Patna High Court - Orders
M/S Misrilall Jain (P) Ltd. vs M/S Nacro Chemicals Ltd. on 17 September, 2014
Author: Ramesh Kumar Datta
Bench: Ramesh Kumar Datta
IN THE HIGH COURT OF JUDICATURE AT PATNA
Company Petition No.11 of 1996
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In the matter of M/s. Nacro Chemicals Ltd.
(In Liquidation)
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CORAM: HONOURABLE MR. JUSTICE RAMESH KUMAR DATTA
ORDER
82 17-09-2014I.A. No. 7836 of 2010:
The interlocutory application has been filed for a direction that the distribution of the sale proceeds of Rs.
99,00,000/- of the assets of the company under liquidation, M/s.
Nacro Chemicals Ltd., between its workmen and secured creditors, i.e., State Bank of India, Patna and I.D.B.I. Bank, Patna be recalled and they be directed to return the amounts received by them on account of such distribution and further to direct the Official Liquidator for payment of sales tax and central sales tax dues of the company amounting to Rs.
38,64,953.98 with interest to the Government of Bihar in Commercial Taxes Department out of the said Rs. 99,00,000/-
prior to the payment to the workmen and secured creditors, if any, out of the said Rs. 99 lacs.
The stand of the applicant-State of Bihar is that M/s.
Nacro Chemicals Ltd. was a registered dealer under the provisions of Bihar Finance Act and for the financial years Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014 -2- 1993-94 to 1996-97 it had outstanding dues of Rs. 1,40,576.68 towards Bihar Sales Tax and Rs. 37,24,377.30 towards Central Sales Tax, totaling to Rs. 38,64,953.98 for which certificate proceedings for recovery of the amount had been filed and are pending before the Court of Certificate Officer, Patna being Certificate Case Nos. 1/1999-2000, 1/2000-01 and 2/2000-01 having been filed respectively on 7.1.2000, 27.3.2001 and 27.3.2001 but the said amounts could not be recovered from the said company.
It is also the stand of the applicant that a Chartered Accountant had been appointed for submitting an investigation report with respect to the company by the Official Liquidator who has in the said report stated that the sales tax liability of the company is to the tune of Rs. 25,76,427/-. It is the further stand that the company in liquidation in its show cause admitted the said sales tax liability of Rs. 25,76,427/-. It is also stated that since the certificate cases had remained pending for long, therefore, in August, 2010 the Officers of the Department enquired from the office of the Certificate Officer about the progress of the cases and was told that a large number of files had been stolen from the said office which included the records of the company in liquidation for which Gandhi Maidan P.S. Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014 -3- Case No. 224/2008 dated 10.7.2008 under Section 379 IPC had been registered. In the office it was also learnt that M/s. Nacro Chemicals Limited had gone into liquidation which fact was confirmed from the office of the Official Liquidator also and it was learnt that the assets of the company had been sold for Rs. 99/- lacs. Thereafter the present interlocutory application was filed and upon learning that the amounts have already been distributed among the workmen and the secured creditors subsequently another interlocutory application seeking the relief of amendment of prayers was filed which amendment was allowed.
Learned counsel for the applicant submits that the sales tax dues of the company in liquidation are in the nature of indirect taxes which have been recovered by the dealer from the purchasers and belonging to the Government and thus they do not form part of the income or assets of the company. Therefore, they cannot be taken into account for satisfaction of the debts and dues of the creditors.
Learned counsel further submits that in terms of the provisions of Section 17 of the Central Sales Tax Act, 1956 a duty has been cast upon the Liquidator to give notice of his appointment within 30 days of having become such liquidator to Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014 -4- the appropriate authority of the Sales Tax Department who shall, after making such enquiry or calling for such information, as it may deem fit, notify to the liquidator within three months from the date on which he receives notice of the appointment of the liquidator the amount which, in the opinion of the appropriate authority would be sufficient to provide for any tax which is then, or is likely thereafter to become payable by the company and the Liquidator is obliged not to part with any asset of the company or property in his hand until he has been notified by the appropriate authority and on being so notified, shall set aside an amount equal to the amount notified and until he so set aside such amount, shall not part with any asset or property in his hand. It is further submitted that under the said Section it is clearly provided that failure of the Liquidator to give notice or to set aside the amount as required by, or parting with any of the assets of the company or the properties in his hands, makes him personally liable for the payment of tax which the company would be liable to pay. It is also pointed out that the provisions of the said Section have been given overriding effect over anything to the contrary contained in any other law for the time being in force. It is thus submitted by learned counsel for the State-applicant that the Official Liquidator was enjoined by the Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014 -5- provision of Section 17 of the Central Sales Tax to give notice to the Sales Tax Authorities and thereafter on being notified of the amount due or likely to become due on the company in liquidation ought to have set apart that amount for satisfaction of those sales tax dues and only thereafter any distribution of the amounts could have been made. In the said circumstances, it is submitted that the amounts wrongly distributed to the workmen and secured creditors ought to be directed to be repaid to the Official Liquidator and only after satisfying the dues of the company, if any amount remains, the same should be paid to the workmen and secured creditors.
In support of the aforesaid propositions, learned counsel relies upon a decision of the Supreme Court in the case of Board of Trustees, Port of Mumbai Vs. Indian Oil Corporation and another: (1998) 4 SCC 302, in paras 12 and 13 of which it has been held as follows:-
" 12. In M.K.Ranganathan V. Govt. of Madras:
AIR 1955 SC 604: (1955) 2 SCR 374: (1955) 25 Comp Cases 344 (SCR at pp. 383,387) this Court considered the position of a secured creditor in a winding-up proceeding as also of a person entitled to attach and sell any property without the intervention of the court. It said that a secured creditor stands outside the Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014 -6- winding up and can realize his security without the leave of the court; though if he files a suit or takes legal proceedings he will require the leave of the winding-up court. Attachment or distraint without the intervention of the court are not under the purview of winding-up proceedings (see also Industrial Credit and Investment Corpn. Of India Ltd. V. Srinivas Agencies: (1996) 4 SCC 165.
13. Therefore, the lien of a harbour authority over the vessel is a paramount lien and realization of its dues by the harbour authority by the sale of the vessel is above the priorities of secured creditors. In other words, the statutory lien of a harbour authority has paramountcy even over the claims of secured creditors in a winding up. In exercise of its right under Section 64 the appellant is, therefore, entitled to sell the vessel without the intervention of the court. In exercise of that paramount right which overrides the claims of all other creditors including secured creditors, the appellant has a right to arrest the vessel and sell it. Without the consent of the appellant, this right cannot be transferred to the sale proceeds of the vessel."
Learned counsel also relies upon a decision of the Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014 -7- Apex Court in the case of Imperial Chit Funds (P) Ltd. Vs. Income Tax Officer, Ernakulam: (1996) 8 SCC 303, in paras 6,7 and 8 of which it has been held as follows:
"6. In the judgment under appeal the High Court has referred to the legislative history and background that led to the enactment of Section 178 of the Income Tax Act, 1961. The High Court has referred to the report of the Company Law Reforms Committee which has been referred to in the decision of the Andhra Pradesh High Court, wherein the plea for priority of tax demands, particularly income tax, was dealt with and it was observed that preferential right without limit should not be conferred. The Committee‟s recommendations were not completely accepted by the legislature. That apart, the report of the Direct Taxes Administration Inquiry Committee was referred to (Srinivasan‟s book on Income Tax Vol. II, p. 345), wherein necessity was pointed out, for the Liquidator to obtain tax clearance certificate or to compel him to set aside the amounts to cover the amounts due under income tax or amounts which may become due, and it was thereafter, Section 178 of the Income Tax Act, 1961 was enacted in the present form. After referring to the above materials in paragraph 4 of the judgment, the Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014 -8- Full Bench of the High Court observed, thus:
"With respect, these decisions (Decisions of other High Courts) fail to take note of the object and purpose with which Section 178 of the Income Tax Act was put into the statute book; and the significance and the implications of "setting aside"
of an approximate amount needed to meet the tax liability of the company. These have been noticed in the Kerala and the Andhra decisions to which we shall refer. Before we do so, we may briefly indicate that the effect of Section 178(3)(b) is that the amount "set aside" by the Liquidator is marked off as outside the area of the winding-up proceedings and the jurisdiction of the winding-up court. This is the view taken by the Kerala High Court and we are in agreement with it;"
We would only add that the scope of Section 530(1)(a) is different from that of Section 178 of the Income Tax Act. Under Section 530(1)(a) all taxes which have "become due and payable" alone are entitled to preferential payment. The amount should have been crystallized into a liability. Under Section 178(2) read with Section 178(3) of the Income Tax Act, provision should be made for any tax which is then or is likely thereafter to become payable. Even the amounts which have not been crystallized into a liability, but which are "likely to become due thereafter" should be taken note of. And, we should also bear in mind, the non Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014 -9- obstante clause -- Section 178(6) of the Income Tax Act.
7. In the judgment under appeal, the Full Bench has followed the judgment of a learned Single Judge of the Kerala High Court in ITO v. Indian Traders Bank Ltd.: 1968 KLT 595 (Ker). In the said decision Raman Nair, Acting Chief Justice, a Judge with considerable experience in company law, dealt with Section 178 of the Income Tax Act and Sections 529 and 530 of the Companies Act, and observed in his characteristic style, thus:
"One wishes that Section 178 of the Income Tax Act, 1961 were more explicit, but, as I read that provision, I do not think that it affects the scheme of priority in Section 530 of the Companies Act although its effect no doubt is that the amount set aside under sub-section (3) thereof has first to be applied to the satisfaction of the tax liability and in that sense the tax liability gets priority over the other debts of the company in the same way as a secured creditor who stands outside the winding up, or whose security is redeemed under sub-section (4) of Section 47 of the Provincial Insolvency Act, 1920 read with Section 529 of the Companies Act, gets priority to the extent of the value of his security. But, although sub-section (3) of Section 178 of the Income Tax Act, which speaks of the Liquidator making „payment to secured creditors whose debts are Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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entitled under law to priority of payment over debts due to Government‟ -- the only payment I can think of by the Liquidator to a secured creditor who has not relinquished his security is a payment under sub-section (4) of Section 47 of the Provincial Insolvency Act, or to a creditor who, although he has not relinquished his security, has agreed to the Liquidator selling the property free of his encumbrance on condition of his being given the same charge over the sale proceeds -- seems to regard these as cases of priority, they are really not so much cases of priority as of the particular asset not being available for distribution among the creditors in the winding up. They stand on the same footing as, for example, trust funds. What is really available for distribution are the assets which come into the hands of the Liquidator minus the trust monies, or the encumbrance of a secured creditor, or, in a case falling under Section 178 of the Income Tax Act, the amount set aside or earmarked for the payment of the tax. For, reading sub-sections (2), (3) and (4) of that section together there can be no doubt that what the section does is to create a first charge on the amount set aside by sub-section (3) thereof for payment of the tax that might be admitted to proof. To say as the Liquidator has done that the amount is set aside only for the purpose of paying the dividends that might be declared in respect of Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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the tax liability and not the entire liability as proved in the winding up, so that the section serves only the limited purpose of ensuring that the assets of the company are not distributed beyond recall without reserving sufficient funds for the payment of dividends in respect of the tax liability which might not yet have been determined, and therefore not proved, is hardly in keeping with the wording of the section defective though it be. Sub-section (2) of the section, it may be noted, speaks of the tax payable by the company, and, sub-section (4), of the payment of the tax on behalf of the company, not of the dividends payable in respect of the tax liability. What the section contemplates is the payment of the tax eventually found due out of the amount set aside, not the payment of dividends in respect of the tax eventually found due. And, if this brings the section into conflict with Section 530 of the Companies Act, the section must prevail by reason of sub-section (6) thereof -- the question why income tax alone of all government dues should ride this high horse is not for me to answer. But, for the purposes of Section 530 of the Companies Act, the tax liability is an ordinary and not a preferential claim and it is only out of the amount set aside under sub-section (3) of Section 178 of the Income Tax Act, that the Revenue can claim payment of its debt to the exclusion of other Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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creditors."
And the Division Bench in AS No. 225 of 1968, affirming the above decision, observed thus:
"... we cannot ignore the provision in sub- section (2) of Section 178 that the amount to be notified is not only the amount for which preference is given under Section 530 of the Companies Act, 1956 but the entirety of the income tax dues of the company including that which may thereafter become payable. When we read this provision with the provision in sub- section (4) of Section 178 of the Act which makes the Liquidator personally liable for the payment of the tax which the company would be liable to pay if the Liquidator failed to give notice in accordance with sub-section (1) of Section 178, it appears to us that the provision in Section 178(3) imports much more than that was contended by counsel for the appellant. This is the view that has been taken in the judgment under appeal which, if we may say with great respect, deals with all aspects in a few sentences. We respectfully agree with the view taken by the learned Judge."
Approving the above dicta, the Full Bench has further laid stress on the crucial words occurring in Sections 178(2) and 178(3)(b) of the Income Tax Act, which behoves the Official Liquidator to "set aside the amount" equal to the amount notified by the Income Tax Officer and held that Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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these words mean "keeping separate for special purpose" and the words "set aside" or "set apart"
are synonymous with the word „appropriate‟. The Full Bench has observed in paragraph 6 of the judgment thus:
"The shades of meaning thus attached to the expression „set aside‟ convey the idea of an appropriation or an allocation of the income tax dues; with the result, that it stands outside the winding up by the Company Court -- an idea suggested in the judgment of Ag. Chief Justice Raman Nayar, confirmed by the Division Bench."
The Andhra Pradesh High Court in the decision reported in ITO v. Official Liquidator: (1975) 101 ITR 470: 1974 Tax LR 2365(AP), has taken a similar view. We are of the opinion that the judgment of the learned Single Judge of the Kerala High Court in ITO v. Indian Traders Bank Ltd.:1968 KLT 595(Ker), affirmed in AS No. 225 of 1968 and approved by the Full Bench in the judgment under appeal as also the decision of the Andhra Pradesh High Court in ITO v. Official Liquidator (1975) 101 ITR 470: 1974 Tax LR 2365(AP), lay down the law correctly. On a total view of the relevant statutory provisions, it appears to us that the Income Tax Department is treated as a "secured creditor". The decisions of the Mysore, Calcutta, Rajasthan, Gujarat and Delhi High Courts have failed to give due Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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importance to the legislative history and background that led to the enactment of the section and the crucial words occurring in Sections 178(3) and 178(4) of the Income Tax Act to the effect that the Official Liquidator "shall set aside" the amount notified by the Income Tax Officer and if it is not so done, the Official Liquidator is personally liable to pay the amount of tax which the company would be liable to pay. It should be remembered that Section 178 of the Income Tax Act occurs in Chapter XV of the Act. The object sought to be achieved by the provisions in the said chapter is "to fasten liability to pay the tax" on the income received and to catch the income at the earliest point of time and tax the same where it is found, instead of waiting for long. We, therefore, hold that the judgment under appeal does not merit interference by this Court.
8. During the course of hearing, our attention was drawn to Section 17 of the Central Sales Tax Act, 1956 which is similar to Section 178 of the Income Tax Act, 1961. We are of the view that the interpretation placed by us on Section 178 of the Income Tax Act, should govern cases arising under Section 17 of the Central Sales Tax Act, 1956 as well. But, a situation may arise where the authorities under both the Acts (Income Tax Act as well as Central Sales Tax Act) send similar orders to the Official Liquidator, in which case the Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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question of precedence may arise. In our opinion, in such cases, the priority shall be with respect to the date of receipt of the orders by the Official Liquidator."
It is urged by learned counsel for the State that the provisions of Section 17 of the Central Sales Tax Act, 1956 being in pari materia to the provisions of Section 178 of the Income Tax Act, as has been held by the Apex Court in the aforementioned Imperial Chit Funds (P) Ltd.‟s case (supra), it is evident that the Official Liquidator has failed to discharge his duty under Section 17 of the Act and the distribution of the assets is vitiated and goes to the root of the matter so far as the recovery of the dues under the Central Sales Tax Act is concerned.
Learned counsel further submits that under Section 29 of the Bihar Finance Act, 1981 it has been laid down that any amount of tax and penalty payable by the dealer or any other person under the said act shall be a first charge on the property of the dealer or such person. It is thus submitted that dues of the State Sales Tax, being a first charge on the property of the company in liquidation by virtue of statutory charge created under Section 29 of the Act, would have priority over mortgage Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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of the same property with the secured creditors and would have precedence over even existing mortgages on the date of the enactment and the payment to the secured creditors could only have been made after the sales tax dues were realized from the assets in question.
In support of the same learned counsel relies upon a decision of the Supreme Court in the case of State Bank of Bikaner & Jaipur Vs. National Iron & Steel Rolling Corporation and others: (1995) 2 SCC 19, in paras 10 and 11 of which it has been held as follows:-
"10. In the present case, the section creates a first charge on the property, thus clearly giving priority to the statutory charge over all other charges on the property including a mortgage. The submission, 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, cannot be accepted. The charge operates on the entire property of the dealer including the interest of the mortgagee therein.
11. Looked at a little differently, the statute has created a first charge on the property of the dealer. What is meant by a "first charge"? Does it have precedence over an earlier mortgage? Now, as set out in Dattatreya Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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Shanker Mote case: (1981) 2 All ER 555 a charge is a wider term than a mortgage. It would cover within its ambit a mortgage also. Therefore, when a first charge is created by operation of law over any property, that charge will have precedence over an existing mortgage."
In this regard learned counsel places strong reliance on a decision of the Supreme Court in the case of Employees Provident Fund Commissioner V. Official Liquidator of Esskay Pharmaceuticals Ltd.: (2011) 10 SCC 727, wherein the similar provisions creating first charge under S. 11 of the Employees‟ Provident Funds and Miscellaneous Provisions Act, 1952 have been held to override S. 529-A of the Companies Act in the following words in paras 48,49 and 50:-
"48. It is also important to bear in mind that even before the insertion of Sections 529(1) proviso, Sections 529(3) and 529-A* and amendment of Section 530(1), all sums due to any employee from a provident fund, a pension fund, a gratuity fund or any other fund established for the welfare of the employees were payable in priority to all other debts in a winding-up proceedings, Section 530(1)(f). Even the wages, salary and other dues payable Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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to the workers and employees were payable in priority to all other debts. What Parliament has done by these amendments is to define the term "workmen‟s dues" and to place them on a par with debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to Section 529(1). However, these amendments, though subsequent in point of time, cannot be interpreted in a manner which would result in diluting the mandate of Section 11 of the EPF Act, sub-section (2) whereof declares that the amount due from an employer shall be the first charge on the assets of the establishment and shall be paid in priority to all other debts. The words "all other debts" used in Section 11(2) would necessarily include the debts due to secured creditors like banks, financial institutions, etc. The mere ranking of the dues of workers on a par with debts due to secured creditors cannot lead to an inference that Parliament intended to create first charge in favour of the secured creditors and give priority to the debts due to secured creditors over the amount due from the employer under the EPF Act.
49. At the cost of repetition, we would emphasise that in terms of Section 530(1), all revenues, taxes, cesses and rates due from the Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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company to the Central or State Government or to a local authority, all wages or salary of any employee, in respect of the services rendered to the company and due for a period not exceeding 4 months, all accrued holiday remuneration, etc. and all sums due to any employee from a provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the employees maintained by the company are payable in priority to all other debts. This provision existed when Section 11(2) was inserted in the EPF Act by Act 40 of 1973 and any amount due from an employer in respect of the employees‟ contribution was declared first charge on the assets of the establishment and became payable in priority to all other debts. However, while inserting Section 529-A in the Companies Act by Act 35 of 1985 Parliament, in its wisdom, did not declare the workmen‟s dues (this expression includes various dues including provident fund) as first charge.
50. The effect of the amendment made in the Companies Act in 1985 is only to expand the scope of the dues of workmen and place them on a par with the debts due to secured creditors and there is no reason to interpret this amendment as giving priority to the debts due to secured creditor over the dues of provident Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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fund payable by an employer. Of course, after the amount due from an employer under the EPF Act is paid, the other dues of the workers will be treated on a par with the debts due to secured creditors and payment thereof will be regulated by the provisions contained in Section 529(1) read with Sections 529(3), 529- A and 530 of the Companies Act."
Learned counsel for the State also relies upon the similar observations made in the case of Maharashtra State Cooperative Bank Ltd. V. Assistant Provident Fund Commissioner & Ors.: (2009) 10 SCC 123.
Learned counsel further submits that the assessments made by the Sales Tax Authorities are, prima facie, evidence regarding the liability to pay sales tax and the onus to prove that the assessment is not correct, rests on the Liquidator and if he fails to discharge the onus, the assessment must stand. In support of the said proposition learned counsel relies upon a Special Bench decision of Lahore High Court in Governor General in Council through Commissioner of Income-tax, Punjab, N.W.F. & Delhi Provinces, Lahore Vs. Sargodha Trading Co. Ltd.: AIR 1943 Lahore 228, at page 233 of which it was held as follows:-
"The assessment is in my view, prima facie proof of the taxable income, but the Court can Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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go behind it if there are suspicious circumstances. The onus of proving that the assessment does not represent the real taxable income rests, however, on the liquidator."
Learned counsel also relies upon a decision of the Apex Court in the case of Allahabad Bank Vs. Canara Bank & anr: (2000) 4 SCC 406 in which it was held that even where the winding up petition is pending or a winding-up order is passed against the debtor company, the adjudication of liability and execution of the certificate in respect of debt payable to banks and financial institutions are respectively within the exclusive jurisdiction of the Debts Recovery Tribunal and the Recovery Officer and in such a case the Company Court‟s jurisdiction under Sections 442, 537 and 446 of the Companies Act stands ousted and no leave of the company Court is necessary for initiating such proceedings nor can the company Court transfer to it or otherwise interfere with such proceedings; even the priorities among various creditors can be decided only by the Debts Recovery Tribunal in accordance with Section 19(19) of the RDB Act read with Section 529-A of the Companies Act and in no other manner and the provisions of RDB Act are inconsistent with those of Companies Act. The said decision was Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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partly modified in the subsequent decision in the case of Andhra Bank Vs. Official Liquidator and another: (2005) 5 SCC 75, in paras 25 to 27 of which it was held as follows:-
"25. While determining Point (6), however, a stray observation was made to the effect that the "workmen‟s dues" have priority over all other creditors, secured and unsecured because of Section 529-A(1)(a). Such a question did not arise in the case as Allahabad Bank was indisputably an unsecured creditor.
26. Such an observation was, thus, neither required to be made keeping in view the fact situation obtaining therein nor does it find support from the clear and unambiguous language contained in Section 529-A(1)(a). We have, therefore, no hesitation in holding that finding of this Court in Allahabad Bank:
(2000) 4 SCC 406, to the aforementioned extent does not lay down the correct law.
27. The Court also wrongly placed reliance on National Textile Workers‟ Union V. P.R. Ramakrishnan: (1983) 1 SCC 228. The question which arose therein was only as regards the right of the workers to be heard in the winding-up proceeding. The said decision was, therefore, not applicable."
Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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Learned counsel for the I.D.B.I.Bank, on the other hand, submits that Companies Act provides a complete scheme for the distribution of assets of the company in liquidation and thus its provision cannot be overridden by any of the provisions of the Central Sales Tax Act or the Bihar Finance Act, 1981. Section 529-A of the Act makes the dues of secured creditors, which are pari passu with workmen‟s dues, to be paid in priority to other debts and the said provision itself has been given overriding effect by the non obstante clause holding that the same would apply notwithstanding anything contained in any other provisions of the Companies Act or any other law for the time being in force. Further, the said provision having been introduced by the Amendment Act, 1985, would certainly override the provisions as contained in Section 17 of the Central Sales Tax Act, 1957, both being central enactments.
It is further submitted that so far as the taxes payable to a Central or State Government are concerned, under Section 530(1)(a) of the Act the same have been given a lower priority than the dues of the workmen and the secured creditors and under the scheme of Section 529A only the workmen can claim pari passu rights of payment but not above the secured creditors. Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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Learned counsel submits that so far as the reliance upon the decision in Allahabad Bank Vs. Canara Bank‟s case (supra) is concerned, the same has no relevance in the present matter and the said decision, as a matter of fact, supports the stand regarding the priority of the debts of the secured creditors and workmen in terms of Section 529A of the Companies Act.
In support of his aforesaid stand, learned counsel relies upon a decision of the Supreme Court in the case of Central Bank of India Vs. The State of Kerala and others: (2009) 4 SCC 94, in paras 96, 96.6, 126 and 129 of which it has been held as follows:
"96. Section 14-A of the Workmen‟s Compensation Act, 1923, Section 11 of the Employees‟ Provident Funds and Miscellaneous Provisions Act, 1952 (for short "the EPF Act"), Section 74(1) of the Estate Duty Act, 1953, Section 25(2) of the Mines and Minerals (Regulation and Development) Act, 1957, Section 30 of the Gift Tax Act, 1958 and Section 529-A of the Companies Act, 1956 are some of the Central legislations by which statutory first charge has been created in favour of the State or workers, read as under."
............. .................... ...................
"96.6. "529-A. Overriding preferential Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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payments.--(1) Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company,--
(a) workmen‟s dues; and
(b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of Section 529 pari passu with such dues, shall be paid in priority to all other debts. (2) The debts payable under clause (a) and clause (b) of sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions."
(emphasis supplied)
126. While enacting the DRT Act and the Securitisation Act, Parliament was aware of the law laid down by this Court wherein priority of the State dues was recognised. If Parliament intended to create first charge in favour of banks, financial institutions or other secured creditors on the property of the borrower, then it would have incorporated a provision like Section 529-A of the Companies Act or Section 11(2) of the EPF Act and ensured that notwithstanding series of judicial pronouncements, dues of banks, financial Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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institutions and other secured creditors should have priority over the State‟s statutory first charge in the matter of recovery of the dues of sales tax, etc. However, the fact of the matter is that no such provision has been incorporated in either of these enactments despite conferment of extraordinary power upon the secured creditors to take possession and dispose of the secured assets without the intervention of the court or Tribunal. The reason for this omission appears to be that the new legal regime envisages transfer of secured assets to private companies.
129. If Parliament intended to give priority to the dues of banks, financial institutions and other secured creditors over the first charge created under State legislations then provisions similar to those contained in Section 14-A of the Workmen‟s Compensation Act, 1923, Section 11(2) of the EPF Act, Section 74(1) of the Estate Duty Act, 1953, Section 25(2) of the Mines and Minerals (Regulation and Development) Act, 1957, Section 30 of the Gift Tax Act, and Section 529-A of the Companies Act, 1956 would have been incorporated in the DRT Act and the Securitisation Act."
Learned counsel also relies upon a decision of a Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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learned Single Judge of the Bombay High Court in Company Application No. 341/2010 (State of Kerala Vs. The Official Liquidator of Poysha Industrial Company Ltd.), in paras 9 and 10 of which, relying upon the above decision of the Apex Court in Central Bank of India‟s case (supra), it has been held as follows:-
"9. The Supreme Court held that there was no provision in the DRT Act and the Securitisation Act by which the first charge has been created in favour of the Banks, Financial Institutions or the secured creditors on the property of the borrower. To that extent, the Appellant‟s case qua these Acts, was not accepted..............
The observations in paragraph 126 that if the parliament intended to create a first charge in favour of secured creditor on the property of the borrower then it would have incorporated a provision like Section 529-A of the Companies Act, 1956 indicate that Section 529-A in fact created a first charge in favour of the parties mentioned therein namely the secured creditors and worker in the case of a company in liquidation. These observations are reiterated in paragraph 129. It is because the DRT Act and the Securitisation Act did not contain provisions similar inter-alia to Section 529-A of the Companies Act, 1956 that the Supreme Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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Court negated the Appellants‟ contention. In fact in the paragraph 131, the Supreme Court held that the Court could have given effect to the non-obstante clauses contained in the DRT Act and the securitization Act vis-à-vis Section 26-B of the Kerala General Sales Tax Act, 1963 only if there was a specific provision in the two enactment creating the first charge in favour of the secured creditors. It is only because Parliament had not made such provision in the said two enactments, that it was held that the first charge created by the State Legislation could not be destroyed by implication or inference.
10. The debtor in the present case is a company in liquidation and the provision of Section 529,529-A and 530 of the Companies Act, 1956 are applicable and these provisions contain such a charge as held by the Supreme Court itself. In view thereof and in view of the observation of the Supreme Court, it must be held that the Applicant‟s dues do not have priority over the dues which fall within the ambit of Section 529-A of the Companies Act,1956."
Learned counsel also relies upon a decision of the Supreme Court in the case of A.I.Champdany Industries Limited Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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Vs. Official Liquidator and another: (2009) 4 SCC 486, in paras 8, 9, 15, 25, 26, 27, 29 and 30 of which it has been held as follows:
"8. The company went in to liquidation. It was directed to be wound up. The Official Liquidator indisputably took charge of both the movable and immovable assets of the Company. The fact that the Company went in liquidation was given due publicity. The respondent municipality did not file its claim before the Official Liquidator. It did not stand in queue to get the same recovered and/or adjusted from the sale proceeds.
9. Indisputably the manner in which the claim of a creditor in respect of the dues of the company in liquidation is to be realised has been laid down in Sections 529 and 529-A of the Companies Act, 1956.
15. The respondent municipality was an unsecured creditor. 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 realisation of their dues from the sale proceeds.
25. The Companies Act in relation to winding Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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up of proceeding is otherwise a special law. While distributing the assets between the creditors and unsecured creditors, the provisions of Sections 529 and 530 must be complied with.
26. 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. In terms of Section 456 thereof once an order for winding up is made the liquidator has to take into custody the properties, effects and actionable claims to which the company is or appears to be entitled. Section 528 provides that all debts payable on a contingency and all claims against the company, present or future are admissible to proof 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 persons adjudged insolvent. Section 530 provides for certain priorities to secured creditors and other unsecured creditors.
27. Once the property is sold, the assets of the company are required to be distributed to the creditors in order of preference. As the respondent municipality was not a secured creditor, the impugned judgment cannot be sustained.Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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29. Dues of the municipality would also not even otherwise come within the purview of the Crown debt. Even a Crown debt could be discharged only after the secured creditors stand discharged.
30. In Union of India v. Sicom Ltd.:( 2009) 2 SCC 121 it is stated: (SCC pp. 126-27, paras 9-
10) "9. Generally, the rights of the Crown to recover the debt would prevail over the right of a subject. Crown debt means the „debts due to the State or the King; debts which a prerogative entitles the Crown to claim priority for before all other creditors‟.
[See Advanced Law Lexicon by P. Ramanatha Aiyar (3rd Edn.) p. 1147.] Such creditors, however, must be held to mean unsecured creditors. Principle of Crown debt as such pertains to the common law principle. A common law which is a law within the meaning of Article 13 of the Constitution is saved in terms of Article 372 thereof. Those principles of common law, thus, which were existing at the time of coming into force of the Constitution of India are saved by reason of the aforementioned provision. A debt which is secured or which by reason of the provisions of a statute becomes the first Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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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 which is an unsecured one.
10. It is trite that when Parliament or a State Legislature makes an enactment, the same would prevail over the common law. Thus, 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. To achieve the same purpose, Parliament as also the State Legislatures inserted provisions in various statutes, some of which have been referred to hereinbefore providing that the statutory dues shall be the first charge over the properties of the taxpayer. This aspect of the matter has been considered by this Court in a series of judgments."
Learned counsel also relies upon a decision of the Kerala High Court in the case of Giovanola Binny Ltd. (In Liquidation) In re: (1990) 182 ITR 134, at pages 139 and 140 of which it has been held as follows:-
"In Food Controller V. Cork [1923] AC 647,669-76, the House of Lords again dealt with the question of priority of Crown debts. Lord Wrenbury clarified the position as Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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follows:
"With this preface, I go on to consider, first, what is the prerogative or (if there be more than one) what are the prerogatives of the Crown, and, secondly, what is the operation of the statute in respect of them.
The Crown, by virtue of its prerogatives, is entitled to say: „In payment of debt I have the right to come first and to enforce that right I can proceed by way of writ of extent. I should not myself describe this as two prerogative rights, of which one is larger than the other, but rather as one prerogative right and a prerogative remedy to enforce the right, I can understand that the Crown might surrender the latter, while retaining the former, but not that it could surrender the former while retaining the latter. If the right to come first is surrendered, the prerogative remedy to enforce that right by writ of extent must have been surrendered also. The question for decision, therefore, I think is, and is only, whether the Crown has surrendered the prerogative right to come first.
The effect of section 209 is as follows: By section 209, sub-section (1)(a), certain Crown debts, which I will call the specified Crown Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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debts, are brought into the class of debts identified by section 209(1)(a), (b), (c), (d). Debts of this class are to be paid in priority to all other debts, in priority, therefore, to (amongst others) the unspecified Crown debts. Subject to the priority right of this class, all liabilities are by section 186 to be satisfied pari passu. The specified Crown debts, therefore, are to be paid pari passu with the other debts in the class created by section 209(1), and in priority to all other debts, whether Crown debts or not, which are not in that class. Further, all debts, whether Crown debts or not which are not in that class are to be paid pari passu after satisfying the above priority. This is the statutory administration of the assets, and to this the Crown has given its assent.
It follows from what I have said that the Crown is no longer in a position to say „I come first‟. It does not come first. Some debts have been raised by section 209 (1) to a position in which they rank with the specified Crown debts, and that class comes first.
Other-debts have been raised by section 186 to a position in which they rank with the unspecified Crown debts, and these are to be postponed and to be paid pari passu.Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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By assenting to an Act which altered the rights of the Crown in manner above stated, the Crown surrendered its prerogative right to come first, and necessarily surrendered also its prerogative right to enforce by a writ of extent a right of priority which existed no longer."
In the light of the aforesaid decisions it is urged by learned counsel for the IDBI Bank that neither the provisions of Section 17 of the Central Sales Tax Act nor Section 29 of the Bihar Finance Act, 1981 are of any assistance to the applicant in the matter of winding-up proceedings as the rights created thereafter do not stand on higher footing than the creditors and workmen once the company goes into liquidation.
It is further submitted that the Imperial Chit Funds case (supra) sought to be strongly relied upon by the applicant also does not support its stand as in the said case only the rights of the Income Tax Department vis-à-vis unsecured creditors was under
consideration and it does not stand on higher footing than the claims of the secured creditors and the workmen. In this context learned counsel seeks support from a decision of a learned single Judge of the Gujarat High Court in the case of Assistant Commissioner of Income Tax V. Official Liquidator of Minal Oil Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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and Industries Ltd. and others: (2007) 136 Company Cases 399 (Guj), in paras 11 and 12 of which it has been observed as follows:-
"11. Therefore, even considering the proviso to section 178(3) of the Act, the official liquidator is not debarred from making any payment to secured creditors, whose debts are entitled under the law to priority of payment over debts due to the Government on the date of liquidation. Thus, the said provision itself provides that payment can be made to secured creditors having priority in law over the Government. Therefore, the contention on behalf of the applicant that on notifying the claim by the Assessing Officer under section 178(2) of the Act, the official liquidator is required to set apart the said amount and only thereafter the balance amount can be disbursed amongst other secured creditors, cannot be accepted. If such interpretation is given, the same would be contrary to the proviso to sub-section (3) of Section 178 of the Act. Under the circumstances, the contention on behalf of the applicant to that effect is required to be rejected. If section 529A of the Companies Act, 1956, is considered, it is clear that it has an overriding effect. Section 529A of the Companies Act Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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was brought in by an amendment and was inserted in the Companies Act by Act of 1985. The said section makes it clear that notwithstanding anything contained in any other provisions of this Act or any other law for the time being in force, dues of the workers and the debts due to secured creditors to the extent such debts rank under clause ( c) of the proviso to sub-section (1) of section 529 pari passu with such dues shall be paid in priority to all other debts. It is also required to be noted at this stage that so far as the dues of the company towards the tax liabilities is concerned, the same would come within section 530(1)(a) of the Companies Act and as per section 530(1) of the Companies Act, the said dues as envisaged under section 530(1)(a), would be subject to the provisions of section 529A and the said dues are to be paid in priority to all other debts subject to the provisions of Section 529A of the Companies Act. Therefore, first, the amount realized, is to be disbursed to the creditors, as mentioned under section 529A of the Companies Act and they would have a preferential payments. Therefore, also considering sections 529A and 530(1)(a) of the Companies Act read with the proviso to section 178(3) of the Act, the workmen‟s Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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dues and the debts due to secured creditors to the extent such debts rank under clause (c ) of the proviso to sub-section (1) of Section 529 will have a pari passu and shall be paid in priority to all other debts. Therefore, the contention on behalf of the applicant that the dues of the Income-tax Department would have a priority over the secured creditors cannot be accepted and has no substance and the same is required to be rejected.
12. So far as the reliance placed upon the decision of the hon‟ble Supreme Court in the case of Imperial Chit Funds (P) Ltd. [1996] 219 ITR 498, {1996} 86 Comp. Cas 555;
AIR 1996 SC 1887 by learned counsel appearing on behalf of the applicant is concerned, as stated above, before the hon‟ble Supreme Court, the issue was with regard to inter se claim of the creditors under section 530(1) of the Companies Act and the issue with regard to priority and/or preference over the secured creditors as envisaged under section 529A of the Companies Act, was not there at all. Thus, the question before the hon‟ble Supreme Court was whether the claim of the tax would have precedence over the claim of other creditors under section 530 of the Companies Act in view of the Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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provisions of sub-section (5) of section 530 of the Companies Act and it is to that extent that the hon‟ble Supreme Court held that an order passed under section 178 of the Act will prevail over the rights of other unsecured creditors under section 530 of the Companies Act and therefore, the decision of the hon‟ble Supreme Court in the case of Imperial Chit Funds (P.) Ltd. [1996] 219 ITR 498; [1996] 86 Comp. Cas 555; AIR 1996 SC 1887 is not of any assistance to the applicant. Identical questions came to be considered by the Bombay High Court and the Kerala High Court in the cases of Syndicate Bank [1999] 98 Comp Cas 487; AIR 1999 Bom 243, Venad Pharmaceuticals and Chemicals Ltd. ( in liquidation), In re [2003] 114 Comp Cas 185 respectively and considering the decision of the hon‟ble Supreme Court in the case of Imperial Chit Funds (P.) Ltd. [1996] 219 ITR 498; [1996] 86 Comp Cas 555; AIR 1996 SC 1887 as well as the decision of the Andhra Pradesh High Court in the case of ITO V. Official Liquidator [1975] 101 ITR 470; [1976] 46 Comp Cas 46, the Bombay High Court and the Kerala High Court have held that rights of the secured creditors and the workers as set out under section 529A of the Companies Act would override the claim Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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of the tax authorities in respect of order made under section 178 of the Act. This court is in full agreement with the decisions of the Bombay High Court and Kerala High Court by which the contention of the Income-tax Department that considering the provisions of section 178 of the Act, the dues of the Income-tax Department would have a preference over the secured creditors and the workers, has been negatived."
The Official Liquidator, apart from adopting the submission of learned counsel for the IDBI Bank, submits that in the present matter the winding-up order has been passed on the recommendation of the BIFR. So far as the report of the Chartered Accountant is concerned, the same was for the purpose of prosecution and that any of the amounts disclosed in the Chartered Accountant‟s report has not been admitted by the O.L. and any admission of the ex-Management in their affidavit can be of no avail with respect to the company in winding-up. It is submitted that under Section 528 of the Companies Act, debts of every type has to be admitted into proof.
The Official Liquidator also strongly relies upon the proviso to sub-section (3) of Section 17 of the Central Sales Tax Act, 1956 submitting that the said proviso makes it clear that Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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nothing contained in the said sub-Section with regard to not parting with the assets of the company or the property in his hands unless he sets aside an amount equal to the amount notified by appropriate authority, shall debar the liquidator from parting with such assets or properties in compliance of any order of a Court or for the purpose of payment of tax payable by the Company under the Act or making any payment to the secured creditors whose debts are entitled under law to priority of payment over debts due to Government on the date of liquidation or for meeting reasonable costs and expenses of the winding up of the company. It is thus submitted that the provisions of the Central Sales Tax Act themselves make it clear that priority of secured creditors has not been disturbed and the liquidator is not debarred from making payments to the secured creditors and, accordingly, the workmen also whose dues stand pari passu with that of the secured creditors. Thus, it is submitted by the O.L. that the payment of the amount of Rs. 99/- lacs from the secured assets of the company in no way contravenes the provisions of Section 17 of the Central Sales Tax Act.
The O.L. further submits that any dues of tax of the State or the Central Government do not stand above the scrutiny of the company Court and after an assessment order is made by the Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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taxation authorities, it is open for determination by the liquidation court for the purpose of safeguarding the interest of the company and its creditors under the Companies Act. In support of the same, he relies upon a Constitution Bench decision of the Apex Court in the case of S.V. Kandeakar v. V.M. Deshpande, : AIR 1972 SC 878, in para 8 of which it has been held as follows:
"8. The argument that the proceedings for assessment or re-assessment of a company which is being wound up can only be started or continued with the leave of the liquidation Court is also, on the scheme both of the Act and of the Income-tax Act, unacceptable. We have not been shown any principle on which the liquidation court should be vested with the power to stop assessment proceedings for determining the amount of tax payable by the company which is being wound up. The liquidation Court would have full power to scrutinize the claim of the revenue after income- tax has been determined and its payment demanded from the liquidator. It would be open to the liquidation court then to decide how far under the law the amount of Income-tax determined by the Department should be accepted as a lawful liability on the funds of the company in liquidation. At that stage the winding up Court can fully safeguard the interests of the company and its Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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creditors under the Act. Incidentally, it may be pointed out that at the bar no English decision was brought to our notice under which the assessment proceedings were held to be controlled by the winding up Court. On the view that we have taken, the decision in the case of Seth Spinning Mills Ltd. (In Liquidation) (1962) 46 ITR 193 (Punj) (supra) and the Mysore Spun Silk Mills Ltd. (In Liquidation) (1968) 68 ITR 295 (Mys) (supra) do not seem to lay down the correct rule of law that the Income-tax Officers must obtain leave of the winding up court for commencing or continuing assessment or re-assessment proceedings."
It is submitted that the aforesaid observations clearly go to show that the amounts due upon assessments made by the tax authorities do not stand on a higher footing than the provisions of the Companies Act with regard to the rights of different categories of creditors.
In this regard it is submitted that in the present matter on 1.8.1997 notice of the petition was advertised under Rule 99 read with Rule 44 of the Company (Court) Rules, 1959 which was a notice for the public at large including the State applicant but it had not chosen to appear and protect its right under the provisions of the Bihar Finance Act or Central Sales Tax Act and thus having missed the bus, it cannot, at this belated stage, invoke the Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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jurisdiction of this Court for overcoming its own laches.
It is further submitted that after the advertisement published on 31.5.2008 claims were invited but at that stage also the applicant did not chose to appear and make its claim.
Moreover it is the specific stand of the Official Liquidator that the Sales Tax Department does not have any priority over and above the secured creditors under the provisions of the Companies Act and the provisions of the Finance Act cannot override the provisions under the Companies Act and thus the amounts which were realized on sale of the properties which were secured to the secured creditors have rightly been distributed pari passu among the secured creditors and the workmen, the dues of the secured creditors being to the tune of Rs. 11,66,65,088/- whereas the payment made to them was Rs. 99/- lacs.
In support of his stand the O.L. also relies upon a decision of a Division Bench of Kerala High Court in K.T.C.Tyres (India) Limited ( in liquidation) In re: (2003) 114 Company Cases 185, at page 189 of which it has been held as follows:
"We have to examine the claim of the Income Tax Department vis-à-vis Section 529-A of the Companies Act. Section 529A was inserted in the Companies Act by Act 35 of 1985. Ss. 529- A and 530 confer special rights and benefits on Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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the workmen of the undertaking. Workmen get rights pari passu with those of the secured creditors on the assets of the company in liquidation. Purpose of the Section is to ensure that workmen should not be deprived of their rights in the event of liquidation of the company. Section 529-A has employed a non-
obstante clause which says that "notwithstanding anything contained in any other provision of the Companies Act or any other law for the time being in force". The non obstante clause whittles down the priority of even the crown debts. It is the general concern for the interest of the workmen that is saved by the Apex Court in the decision in Workmen of Rohtas industries Ltd. V. Rohtas Industries Lid. (1987) 62 Comp. Cases 872). The Apex Court held that subsistence and living of the workers is of paramount importance and has to rank with highest priority. Their wages and emoluments upto the date of closure of the company will rank in priority over the secured creditors. In Giovanola Binny Ltd.‟s case, supra (1990) 67 Comp. Cases 441, this Court has held that tax on capital gains cannot be claimed in preference to dues of Bank and claims of workmen."
Learned counsels for the State Bank of India and Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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other secured creditors adopt the submissions made by learned counsel for the IDBI Bank and the O.L. I have considered the submissions of learned counsels for the parties and the O.L. It may at this stage be appropriate to quote the relevant provisions of the Companies Act, namely, Section 529(1) and (2), 529-A and 530(1)(a) which are as follows.
"529. Application of insolvency rules in winding up of insolvent companies.-(1) In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to-
(a) debts provable;
(b) the valuation of annuities and future and contingent liabilities; and (c ) the respective rights of secured and unsecured creditors; as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent:
Provided that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen‟s portion therein, and, where a secured creditor, instead of relinquishing his security and proving his debt, opts to realize his security,-Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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(a) the Liquidator shall be entitled to represent the workmen and enforce such charge;
(b) any amount realized by the Liquidator by way of enforcement of such charge shall be applied rateably for the discharge of workmen‟s dues; and (c ) so much of the debt due to such secured creditor as could not be realized by him by virtue of the foregoing provisions of this proviso or the amount of the workmen‟s portion in his security, whichever is less, shall rank pari passu with the workmen‟s dues for the purposes of section 529-A. (2) All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the winding up, and make such claims against the company as they respectively are entitled to make by virtue of this section.
Provided that if a secured creditor instead of relinquishing his security and proving for his debts proceeds to realize his security, he shall be liable to pay his portion of the expenses incurred by the Liquidator (including a provisional Liquidator, if any) for the preservation of the security before its Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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realization by the secured creditor.
Explanation.- For the purposes of this proviso, the portion of expenses incurred by the Liquidator for the preservation of a security which the secured creditor shall be liable to pay shall be the whole of the expenses less an amount which bears to such expenses the same proportion as the workmen‟s portion in relation to the security bears to the value of the security."
"529-A - Overriding preferential payment.- Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company--
(a) workmen‟s dues; and
(b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of section 529 pari passu with such dues, shall be paid in priority to all other debts.
(2) The debts payable under clause (a) and clause (b) of sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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S.530. Preferential payments.- (1) In a winding up subject to the provisions of section 529A, there shall be paid in priority to all other debts--
(a) all revenues taxes, cesses and rates due from the company to the Central or a State Government or to a local authority at the relevant date as defined in clause (c) of sub- section (8), and having become due and payable within the twelve months next before that date;"
The provisions of Section 17 of the Central Sales Tax Act, 1956 is also quoted below:-
"S.17.-Company in liquidation. (1) Every person--
(a) who is the liquidator of any company which is being wound up, whether under the orders of a court or otherwise; or
(b) who has been appointed the receiver of any assets of a company, (hereinafter referred to as the liquidator) shall, within thirty days after he has become such liquidator, give notice of his appointment as such to the appropriate authority.
(2) The appropriate authority shall, after making such inquiry or calling for such Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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information as it may deem fit, notify to the liquidator within three months from the date on which he receives notice of the appointment of the liquidator the amount which, in the opinion of the appropriate authority would be sufficient to provide for any tax which is then, or is likely thereafter to become, payable by the company. (3) The liquidator shall not part with any of the assets of the company or the properties in his hands until he has been notified by the appropriate authority under sub-section (2) and on being so notified, shall set aside an amount equal to the amount notified and, until he so sets aside such amount, shall not part with any of the assets of the company or the properties in his hands:
Provided that nothing contained in this sub- section shall debar the liquidator from parting with such assets or properties in compliance with any order of a court or for the purpose of the payment of the tax payable by the company under this Act or for making any payment to secured creditors whose debts are entitled under law to priority of payment over debts due to Government on the date of liquidation or for meeting such costs and expenses of the winding up of the company as are in the opinion of the appropriate authority reasonable. (4) If the liquidator fails to give the notice in Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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accordance with sub-section (1) or fails to set aside the amount as required by, or parts with any of the assets of the company or the properties in his hands in contravention of the provisions of sub-section (3), he shall be personally liable for the payment of the tax which the company would be liable to pay:
Provided that if the amount of any tax payable by the company is notified under sub-section (2), the personal liability of the liquidator under this sub-section shall be to the extent of such amount.
(5) Where there are more liquidators than one, the obligations and liabilities attached to the liquidator under this section shall attach to all the liquidators jointly and severally. (6) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force."
It is also relevant to quote Section 29 of the Bihar Finance Act, 1981 which is as follows:-
"29. Tax to be first charge on property.- Notwithstanding anything to the contrary contained in any law for the time being in force any amount of tax and penalty, if any, payable by a dealer or any other person under this part Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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shall be a first charge on the property of the dealer or such person."
The bulk of the dues claimed by the State applicant is under the Central Sales Tax Act to the tune of Rs. 37,24,377.30 plus interest thereon and a lesser amount of Rs. 1,40,576.68 under the Bihar Finance Act, 1981. The dues relate to the period starting from the financial year 1993-94 till 1996-97 for which certificate cases were filed in the year 2000 and 2001 by the Sales Tax Department.
So far as the dues under the Central Sales Tax Act are concerned, the State-applicant essentially relies upon the decision of the Apex Court in Imperial Chit Fund‟s case (supra). What was held in the said decision was that the provision of Section 178 of the Income Tax Act, which is pari materia with the provision of Section 17 of the Central Sales Tax Act, 1956, goes beyond the provisions of Section 530(1)(a) of the Companies Act and enjoins upon the O.L. not only to give notice of his appointment to the Tax Department within 30 days of his appointment but also to set aside the amount equal to the amount notified by the Tax Department within three months of receipt of such notice and the amounts to be set apart do not include only the taxes which become due and payable within 12 months of the Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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provisional date of appointment of the O.L. in the winding-up as provided in Section 530(1(a), but also such taxes which is then or is likely thereafter to become payable. It was thus held that the provisions of Section 178 of the Income Tax Act and corresponding provisions of Section 17 of the Central Sales Tax Act have the effect of treating the Department as practically a secured creditor.
It is evident that the question of setting apart any amount would only arise out of the sale of any assets which are not the asset of secured creditor who has not relinquished the security. Thus it is no part of the duty of the O.L. to set apart any amount realized out of the assets which are the security of a secured creditor who has not relinquished the security and proceeded to realize the same. In such case the role of the O.L. is only to see that the pari passu charge of the workmen on such assets to be realized by the secured creditors are protected for the purpose of realizing the workmen‟s dues. It is nowhere stated in Imperial Chit Funds‟s case (supra) that even such assets of the secured creditors are to be sold for the purpose and the amounts realized from such assets of the secured creditors which are sold are also to be kept apart. As a matter of fact, as rightly submitted by the O.L., it has been made clear in the proviso to sub-section Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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(3) of Section 17 of the CST Act that the said sub-section does not debar the O.L. from making any payment to the secured creditors. As a matter of fact, the so called payment by the O.L. to the secured creditors is not really a payment to the secured creditors. It is only distribution of the money among the secured creditors of the security asset on which they have the charge and with regard to which they have right to stay outside the winding- up proceedings by not relinquishing their security, so that the same is paid to more than one secured creditors proportionately and also safeguarding the workmen‟s dues. The said position is clear from the decision of the Apex Court in Central Bank of India‟s case (supra) in which it was clearly laid down that any first charge on the asset of the company provided by the provisions of the State Sales Tax Act could not override specific provisions to the contrary created by Section 529A of the Companies Act. The same is also reflected from various decisions, particularly the decision of the Bombay High Court in the case of Poysha Industrial Company Ltd.(supra) and of the Gujrat High Court in Minal Oil & Industries Ltd. case (supra).
In the present winding-up proceedings it is evident that the secured creditors have not relinquished their security but have proceeded to realize the same under the aegis of Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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the Liquidator who was acting essentially for protecting the interest of the workmen and for recovery of the expenses for the preservation of the said secured assets. It is thus evident that the secured creditors in terms of the provisions of the Companies Act had merely obtained proportionate interest in the security and neither Section 17 of the Central Sales Tax Act nor Section 530(1)(a) of the Companies Act has the effect of overriding the interest of the secured creditors and the workmen in terms of Section 529A read with Section 529 of the Companies Act over such secured assets.
The decision of the Apex Court in the case of State Bank of Bikaner and Jaipur (supra) was not at all in relation to the winding-up proceedings and thus the same could be of no assistance for the recovery of State sales tax dues under the provisions of Section 29 of the Bihar Finance Act, 1981. Once the winding-up proceedings have started such provisions of State enactments cannot override the provisions of winding-up contained in the Companies Act which is a special enactment for the said purpose by the Union Parliament.
The Supreme Court‟s decision in Esskay Pharmaceuticals case was based upon the special provisions contained in S. 11(2) of the Employees Provident Funds & Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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Miscellaneous Provisions Act which is a Parliamentary enactment and a social welfare legislation intended to protect the interest of a weaker section of society and was therefore given a liberal and purposive interpretation keeping in view the directive principles of State Policy contained in Articles 38 and 43 of the Constitution. No such principles of interpretation can be invoked in favour of Section 17 of the Central Sales Tax Act or Section 29 of the Bihar Finance Act.
The Board of Trustees, Port of Mumbai case (supra), relied upon by learned counsel for the State, was based upon the principle that the statutory lien of a harbour authority has paramountcy even over the claims of secured creditors in a winding up and in exercise of that paramount right under Section 64 of the Major Port Trusts Act, 1963 the harbour authority has a right to arrest and sell the vessel without any leave of the winding up Court. No such paramount lien is conferred upon the Sales Tax authorities.
At this stage I may also consider the submission made by learned counsel for the State-applicant that the sales tax dues do not form part of the asset of the company as having been recovered by the dealer from the purchasers. The provisions of the Companies Act under Section 531(1)(a) themselves clearly go Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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to show that the tax to be recovered by the State Government whether they are in the nature of direct taxes or taxes recovered by the Central Government of any nature whether direct or indirect have to be paid from the assets of the company and further all revenue, taxes and rates levied by the State Government or local authorities are in the nature of indirect taxes and to accept the proposition that such taxes do not form the asset of the company would run contrary to the provisions of Section 530(1)(a) of the Act. The said submission has therefore to be rejected as wholly untenable in view of the relevant provisions of the Companies Act. The said proposition is also contrary to what has been held by the Supreme Court in para 62 of the judgment in Maharashtra State Cooperative Bank case (supra), relied upon by learned counsel for the State-applicant.
Thus, in the light of the aforesaid discussions, this Court does not find any force in the submission of learned counsel for the State-applicant. The application is, accordingly, dismissed.
At this stage however, I may point out that the provision of Section 178 of the Income Tax Act and the pari materia provision of Section 17 of the Central Sales Tax Act, 1956 clearly makes it obligatory upon the liquidator, including Patna High Court COM PET No.11 of 1996 (82) dt 17.09.2014
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the Official Liquidator, to notify the concerned appropriate authorities of the said Tax Departments regarding his appointment within 30 days of the appointment to enable them to notify the amounts of taxes which were then or likely thereafter to become payable, within three months so that he may set apart the said amount from the assets in his hand. These being statutory directions with the consequence of personal liability of the liquidator, including the Official Liquidator, on non- compliance of the same, it is the duty of the O.L. in all matters to notify the concerned Income Tax Authority or the Central Sales Tax authority in terms of the said provisions. It has been informed by the O.L. that no such notices are being issued to the tax authorities. It being a statutory requirement, the O.L. must ensure that in all pending matters forthwith and in future winding-up matters within 30 days of his appointment notices are duly issued to the concerned Income Tax authority and Central Sales Tax authority to enable them to act in terms of their statutory obligations to notify the liquidator about the taxes due.
(Ramesh Kumar Datta, J) S.Pandey/-
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