date of sale. and. Clause (g) of Sub-section (1) of Section 55 of the Transfer of Property Act whereupon reliance has been placed by Mr. the interest on all encumbrances on such property due on such date. Sen reads as under : "In the absence of a contract to the contrary. to discharge all encumbrances on the property then existing. when a property is sold in auction.

the provisions of Sections 529 and 530 must be complied with. The advertisement did not specify that all public charges have to be paid. effects and actionable claims to which the company is or appears to be entitled. Companies Act in relation to winding up of proceeding is otherwise a special law. While distributing the assets between the creditors and unsecured creditors. All claims against the companies were required to be filed before the liquidator until the property was sold as provided for under Section 457 of the Companies Act. Section 528 provides that all debts payable on a contingency and all claims against the company. Section 529 provides for the same rule as in force for the time being under the law of insolvency with respect to the estates of . Municipal Corporation indisputably is not a preferential creditor. 20. as a result whereof the meaning of term encumbrance would be expanded.12 the contrary must be express and not implied. In terms of Section 456 thereof once an order for winding up is made the liquidator has to take into custody the properties. present or future are admissible to proof against the company.

infinitum without . Almost a similar question in regard to the dues of the electrical charges came up for consideration before this Court in Isha Marbles Vs. 21. But. Once the property is sold. it would permit dishonest consumers transferring their units from one hand to another. Electricity is public property. As the respondent- Municipality was not a secured creditor. if we hold as we have done above. Law. as it stands. benignly protects public property and behoves everyone to respect public property. We are clearly of the opinion that there is great reason and justice in holding as above. the courts must be zealous in this regard. the impugned Judgment cannot be sustained. is inadequate to enforce the liability of the previous contracting party against the auction-purchaser who is a third party and is in no way connected with the previous owner/occupier. [1995 (2) SCC 648]. Section 530 provides for certain priorities to secured creditors and other unsecured creditors. 1951. It may not be correct to state. Hence. in its majesty.13 persons adjudged insolvent. from time to time. 1910 a three Judge Bench of this Court held that a liability on the purchaser cannot be imposed which was not incurred by them stating : "63. In that case sale of the assets of industrial undertaking took place in terms of the provisions of the State Financial Corporation Act. Having regard to the provisions of the Indian Electricity Act. Bihar State Electricity Board and Anr. the law. the assets of the company are required to be distributed to the creditors in order of preference.

however. No doubt. Dues of the Municipality would also not even otherwise come within the purview of the crown debt. it is stated : "11. Vs. debts which a prerogative entitles the Crown to claim priority for before all other creditors. [See Advanced Law Lexicon by P." 22. Ramanatha Aiyear (3rd Edn. 1147]. thus. the rights of the crown to recover the debt would prevail over the right of a subject. & Anr. Such creditors. Principle of Crown debt as such pertains to the common law principle. must be held to mean unsecured creditors. Even a crown debt could be discharged only after the secured creditors stand discharged.) p.14 the payment of the dues to the extent of lakhs and lakhs of rupees and each one of them can easily say that he is not liable for the liability of the predecessor in interest. which were existing at the time of coming into force of the Constitution of India are saved by reason of the aforementioned provision. A common law which is a law within the meaning of Article 13 of the Constitution is saved in terms of Article 372 thereof. Generally. dishonest consumers cannot be allowed to play truant with the public property but inadequacy of the law can hardly be a substitute for overzealousness. Those principles of common law. Sicom Ltd. In Union of India & Ors. Crown debt means the debts due to the State or the king. A debt which is secured or which by reason of the provisions of a statute becomes the first charge over the property having regard to the plain meaning of Article 372 of the Constitution of India must be held to prevail over the Crown debt . 23. [2009 (1) SCALE 10].

.. To achieve the same purpose." 24.....B.10.. Thus... February 19. For the reasons aforementioned.15 which is an unsecured one......J.. the impugned judgment cannot be sustained. the Parliament as also the State Legislatures inserted provisions in various statutes. It is set aside accordingly....000/- ..... 12....... It is trite that when a Parliament or State Legislature makes an enactment..... 2009 ................ [Asok Kumar Ganguly] New Delhi....... the same would prevail over the common law... The appeal is allowed with costs. [S. This aspect of the matter has been considered by this Court in a series of judgments..... 13.J.. the common law principle which was existing on the date of coming into force of the Constitution of India must yield to a statutory provision. Counsel's fee assessed at Rs. Sinha] .. some of which have been referred to hereinbefore providing that the statutory dues shall be the first charge over the properties of the tax-payer.

[Para 33] [992-D-G] 1.2003. but it is another thing to say that although the due as regards the principal amount resulting from the quantity or quality of supply of the goods stands admitted but a question is raised as to whether any agreement had been entered into for payment of interest or whether the rate of interest would be applicable or not. it is evident that what is necessary for invoking the said provision is that despite service of notice.2. The agreement spoke of payment of compensation to the appellant for the delay in payment on account of earlier supplies after clearing the entire old dues.1 Circumstances in which a company may be wound up by the court are contained in s. 16.2003 merely stated that a sum of Rs. In the latter case. It is one thing to say that the amount of debt is not definite or ascertainable because of the bona fide dispute raised thereabout or there exists a dispute as regards quantity or quality of supply or such other defences which are available to the purchaser. the application for winding up cannot be dismissed.11. the same must be by way of interest payable on the principal amount or otherwise.2003. Respondent did not pay the price of the said supplies. it would be one of the grounds therefor.3. Appellant had been supplying Castor Oil to the respondent. on presentation of the invoices. 990-C-D] 1. If a company is unable to pay its debts as contained in Clause (e) thereof. despite receipt of a legal notice dated 23. It also stands admitted that the parties negotiated as regards the manner in which the payments could be made.468 was due. the Court HELD: 1. Section 434 raises a legal fiction as to when the company would be deemed to be unable to pay its debts.12. Section 433 of the Act does not state that the debt must be precisely a definite sum. [Paras 28 and 29] [989-D. There cannot be any doubt whatsoever that when.434.80. no payment was made to liquidate the debt on the part of the company. in principle. Respondent never denied the demand of interest as such.Next case Head notes Allowing the appeal. promises were made to square up the old outstanding dues and bring it into the system for the purpose of rotation. 1956. E. Failure to pay agreed interest or the statutory interest would come within the purview of the word `debt'. In a meeting held on 25. the respondent had agreed to compensate the appellant for the delay in payment. company which was indebted in a sum exceeding one lakh rupees then due failed and/or neglected to pay the same within three weeks thereafter or to secure or compound for it to the reasonable satisfaction of the creditor. H. [Paras .12. In the instant case. On a plain reading of clause (a) of sub-section (1) of s. 433 of the Companies Act. but in its reply dated 30.

Rashid Leathers (P) Ltd.B. The judgment of the Division Bench also contains a legal flaw insofar as it failed to take into consideration that the appellant had in fact issued three notices dated 6. Devendra Kumar Jain v. firstly. (1996) 5 Comp LJ 342 (Bom). question of leading evidence would arise only after the company petition is admitted and. Ltd. Gangadhar Narsinghdas Agrawal v. (1989) 66 CC 232. Ltd. On the date of filing of the application.09. G. secondly. Ltd.2003. G. Boving Fouress Limited (2001) 3 Comp LJ 413 (Karn). v. Polar Forgings and Tools Ltd. (1965) 35 CC 456. Division Bench of the High Court proceeded on the basis that the entire sum covering both the principal and the interest must be undisputed. (1971) 3 SCC 632. Kitply Industries Ltd. Ltd. shall be adjusted towards the principal. Ultimate Advertising and Marketing New Delhi v.C. because the Division Bench did not hold that the invoices were not proved by cogent evidence. The findings of the High Court are not correct for more than one reason. Unisystems (P) Ltd. Wpil Limited 2006 (2) CHN 530. [Paras 39 and 40] [998-FH. Bio Vaccines Pvt. (1985) CC 875 (P&H). v. A.2003 and legal notice dated 23. v. v. Krishnaswami and Anr. Anand Steel v. v. issuance of invoices and signature of the respondent thereon is not disputed. (1987) 3 Comp LJ 175 (Karn). Timble (P) Ltd.01.) Ltd. Jyothi Limited v. (1997) 89 CC 259.. Super Fine Skin Traders (1990) 68 CC 684. thirdly. Laboratories Ltd. 999-A] Stephen Chemical Limited v. dues in respect of at least a part of the debt which was more than the amount specified in Section 433 of the Companies Act was not denied. Unisystems P. It is not a requirement of the law that the entire debt must be definite and certain. Bharat Earth Movers Ltd. v. (1986) 60 CC 753. (1995) 84 CC 766. Ultimate Advertising and Marketing v. Suryatronics Pvt. Amalgamated Commercial Traders (P. v. Laboratories Ltd. Stepan Chemical Ltd. Stepan Chemical Ltd. 991-A] 1. Innosearch Limited (1986) 60 CC 702. D. Madhu Woollen Industries Pvt.K. Bombay Glass Blowing Industries v. (1984) 56 CC 77 (Karn). Multimetals Ltd. Hari Narain and Sons Pvt. a prima face case was made out. Universal Bearing Agency v.2003 specifically mentioning that the payments had been adjusted towards interest first and balance. Pfizer Ltd.30 and 31] [990-D. M/s. It held that it cannot be presumed prima facie that the respondent is unable to pay its debt. E] 1. Kanpur AIR 1998 Allahabad 320.5. v. Usan . M/s. Amar Formulators and Electronics (P) Ltd.12. Madhusudan Gordhandas & Co.4. (1999) 98 CC 174. Southern Industrial Polymers (P) Ltd. if any. [Paras 37 and 38] [996-998-F-G.B. v. Thus. (1998) 91 CC 715. Division Bench upon noticing the fact of the matter formulated the question "as to whether respondent is liable to pay interest at 2% pm on delayed payments and what that is being disputed would it constitute prima facie a valid ground for admission of the company petition". 8. Ltd.

[Paras 41 and 42] [999-B. Tweeds Garages Ltd. Rim and Accessories (P) Ltd. Ispat Industries Ltd. and Others v. Securities & Exchange Board of India (2004) 8 SCC 524. 1978 as also in terms of Sections 5 and 6 of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act. v. (2005) 128 CC 72 and Assam Small Scale Industries Development Corpn. Para 20 (1999) 98 CC 174 Referred to.Laboratories P. and Another v. Union of India (2006) 8 SCC 457. (2007) 3 SCC 545. Meka Venkatadri Appa Rao Bahadur Zamindar Garu and Ors. Krishna Chemicals v. The judgment of the High Court is set aside. 1962 Ch 406. Para 25 (1987) 3 Comp LJ 175 (Karn) Referred to. [Para 43] [1001-G-H. 2. Raja Parthasarathy Appa Rao Bahadur Zamindar Garu AIR 1922 PC 233. Para 25 (1984) 56 CC 77 (Karn) Referred to. Bayabai and Ors. 1002-A-B] Case Law Reference: (1986) 60 CC 702 Referred to. Proxima Medical System GMBH (2005) 7 SCC 42 and Tube Investments of India Ltd. 1000-A-H] Clariant International Ltd. Para 18 (1990) 68 CC 684 Referred to. Meghraj and Ors. Para 23 (1998) 91 CC 715 Referred to. Mst. v. Ltd. referred to. J. (1990) 3 Comp LJ 322. 3. in RE (2005) 2 Comp LJ 235. (2005) 13 SCC 19. Mediquip Systems (P) Ltd. 1969 (2) SCC 274. Alok Shanker Pandey v. v. Ltd. Para 25 . Para 21 AIR 1998 Allahabad 320 Referred to.D. referred to. Para 24 (2001) 3 Comp LJ 413 (Karn) Referred to. Pharmaceuticals and Anr. Interest is also payable in terms of the provisions of Section 62(1)(a) of the Sale of Goods Act. Para 18 (1995) 84 CC 766 Referred to. Interest may be held to be payable in terms of Section 3 of the Interest Act. Gurpreet Singh v. Orient Paper and Industries Ltd. (1985) 57 CC 236. Para 18 (1997) 89 CC 259 Referred to.. Para 25 (1985) CC 875 (P&H)Referred to. Para 20 (1989) 66 CC 232 Referred to. 1993. An interest is inter alia payable by way of restitution. v. Re. referred to. Interest of justice would be subserved if in exercise of jurisdiction under Article 142 of the Constitution of India the respondent is directed to pay simple interest on the admitted sum at the rate of 12% per annum on the balance amount instead of 24% per annum within eight weeks from the date of amount became due till it is paid failing which the consequences provided in law shall ensue. Union of India and Ors.

Para 34 (2005) 7 SCC 42 Referred to. L. Para 34 (1985) 57 CC 236 Referred to. 433 and 434 . Para 42 CIVIL APPELLATE JURISDICTION : Civil Appeal No. Para 35 (1990) 3 Comp LJ 322 Referred to. Para 34 (2005) 2 Comp LJ 235 Referred to.433 does not state that debt must be a definite sum . Gautam Jha and Ruby Singh Ahuja for the Appellant. Para 41 (2006) 8 SCC 457 Referred to.Supplier issued notices that payments had been adjusted towards interest first and balance would be adjusted towards principal. 64 of 2004. . Para 42 (2005) 13 SCC 19 Referred to. Narsimaha. 7352 of 2008. Para 27 (1965) 35 CC 456 Referred to. Roshmani and Sudhir Nandrajog for the Respondent. Gourab Banerji. Nagesh.2005 of the High Court of Andhra Pradesh at Hyderabad in Original Side Appeal No. Para 26 (2006) 2 CHN 530 Referred to.Held: Failure to pay agreed interest or statutory interest would be `debt' . Subject Companies Act. thus. Para 25 (1986) 60 CC 753 Referred to. P. Para 41 (2007) 3 SCC 545 Referred to.Interest payable on the sum due whether debt to attract ss.Winding up petition under Maintainability of .More so.3. failure of purchaser to pay price for the goods to supplier on presentation of invoices . 1956 . Para 36 (2004) 8 SCC 524 Referred to. Para 41 (2005) 128 CC 72 Referred to. Para 31 (1971) 3 SCC 632 Referred to.On facts.(1996) 5 Comp LJ 342 (Bom)Referred to. Para 41 AIR 1922 PC 233 Referred to. Para 41 (1969) 2 SCC 274 Referred to. Para 32 1962 Ch 406 Referred to. a prima face case was made out .On receipt of legal notice also purchaser did not make payment to liquidate debt .Credit bill signed by purchaser's representative contained clause for payment of interest on delayed payments . 433 and 434 .s. Saurav Agrawal.Purchaser agreed to compensate supplier for delay in payment and never denied demand of interest .ss. From the final Judgment and Order dated 14. P.S.

Respondent agreed to square up the old dues and also agreed to compensate respondent for the delay in payment on account of earlier supplies.468/ was due. 1978 as also ss.3 of Interest Act. Hence the present appeal.Held: Interest is inter alia payable by way of restitution . respondent would be liable to pay interest @ 2% pm.It is also payable in terms of s.62(1)(a) of Sale of Goods Act. Respondent did not deny or dispute demand of interest and according to it Rs. 16. 434 of the Companies Act.when application for winding up filed. Division Bench of High Court allowed the same.433 . Single Judge admitted the company petition and held that a prima facie case was made out therefor having regard to the correspondences passed between the parties.In the interest of justice. Appellant adjusted the amount first towards interest at the stipulated rate and balance against the principal amount. But the said amount was not paid. The said agreement was not adhered to. High Court not justified in setting aside application for winding up admitted by Company Judge . Appellant-small scale unit was supplying Castor Oil to the respondentcompany. Respondent was to pay Rs. Respondent filed an appeal.80. 439 of the Act. The representative of the respondent signed the credit bill.Grant of . Certain sum was paid and the appellant refused to make further supplies. A meeting took place. the credit bills and also the minutes of the meeting. 1956 to the respondent that if payment is not paid after availing the credit period.15. Parties negotiated as regard the manner of making payment. Appellant issued a notice u/s. Respondent did not pay the complete price of the said supplies on presentation of the invoices. Judgement REPORTABLE . 1993. Appellant filed a winding up petition u/s. 65. dues were more than the amount specified in s. Interest . The invoices of credit bills contained a clause that the amount was to be paid within seven days.947 with interest @ 2% pm.Thus. Appellant raised the demand but the respondent did not make the payment. purchaser directed to pay simple interest on admitted sum @ 12% pa on the balance amount instead of 24% pa within the specified period.5 and 6 of Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act. s. Appellant agreed to restore supply of Castor Oil provided the respondent deposited the outstanding dues. else buyer would be liable to pay 2% interest per month. 433(e) and 433(f) r/w s.

Vijay Industries Versus M/s. . NATL Technologies Limited .. 7352 OF 2008 [Arising out of SLP (Civil) No... 2. Leave granted. 1956 is the question involved herein. 15672 of 2005] M/s.Appellant JUDGMENT S. J : 1..IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.Respondent . SINHA.B. Whether interest payable on the sum due would be a debt so as to attract the provisions of Sections 433 and 434 of the Companies Act.

company had put its signatures as a token of acceptance. As despite demand the amount due and owed to it was not paid by the respondent. Appellant is said to have adjusted the amount first towards interest at the stipulated rate and balance against the principal amount. On the . Admittedly. 5. if any. against the principal amount.2 3. 89. it supplied Castor Oil to the respondent valued at Rs. we may notice the fact of the matter. It was stated that the appellant had appropriated account of payments made by it against the interest and balance.99. however. Appellant is a small scale unit registered with the District Industries Centre. adverting to the said question.13. It is not in dispute that at the foot of each credit bill an officer of the respondent . A sum of Rs.589/-. Before." 4. 49. a legal notice was served upon it claiming interest on the said sum.000/. The invoices of the credit bills attached with each of the supply contained a clause relating to payment of interest in the following terms: "amount must be paid within seven days or you are liable to pay 2% interest per month.had been paid by the respondent.

we could not arrange any payment directly to your company.3 basis thereof. In view of the notice served by the Income Tax Department. 1961 from the Income Tax Department.457/.02 2. 06.10. 64.2003. we are directed to pay the amounts due to you on account of Castor Oil supplied directly to the department in view of your dues to the department to an extent of Rs. 10.000/S. As per the notice.01.34. we have not intentionally defaulted in making arrangements for . we have paid by way of cheques to Income Tax Officer Ward-8(3) on account of supply of castor oil as detailed below:Cheque No. The said legal notice was replied by the respondents.00 lakhs towards Castor Oil Supplies to our plant. the balance amount due to your company on account of oil supplies is only Rs. 09.882/-. This matter was brought to your notice and also advised you to obtain a direction from the Income Tax Department to pay the dues directly to your company.08.34.B.00 lakhs.) 074013 100313 Allahabad Bank 09. You are aware that after making payment of Rs. stating: "We have received a legal notice from Sri Rao Raghunandan.58.868/5.868/- After adjusting the above amounts and our earlier payment of Rs. In the circumstances.737/-. 25. Advocate dt. Subsequently.H.02 3.40. 27. Bank Dated Amount (Rs.09. a demand for a sum of Rs.43. we have received a notice under Section 226 (3) of the Income Tax.00.together with future interest at the rate of 2% per month was raised.

Without disputing its liability. We request you kindly to obtain the clearance.2003. 7. the respondent offered to pay a sum of Rs. 75. we request you to kindly advice your advocate to withdraw the legal notice served on us forthwith." .000/.000/.09. It is on that assurance the appellant is said to have agreed to restore supply of Castor Oil provided it deposited 50% of the outstanding dues and remaining 50% at the rate of Rs." 6. 27.per week.00. in view of the correspondence that exchanged between the parties. 2.upto November. 2003 stands Rs. 58..882/-. In the circumstances.We have accounted your payments against the interest and balances against Castor Oil Supplies approximately.00. so as to enable us to arrange payment of the outstanding amount due to you amounting to Rs.457/. 64. 2002.. Accordingly. 2003. On such account being taken the balance of Rs. however. the balance upto 31st March. 69. 2.per week to the appellant beginning from April. the respondent stated: ".134/-. 40. This amount carries interest @ 2 % per month.4 the payment of your dues on account of Castor Oil Supplies from time to time. In its letter dated 8.

. As the said agreement between the parties arrived at in the said meeting was not adhered to.2003 to 11. the minutes whereof reads. Basing on the convenience and as per the discussions from time to time NATL have agreed to square up the old outstandings and bring in to the system for the rotation. As evidently.2003. A sum of Rs. Also in principle agreed to compensate Vijaya Industries for the delay in payment on account of earlier supplies after clearing the entire old dues. the appellant refused to make further supplies. have agreed to arrange payment for the values of 2 truck loads of Castor Oil in the month of December. a meeting took place.2003 a legal notice under Section 434 of the Companies Act. Vijaya Industries is rotataing. you are laible to pay interest at 2% per .. One Tanker load for the payment arrangement towards old outstanding. the Company representative Sri Jagadish Prasad agreed for supply of Three Tanker loads including the existing One Tanker load which is already supplying.5 8. The Representatives of NATL Technologies Ltd. on 23." 9. stating: ". thus: "As per the discussion regarding the old outstanding and for the continuity of the Business at present.04.07. 1956 was served on the respondent.My client states that as per the invoices raised by it. 8 lakhs was paid in between the period 19. Against the above payment.12.

468/.01.460/-). 2003 so as to enable us to arrange payment for full and final settlement of your dues amounting to of Rs. my client calls upon you to pay an amount of Rs. the total sum due was Rs.2004.80.947/. 80. In its reply to the said legal notice. According to it. . we advice you kindly withdraw the legal notice dated 23rd December. 11. Appellant filed a winding up petition under Section 433(e) and 433(f) read with Section 439 of the Companies Act on 23. 65.. 16. the respondent did not deny or dispute demand of interest." Even that amount was not paid..with further interest thereon at 2% per month within three weeks from the date of receipt of this notice.15..6 month if payment is not paid after availing the credit period..468/ (sic for Rs. 16." It was further stated: "In view of the above. 15.80." 10.within two months from the date of this letter. stating: "In the circumstances.

each for an amount of Rs.25.2004.00. 2. 25. Appellant in its rejoinder contended that the credit bills mentioned that the respondent was liable to pay interest at the rate of 2% per month on delayed payment. Bank Street.09. 25. 2.10.07.02. stating that it was not liable to pay any interest nor it entered into any agreement in connection therewith. Respondent in its counter-affidavit before the learned Company Judge denied its liability to pay its interest for the first time. 13.2004 and 25. learned counsel for respondent has given a Demand Draft bearing No. 14. 216953 dt.2004. An interim order was passed on 17.25.2004.30.2004 directing: "Both the learned counsel agree that the matter can be settled out of Court having regard to the commercial relations between petitioner and respondent for long duration.2004 for an amount of Rs. 216951.000/.(Rupees two lakhs only) drawn on Punjab National Bank.11.30. 216948. 216952 dt.12. 097852.2004 for an amount of Rs. 14.S. Hyderabad. 2. 25. Raju.2004 respectively.000/. and another cheque bearing No. Sri V.468/- .(Rupees two lakhs thirty thousand only).06. and six post-dated chequesfive cheques bearing Nos. dt. 216950.08.7 12. 216949.

17. Learned counsel for petitioner has received the Demand Drafts. Mr. Commercial Branch. The learned Single Judge.2004.2004 held that a prima facie case has been made out therefor having regard to the correspondences passed between the parties. learned senior counsel appearing on behalf of the appellant. Gourab Banerji. the credit bills and also the minutes of the meeting. in view of the stand taken by the parties. while admitting the company petition by an order dated 10.8 (Rupees two lakhs thirty thousand four hundred and sixty eight only).11. the respondent preferred an appeal. drawn on State Bank of India.07. in favour of the petitioner company in Court today." 15. the Division Bench has allowed the said appeal. Secunderabad. one taking a liberal view and another a strict view. By reason of the impugned judgment. would at the outset bring to our notice that there is a difference of opinion on the issue amongst the different High Courts. without prejudice to the claim of the petitioner for interest and seeks time for getting instructions from his client regarding cheques. . Aggrieved by and dissatisfied therewith. Post on 09. 16.

Polar Forgings and Tools Ltd. The Punjab and Haryana High Court in Stephen Chemical Limited v. Mr. 18. [(1995) 84 CC 766] took a liberal view of the matter opining that even if interest is not payable by way of an agreement. usage or custom. Super Fine Skin Traders [(1990) 68 CC 684] and the Delhi High Court in Devendra Kumar Jain v. the Madras High Court in Rashid Leathers P) Ltd.9 We have noticed hereinbefore that the defence of the respondent was: (i) (ii) there has been no agreement between the parties to pay interest. Innosearch Limited [(1986) 60 CC 702]. the Company Court will have the requisite jurisdiction to go into such a . Banerji would submit that the High Court committed a serious error in accepting the aforementioned contentions of the respondent as each of the credit bill was signed by the representative of the respondent company. it had not been informed about the adjustment of payments made by it towards interest. v.

A finding of fact was arrived at that there was no written agreement except the printed clause for payment of interest in the invoices. Ltd. the parties adduced evidences. Interest at the rate of 12% per annum was granted in stead and place of stipulated rate of interest. [(1999) 98 CC 174] wherein after the company petition was admitted." 20. a Division Bench of the Delhi High Court. Ltd. The court did not rely upon the evidence adduced on behalf of the appellant. v. [(1997) 89 CC 259] and Bombay Glass Blowing Industries v. Suryatronics Pvt. . opined: "My conclusion is that in a case where the liability to pay the principal amount is not disputed by the company the creditor need not be forced to initiate separate litigation for recovery of the interest amount and the interest amount can be determined by the Company Judge in the winding up proceedings and on failure of the company to pay that amount the Company can be ordered to be wound up on the ground that it is unable to pay its debts. 19. We may notice the two decisions of the Andhra Pradesh High Court in Multimetals Ltd.10 question and admit a company petition for non-payment of interest on the admitted dues. In Devendra Kumar Jain (supra). Bio Vaccines Pvt.

Therefore. He cannot claim that from the person liable to pay the price of goods he is entitled to. 1978 or Section 62(1)(a) of the Sale of Goods Act. stating: "From a reading of Section 61 (2)(a) of the Sale of Goods Act. in the absence of any agreement to pay the same. it is revealed that it is the discretion of the Court to award interest at such rate as it thinks fit on the amount of price to the seller from date of tender of goods or from the date on which the price was payable and under Section 3 of the Interest Act. prior to the institution of the proceedings. If the proceedings relate to a debt payable by virtue of a written "instrument at a certain time from the date when the debt is payable lo the dale of institution of the proceedings and if the proceedings do not relate to any such debt. In other words. then. therefore. The creditor cannot claim interest at any particular rate. These provisions refer to the sole discretion of the Civil Court to award interest in a suit for recovery of money. Before that. the concerned creditor is not at all entitled to interest until the Court so orders. 1930 would not be attracted. it cannot be said that the creditor is entitled to interest as a matter of right before the institution of the proceedings in the Court. in addition to the unpaid price of goods. the said Court in Bombay Glass Blowing Industries (supra) held that the provisions contained in Section 3 of the Interest Act. the alleged amount of interest or damages is unascertained. from the date mentioned in this regard in the written notice given by the person entitled to the dale of institution of the proceedings. the interest claimed and calculated according to his-unilateral act and.11 It was in the aforementioned situation. the concerned person cannot be said to be indebted to . at a rate not exceeding the current rate of interest.

the respondent-company was indebted to the petitioner-company to pay the interest at any rate. therefore. how can it be said that at the time of issuance of the statutory notice. This being the position. 22. however be placed on record that the aforementioned decision of the learned Single Judge of the Allahabad High Court in Ultimate . It may. We may at the outset notice that Ultimate Advertising and Marketing (supra) has also been noticed in Devendra Kumar Jain (supra) to hold that the Company Judge is the appropriate forum for determining as to whether the creditor is entitled to interest. The Division Bench of the High Court. in its impugned judgment. on account of default in making payment of interest as claimed by the petitionercompany.B. where the company admits its liability. much less at the rate of 21 per cent per annum ? and. 23." [Emphasis supplied] 21. [(1989) 66 CC 232]. it is liable to be declared as commercially insolvent The same position continues even during the pendency of the proceedings. not only relied upon the aforementioned two binding precedents but also a judgment of the Allahabad High Court in Ultimate Advertising and Marketing v. Laboratories Ltd. G.12 a certain extent so far as the claim of interest is concerned.

B. G. any claim was made in respect of the payment of interest and furthermore the respondent had filed a counter affidavit to the said petition denying and disputing the said assertion of the appellant that an order of winding up of the company was not passed only for payment of the interest which had been disputed bonefide... it seems that the company Judge has a power to direct the respondent-company to pay the amount of interest but in each case." However.13 Advertising and Marketing (supra) came up for consideration before a Division Bench thereof in M/s. Ultimate Advertising and Marketing New Delhi v. . the petitioner-company cannot make a grievance that the company Judge failed to allow the company petition for winding up the company for payment of the Interest. on the facts of that case. the facts are to be examined as to whether there is bona fide dispute regarding the claim of the interest and if the Court finds that there is bona fide dispute.. Laboratories Ltd. there was nothing to show that prior to the issuance of the statutory notice by the appellant. Kanpur [AIR 1998 Allahabad 320] wherein inter alia it was held: "From the cases referred to above by various High Courts.

. Boving Fouress Limited [(2001) 3 Comp LJ 413 (Karn)] wherein the learned Judge from paragraphs 5 to 8 of the judgment considered Stephen Chemical Limited (supra). on the one hand . Rashid Leathers P) Ltd. stating: ".. We may furthermore notice that even in Kitply Industries Ltd. rejected the claim for payment of interest. (supra) and Devendra Kumar Jain (supra). Ltd. We may notice an elaborate judgment of a learned Single Judge of the Karnataka High Court in Jyothi Limited v. in the absence of any agreement between the parties.14 24." The said decision was rendered after trial. v. the dispute which the respondent has raised regarding its liability to pay interest cannot be treated as a fictitious or frivolous dispute.In my opinion. It is also to be noted that the petitioner has not even said that the parties had agreed for payment within a particular time period. 25. There is sufficient justification in the claim of the respondent that the dispute is a bona fide dispute. Hari Narain and Sons Pvt. [(1998) 91 CC 715] a similar view was taken by the Rajasthan High Court... The learned Judge upon holding that the principles enumerated in various decisions referred to therein must be applied in each and every case having regard to the facts thereof.

B. Unisystems (P) Ltd. Stepan Chemical Ltd. Anand Steel v. Multimetals Ltd. v. Laboratories Ltd. v. Ltd. [(1987) 3 Comp LJ 175 (Karn)]. G. (supra) has also been overruled in Unisystems P. Gangadhar Narsinghdas Agrawal v. it was furthermore held: . [(1984) 56 CC 77 (Karn)]. (supra). G.15 and from paragraphs 10 to 16 considered Southern Industrial Polymers (P) Ltd. [(1986) 60 CC 753]. Amar Formulators and Electronics (P) Ltd. Laboratories Ltd. [(1989) 66 CC 232] and Kitply Industries Ltd. [(1996) 5 Comp LJ 342 (Bom)]. The learned Judge opined that the word "debt" refers to an ascertained and definite amount due to the creditor and not a disputed amount.B. Stepan Chemical Ltd. 26. (supra). v. The said fact was not brought to the notice of the learned Single Judge. Bharat Earth Movers Ltd. It was furthermore not brought to the notice of the High Court that Unisystems (P) Ltd. Ultimate Advertising and Marketing v. Timble (P) Ltd. [(1985) CC 875 (P&H)]. However. [(1989) 66 CC 232] was reversed by the Division Bench. We have noticed hereinbefore that the decision of the Allahabad High Court in Ultimate Advertising and Marketing v.

or where there is an admission or promise to pay interest by the company or where in proceedings for recovery of money. or by countersigning of the bill by the purchaser. if it is supported by an agreement or promise to pay interest by the purchaser. Interest can be awarded on the basis of a provision in a bill/ invoice. where there is a contract to pay interest. Where in the absence of an agreement or contract for payment of interest on the value of goods supplied. (c) Interest cannot be awarded merely on the basis of a term in a bill or invoice. This is because a credit bill or an invoice is a unilateral demand by the supplier and is neither a bilateral agreement nor a promise by the purchaser to pay interest. (b) The term `debt' may refer not only to `principal' (value of goods or amount advanced). then non-payment of interest (whether with principal or interest alone) may amount to inability to pay debts. a competent court or arbitrator has determined the liability to pay interest. unless the creditor proves that such provision is based on a contract or agreement on the part of the purchaser to pay interest.16 "(a) The term `debt' refers to an ascertained and definite amount `due' and does not refer to a claim for compensation/ damages or a claim which requires assessment by a court before it becomes due and payable. or by acceptance by the purchaser of the term in the bill relating to interest. a notice of demand is sent by the supplier requiring payment of the value of goods supplied with interest thereon and a reply is sent by the purchaser in general terms seeking time to . Such agreement may be established with reference to correspondence. but also to interest due thereon. Where the contract specifically provides for payment of interest.

for the purpose of a winding up petition. In the absence of a contractual or legal liability. such reply cannot be construed as an admission to pay interest. We may also notice that a Division Bench of the Calcutta High Court in Universal Bearing Agency v." 27. the court considering a petition under section 433(e) should not decide the issue.17 pay the bill amount. . Wpil Limited [2006 (2) CHN 530] followed the decision of the Punjab and Haryana High Court in Stephen Chemical Limited (supra). Either an agreement to pay interest or a specific admission or promise to pay interest or an order or decree granting interest by a court or tribunal empowered to award interest. therefore. is a condition precedent to hold that interest is a debt due. nor act as an estoppel in regard to a subsequent denial by the company in legal proceedings. merely to avoid multiplicity proceedings. and. The purpose of winding up proceedings being completely different from the purpose of proceedings for recovery of a debt. winding up proceedings are not a substitute for a civil suit. (d) Where there is a bona fide dispute in regard to interest. relegating parties to a civil suit cannot be considered as resulting in multiplicity of proceedings.

Keeping in view the aforementioned divergence in the opinions of the different High Courts. Clause (a) of Sub-section (1) whereof reads as under: . Section 433 (f) of the Companies Act reads as under: "A company may be wound up by the Tribunal. let us consider relevant provisions of the Companies Act." Section 434 raises a legal fiction as to when the company would be deemed to be unable to pay its debts.18 28. it would be one of the grounds therefor. -(a) *** *** (b) *** *** (c) *** *** (d) *** *** (e) *** *** (f) if the Tribunal is of the opinion that it is just and equitable that the company should be wound up. If a company is unable to pay its debts as contained in Clause (e) thereof. Circumstances in which a company may be wound up by the court are contained in Section 433 of the Companies Act.

The fact that the respondent did not pay the price of the said supplies. it is evident that what is necessary for invoking the said provision is that despite service of notice. by assignment or otherwise.12. on presentation of the invoices. The fact that despite receipt of a legal notice dated 23. by registered post or otherwise." 29. the company which was indebted in a sum exceeding one lakh rupees then due failed and/ or neglected to pay the same within three weeks thereafter or to secure or compound for it to the reasonable satisfaction of the creditor.2003. appellant had been supplying Castor Oil to the respondent. has served on the company. On a plain reading of the aforementioned provisions. by causing it to be delivered at its registered office. 30.19 "( 1 ) A company shall be deemed to be unable to pay its debts-(a) if a creditor. Admittedly. or to secure or compound for it to the reasonable satisfaction of the creditor. to whom the company is indebted in a sum exceeding one lakh rupees then due. is also not in dispute. a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum. It also . no payment has been made to liquidate the debt on the part of the company is not in dispute.

Respondent never denied the demand of interest as such. in principle. The agreement spoke of payment of compensation to the appellant for the delay in payment on account of earlier supplies after clearing the entire old dues.K. wherein it was held: "It is well-settled that "a winding up petition is not a legitimate means of seeking to enforce payment .468 (sic for Rs. A. v. There cannot be any doubt whatsoever that when. the respondent had agreed to compensate the appellant for the delay in payment. but in its reply dated 30.2003 merely stated that a sum of Rs.12. 31. 16. the same must be by way of interest payable on the principal amount or otherwise. promises were made to square up the old outstanding dues and bring it into the system for the purpose of rotation.20 stands admitted that the parties negotiated as regards the manner in which the payments could be made.18.80. Krishnaswami and Another [(1965) 35 CC 456]. 15. Construction of the aforementioned provision came up for consideration before this Court in Amalgamated Commercial Traders (P.460) was due.C. In a meeting held on 25.2003.11.) Ltd.

[(1971) 3 SCC 632]. (See London and Paris Banking Corporation) Again. Madhu Woollen Industries Pvt.21 of the debt which is bona fide disputed by the company. a petition for winding up by a creditor who claimed payment of an agreed sum for work done for the company . petitions. Ltd. there was no reason to believe that the debt. however. Yet again in M/s. The modern practice has been to dismiss such. A petition presented ostensibly for a winding up order but really to exercise pressure will be dismissed. the court will not wind up the company. But. if the debt is bona fide disputed and the defence is a substantial one. Two rules are well settled. the petition was dismissed. First. At one time petitions founded on disputed debt were directed to stand over till the debt was established by action. would not be paid. of course. this Court upon considering Amalgamated Commercial Traders (P.) Ltd. if established. The court has dismissed a petition for winding up where the creditor claimed a sum for goods sold to the company and the company contended that no price had been agreed upon and the sum demanded by the creditor was unreasonable. v."" 32. (supra) and various other English cases opined as under: "20. the court may decide it on the petition and make the order. and under circumstances may be stigmatized as a scandalous abuse of the process of the court. Madhusudan Gordhandas & Co. if the debt is not disputed on some substantial ground. If.

It has not been disputed before us that failure to . 33. Ltd. (iii) The principles which the court acts are first that the defence of the company is in good faith and one of substance. the defence is likely to succeed in point of law and. the court will make a winding up order without requiring the creditor to quantify the debt precisely. the company adduced prima facie proof of the facts on which the defence depends. Section 433 of the Companies Act does not state that the debt must be precisely a definite sum.)" The court furthermore opined: (i) Where the debt is undisputed. however. the court will not act upon a defence that the company has the ability to pay the debt but did not choose to pay that particular debt.22 when the company contended that the work had not been properly was not allowed. (ii) Where. (See Re. secondly. there is no dispute that the company passed the creditor a debt entitled him to a winding up order but the exact amount of the debt is disputed. Brighton Club and Horfold Hotel Co. thirdly.

Madhusudan Gordhandas & Co. be quite unjust to refuse a winding-up order to a petitioner who is admittedly owed moneys which have not been paid merely because there is . this Court referred to the decisions of the Chancery Division in Re. it seems to me that it would. Moreover. It is one thing to say that the amount of debt is not definite or ascertainable because of the bona fide dispute raised thereabout or there exists a dispute as regards quantity or quality of supply or such other defences which are available to the purchaser. in many cases. Tweeds Garages Ltd. In M/s. as I have said. the application for winding up cannot be dismissed. there is really no dispute. in our opinion. In the latter case. [1962 Ch 406]. (supra). 34.23 pay agreed interest or the statutory interest would come within the purview of the word `debt. holding: "From those sections it appears that the only qualification which is required of the petitioners in this case is that they are creditors and about that. but it is another thing to say that although the due as regards the principal amount resulting from the quantity or quality of supply of the goods stands admitted but a question is raised as to whether any agreement had been entered into for payment of interest or whether the rate of interest would be applicable or not.

Usan Laboratories P." Re.. suppose that a creditor obtains judgment against a company for 10. The creditor then presents a petition to have the company wound up. Pfizer Ltd. There is a genuine bona fide dispute whether the sum paid off is 10 or 20. a dispute as to the precise sum which is owed to him is not of itself a sufficient answer to his petition.000 and after the date of the judgment something is paid off. Pfizer Ltd. therefore. [(1985) 57 CC 236] holding that only because there is a dispute in regard to the rate of interest. in RE [(2005) 2 Comp LJ 235]. the winding up petition cannot be thrown out on that ground alone. If I may refer to an example which I suggested in the course of argument. Tweeds Garages Ltd. Madhusudan Gordhandas & Co. apart from M/s. where there is no doubt (and there is none here) that the petitioner is a creditor for a sum which would otherwise entitle him to a winding-up order.24 a dispute as to the precise amount owing. v. "entitled to an order"? I think not. (supra). (supra). (supra) was a case of principal plus interest. has inter alia been followed by the Bombay High Court in Pfizer Ltd. (supra) has been followed by the Bombay High Court in Ispat Industries Ltd. Is the company to be entitled to say: "It is not disputed that you are a creditor but "the amount of your debt is disputed and you are not. . In my judgment. Ltd.

in other words. namely. whether dismissal of connecting stay petition could be justified reason alone for dismissing appeal summarily which was based on cogent grounds? (ii) Whether the appellant Company can be said to be indebted to the respondent petitioning creditor in respect of US $ 11. has also been drawn to a recent decision of this Court in Mediquip Systems (P) Ltd. that the appellant was not entitled to stay of operation of the order passed by the Company Judge under appeal or.69.25 35.480 to secure the . inter alia. v. Pameda Medizinische Systems GmbH and not by the petitioning creditor? (iv) Whether the Division Bench as well as the Company Judge. Our attention. however. in exercise of their jurisdiction under the Companies Act.480 when the said sum was not remitted by the said petitioning creditor. namely.69.000 was remitted by another company.000 equivalent to INR 4. erred in directing the Company to deposit Rs 4. Proxima Medical System GMBH [(2005) 7 SCC 42] wherein the questions of law which fell for consideration before this Court inter alia were: "(i) Whether the Division Bench of the High Court at Calcutta was justified in dismissing the appellant's appeal summarily holding. Proxima Medical System GmbH? (iii) Whether the winding-up proceedings under the relevant provisions of the Companies Act are maintainable against the Company by the said respondent petitioning creditor when it is evident from the document issued by Deutsche Bank (remitter's banker) and foreign inland remittance certificate (issued by the Company's banker) that US $ 11.

480 as directed by the Company Judge to Rs 2 lakhs in compliance whereof the Company had duly deposited Rs. on extraneous considerations.26 alleged claim of the petitioning creditor when the petitioning creditor was not the remitter of the said amount and such was seriously disputed before the Company Judge and the Company Judge did not adjudicate the disputes at controversy and directed the petitioning creditor to file suit in respect thereof? (v) Whether the Division Bench in passing the order under appeal was justified to direct the Company to deposit the balance amount when an earlier Division Bench by an interim order reduced the quantum of deposit from Rs. 2 lakhs which was duly deposited by the Company to the satisfaction of the Court?" In that case. it had no jurisdiction to direct . on the premise that no clear cut finding had been arrived at by the Company Judge that the debt was prima facie due and payable by the company to the creditor and the impugned order had been passed in purported exercise of jurisdiction not vested in the Company Court for an application for winding up of the Company. when an earlier Division Bench by an interim order granted stay of advertisement subject to the appellant's depositing Rs. 2 lakhs on 11-11-2002 and the petitioning creditor failed to present any suit within three months thereof as per direction of the Company Judge? (vi) Whether the Division Bench was justified in passing the order under appeal by dismissing the stay application.69. 4.

*** *** *** 21. Holding that such a jurisdiction is not vested in the company court.. There must be a debt due and the company must be unable to pay the same. Thus. This Court in a catena of decisions has held that an order under Section 433(e) of the Companies Act is discretionary. The debt under Section 433 of the Companies Act must be a determined or a definite sum of money payable immediately or at a future date. it was held: "18. what was in question was whether the Company Judge could issue a direction to the company to make payment to a third party." 36.27 the company to deposit the amount payable to a third party or to a party other than the petitioning creditor. however. It is. A debt under this section must be a determined or a definite sum of money payable immediately or at a future date and that the inability referred to in the expression "unable to pay its debts" in Section 433(e) of the Companies Act should be taken in the commercial sense and that the machinery for winding up will not be allowed to be utilised merely as a means for realising debts due from a company. of some interest to note that the Division Bench referred to a decision of the Madras High Court in Tube Investments of ..

it is open to the creditor to resort to both the remedies of filing of a civil suit as well as filing of a petition for winding-up of the company. (2) The existence of a dispute with regard to payment of interest cannot at all be construed as existence of a bona fide dispute relegating the parties to decide such a dispute before the Civil Court and in such an eventuality. the Company Court itself is competent to decide such a dispute in the winding-up proceedings. v.28 India Ltd. and (3) If there is no bona fide dispute with regard to the sum payable towards the principal. Rim and Accessories (P) Ltd. It was furthermore found that there was no general allegation or averment that the company was unable to pay its dues and other obligations in the sense of its innumerable creditors. however small that sum may be. [(1990) 3 Comp LJ 322] where the following principles relating to bona fide dispute had been evolved: "(1) If there is a dispute as regards the payment of the sum towards principal. a petition of winding up is not maintainable and the necessary forum for determination of such a dispute existing between the parties is the Civil Court." In that case also a bona fide dispute was raised by the company. It was in the aforementioned .

It is not a requirement of the law that the entire debt must be definite and certain. The Division Bench of the High Court proceeded on the basis that the entire sum covering both the principal and the interest must be undisputed. holding: "Except making a bald allegation in the company petition that the petitioner had come to know that the respondent company owes large sums of money to its creditors and it is not in a position to meet its debt obligations and as. The only piece of evidence available on the side of the petitioner is that the respondent is indebted to the petitioner a sum which is claimed towards interest on the delayed payment. dues in respect of at least a part of the debt which was more than the amount specified in Section 433 of the Companies Act was not denied. could it be said that the respondent neglected to pay the debt particularly when the respondent is disputing the liability of payment of interest on the delayed payments and when there is no such written agreement in between the parties for such payment of interest. the petitioner has not taken necessary care to prima facie establish the same. on the date of filing of the application. therefore.29 situation that Section 433(f) of the Companies Act was found to be not applicable. 37." . become commercially insolvent. In this case. Assuming for a moment that the respondent company is liable to pay interest on the delayed payments and it has not paid the said amount to the petitioner.

The Division Bench upon noticing the fact of the matter formulated the question "as to whether the respondent is liable to pay interest at 2% per month on delayed payments and what that is being disputed would it constitute prima facie a valid ground for admission of the company petition?" It was held: ". in view of the judgment of the Rajasthan High Court in Kitply Industries case (supra). even assuming is there.30 38.The petitioner seeks to rely upon the invoices which according to him contain at the foot a clause for payment of interest on delayed payments. it must be shown before the Court that the debt claimed against the company is ascertained and definite and that the company failed to pay the same. seems to be obvious.. Mere failure to pay the amount would not constitute the requisite 'neglect to pay' as envisaged under Clause (a) of Subsection (1) of Section 434 of the Act when the company bona fide disputes the very liability and hence the defence taken up by it is of substance." It was furthermore held: . since it has not been placed by means of any cogent evidence in this case.. Before seeking a company to be wound up on the ground that it is unable to pay its debts. thus. The legal position. cannot constitute an agreement between the parties for payment of interest. Such a clause.

it cannot be presumed prima facie that the respondent is unable to pay its debts. For the above reasons. because the Division Bench did not hold that the invoices were not proved by cogent evidence. we are of the considered view that the claim of the petitioner towards interest on delayed payments since not covered by any specific agreement between the parties inter se is a contentious issue and the dispute as regards the payment of interest is bona fide and it cannot." 39. shall be adjusted towards principal later. 65.basing upon such calculations cannot be accurate. It is still got to be ascertained if the claim of the respondent were to be considered that there has been no agreement for payment of interest on delayed payments. if any.947/. The petitioner. with respect. who pleaded inter alia in his petition that as per the trade practice payments made shall be adjusted towards interest first and balance. in which event the claim of the petitioner that the respondent is liable to pay Rs.31 "Having regard to the facts and circumstances of the instant case. if any towards principal next becomes inappropriate. The findings of the High Court. firstly. . appropriating the amounts towards interest first and the balance. legitimately be concluded that the respondent has neglected to pay. In the absence of any such trade practice. secondly. are not correct for more than one reason. The total amount claimed by the petitioner as due in that view of the matter becomes doubtful and not definite. therefore. failed to establish the same by any prima facie evidence.15. question of leading evidence would arise only after the company petition is admitted and.

An interest is inter alia payable by way of restitution.09. 40. however. By reason of the said provision. It provides for only civil consequences.2003 specifically mentioning that the payments had been adjusted towards interest first and balance.2003 and legal notice dated 23.2003. Clause (i) of Regulation 44. this Court held: "25. the power of the Board to issue directions is sought to be restricted to pay the amount of consideration . shall be adjusted towards the principal.01. 41. and Another v. issuance of invoices and signature of the respondent thereon is not disputed. if any.32 thirdly. In Clariant International Ltd. The judgment of the Division Bench also contains a legal flaw insofar as it failed to take into consideration that the appellant had in fact issued three notices being dated 6. does not provide for any penal consequence. Securities & Exchange Board of India [(2004) 8 SCC 524]. This brings us to the question as to why an interest is payable.12. Thus. a prima face case was made out. 8. A direction in terms of Regulation 44 which was in the interest of securities market indisputably would have caused civil or evil consequences on the defaulters.

The Board. Union of India and Others [(2007) 3 SCC 545] has held that interest is payable by way of accretion on capital. Raja Parthasarathy Appa Rao Bahadur Zamindar Garu [AIR 1922 PC 233] wherein it was held: ". Such a direction. The transactions in the market are not thereby affected one way or the other. it may or may not issue such a direction. this Court in Alok Shanker Pandey v. as noticed hereinbefore.33 together with interest at a rate not less than the interest payable by banks on fixed deposits. they have no legal right. and the rule which is well established in ordinary cases is that in those circumstances the money is first applied in payment of interest and then when that . As a necessary concomitant.. Both the Board and the Tribunal have proceeded on the basis that the interest is to be paid with a view to recompense the shareholders and not by way of penalty or damages. thus." Yet again. The question came up for consideration in Meka Venkatadri Appa Rao Bahadur Zamindar Garu and others v. has a discretion in the matter and. The shareholders do not have any say in the matter. There are moneys that are received without a definite appropriation on the one side or on the other.There is a debt due that carries interest. was for the purpose of protecting the interest of investors and not "in the interest of the securities market". therefore..

To apply the sums paid to principal where interest has accrued upon the debt.." The said decision has been followed by this Court in Meghraj and Others v. the sums paid on account must be applied first to interest. para 5] and a Constitution Bench of this Court in Gurpreet Singh v. In Alok Shanker Pandey v. no doubt. where it is applicable. Bayabai and others [(1969) 2 SCC 274. is only common justice. Yates in these words: "The defendant's counsel relied on the old rule that does. namely. this Court held: "8. That rule. apply to many cases.J.34 is satisfied in payment of the capital. v. in Parr's Banking Co. We are of the opinion that there is no hardand-fast rule about how much interest should be granted and it all depends on the facts and circumstances of each case. Union of India [(2006) 8 SCC 457. and is not paid. That rule is referred to by Rigby. Union of India and Others [(2007) 3 SCC 545]. L. that. Mst. where both principal and interest are due. However. para 19]. we are also of the opinion that since interest was not granted to the appellant along . would be depriving the creditor of the benefit to which he is entitled under his contract. We are of the opinion that the grant of interest of 12% per annum is appropriate in the facts of this particular case.

In Krishna Chemicals v. 1993. Interest may be held to be payable in terms of Section 3 of the Interest Act. Orient Paper and Industries Ltd. and the entire amount mentioned above must be paid to the appellant within two months from the date of this judgment. The fact that the exact amount of interest claimed by the petitioners against the Company is disputed can be no ground to dismiss the petition for winding up for non-payment of the interest so long as the liability to pay interest of the Company to .35 with the principal amount. Interest is also payable in terms of the provisions of Section 62(1)(a) of the Sale of Goods Act. 1978 as also in terms of Sections 5 and 6 of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act. [(2005) 128 CC 72]. the Orissa High Court held: "The interest amounts as claimed by the petitioners in the two cases against the Company however may not be in accordance with the provisions of Sections 4 and 5 of the Act. 1993." 42. the respondent should then in addition to the interest at the rate of 12% per annum also pay to the appellant interest at the same rate on the aforesaid interest from the date of payment of instalments by the appellant to the respondent till the date of refund of this amount.

Madhu Woollen Industries Pvt. where there is no doubt that the Company owes the creditor a debt entitling him to a winding up order but the exact amount of the debt is disputed the Court will make a winding up order without requiring the creditor to quantify the debt precisely. Ltd. Pharmaceuticals and Another [(2005) 13 SCC 19] 43." The provisions of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act. we have no other option but to set aside the judgment of the High Court. For the reasons aforementioned. (supra) in the portion of the judgment quoted above. 1993 and admittedly such liability has not been discharged by the Company. Ltd. J. As has been held by the Supreme Court in Madhusudan Gordhandas and Co. which arises for consideration is whether at this stage we shall remit the matter back to the learned Single Judge to admit the company petition or dispose of the matter ourselves. and Others v. The question.D. v.36 the petitioners exists under Sections 4 and 5 of the Act. however. 1993 were applied in Assam Small Scale Industries Development Corpn. We are of the opinion that interest of justice would be subserved if we in exercise of our jurisdiction under Article 142 of the Constitution of India direct that the respondent to pay simple interest on the admitted sum at the rate of 12% . We choose to adopt the latter course.

.. [Cyriac Joseph] New Delhi............. We have passed this order with a view to avoid multiplicity of proceedings and for the purpose of avoiding unnecessary delay in the interest of parties.... ...... 44....... 2008 ......J..... December 17.... No costs. 45..37 per annum on the balance amount instead of 24% per annum within eight weeks from the date of amount became due till it is paid failing which the consequences provided in law shall ensue...J.... The appeal is allowed....B.... [S.... Sinha] .......

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