*1* ca.341.10.sxw kps I N THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION COMPANY APPLICATION NO.341 OF 2010 IN COMPANY PETITION NO.201 OF 1994 State of Kerala. ..Applicant -Versus- The Official Liquidator of Poysha Industrial Company Ltd.. ..Respondent .......... Mr.M.P.S. Rao, Senior Counsel a/w Mr.K.P.Sreejith i/b India Law, for the Applicant. Mr.J.P.Sen, for the Official Liquidator. .......... CORAM : S.J. VAZIFDAR, J. DATE : 11th August, 2010. JUDGMENT: 1 This is an application by the State of Kerala seeking an order directing the Official Liquidator to release the further adjudicated/re-adjudicated amount of Rs.68,55,885/- payable by the Company in liquidation. 2 On 12.11.2003, the Applicant lodged a claim of Rs. 10,08,62,024/- towards the sales tax arrears with the Official Liquidator. On 29.04.2009, the Official Liquidator adjudicated the Applicant’s claim in the sum of Rs.9,40,06,139/- and rejected the claim to the extent of Rs.68,55,885/- on the ground that it was not *2* ca.341.10.sxw proved. The Applicants received the sum of Rs.9,40,06,139/- on 23.09.2009 from the Debts Recovery Tribunal without prejudice to their rights to adopt appropriate proceedings for the balance amount. The Official Liquidator, thereafter, on 08.03.2010 re- adjudicated the Applicant’s claim and admitted the same even to the extent of the said sum of Rs.68,55,885/- which was earlier rejected. By an order dated 19.03.2010, S.J.Kathawalla, J. directed the Official Liquidator to make payment of the principal amount to the Applicant as per the provisions of Sections 529, 529-A and 530 of the Companies Act, 1956. The Applicant, accordingly, filed an application before the Debts Recovery Tribunal for payment of the said sum of Rs.68,55,885/-. On 12.05.2010, the Recovery Officer of D.R.T. transferred the amount to the Official Liquidator for distribution after seeking clarification from this Court. It is in these circumstances, that the present Company Application was filed on 08.07.2010. 3 The amount lying to the credit of the Company in liquidation is admittedly not sufficient to meet the claims of the Applicant, the secured creditors and the workmen. 4 Mr.Rao, the learned Senior Counsel appearing on behalf of the Applicant submits that the Applicant’s dues rank in priority over those of all other creditors including the secured creditors and workmen in view of the provisions of Section 26-B of the Kerala General Sales Tax Act, 1963 which came into effect on 01.04.1999. Section 26-B reads as under:- “26B. Tax payable to be first charge on the property:- Notwithstanding anything to the contrary contained in any *3* ca.341.10.sxw other law for the time being in force, any amount of tax, penalty, interest and any other amount, if any, payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer, or such person.” 5 Mr.J.P.Sen, the learned counsel appearing on behalf of the Official Liquidator submits that in view of the provisions of Sections 529, 529-A and 530 of the Companies Act, 1956, the dues of the Applicant qua a Company in liquidation cannot take priority over those of the secured creditors and workmen. Sections 529(1), 529-A and 530(1)(a) read as under:- “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 realise his security,- (a) the liquidator shall be entitled to represent the workmen and enforce such charge; (b) any amount realised by the liquidator by way of enforcement of such charge shall be applied ratably for the discharge of workmen's dues; and (c) so much of the debt due to such secured creditor as could not be realised 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 529A.” “529A. Overriding preferential payments. *4* ca.341.10.sxw (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.” “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;” 6 I must decide this question only on precedent as I find it covered by the judgment of the Supreme Court in the case of Central Bank of India Vs. State of Kerala & others, (2009)4 SCC 94. 7 The question in that case was whether the provisions of Section 38-C of the Bomay Sales Tax Act, 1959 and Section 26-B of the Kerala General Sales Tax Act, 1963 and similar provisions contained in other State legislations by which a first charge has been created on the property of the dealer or such other person who is liable to pay the sales tax, are inconsistent with the provisions contained in the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hereinafter to be referred as “the DRT Act”) *5* ca.341.10.sxw for recovery of “debt” and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter to be referred as “the Securitisation Act”) for enforcement of “security interest”. 8 While dealing with this question, the Supreme Court firstly held that the amounts payable under Section 529-A of the Companies Act, 1956 constitute a statutory first charge. Paragraph 96 of the judgment reads as under:- “Section 14A 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 (Development and Regulation) Act, 1957, Section 30 of the Gift Tax Act, 1958 and Section 529A 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...” 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. In paragraphs 126, 129, 130 and 131 of the judgment, the Supreme Court held as under:- “126. While enacting the DRT Act and Securitisation Act, Parliament was aware of the law laid down by this Court wherein priority of the State dues was recognized. 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 529A of the Companies Act or Section 11(2) of the EPF Act and ensured that notwithstanding series of judicial *6* ca.341.10.sxw pronouncements, dues of banks, financial 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. 127. ........ 128. ....... 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 14A 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 (Development and Regulation) Act, 1957, Section 30 of the Gift- Tax Act, and Section 529A of the Companies Act, 1956 would have been incorporated in the DRT Act and Securitisation Act. 130. Undisputedly, the two enactments do not contain provision similar to Workmen's Compensation Act, etc. In the absence of any specific provision to that effect, it is not possible to read any conflict or inconsistency or overlapping between the provisions of the DRT Act and Securitisation Act on the one hand and Section 38C of the Bombay Act and Section 26B of the Kerala Act on the other and the non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act cannot be invoked for declaring that the first charge created under the State legislation will not operate qua or affect the proceedings initiated by banks, financial institutions and other secured creditors for recovery of their dues or enforcement of security interest, as the case may be. 131. The Court could have given effect to the non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act vis a vis Section 38C of the Bombay Act and Section 26B of the Kerala Act and similar other State legislations only if there was a specific provision in the two enactments creating first charge in favour of the banks, financial institutions and other secured creditors but as the Parliament has not made any such provision in *7* ca.341.10.sxw either of the enactments, the first charge created by the State legislations on the property of the dealer or any other person, liable to pay sales tax etc., cannot be destroyed by implication or inference, notwithstanding the fact that banks, etc. fall in the category of secured creditors.” The observations in paragraph 126 that if the Parliament intended to create a first charge in favour of the 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 infact created a first charge in favour of the parties mentioned therein namely the secured creditors and workers 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, 1959, that the Supreme Court negated the Appellants’ contentions. In fact in 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 Securitisation Act vis-a-vis Section 26-B of the Kerala General Sales Tax Act, 1963 only if there was a specific provision in the two enactments 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 provisions of Sections 529, 529-A and 530 of the Companies Act, 1956 are applicable and these provisions contain *8* ca.341.10.sxw such a charge as held by the Supreme Court itself. In view thereof and in view of the observations 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. 11 In the circumstances, the Company Application is dismissed. There shall, however, be no order as to costs. -