Case: Maharashtra State Co-operative Bank Ltd.  Vs. The Assistant Provident Fund Commissioner

4. During crushing season 2000-2001, the appellant advanced loan of Rs.4000 lacs to Kannad Sahakari Sakhar Karkhana Limited (hereinafter described as `the Sugar Mill). For securing repayment of the loan and interest, the management of the Sugar Mill executed necessary documents including deed of pledge dated 5.3.2001, the relevant portions of which are extracted below:-"We, the undersigned, Kannad Sahakari Sakhar Karkhana Ltd., Tal. Kannad, Aurangabad, member of Maharashtra State Co-operative Bank Limited (Incorporating the Vidarbha Co-operative Bank Ltd.) hereinafter referred to as "the said Bank" agree to take a loan from the said Bank on the pledge of stocks/goods/commodities on the following terms and conditions. The credit limit will be Rs.400000000 and its period will be upto 31.10.20011. The stocks/goods/commodities which we have at present placed in the custody of the said Bank as security or which we might so place from time to time will remain in the sole custody of the said Bank and whatever action the said Bank will take for indicating its custody shall be agreeable to us3. If it is necessary to hire a godown, we undertake to hire the godown in the name of the said Bank and to pay the rent from time to time4. We undertake to insure the stocks/goods/commodities for their full value with an Insurance Company approved by the said Bank and will get the policy issued in the name of the said Bank5. If for any reason the godown is required to be changed or repaired, we undertake to bear the expenses in that connection6. We undertake to repay the principal of the loan with interest and all expenses due by us by _____ as stipulated in para (2) hereof if the period, be extended by the said Bank before the expiry of the extended period7. The loan shall bear interest at ____ percent per annum. If the rent of the godown, the expenses in connection with insurance and other expenses if any not paid by us, the same shall be debited to our loan account and shall bear interest at the same rate. This interest shall be payable with half yearly rests on 30th June and 31st December or earlier immediately when the stocks/goods/commodities are relieved8. Over and above the aforesaid dues, if any other amount is due to the said Bank by us exclusively or in partnership with anybody else, we agree that the stocks/goods/commodities kept in the custody of the said Bank will also be treated as security for such amount due by us10. We shall not in any way hold the said Bank responsible for the weight, quality, conditions or safety of the stocks/goods/commodities given into its custody. We shall hold ourselves responsible for any shortage, damage or shrinkage that may arise by any cause whatsoever13. If and when there is insecurity due to local riots or civil commotion, etc. we undertake to insure the stocks/goods/commodities against any damage or loss by such riots or civil commotion. If we fail to do so, the said Bank shall so insure the stocks/goods/commodities for and on our behalf and shall be entitled to debit the cost thereof to our account15. Though by this Agreement, the date of repayment of the loan has been fixed as aforesaid, the said Bank shall treat the loan as demand we undertake to repay the same as soon as the said Bank shall make a demand or the said Bank shall be at full liberty to recover all the dues payable by us16. In the event of breach of the aforesaid conditions and or if we fail to repay the loan within 24 hours, if so required by the said Bank, it shall have the full right to recover its amount by sale of the stocks goods commodities by public auction or private treaty (though the said Bank is not bound so to sell the stocks/goods/commodities). On receipt of the Account of sale under the signature of the Manager, Accountant or other officer of the said Bank duly authorized we shall acknowledge its correctness. If the proceeds of the sale do not fully meet the loan due by us interest or other expenses, we undertake to pay the balance so remaining with interest."5. On the same day i.e., 5.3.2001, the management of the Sugar Mill also executed promissory note for payment of Rs.40 crores with interest @ 15.50% with half yearly rests6. Though, the appellant has not given the details of the dues of provident fund payable by the employer, a reading of the document marked Ex. A (pages 119-122 of the SLP paper book) shows that the Assistant Provident Fund Commissioner, Aurangabad (for short `the Assistant Commissioner) passed order dated 29.9.2003 under Section 7A of the Act whereby he held the employer liable to pay Rs.1,75,10,477/- towards EPF contributions, EPF administrative charges, EDLI contributions, EDLI Ins./administrative charges and directed it to pay the amount with interest @ 12% within 10 days. As the employer failed to comply with that order, the Assistant Provident Fund Commissioner and Recovery Officer, Employees Provident Fund, Sub-Regional Office, Aurangabad (hereinafter referred to as `the Recovery Officer) issued warrant of attachment dated 11.3.2004 under Section 8B of the Act for recovery of Rs.3,85,21,734/- which included 12% interest payable in accordance with Rule 5 of the Second Schedule (Part I) of the Income-tax Act, 1961 read with Section 8G of the Act. The warrant of attachment was executed by the Enforcement Officer on 26.3.2004 by preparing an inventory of the sugar bags lying in the godowns of the Sugar Mill and affixing paper seals on the same7. The appellant challenged the warrant of attachment and consequential action taken by the Enforcement Officer in Writ Petition No.6824/2005, mainly on the ground that in view of the deed of pledge executed by the management of the Sugar Mill, the sugar bags which were lying under its lock and key, could not have been attached for realization of the dues of provident fund etc. During the pendency of the writ petition, the Assistant Commissioner filed Civil Application No.2739/2006 for sale of the sugar bags. At the hearing of that application, learned counsel appearing for the appellant-bank referred to the orders passed in Writ Petition No.3413/2005 and connected cases for conducting joint auction of the attached goods i.e., sugar bags. After taking note of his submission, the Division Bench of the High Court passed order dated 1.12.2006, the relevant portions of which are as under:-"We accordingly allow this application and direct that the sugar bags attached by the petitioner as well as the Assistant Provident Fund Commissioner shall be jointly auctioned and the sale proceeds shall be deposited with the Registrar of this Court. The successful bidder will draw a Demand Draft or a Bankers Cheque in the name of the Registrar General of this CourtIt is further ordered that the auction sale undertaken jointly, shall be completed within a period of three months by floating public tenders calling for bids and by accepting tender of the highest bidderOnce the amount is deposited with the Registrar of this Court, liberty to apply for withdrawal of the said amount."8. In compliance of the aforementioned order, the sugar bags lying in the godowns of the Sugar Mill were auctioned for a sum of Rs.9,24,08,254/-. Thereafter, the Assistant Commissioner filed Civil Application No.1680/2007 for permission to withdraw a sum of Rs.7,77,46,511/- towards the dues of provident fund etc. by asserting that in addition to Rs.1,75,10,477/- payable under Section 7A with interest @ 12%, the employer is liable to pay Rs.6,02,36,034/- in terms of order dated 27.3.2007 passed under Section 14B read with Section 7Q of the Act9. It appears that during the pendency of the litigation, the Assistant Commissioner passed another order whereby he attached the bank account and movable and immovable properties of the Sugar Mill along with 69,000 sugar bags. Therefore, the management of the Sugar Mill filed Civil Application No.1681/2007 with the prayer that attachment effected by the Assistant Commissioner may be vacated10. By the impugned order, the High Court disposed of both the applications and issued various directions including the following:-"(a) Out of the amount of Rs.9,24,08,254/-, the amount of Rs.4,20,67,446/- (Principal amount Rs.1,75,10,477/- plus interest Rs.2,45,56,969/-) be paid to the Assistant Provident Fund Commissioner so as to appropriate towards the provident fund dues of the workers of the sugar factory(b) Out of the remaining amount, the amount of Rs.1,46,61,743/- shall be paid to the MSC Bank which MSC Bank shall appropriate towards the dues of the Sugar Factory(c) The remaining amount of Rs.3,56,79,065/- be deposited initially for a period of 1 year with the MSC Bank in the name of the Registrar General, High Court, Bombay for a period of 1 year. If within the period of 1 year, the appeal filed by the Petitioner with the Appellate Tribunal under the Provident Fund Act is not disposed of, then the Registrar General will re-deposit and/or renew the said amount on yearly basis with MSC Bank till final disposal of the said appeal(d) The information in respect of the number, pendency or disposal of the Appeal shall be given by the Sugar Factory to the Registrar General when the said Appeal is disposed of(e) In case the said appeal filed by the Sugar Factory is dismissed by the Appellate authority, then the amount of Rs.3,56,79,065/- will have to be transferred to the Assistant Provident Fund Commissioner and the Registrar General is hereby directed, accordingly, to transfer it(f) In case the appeal is allowed and thereby the sugar factory becomes entitled to the amount of Rs.3,56,79,065/-, then the MSC Bank is at liberty to appropriate the said amount towards the dues of the Sugar Factory(g) In view of the above directions and the disbursement of the amount, the order passed by the Assistant Provident Fund Commissioner attaching the assets, Bank Accounts and sugar bags etc. of the Sugar Factory is hereby quashed and set aside and the Sugar Factory is at liberty to deal with the said assets in accordance with their own Resolution and decisions keeping in mind the directions."

Reasoning: 30. In the light of the above analysis of the relevant provisions of the Act and precedents, we shall now examine the tenability or otherwise of the argument of the learned senior counsel appearing on behalf of thek that by virtue of the deeds of pledge executed by the Sugar Mills, his client had become owner of the sugar bags and the same could not have been attached and sold for realization of the amount due under the Act31. A careful reading of the deed of pledge dated 5.3.2001 executed by the management of Kannad Sahakari Sakhar Karkhana Ltd. (the terms of three deeds dated 2.1.2003, 6.2.2003 and 4.4.2003 executed by the management of the other Sugar Mill are substantially similar) shows that even though the sugar bags which were available with the Sugar Mills at the relevant time were placed in the custody of thek as security for repayment of loan together with interest, the former continued to be owner thereof. To put it differently, title of the property remained with the Sugar Mills and only limited interest therein was passed on to thek as security for repayment of the loan etc. If the management of the Sugar Mills were to repay the dues of thek within the time specified in the deeds of pledge, the latter was duty bound to lift its notional control over the sugar bags lying in the godowns of the Sugar Mills. In case of default, thek could recover its dues by selling the sugar bags. If the price of the sugar bags was less than the amount due, thek could resort to other appropriate adjudicatory mechanism for recovery of the balance amount. If the sugar bags had become property of thek simply because the same were pledged by the management of the Sugar Mills for securing repayment of the loan etc., there was no occasion for the latter to take the responsibility of hiring godowns on behalf of the, pay rent thereof and get the goods insured. Equally, there was no reason for the management of the Sugar Mills to take the responsibility of changing or repairing the godowns and bear its cost or confer immunity upon the bank in the matter of weight, quality, conditions or safety of the goods and take upon itself the responsibility for any shortage, damage or shrinkage and insure the goods against any damage or loss or riots or civil commotion. In our considered view, the very fact that except giving the symbolic custody of the sugar bags to thek by allowing it to put lock and key on the godowns, all steps for preserving the goods and getting the same insured were taken by the management of the Sugar Mills which also agreed to take the responsibility of any shortage, damage or shrinkage unmistakably shows that the Sugar Mills continued to be owner of the sugar bags33. Under the common law a pawn or a pledge is a bailment of personal property as a security for some debt or engagement. A pawner is one who being liable to an engagement gives to the person to whom he is liable a thing to be held as security for payment of his debt or the fulfilment of his liability. The two ingredients of a pawn or a pledge are: (1) that it is essential to the contract of pawn that the property pledged should be actually or constructively delivered to the pawnee and (2) a pawnee has only a special property in the pledge but the general property therein remains in the pawner and wholly reverts to him on discharge of the debt. A pawn therefore is a security, where, by contract a deposit of goods is made as security for a debt. The right to property vests in the pledgee only so far as is necessary to secure the debt. In this sense a pawn or pledge is an intermediate between a simple lien and a mortgage which wholly passes the property in the thing conveyed36. The ratio of the above noted two judgments is that in a contract of pawn the property pledged should be actually or constructively delivered to the pawnee and pawnee has only a special property in the pledge but the general property remains with the pawner and wholly reverts to him on discharge of debt. The right to property vests in the pledgee only so far as necessary to secure his debt. We, therefore, hold that the deeds of pledge executed by the management of the Sugar Mills as security for repayment of loan etc. did not have the effect of transferring of the ownership of the sugar bags to thek and the Recovery Officer did not commit any illegality by attaching the same and the High Court was fully justified in directing payment of a portion of the sale price to the Assistant Commissioner for being appropriated towards the provident fund dues of the workers37. Before leaving this issue, we may refer to the judgments on which reliance has been placed by the learned senior counsel appearing for the. The question which fell for consideration in Karnataka Pawnbrokers Association v. State of Karnataka (supra), was whether pawnbroker is a dealer and carries on business within the meaning of Tamil Nadu General Sales Tax Act, 1959 read with the Tamil Nadu Pawnbrokers Act, 1943 and Rules as also the Karnataka Sales Tax Act, 1957 read with Karnataka Pawnbrokers Act, 1961 and Rules, when it caused sale of unredeemed goods occasioned by the default of the pawnor41. As per Blacks Law Dictionary (Eighth edition), the word `asset means, an item that is owned and has value; the entries on a balance sheet showing the items of property owned, including cash, inventory, equipment, real estate, accounts receivable and goodwill; all the property of a person available for paying debts or for distribution. In Law Lexicon by P. Ramanatha Aiyar (Second edition), the word `assets has been described as the property in the hands of an heir, an executor, administrator or trustee which is legally or equitably chargeable with the obligations with such heir, executor, administrator or trustee is, as such, required to discharge. Everything which can be made available for the payment of debts, whether belonging to the estate of a deceased person or not; property in general all that one owns, considered as applicable to the payment of his debts; as, his assets are much greater than his liabilities. In Velchand Chhaganlal v. Mussan 14 Bom.L.R. 633, it was held that the word `assets means, a mans property of whatever kind which may be used to satisfy debts or demands existing against him42. As per Salmonds Jurisprudence, the word "property" meansin its widest sense, property includes a persons legal rights, of whatever description. A mans property is all that is his in law. This usage however, is obsolete at the present day, though it is common enough in the older books. In a second and narrower sense, property includes not all a persons rights, but only his proprietary as opposed to his personal rights. The former constitutes his estate or property, while the latter constitute his status or personal condition. In this sense a mans land, chattel, shares and the debts due to him are his property; but not his life or liberty or reputation.... In a third application, which is that adopted (here) the terms includes not even all proprietary rights but only those which are both proprietary and in rem. The law of property is the right of proprietary rights in rem, the law of proprietary rights in personam being distinguished from it as the law of obligations. According to this usage a freehold or leasehold estate in land, or a patent or copyright, is property; but a debt or the benefit or a contract is not. Finally, in the narrowest use of the term, it includes nothing more than corporeal propertythat is to say, the right of ownership in a material object, or that object itself43. In the light of the above dictionary and legal meanings of the word `assets and jurisprudential concept of the word `property, it has to be seen whether the sugar bags pledged with thek constituted assets of the establishment for the purpose of Section 11(2) of the Act. We have already held that even though symbolic custody of the sugar bags was given to thek as security for repayment of loan etc., the Sugar Mills continued to be owner thereof. In other words, the sugar bags pledged with thek continued to be movable property i.e. assets of the establishment, which could be attached and sold by the Recovery Officer in terms of Section 8B or by adopting alternative modes of recovery enumerated in Section 8F44. At the cost of repetition, it is apposite to mention that Section 11 is declaratory in nature.n (2) thereof declares that any amount due from an employer shall be deemed to be first charge on the assets of the establishment and shall be paid in priority to all other debts. For recovery of the amount due from an employer which is treated as arrear of land revenue, the Recovery Officer or any other authorized officer has to take recourse to the provisions contained in Section 8 read with Sections 8B and 8F. The recovery can be effected by attachment or sale of the movable or immovable property of the establishment or, as the case may be, the employer, or by arrest of the employer and his detention in prison or by appointing a receiver for the management of the movable or immovable properties of the establishment or, as the case may be, the employer or by taking action in the manner laid down in the Third Schedule to thex Act, 196145. The judgment in Transcore v. Union of India (supra) on which reliance has been placed by Shri Desai, does not have any bearing on any of the facets of the question raised in these appeals. In paragraph 62 of that judgment, the Court merely referred to Snells Principles of Equity. In paragraph 73, the Court explained the distinction between symbolic and physical possession and observed that the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 basically deals with the securities by which the creditor obtains ownership of or interest in the property concerned i.e., mortgages and the securities under which the secured creditor, namely, the Bank/Financial Institution obtains interest in the property concerned46. We shall now deal with the last argument of the learned senior counsel for thek that the interest payable in terms of Section 7Q and damages imposed under Section 14B of the Act cannot be treated as first charge on the assets of the establishment payable in priority to all other debts within the meaning of Section 11(2)47. Section 11 gives statutory priority to the amount due from the employers all other debts. Clause (a) ofn (1) of Section 11 is applicable to cases where an employer is adjudicated insolvent or, being a company, an order of its winding up is made. In that situation, the amount due from the employer in relation to an establishment to which any Scheme or the Insurance Scheme applies in respect of any contribution payable to the Fund or, as the case may be, the Insurance Fund, damages recoverable under Section 14B, accumulations required to be transferred under Section 15(2) or any other charges payable by him under any other provision of this Act or of any provision of the Scheme or the Insurance Scheme. Clause (b) is applicable to cases where the amount is due from the employer in relation to exempted establishment in respect of any contribution to the provident fund or any insurance fund in so far it relates to exempted employees under the rules of provident fund or any insurance fund, any contribution payable by him towards the Pension Fund under Section 17(6), damages recoverable under Section 14B or any charges payable by him to the appropriate Government under the Act or under any of the conditions specified in Section 17. Thisn then lays down that such amount shall be paid in priority to all other debts in the distribution of the property of the insolvent or the assets of the company being wound up.n (2) lays down that any amount due from the employer whether in respect of the employees contribution deducted from the wages of the employee or the employers contribution shall be deemed to be the first charge on the assets of the establishment, and shall be paid in priority to all other debts. The expression "any amount due from an employer" appearing inn (2) of Section 11 has to be interpreted keeping in view the object of the Act and other provisions contained therein includingn (1) of Section 11 and Sections 7A, 7Q, 14B and 15(2) which provide for determination of the dues payable by the employer, liability of the employer to pay interest in case the payment of the amount due is delayed and also pay damages, if there is default in making contribution to the Fund. If any amount payable by the employer becomes due and the same is not paid within the stipulated time, then the employer is required to pay interest in terms of the mandate of Section 7Q. Likewise, default on the employers part to pay any contribution to the Fund can visit him with the consequence of levy of damages. As mentioned earlier,n (2) was inserted in Section 11 by Amendment Act No.40 of 1973 with a view to ensure that payment of provident fund dues of the workers are not defeated by the prior claims of the secured and/or of the unsecured creditors. While enactingn (2), the legislature was conscious of the fact that in terms of existing Section 11 priority has been given to the amount due from an employer in relation to an establishment to which any scheme or fund is applicable including damages recoverable under Section 14B and accumulations required to be transferred under Section 15(2). The legislature was also aware that in case of delay the employer is statutorily responsible to pay interest in terms of Section 17. Therefore, there is no plausible reason to give a restricted meaning to the expression `any amount due from the employer and confine it to the amount determined under Section 7A or the contribution payable under Section 8. If interest payable by the employer under Section 7Q and damages leviable under Section 14 are excluded from the ambit of expression "any amount due from an employer", every employer will conveniently refrain from paying contribution to the Fund and other dues and resist the efforts of the concerned authorities to recover the dues as arrears of land revenue by contending that the movable or immovable property of the establishment is subject to other debts. Any such interpretation would frustrate the object of introducing the deeming provision and non obstante clause in Section 11(2). Therefore, it is not possible to agree with the learned senior counsel for thek that the amount of interest payable under Section 7Q and damages leviable under Section 14B do not form part of the amount due from an employer for the purpose of Section 11(2) of the Act.