Industrial Development Bank of India v. Superintendent of Central Excise and Customs and Others

7. In the context of the present appeal, we would like to reproduce Sections 529A and 530 of the Companies Act, which read as under: “529A. Overriding preferential payments.—(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 subsection (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.”

(c) the expression “the relevant date” means—

(i) in the case of a company ordered to be wound up compulsorily, the date of the appointment (or first appointment) of a provisional liquidator, or if no such appointment was made, the date of the winding up order, unless in either case the company had commenced to be wound up voluntarily before that date; and

(ii) in any case where sub-clause (i) does not apply, the date of the passing of the resolution for the voluntary winding up of the company. (9) This section shall not apply in the case of a winding up where the date referred to in sub-section (5) of Section 230 of the Indian Companies Act, 1913 (7 of 1913), occurred before the commencement of this Act, and in such a case, the provisions relating to preferential payments which would have applied if this Act had not been passed, shall be deemed to remain in full force.”

8. Section 529A of the Companies Act, a non-obstante provision, is to be given primacy in case of conflict, and consequently, in case of disharmony, this section will override the discordant provisions of the Companies Act and all other enactments in force. Section 529A of the Companies Act was enforced by Act No. 35 of 1985 with effect from 24th May 1985. Therefore, when there is a clash and disagreement between section 529A of the Companies Act and another provision of the Companies Act or any other enactment in force on 24th May 1985, Section 529A prevails and the debts are to be paid in terms of Section 529A of the Companies Act.

9. As per clause (b) of sub-Section (1) to Section 529A of the Companies Act, the debts due to secured creditors to the extent such debts under clause (c) of the proviso to sub-Section (1) to Section 52917 rank pari passu with the workmen’s dues18, are to be paid in priority to all other debts. Sub-section (2) to Section 529A states that the debts payable under clauses (a) and (b) of sub- Section (1) to Section 529A shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.

18 The expression ‘Workmen’s dues’ in Sections 529, 529A and 530 of the Companies Act is defined and restricted under sub-section (3)(b) to Section 529 of the Companies Act.

10. In the present case, we are not required to examine the inter-play and principle of proportionality with reference to clauses (a) and (b) to Section 529A of the Companies Act, albeit we must give full effect to and enforce the non-obstante nature of Section 529A of the Companies Act, whereby, notwithstanding anything contained in any other provision of the Companies Act or any other law for the time being in force on 24th May 1985, on winding up of a company, the debt due to the workmen and the debt due to secured creditors as specified, rank pari passu and are to be paid in the manner prescribed therein in priority to all other debts.

11. Section 530 of the Companies Act, which was amended and substituted by Act No. 35 of 1985 with effect from 24th May 1985, states that Section 530 is subject to provisions of Section 529A of the Companies Act. Section 530 of the Companies Act deals with preferential payments that are a level below the overriding preferential payments under Section 529A of the Companies Act. Clause (a) to Section 530(1) of the Companies Act confers preferential status to all revenue taxes, cesses, and rates ‘due’ to the Central or the State government or to a local authority on the ‘relevant date’ as defined in clause (c) to sub-section (8) to Section 530 of the Companies Act, which have become ‘due and payable’ within the twelve months next before the relevant date. The taxes, cesses and rates due to the Central and State governments or local authorities under Section 530 of the Companies Act cannot be given priority over the payments/debts mentioned in Section 529A of the Companies Act. It is, therefore, beyond debate that the provisions of Section 529A of the Companies Act prevail over Section 530 of the Companies Act.

12. We shall subsequently interpret the expression debts ‘due’ in the first portion of clause (a) to Section 530(1) of the Companies Act and the words ‘become due and payable within the twelve months next before that date’ in the latter portion of clause (a) to Section 530(1) of the Companies Act, but at this stage, it is relevant to take on record the ‘relevant date’ as defined in clause (c) to sub- Section (8) to Section 530 of the Companies Act. As per subclause (i) to clause (c) to sub-Section (8) to Section 530 of the Companies Act, the ‘relevant date’ in case where a company has been ordered to be wound up compulsorily, shall be the date of appointment or first appointment of a provisional liquidator, or if no such appointment is made, the date of the winding up order, unless the company had commenced to be wound up voluntarily before that date. The present case is one of compulsory winding up and, therefore, the ‘relevant date’, in the absence of appointment of a provisional liquidator, would be the date on which the winding up order was passed against the Company, which is 1st December 200319.

13. Again, before we proceed to interpret the expressions debt ‘due’ and debt ‘due and payable’ in clause (a) to Section 530(1) of the Companies Act, it is relevant to take note of the effect of Sections 447, 456, 468, 528 and 529 of the Companies Act, as well as the object and purpose behind these provisions. The relevant sections read as follows:

(i) all wages or salary including wages payable for time or piece work and salary earned wholly or in part by way of commission of any workman, in respect of services rendered to the company and any compensation payable to any workman under any of the provisions of the Industrial Disputes Act, 1947;

(ii) all accrued holiday remuneration becoming payable to any workman, or in the case of his death to any other person in his right, on the termination of his employment before, or by the effect of, the winding up order or resolution;

(iii) unless the company is being wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company, or unless the company has, at the commencement of the winding up, under such a contract with insurers as is mentioned in Section 14 of the Workmen's Compensation Act, 1923, rights capable of being transferred to and vested in the workman, all amounts due in respect of any compensation or liability for compensation under the said Act in respect of the death or disablement of any workman of the company;

(iv) all sums due to any workman from a provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the workmen, maintained by the company; (c) “workmen's portion”, in relation to the security of any secured creditor of a company, means the amount which bears to the value of the security the same proportion as the amount of the workmen's dues bears to the aggregate of—

(i) the amount of workmen's dues; and

(ii) the amounts of the debts due to the secured creditors.”

14. As per Section 447 of the Companies Act, an order for winding up of a company operates in favour of all the creditors as if it had been made on a joint petition of a creditor. All creditors are treated as petitioning creditors. Section 456 of the Companies Act requires a provisional liquidator or a liquidator, as the case may be, to take all properties and action claims, to which the company is or appears to be entitled, into his custody or under his control. Sub-section (1A) to Section 456 of the Companies Act entitles the liquidator or the provisional liquidator to write a request to the Chief Presidency Magistrate or the District Magistrate within whose jurisdiction such property, effects or actionable claims etc. of the company may be found, and, thereupon, these officers, after giving notice to the party, are to take possession of the properties, effects, actionable claims, books of accounts, etc and deliver the possession to the liquidator or provisional liquidator. Sub-section (1B) to Section 456 of the Companies Act permits the Chief Presidency Magistrate or the District Magistrate to take such steps or use such force, as in his opinion may be necessary. Section 468 of the Companies Act permits the tribunal/court to direct any contributory, trustee, receiver, banker, agent, officer or other employee of the company to pay, deliver, surrender or transfer forthwith, or within such time as directed, to the liquidator, any money, property, or books and papers in his custody and control to which the company is prima facie entitled.

15. Sections 528 to 530 of the Companies Act fall under Chapter V - ‘Provisions Applicable to Every Mode of Winding Up’, under the sub-heading ‘proof and ranking of claims’. Section 528 of the Companies Act states that debts of all descriptions, including the debts payable on contingency, and claims against the company, present or future, ascertained or sounding only in damages, shall be admissible to proof against the company, on a just estimate being made of such debts as far as possible. Section 456 of the Companies Act, inter alia, provides that all the property and effects of the Company shall be deemed to be in the custody of the tribunal/court as from the date of the order for the winding up of the Company.

16. The objective of giving jurisdiction to the Company Court/tribunal during the process of liquidation of the Company is two-fold: First, to ensure that the assets of a company in liquidation are amassed and constellated to prevent a scramble and dissipation of the assets of an insolvent company. Secondly, the Company Court/tribunal is entrusted with paying off debts from the sale proceeds of the assets so assimilated, according to the waterfall mechanism provided for and specified under Sections 529, 529A and 530 of the Companies Act. Accordingly, and with this objective, Section 529A of the Companies Act refers to the doctrine of pari passu in the proviso to sub-section (1) to Section 529, with reference to the claims inter se the workmen and the secured creditors. Even otherwise, on a conspectus of these sections, the principle applicable and underlying these provisions is to stop alienation and preserve the assets on the date of the bankruptcy, which date, in some cases, can relate back to the date of filing of the winding up petition, as in case of execution of a decree. This preservation is with a view to ensure the division and application of the assets of the company being wound up, as it stood on the relevant date.20 The payment must be made in terms of the priority prescribed.

17. This Court in J.K. (Bombay) (P) Ltd. v. New Kaiser-I-Hind Spg. and Wvg. Co. Ltd.21 has held that once a winding up order is passed, the assets of the company under liquidation are passed under the control of the liquidator, whose statutory duty is to realize them. Thereafter, the creditors are paid out by the liquidator from the sale proceeds of the assets of the liquidated company. The creditors have to be paid in terms of the waterfall or priority mechanism. Therefore, payment has to be first made in terms of Section 529A of the Companies Act to overriding preferential creditors, then to preferential creditors in terms of Section 530 of the Companies Act and lastly, payment has to be made and distributed pari passu among the ordinary or unsecured creditors. This objective and intent is also apparent when we examine the Company Court Rules, as per which the liquidator is to fix a date on or before which all creditors of the company are to prove their debts or claims and to establish any title they may have to priority under Section 530 of the Companies Act.22 Not only this, the rules enable a creditor to claim interest up to the date of the winding up order, and in certain circumstances,

22 See – Rule 147, Companies (Court) Rules, 1959. payment of interest subsequent to the date of winding up.23 There is, however, an exception to the two-fold method, as has been held in Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. and Others24, which we will subsequently elucidate.

18. This brings us to the interpretation of the expressions debt ‘due’ and debt ‘due and payable’ in Section 530(1)(a) of the Companies Act. The interpretation is no longer debatable in view of the judgment of this Court in Rajratha Naranbhai Mills Co. Ltd. v. Sales Tax Officer, Petlad25, which has approved the view taken by D.A. Desai, J., in his judgment in Sales Tax Officer, Petlad v. Rajratna Naranbhai Mills Co. Ltd. and Another26, a judgment, which, we respectfully submit, forms the foundation of our reasoning and ratio in the present case. This Court in Rajratha Naranbhai Mills Co. Ltd. (supra), agreeing with the views expressed by D.A. Desai, J. in Sales Tax Officer, Petlad (supra), overruled the judgment of the division bench under challenge, for several reasons, to hold that the words debt ‘due’ occurring in the first part and the words debt ‘due and payable’ in the latter part of Section 530(1)(a) of the Companies Act are different expressions meant to convey different and not the same meaning. Therefore,

26 (1974) 44 Comp Cas 65 (Guj). for a government debt to be covered under clause (a) to Section 530(1) of the Companies Act, it must not only be a debt ‘due’, but it must also be a debt ‘due and payable’ within twelve months next before the relevant date. The requirements of the latter portion of clause (a) to Section 530(1) of the Companies Act are dual and cumulative, which is debt ‘due and payable’, and not one that is ‘due’. The debt ‘due’ must have become payable at any time within twelve months next before the relevant date. The debt ‘due and payable’ prior to twelve months next to the relevant date is not a preferential debt in terms of Section 530(1)(a) of the Companies Act. Such debt will rank pari passu with ordinary or unsecured creditors, without any preferential treatment. In this regard, we quote the following passages from the decision of this Court in Rajratha Naranbhai Mills Co. Ltd. (supra):

19. D.A. Desai, J., in his judgment in Sales Tax Officer, Petlad (supra) as a judge of Gujarat High Court, had examined the question of when a debt becomes payable, for this is a requirement to be satisfied, and only when the debt becomes ‘due and payable’ during the twelve months next before the relevant date, does the debt get the character of a preferential debt. After elaborate discussion, D.A. Desai, J. has held that the debt becomes ‘due’ under the applicable taxing statute on the date when the sale, that is, the taxing event takes place. Tax may become ‘due’ but may be payable in future in terms of the statute. In the context of the Sales Tax Act in question27, it was held that the sales tax became ‘due and payable’ when the returns were filed. Determination or quantification of the tax at the time of passing of the assessment order in terms of the Sales Tax Act, Sales Tax Officer, Petlad (supra) holds, was not relevant. We need not refer to the Sales Tax Act relevant in Sales Tax Officer, Petlad (supra) for the purpose of the present case. On the other hand, we would have to refer to the provisions of the Customs Act to ascertain the date on which the customs duty in respect of the goods in question became ‘due and payable’. We are answering this question, though not necessary, as the appellant – IDBI is an overriding preferential creditor under Section 529A of the Companies Act and at best, if the requirements of clause (a) to Section 530(1) of the Companies Act are satisfied, the customs dues would fall under Section 530 of the Companies Act and will be categorized as preferential payment. To decide this question, we shall also be examining the question of whether the Customs

27 Bombay Sales Tax Act, 1953 and Central Sales Tax Act, 1956. Act creates a first charge overriding the charge in favour of the secured creditor, namely, the appellant – IDBI.

20. This Court in Dena Bank (supra), while examining the issue of priority of government dues or Crown debts over the dues of other creditors, opined that the Crown's preferential right to recovery of debts over other creditors is confined to ordinary or unsecured creditors. The common law principles of equity and good conscience, as applicable in India and the common law of England, do not accord the government or Crown dues a preferential right for recovery of dues or debts over a mortgagee, pledgee of goods or a secured creditor. The common law doctrine giving preferential rights to the Crown debts confined to ordinary or unsecured creditors constitutes ‘law in force’ within the meaning of Article 372(1) of the Constitution of India, and accordingly, this law continues to be in force. This Court in Dena Bank (supra) specifically refers to and approves the statement of law made in ‘Rashbehary Ghose: Law of Mortgage’28 – “It seems a government debt in India is not entitled to precedence over a prior secured debt.” This principle also emanates from the decision of the Constitution bench of this Court in Builders Supply Corporation v. Union of India and Others29, which was followed by a three 28 TLL, 7th Edn., p. 386. 29 (1965) 2 SCR 289. judges’ bench in Collector of Aurangabad and Another v. Central Bank of India and Another30. At the same time, we must record for clarity that this principle, which vents from the ‘law in force’ within the meaning of Article 372(1) of the Constitution of India, must give way to a statutory charge which may be created by an enactment, whereby a first charge is given to government dues or Crown debts, notwithstanding the charge of the secured creditors.

21. Having considered the provisions of the Companies Act, and the general principles of law, we would now proceed to examine whether the Customs Act creates a first charge for payment of the customs dues, and if so, harmonise and resolve the conflict between the Companies Act and the Customs Act.

22. We would begin by quoting Section 15 of the Customs Act:

23. In a similar factual matrix, a three judges’ bench of this Court in Commissioner of Customs, Calcutta and Another v. Biecco Lawrie Ltd.31 had examined the provisions of Section 15 of the Customs Act, as they then existed, and have opined that clause (b) to Section 15(1) of the Customs Act will cease to apply when the requirements under Section 68 of the Customs Act stand fulfilled and the imported goods are cleared for home consumption. In the context of the present case, we must hold that the debt had become ‘due’ in terms of the two adjudication orders dated 15th October 2000 and ‘payable’ immediately. Thus, the customs duty became ‘due and payable’ prior to twelve months next to the ‘relevant date’; the ‘relevant date' being the date of winding up of the Company on 1st December 2003. The amount ‘due and payable’ in terms of the two adjudication orders dated 15th October 2000 would, therefore, not fall in the category of preferential payments under clause (a) to Section 530(1) of the

24. We have also examined Sections 61, 72 and 142 of the Customs Act32 to consider the question of whether the Customs Act confers and creates statutory first charge on the customs dues, and are of the opinion that the sections do not incorporate a statutory first charge to override the general law, as per the dictum in Dena Bank (supra). The provisions of the land revenue enactment applicable in the present case have not been relied upon by the respondents, in which event, a legal issue relating to conflict of laws would have arisen and required an answer. The provisions in the Customs Act do not, in any manner, negate or override the statutory preference in terms of Section 529A of the Companies Act, which treats the secured creditors and the workmen’s dues33 as overriding preferential creditors; and the government dues limited to debts ‘due and payable’ in the twelve months next before the relevant date, which are to be treated as preferential

33 As defined and payable in terms of Section 529(3)(b) of the Companies Act. payments under Section 530 of the Companies Act, but are ranked below overriding preferential payments and have to be paid after the payment has been made in terms of Section 529 and 529A of the Companies Act. Therefore, the prior secured creditors are entitled to enforce their charge, notwithstanding the government dues payable under the Customs Act.

25. The view and the ratio we have expressed is in consonance with the decision of this Court in Punjab National Bank v. Union of India and Others34. A similar view has also been expressed by a three judges’ bench of this Court in Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs35, with references to the provisions of the Insolvency and Bankruptcy Code, 201636 and the Customs Act. In this context, the three judges’ bench in Sundaresh Bhatt, Liquidator of ABG Shipyard (supra) has referred to Section 238 of the IBC to observe that Section 238 of the IBC clearly overrides any provision of law which is inconsistent with the IBC. This judgment has also made reference to Section 142A of the Customs Act, which reads thus: “142A. Liability under Act to be first charge.— Notwithstanding anything to the contrary contained in any Central Act or State Act, any amount of duty,

36 For short, ‘IBC’. penalty, interest or any other sum payable by an assessee or any other person under this Act, shall, save as otherwise provided in Section 529-A of the Companies Act, 1956 (1 of 1956), the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 (51 of 1993), the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002 and the Insolvency and Bankruptcy Code, 2016 be the first charge on the property of the assessee or the person, as the case may be.” Section 142A of the Customs Act was inserted by Act 8 of 2011 with effect from 8th April 2011. It does not apply to the present litigation. Section 142A of the Customs Act protects and ensures that the dues under the Customs Act do not, in any way, affect the rights of third parties under Section 529A of the Companies Act or rights of the parties as per provisions of the Recovery of Debts Due to Banks and the Financial Institutions Act, 199337, the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 200238 and the IBC. Read in this manner, it is clear to us that the provision of Section 142A of the Customs Act, insofar as it protects the rights of overriding preferential creditors governed and covered by Section 529A of the Companies Act, is clarificatory and declaratory in nature, and does not lay down a new dictum or confer any new right as far as the present case is concerned. However, the enactment of section 142A of the Customs Act does confer or create a first charge on

38 For short, SARFAESI Act’. the dues ‘payable’ under the Customs Act, notwithstanding provisions under any Central Act, but not in cases covered under Section 529A of the Companies Act, RDDBFI Act, SARFAESI Act and the IBC. Section 142A of the Customs Act, post its enactment, would dilute the impact of Section 530 of the Companies Act, which had restricted preferential treatment to government taxes ‘due and payable’ limited to twelve months prior to the ‘relevant date’, without preferential right for taxes that had become ‘due and payable’ in the earlier period.

26. In view of our reasoning, we must hold that the decision of the division bench of the Calcutta High Court in Dytron (India) Ltd. (supra) does not lay down the correct law and is, accordingly, overruled. The decision in Dytron (India) Ltd. (supra) was referred to in Sundaresh Bhatt, Liquidator of ABG Shipyard (supra), wherein this Court observed that reliance of the National Company Law Appellate Tribunal on Dytron (India) Ltd. (supra) was not appropriate as such interpretation has been legislatively overruled by the inclusion of Section 142A in the Customs Act. We wish to clarify, as held above, that the decision in Dytron (India) Ltd. (supra) does not lay down the correct law, as even earlier, the position in law was that the debt ‘due and payable’, when it falls within the four corners of clause (a) to Section 530(1) of the Companies Act, would be treated as preferential payment, but it would not override and be given preference over the payments of overriding preferential creditors covered under Section 529A of the

27. We must also examine the decision of this Court in Imperial Chit Funds (P) Ltd. v. Income Tax Officer, Ernakulam39, wherein this Court has interpreted the legal effect of Section 178 of the Income Tax Act, 196140, which was enacted pursuant to the report of the Company Law Reforms Committee. On interpretation of Section 178 of the Income Tax Act, it was held that the provision is made applicable for any tax which is ‘then or is likely to become payable’, and specifically relates to cases where the company is in liquidation. Consequently, the amount specified and covered by Section 178 of the Income Tax Act is protected in view of the nonobstante clause in sub-section (6) to Section 178 and this amount has to be set aside. In terms of Section 178 of the Income Tax Act, the amount set aside will not form a part of the pool of dues to be distributed among ordinary or unsecured creditors or, for that matter, as indicated over the overriding or preferential creditors under Sections 529A and 530 of the Companies Act.

28. In view of the aforesaid discussion and for the reasons stated, the present appeal is allowed and the impugned judgment dated 26th August 2008 in Original Side Appeal No. 1 of 2005 is set aside. Company Application No. 906 of 2004 filed by the Official Liquidator in Company Petition No. 168 of 2002 will be treated as allowed. The sale proceeds deposited in this Court and converted into fixed deposit receipts, along with the interest accrued thereon, will be paid to the Official Liquidator to be distributed in accordance with the provisions of Sections 529A and 530 of the Companies Act. There would be no order as to costs ....................................... J. (SANJIV KHANNA) ...................................... J. (SUDHANSHU DHULIA) NEW DELHI; AUGUST 18, 2023.