Karnataka High Court
Doddaballapur Spinning Mills Pvt. Ltd. ... vs Regional Provident Fund Commissioner ... on 19 August, 2005
Equivalent citations: (2006)ILLJ835KANT, 2006 (1) AIR KAR R 472
Author: N. Kumar
Bench: N. Kumar
ORDER N. Kumar, J.
1. These two writ petitions are taken up for consideration together, as common question of law is involved though the impugned orders are different.
2. The petitioner is a Textile Spinning Mills having around 146 permanent workmen on its rolls. They are in the business for the last 37 years. Because of recession in the textile industry it is facing severe financial crisis for the last seven years. The petitioner owes the Corporation Bank Rs 72,95,000-00. They are unable to clear the ESI and PF dues. The accumulated loss of the company is to the tune of Rs. 2,02,67,767-00 as on March 31, 2003. The Company stopped production intermittently for want of raw materials. It could not run the mill, with the result production was stopped totally from March, 1999. They approached the Board for Industrial and Financial Reconstruction (for short BIFR). Their application was registered and the petitioner was declared as a sick industrial company under the provisions of Sick Industrial Companies (Special Provisions) Act, 1985 (for short, the 'Act'). The petitioner submitted rehabilitation scheme. In the scheme submitted the petitioner accepted the Employer's dues payable under the provisions of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (for short, EPF Act), for the period May 2001 to May 2003 in a sum of Rs. 16,94,478-00. In fact, the petitioner has remitted the employees share of the contributions to the first respondent, corporation.
3. The BIFR has given direction to the Provident Fund Commissioner to receive the above said amount by way of 60 instalments payable for five years at the rate of 8% interest per annum. The third respondent, Regional Provident Fund Commissioner, who was a party before the BIFR and to the order, passed a prohibitory order against the petitioner and its supplier namely, Vinpd Marketing Private Limited under the provisions of the EPF Act, not to release any amount to the petitioner if it is due from the said supplier. The amount due according to the third respondent is Rs. 1,01,552-00. The aforesaid prohibitory order was based on the order dated May 19, 2003 towards P. F. dues for the period from January 2002 to April, 2003 and July 31, 2003 determining Rs. 360,395-00 and for the period August 2002 to December 2002 in a sum of Rs. 4,26,381- 00 respectively. Aggrieved by this action of the respondent as per Annexures-F, G and H the petitioner has preferred the Writ Petition No. 46277 of 2003 seeking quashing of the same. The amount claimed in Writ Petition No. 52330/2003 is in respect of amounts due in pursuance of an order under Section 14-B of the Act. The petitioner contends that the respondents are estopped in law to execute the orders passed by them in view of Section 22 of the Act, without the consent of the Board. As such, they have sought for quashing of the same.
4. The respondents have filed counter contending that petitioners have not challenged the orders passed under Section 7-A of the EPF Act and when they did not comply with the said orders, they have passed impugned orders under Section 8-B to 8-G for recovery of the said amount. There is no provision under the Act which prevents the respondents from recovering the said amount. Even in the scheme, the petitioners are granted only 12 instalments and not 60 as contended by mem. Therefore, the impugned orders are legal and valid.
5. The learned counsel for the petitioner Sri. K. Prabhakar Rao, contends that Section 32 of the Act which has a non-obstante clause, makes it clear that the provisions of the Act over-rides all law, except Foreign Exchange Regulation Act and the Urban Land (Ceiling and Regulation) Act, 1976. Section 22 of the Act mandates that no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company which is declared sick under the Act can be initiated without the consent of the Board. In that view of the matter the impugned orders passed by the authorities, to execute the order passed under Section 7-A of the EPF Act is illegal and' therefore to be quashed.
6. Per contra, Sri V. Padmanabha Kedilaya, learned counsel appearing for the respondents contend, that the EPF Act is a beneficial piece of legislation, a measure of social security, a welfare legislation. If it is to be held that the provisions of the Act has a over-riding effect on the EPF Act, it would not advance the cause of justice, and it would be totally against the interest of working class. As the amount sought to be recovered by the respondents are in the nature of money due to the revenue to the Government, Section 22 of the Act, is not a bar. Therefore, he submits that ) there is no merit in this writ petition.
7. Section 22(1) of the Act reads as under:
22. Suspension of legal proceedings contract, etc. -(1) Where in respect of an industrial company, an inquiry under Section 16 is pending or any scheme referred to under Section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under Section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress of the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof (and no suit for the recovery of money or for the enforcement of any security against the industrial company) or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority.
8. This provision has been the subject I matter of interpretation by the Supreme Court earlier. Therefore in order to decide the controversy between the parties in this writ petition, it is necessary to notice the interpretation which the Supreme Court has placed on this provision in the decisions which are cited at the Bar.
9. In the case of Gram Panchayat v. Shree Vallabh Glass Works Limited , the Gram Panchayat constituted under the Bombay Village Panchayat Act, 1959, sought to recover a sum of Rs. 9,47,539-00 stated to be the property tax and other amounts due from a sick company. It is in that context the Supreme Court held as under:
In the light of the steps taken by the Board under Sections 16 and 17 of the Act, no proceedings for execution, distress or the like proceedings against any of the properties of the company shall lie or be proceeded further 'except with the consent of the Board. Indeed, there would be automatic suspension of such proceedings against the company's properties. As soon as the inquiry under Section 16 is ordered by the Board the various proceedings set out under sub-section (1) of Section 22 would be deemed to have been suspended, It may be against the principles of equity if the creditors are not allowed to recover their dues from the company, but such creditors may approach the Board for permission to proceed against the company for the recovery of their dues/outstandings/ overdues or arrears by whatever name it is called. The Board at its discretion may accord its approval for proceeding against the company. If the approval is not granted, the remedy is not extinguished. It is only postponed. Sub-section (5) of Section 22 provides for exclusion of the period during which the remedy is suspended while computing the period of limitation for recovering the dues.
10. Again this provision fell for consideration by the Supreme Court in the case of Deputy Commercial Tax Officer and Ors. v. Corromandal Pharmecuticals and Ors. . In that Case a scheme was sanctioned on November 19, 1990. Proceedings were initiated for collection of sales tax for the assessment years 1992-93 and 1993-94, That was challenged on the ground that Section 22 is a bar. In that context the Supreme Court after carefully examining the relevant provisions of the Act held as under:
It is in implementation of the scheme wherein preventive remedial or other measures, are designed for the sick industrial company, steps by way of giving financial assistance etc., by Government, banks or other institutions, are contemplated. In other words, the scheme is implemented or given effect to, by affording financial assistance by way of loans, advances or guarantees or reliefs or concessions or sacrifices by Government, banks, public financial institutions and other authorities. In order to see that the scheme is successfully implemented and no impediment is caused for the successful carrying out of the scheme, the Board is enabled to have a say when the steps for recovery of the amounts or other coercive proceedings are taken against sick industrial company which, during the relevant time acts under the guidance/control or supervision of the Board (BIFR), Any step for execution, distress or the like against the properties of the industrial company or other similar steps should not be pursued which will cause delay or impediment in the implementation of the sanctioned scheme. In order to safeguard such state of affairs, an embargo or bar is placed under Section 22 against any step for execution, distress or the like or other similar proceedings against the company without the consent of the Board or, as the case may be, the appellate authority.
However, having regard to the facts of that particular case it held as under:
If that be so, only the liability or amounts covered by the scheme will be taken in, by Section 22 of the Act. So, we are of the view that though the language of Section 22 of the Act is of wide import regarding suspension of legal proceedings from the moment an inquiry is started, till after the implementation of the scheme or the disposal of an appeal under Section 25 of the Act, it will be reasonable to hold that the bar or embargo envisaged in Section 22(1) of the Act can apply only to such of those dues reckoned or included in the sanctioned scheme. Such amounts like sales tax, etc. which the sick industrial company is enabled to collect after the date of the sanctioned scheme legitimately belonging to the Revenue cannot be and could not have been intended to be covered within Section 22 of the Act. Any other construction will be unreasonable and unfair and will lead to a state of affairs enabling the sick industrial unit to collect amounts due to the Revenue and withhold it indefinitely and unreasonably. Such a construction which is unfair, unreasonable and against spirit of the statute in a business sense, should be avoided.
11. The Supreme Court in the case of Tata Davy Ltd. v. State of Orissa and Ors. had an occasion to consider both these judgments and in the context of interpreting the word "any other law" found in Section 22 is held as under:
The Vallabh Glass Works judgment covers these appeals. Arrears of taxes and the like due from sick industrial companies that satisfy the conditions set out in Section 22(1) of the Central Act cannot be recovered by coercive process unless the said Board gives its consent thereto.
Further it was held that Section 22 of the Central Act requires all creditors seeking to recover their dues from sick industrial companies in respect of whom an inquiry under Section 16 is pending or a scheme is under preparation or consideration or has been sanctioned to obtain the consent of the said Board to such recovery. If such consent is not secured and the recovery is deferred, the creditors' remedy is protected for the period of deferment and is, by reason of sub-section (5) of Section 22, excluded in the computation of the period of limitation. The words "any other law" in Section 22 cannot, therefore, be read in the manner suggested by the learned counsel for the respondents.
12. In the background of these pronouncements by the Supreme Court, it is clear, under Section 22, the proceedings which remain suspended during the matter is pending before the BIFR are:-
(1) winding up of the industrial company;
(2) proceedings for execution, distress or like against any of the properties of the sick industrial company; and (3) proceedings for appointment of a receiver.
The proceedings in respect of these matters could however be continued against the sick industrial company with the consent or approval of the Board or of the appellate authority as the case may be. :
13. The objects and reasons for enacting the Act needs to be remembered. The ill effects of sickness in industrial companies such as loss of production, loss of employment, loss of revenue to the Central and State Governments and locking up of investible funds of banks and financial institutions were of serious concern to the Government and the society at large. The concern of the Government is accentuated by the alarming increase in the incidence of sickness in industrial companies. In order to fully utilise the productive industrial assets; afford maximum protection of employment and optimise the use of the funds of the banks and financial institutions, it became imperative to revive and rehabilitate the potentially viable sick industrial companies as quickly as possible. It was equally imperative to salvage the productive assets and realise the amounts due to the banks and financial institutions, to the extent possible, from the non-viable sick industrial companies through liquidation of those companies. It was found that the existing institutional arrangements and procedures for revival and rehabilitation of potentially viable sick industrial companies were both inadequate and time consuming. A multiplicity of laws and agencies made the adoption of coordinated approach for dealing with sick industrial companies difficult. Under those circumstances it was felt to enact in public interest a legislation to provide for timely detection of sickness in industrial companies and for expeditious determination by a body of experts of the preventive, ameliorative, remedial and other measures that would need to be adopted with respect to such companies and for enforcement of the measures considered appropriate with utmost practicable despatch. It is in this background the Act 1/1986 was enacted.
14. Under the scheme of the Act when a sick industrial company approaches the Board on consideration of the request, if the Board makes a reference under Section 15 of the Act, such a company would come within the protection of the Act. Under the statute the BIFR is to consider in what way various preventive remedial measures should be afforded to a sick industrial company. The BIFR is empowered to frame a proper scheme for rehabilitation of the said company. Only in the event of such a rehabilitation is not possible then the BIFR itself would recommend for dissolution of the company. Therefore, the object of the enactment is to prevent winding up or the assets of the company being liquidated at the instance of the creditors before the BIFR makes up it mind after thorough enquiry and investigation. It is intended to give protection to such a company from the moment a reference is made till a scheme is formulated and if a scheme is formulated till the scheme is implemented. Thereby the intention of the Parliament is to protect the interest of the public, the workers of the establishment, the creditors and in particular the financial institutions. It is in that context Section 22 provides when once the BIFR makes a reference, full protection is given to such sick industrial company. It is immaterial whether the creditor is a private party or a financial institution or a statutory authority or even the Government. No coercive steps can be taken against the assets of the company for recovery of any of these dues. It is clear from the words used in the scheme namely "execution, distress or the like". Therefore, it encompasses all types of claims against the sick industrial company. When a scheme is formulated all these creditors would be before the Board. The Board is bound to consider their claims and when a scheme is formulated, provision is made for discharge of these amounts outstanding due to the creditors. That is how the interest of the creditors is fully taken care of. It is in the nature of moratorium for a particular period. It is always open to such a creditor to proceed against the company with the sanction of the Board. In other words without the consent of the Board the assets of the sick industrial company cannot be proceeded against for recovery of the monies due by any creditor.
15. If after a scheme is formulated and a provision is made for discharge of the debts due to all the creditors and in the course of implementation of the scheme sick industrial company were to receive money such as sales tax, provident fund contributions from the employees which legitimately belong to the revenue and if such amount is collected but not paid to the authorities, for recovery of such amounts the protection under Section 22 is not available. This protection is available only to monies payable by the sick industrial company to the creditors. Even the amounts due of the aforesaid nature which are in the possession of the company prior to approaching the BIFR or amounts collected from the date of approaching the BIFR till the scheme is formulated they are taken care of under the scheme and provision is made for payment of such amount. That is how the interest of the creditors is protected under the scheme of the Act.
16. In the instant case the amounts which are claimed in the impugned notice are for the period prior to the formulation of scheme by the BIFR. The scheme formulated clearly provides for payment of Provident Fund dues amounting to Rs. 16.94 lakhs over a period of five years in 60 monthly installments at 8% interest. At the time of formulating the scheme respondents were heard. They were party to the said scheme. If the respondents are aggrieved by this term of the scheme, it is open to them to challenge the same. Admittedly the respondents have not challenged the term of the said scheme and it fully binds them. That apart in terms of Section 22(1) the respondents are precluded from proceeding against the assets of the company for recovery of the said amount without the consent of the Board. In that view of the matter, the impugned orders passed and the action taken by the respondents is clearly illegal and requires to be quashed.
17. Learned counsel for the respondent-corporation relied on a judgment of this Court in the case of Saketh India Limited v. Regional Provident Fund Commissioner and Ors. in W.P. No. 315787 1998 disposed of on December 14, 1999 where it has been held that, Section 22 is not a bar in respect of recovery of amounts from the employer which he has deducted from the employees contribution from the wages. It is submitted that the said judgment has been affirmed by a Division Bench of this Court and, therefore, the impugned orders cannot be found fault with. In this case admittedly the petitioners have paid the employees contribution which they have deducted from the wages of the workmen. What is challenged is the amounts which are to be recovered as employers contribution. The aforesaid judgment has no application to the facts of this case as in this case the employees contribution is not sought to be recovered.
18. Learned counsel for the respondents also relied on a judgment of the Bombay High Court in the case of Ralliwolf Limited v. Regional Provident Fund Commissioner-1 for Maharahstra and Goa and Ors. 2001-I-LLJ-1423. In that case the question for consideration was, in a proceedings initiated for recovery of the employees' contribution which is deducted by the employer from the wages of the employees, is also saved. It is in that context it was held that, the provident fund and other dues payable under the EPF Act, 1952, are part of the legitimate statutory settlements of the workers. The employer is obligated to pay the contribution of the employees as well as his own contribution to the Fund which is set up under the Act. The contribution of the employees is, in fact, a deduction from the wages which are due and payable to the employees. The deduction which is made from the wages is required to be deposited into the Fund by the Employer. These contributions belong to the employees. The employees are entitled to those contributions and can draw upon them even while they are in service for meeting the. unforeseen eventualities and exigencies that' may arise in the life of an employee. They constitute an important measure of social security. The circumstances in which withdrawals and even advances can be given to. an employee in service are specified in the' scheme and, therefore, it was held that recovery of provident fund and other dues payable under the EPF Act, 1952 does not fall within the purview of Section 22(1) of the SICA,
19. With great respect to the learned single Judge, the aforesaid law enunciated runs counter to the law declared by the Supreme Court in the aforesaid cases. The employees contribution prior to the reference to the sick industrial unit to the BIFR and till a scheme is formulated are taken into account by the BIFR and in the scheme a provision is made for payment of the said amount. Provident Fund department is a party to the said scheme. When after hearing them a scheme is formulated for payment of the said amounts to them and if the provident fund authorities do not challenge the scheme and accept the scheme, then they are bound by the terms of the scheme and they have to receive the money under the scheme. If they want to proceed against the sick industrial company in the event of default, consent of the Board is a must without which they cannot proceed against the company. They must realise by such coercive action, the assets of the rehabilitated company is sold, thereby the company has to be closed, it hurts the workers more than the creditor. The workmen would be out of employment. The question of workmen drawing upon their contributions, while they are in service for meeting the unforeseen eventualities and exigencies, that may arise in the life of an employee would not arise at all. The workmen being partners in running an industry, in their own interest, should wait till the industry become healthy and out of red. But, after the scheme is implemented though the employees' contribution is collected by the company and is not remitted to them then in view of the law declared by the Supreme Court in Corromandel's case (supra), Section 22(1) is not attracted to such claims. Therefore, in view of the law declared by the Supreme Court as aforesaid the impugned orders passed by the respondents seeking for recovery of provident fund contributions for the period before the formulation of the scheme by the BIFR for which a provision is made in the scheme itself for payment is illegal and cannot be enforced, as such it cannot be sustained. Hence, I pass the following order:
(a) Writ Petitions are allowed.
(b) Impugned orders passed in both the Writ Petitions are hereby quashed.