Karnataka High Court
State Bank Of Mysore, B.H. Road, Shimoga vs Provident Fund Commissioner, ... on 27 January, 1998
Equivalent citations: 1998(6)KARLJ566
Author: G. Patri Basavana Goud
Bench: G. Patri Basavana Goud
ORDER
1. The third respondent-M/s. Devi Sugars Limited (as at Annexure-A), pledged the sugar and has availed cash credit facility from the petitioner-State Bank of Mysore to the extent of Rs. 20 crores. The said third respondent has also fallen in arrears in the matter of payment of provident fund contributions under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 ('Act', for short). Respondents 1 and 2, namely, the Provident Fund Commissioner and the Recovery Officer, therefore proceeded to attach the sugar of the third respondent so pledged to the petitioner in the process of recovering the provident fund contributions. In this writ petition under Article 226 of the Constitution, the petitioner-Bank urges that it has got priority over the claim of respondents 1 and 2 under the Act. The Bank contends that the attachment of the godowns wherein the sugar bags are there, effected by respondents 1 and 2 in respect of the said provident fund arrears, is illegal. In this writ petition, it seeks a direction in that regard.
2. Sri Hari Krishna S. Holla, learned Counsel for respondents 1 and 2, relying upon Section 11(2) of the Act urges that respondents 1 and 2 have prior claim in respect of the provident fund contributions, and, as such, the amounts due to them has to take precedence over the claim of the petitioner-Bank notwithstanding the pledge referred to earlier. Sri Holla refers to Section 8B of the Act. It enables the Recovery Officer to proceed to recover the amounts due under the Act by attachment and gale of the property of the establishment. Sri Holla urges that the third respondent pledged to the petitioner-Bank its property, and, that by virtue of Section 11(2) of the Act, first respondent's claim having priority over that of the petitioner, the second respondent-Recovery Officer under Section 8B of the Act is entitled to proceed against the said property of the third respondent-establishment in the hands of the petitioner. Sri Holla urges further that even as per Annexure-A, there is no schedule mentioned therein, and as such, there is no proper document with regard to the pledge.
3. The question as to whether, for want of schedule, the document at Annexure-A is an invalid document, is to be left to be decided by the authorities concerned in an appropriate civil proceeding. I will proceed on the footing that the sugar of the third respondent is pledged to the petitioner-State Bank in respect of availing cash credit facility to the extent of Rs. 20 crores.
4. Sri S.G. Bhat, learned Counsel for the petitioner, urges that the second respondent should proceed under Section 8B as against the property of the third respondent-establishment, and that, after the pledge, the sugar concerned ceases to be the property of the establishment, and, as such, the priority contemplated under Section 11(2) of the Act has no application to the facts of the case in respect of the property which has ceased to be the property of the establishment.
5. Section 11(2) of the Act inter alia provides that if any amount is due from the employer, whether in respect of the employees' contribution deducted from the wages of the employees, or the employer's contribution, the amounts so due 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. There is no doubt at all that if the sugar pledged to the petitioner-Bank can be called the asset of the third respondent, then, Section 11(2) gives priority to the amounts due to the first respondent. Section 8B of the Act also inter alia provides for the Recovery Officer to attach and sell movable or immovable property of the establishment. Here again, if the sugar pledged can be called the property of the third respondent-establishment, then, Section 8B would come into play. The question that, therefore arises is as to whether the sugar concerned continues to be the property of the third respondent-establishment even after the pledge.
6. A Full Bench of this Court in Chief Controlling Revenue Authority in Karnataka v The Manager, Advances, State Bank of Mysore, Bangalore, was dealing with the effect of pledge but in a different context. The following observations which would be material for the present purpose would be relevant.
"40. Similarly, by deed of hypothecation, the NGEF has pledged its machinery and plant with the Bank while retaining possession of the same. But then, at law, the owner in possession is only as bailee as the pledger and pledgee is the real owner. This becomes clear having regard to Section 172 of the Contract Act. A passage from paget on the Law of Banking (Eighth Edition at page 566) which is as follows:
"This difficulty in the way of the owner's being in a position to pledge goods in his own possession has been circumvented by the institution of letters of lien or letters of hypothecation.
The distinction seems a narrow one, but it is clear that an owner, though he cannot himself pledge, may, by agreement, change his possession into that of bailee for the pledgee, and that the instrument constituting him such is one used in the ordinary course of business as proof of the possession or control of goods within the exception to the Bills of Sale Act, and takes the goods out of his order and disposition".
From the above it is clear that the Bank is in a position to treat the securities in its possession as properties of the trust it has authored".
The Full Bench thus held that the pledgee would be the real owner in respect of the machinery and plant pledged by NGEF. Though NGEF had retained possession of the said plant and machinery, it was explained that the pledger would continue to be in possession of the property only as bailee, and the pledgee would be the real owner.
7. In Bank of Bihar v The State of Bihar and Others, the Supreme Court, in paragraph 7 of the judgment, pointed out that -- "Pawnee has special property and a Hen which is not of ordinary nature on the goods and so long as his claim is not satisfied, no other creditor of the pawner has any right to take away the goods or its price".
8. In the light of the position of law as enunciated in the above decisions, I must conclude that the sugar pledged ceased to be the property of the third respondent-establishment, and, as such, the second respondent-Recovery Officer could not have proceeded against it under Section 8B of the Act terming it as the property of the third respondent-establishment. Since the priority under Section 11(2) of the Act can be claimed only in respect of the assets of the third respondent, the said provision is not available to be pressed into service in the present case for the reason that the pledged sugar cannot be called the asset of the third respondent in the light of the position settled particularly by the Full Bench of this High Court in the decision referred to above.
9. Petition allowed. Action of respondents 1 and 2 with regard to attachment of godowns 4 and 5 in Tungabhadra Sugar Factory premises is held illegal.