No Priority of Government Dues Over Debts Due To Secured Creditors: HC

Relevant Text

37. The submission of the learned Advocate General that the State has first charge as crown’s debt against other creditors by virtue of overriding effect of Section 47 of the Act of 2003 which starts with non-obstante clause and the State having full legislative competence to enact law – the Act of 2003 and as such, the OL has refused to give priority to the State dues, this Court finds that the Act of 1956 has been enacted by the Parliament on the basis of Entry 43 of the List-I (Union List) of 7th Schedule appended to the Constitution of India.

38. This Court finds that Article 246 of the Constitution of India opens with a non-obstante clause and the Parliament has been given exclusive power to make laws in respect of matters enumerated in List-I of the 7th Schedule, known as Union List.

39. This Court further finds that the State legislature can also make laws in respect of matters enumerated in List-II of the 7th Schedule, subject to clauses (1) and (2) of Article 246. The non- obstante clause under Article 246(1) indicates the predominance or supremacy of the law made by the Union legislature in the event of an overlap of the law made by the Parliament with respect to a matter enumerated in List-I and a law made by the State legislature with respect to a matter enumerated in List-II of the 7th Schedule.

40. This Court finds that both the Parliament and the State legislature are supreme in their respective assigned fields and it becomes duty of the Court to interpret the legislations made by both the Parliament and the State legislature in such a manner as to avoid any conflict.

41. This Court finds that if the conflict is unavoidable and two enactments are irreconcilable, then due to force of the non- obstante clause in clause (1) of Article 246 of the Constitution of India, the Parliamentary legislation shall prevail notwithstanding the exclusive power of the State legislature to make a law with respect to the matter enumerated in the State List.

42. This Court further finds that Section 529A of the Act of 1956 provides priority to the debts due to the secured creditors and the workers and Section 530 of the Act of 1956 makes payment of taxes subject to the priority embodied in Section 529A.

43. This Court finds that the State has full competence to provide for creating first charge under Section 47 of the Act of 2003 for recovering the amount due to the State under the earlier Sales Tax Act and now VAT, however, the same cannot have priority, when it comes in conflict with the mandate of Section 529A, then the Sections 529A and 530 of the Act of 1956 will prevail.

44. This Court in no way finds that the State had no competence to insert Section 47 in the Act of 2003 and the same law is in no way useless or redundant, however, if the Central Act, as enacted by the Parliament, provides for proceeds of the assets of a Company being wound up, to be given to the secured creditors and the workers, then the same has to be distributed pari passu among others, as per the priority given in Section 529A of the Act of 1956.

45. The submission of learned Advocate General that the Parliament by inserting Section 529A in the Act of 1956 has only given preferential treatment to the workmen’s dues but other creditors like State Government cannot be deprived to claim their due amount, this Court finds that if the Parliament has made amendment in the Act of 1956 and only priority has been given to the claim of the workmen, no further inference can be drawn by the Court of depriving any other creditor to get its dues.

46. This Court finds that even the preferential payments to the revenues, taxes, cesses, etc. due from the Company in winding up to the Central or the State Government or the local authority, will be subject to the provisions of Section 529A of the Act of 1956. This Court, if accepts the plea of the learned Advocate General, in a way, would be re-writing Section 530 of the Act of 1956 and the same cannot be done by this Court. The legislature-Parliament, if has brought any change in respect of the preferential payment and only the dues of workmen have been given priority, no grievance can be allowed to be raised by any other person including the State. The legislature, if in its wisdom has thought that dues of workmen and other secured creditors are required to be protected, no inference can be drawn that the legislature has caused any discrimination for the States to claim their dues.

47. The submission of learned Advocate General that the State Government has enacted a special law by enacting the Act of 2003 and the Companies Act, 1956 is a general law and as such, the special law of the State will prevail over the general law, suffice it to say by this Court that if the parliament has enacted the Companies Act, 1956 and the same also governs all the Companies, as per the provisions of the Companies Act, 1956, then the Act so framed by the Union Legislature cannot be treated as a general law vis-à-vis the Value Added Tax Act, 2003, enacted by the State Government.

48. The submission of the learned Advocate General that the Company-in-liquidation has been wound up and its assets have been sold off and as such, the State has no other option but to recover its dues through the OL, this Court finds that the claim/dues of the creditors are required to be settled by the OL in the manner and priority, as prescribed under the Act of 1956. The State dues, in no way, can have preference over the dues/claims of the workmen and other secured creditors.

49. Reliance is placed by the learned Advocate General on the judgment passed by the Apex Court in the case of Mahendra Lal Jaini Vs. State of UP & Ors. (supra), this Court finds that the issue before the Apex Court was with respect to the constitutional validity of UP Land Tenures (Regulation of Transfer) Act, 1952.

50. Learned Advocate General has relied on this judgment for the purpose of the words “to the extent” for considering the provisions contained in clause (b) of sub-section (1) of Section 529A of the Act of 1956.

51. This Court finds that the words used “to the extent” have already been considered by this Court while interpreting Sections 529 and 530 of the Act of 1956, as such, this judgment is of no assistance to the learned Advocate General.

52. Reliance is placed by the learned Advocate General on the judgment passed by the Apex Court in the case of Employees Provident Fund Commissioner Vs. OL of Esskay Pharmaceuticals Ltd. (supra), this Court finds the issue before the Apex Court was with regard to priority to the dues payable by employer under Section 11 of Employee’s Provident Funds and Miscellaneous Provisions Act, 1952 and whether the same would be subject to Section 529A of the Act of 1956 and in terms of which the workmen’s dues and debts due to the secured creditors, are required to be paid in priority to all other debts.

53. The Apex Court on interpretation of the Section 11 of the Employee’s Provident Funds and Miscellaneous Provisions Act, 1952 and Sections 529, 529A and 530 of the Act of 1956 found that the amendment in the Companies Act, 1985 was only to expand the scope of the dues of workmen and place them at par with the debts due to the secured creditors and there was no reason to interpret the amendment as giving priority to the debts due to the secured creditors over the dues of provident fund payable by the employer. This Court finds that the said judgment is of little assistance to the learned Advocate General.

54. Reliance is placed by the learned Advocate General on the judgment passed by the Apex Court in the case of Jayant Verma & Ors. Vs. UOI & Ors. (supra), this Court finds that the question before the Apex Court was in respect of Entry 45 of List-I and Entry 30 of List-II of the 7th Schedule of the Constitution of India and how those were to be harmonized, as per Article 246 of the Constitution of India and how the ‘federal supremacy principle’ was to be taken care of. This Court finds that the said judgment is of little assistance to the learned Advocate General as the Apex Court considered the pith and substance theory in the said judgment.

55. Reliance is placed by the learned Advocate General on the judgment passed by the Apex Court in the case of Central Bank of India Vs. State of Kerala & Ors. (supra), this Court finds that the issue before the Apex Court was with respect to considering the Section 26B of the Kerala General Sales Tax Act, 1963 providing for statutory first charge over the property of dealer, whether they will have priority over the rights created in favour of the secured creditor such as Banks and other financial institutions. The Apex Court found that there was no inconsistency between the provisions of the Kerala General Sales Tax Act, 1963 and the Recovery of Debts Due to Banks and Financial Institutions other secured creditors and the provisions contained in Section 38C of the Bombay Act and Section 26B of the Kerala Act, were not inconsistent with the provisions of the DRT Act and the Securitisation Act so as to attract non-obstante clauses contained in Section 34(1) of the DRT Act or Section 35 of the Securitisation Act.

56. This Court finds that post decision of the Central Bank of India Vs. State of Kerala & Ors. (supra), the Parliament has made amendments in both the enactments and the financial institutions or secured creditors such as Banks, etc., have now been given preferential right over the State dues/crown’s debt. In the humble opinion of this Court, the judgment relied upon by the learned Advocate General is of little assistance to him.

57. Reliance is placed by the learned Advocate General on the judgment passed by this Court in the case of Jaysynth Dyechem & Ors. Vs. Mewar Textile Mills Ltd. reported in AIR 1988 Raj. 16, this Court finds that the issue before the Court was with regard to considering the provisions of the Rajasthan Relief Undertaking (Special Provisions) Act, 1961 and whether any ‘proceedings’ will include winding up petition or not pending before this Court. This judgment is of little assistance to the learned Advocate General.

58. Accordingly, this Court finds that the claim of the applicant- State to give them priority for payment of their dues over other secured creditors, cannot be granted. Their applications, in the facts & circumstances, stand dismissed.