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Subsequent attempt to interpret the sale contract in a manner that reduces the scope of its liabilit


The bench encompassing Justice Mohan M. Shantanagoudar and Justice Krishna Murari collectively pronounced judgment on the claim of the secured creditor in respect of the proceeds from sale of secured assets. Karkhana Ltd. had obtained credit facilities from the Appellant-Bank and mortgaged its properties in return. Later, it took physical possession of the mortgaged properties. Karkhana issued a notice to its employees directing them to proceed on leave without salary due to its poor financial conditions. The Industrial Court held that it amounted to an unfair labour practice and directed the Karkhana to pay the unpaid salaries on top priority basis from any funds that may become available with it.

The respondents filed a miscellaneous application seeking the issuance of a recovery certificate against the Karkhana, its Managing Director and the Appellant-Bank. The Industrial Court held that a recovery certificate for unpaid salaries of the employees could not be issued against the Appellant-Bank.  Though the High Court of Bombay agreed, it held that the Industrial Court had erred in relying upon the non-availability of funds with the Karkhana to refuse the grant of a recovery certificate, as the relevant consideration for issuance of such a certificate is the entitlement of the applicants and not the financial condition of the employer. In view of that, it directed the issuance of a recovery certificate against the Karkhana and its Managing Director.

The order of the Industrial Court dated 08.08.2011 was modified to clarify that the certificate was to be issued to the Collector first, who would then proceed to recover the sum as per the recovery certificate. After the auction sale, the Appellant-Bank held the proceeds in trust as per Section 13(7) of the SARFAESI Act and did not have a first charge over them. Further, it was found that upon the liquidation of the Karkhana on 19.01.2013, Section 529A of the Companies Act, 1956 came into operation, thereby according employees’ dues priority over all other dues in respect of the sale proceeds. In light of this, it was held that the Collector could recover the said amount of Rs.13,89,84,334 from the sale proceeds held in trust by the Appellant-Bank. Thereby, the present appeal lies before the Hon’ble Supreme Court.

Thus, on facts, we find that in terms of Section 13(7) of the SARFAESI Act, the distribution of money received by the Appellant-Bank should be done as per the sale contract with Respondent No. 5. In other words, the Appellant-Bank is liable to satisfy the employees’ dues as per its undertaking in the sale letter dated 08.03.2010. However, in view of the fact that all other liabilities, including statutory liabilities were agreed to be borne by the subsequent purchaser, statutory liabilities in respect of employees, such as provident fund, gratuity, bonus etc., would have to be borne by Respondent No. 5 herein. We reiterate here that a subsequent attempt by the Appellant-Bank to interpret the sale contract in a manner that reduces the scope of its liability to provident fund dues cannot be given effect.

The appellants argued that the High Court erred in applying Section 529A of the Companies Act, as Section 167 of the Societies Act specifically barred the application of the Companies Act to co-operative societies. They further contended that a claim for unpaid salaries cannot lie against the Appellant, as there was no employer- employee relationship between the Appellant-Bank and the said employees. Per contra, the respondents argued that Section 50 of Maharashtra Recognition of Trade Unions & Prevention of Unfair Labour Practices Act, 1971 (‘MRTU & PULP Act’)  made the employees’ dues recoverable in the same manner as arrears of land revenue as per Section 169(1) of the Maharashtra Land Revenue Code, 1966 (‘Land Revenue Code’). The letter in which the Appellant-Bank had stated that it would take responsibility for employees’ dues and it was argued that the Appellant cannot be absolved of its liability towards the payment of employees’ dues.

The Court made the following observations:

  1. Section 167 creates an expressed bar on the applicability of the Companies Act to societies registered under the Societies Act. Section 167 is squarely applicable since Karkhana was a co-operative society registered under the said Act and the High Court had committed a grave error in relying upon Section 529A of the Companies Act.

  2. Dues of employees are recoverable in the same manner as arrears of land revenue.

  3. There was a material difference between arrears of land revenue due on account of land, and amounts other than arrears of land revenue but recoverable in the same manner as arrears of land.

  4. It relied on the decisions in SICOM Ltd. v. State of Maharashtra & Anr; Builders Supply Corporation v. Union of India; City Co-op Credit & Capital Ltd. & Anr. v. Official Liquidator of Satwik Electric Controls Pvt Ltd; Central Bank of India v. State of Kerala

  5. Employees’ dues would fall under the category of claims captured by Section 169(2), and can only take priority over unsecured claims.

  6. Under the scheme of the SARFAESI Act, there was nothing to show that a priority was created in favour of banks, financial institutions, and other secured creditors as against a first charge specifically created under any other statute.

  7. Section 13(4) of the SARFAESI Act allowed a secured creditor to take possession of the secured assets of a borrower-in-default, including the right to transfer them by way of sale.

  8. The parties intended that the sale letter dated 08.03.2010 be read harmoniously with the sale certificate inasmuch as it appeared that the same was a part of the sale certificate.

  9. The sale certificate and the sale letter constitute a contract.

  10. The sale certificate and sale letter formed a contract, the cumulative effect of which was an agreement that only the employees’ dues would be settled by the Appellant-Bank, and all other liabilities would be settled by the subsequent purchaser.

The Court pronounced the following:

“The Appellant-Bank does not enjoy any paramount charge over the sale proceeds either. the sale letter dated 08.03.2010 and the sale certificate dated 14.09.2010 constitute a contract which displaces the order of distribution. The cumulative effect of these documents is that the Appellant-Bank must pay the employees’ dues out of the sale proceeds from the auctioned property. To this extent, the recovery certificate issued by the Industrial Court on 08.08.2011 may be executed. All other dues in respect of the secured property, including any unpaid statutory dues in relation to employees (provident fund, gratuity, bonus, etc.) shall be paid by Respondent No.5 within a period of six months from the date of this order.The instant appeal is disposed of accordingly.”

–  Jumanah Kader



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