THE MAHARASHTRA STATE CO-OPERATIVE BANK LTD.V. BABULAL LADE & ORS.versusBABULAL LADE & ORS.

                        [2019] 14 S.C.R. 485                             485


   THE MAHARASHTRA STATE CO-OPERATIVE BANK LTD.                          A
                                  v.
                    BABULAL LADE & ORS.
                   (Civil Appeal No. 232 of 2016)
                       DECEMBER 04, 2019                                 B
           [MOHAN M. SHANTANAGOUDAR AND
                KRISHNA MURARI, JJ.]
       Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002: s.13(7) – Whether
                                                                         C
employees dues can take precedence over the claim of secured
creditor – In the instant case, respondent no.6-Society (Karkhana)
obtained credit facilities from appellant-Bank and mortgaged its
properties in return – Default in repayment of loan amount –
Recovery proceedings by appellant-Bank under s.13(2) against
Karkhana – Owing to its poor financial condition, Karkhana issued        D
notice to the employees to proceed on leave without pay –
Representatives of the employees-respondent no.1 to 3 successfully
challenged the notice before Industrial Court and obtained order
whereby Karkhana was directed to pay unpaid salaries to its
employees on top priority basis – Relying on the said order,
                                                                         E
respondent no.1 to 3 sought issuance of recovery certificate against
Karkhana and appellant-Bank – Industrial Court held that recovery
certificate for unpaid salaries of Karkhana employees could not
be issued against the appellant-Bank – It also refused to issue such
a certificate against the Karkhana in view of its precarious financial
condition – However, Karkhana was directed to pay the unpaid             F
salaries to the employees on top priority basis as and when the
funds were available – In challenge against the order, High Court
directed issuance of recovery certificate against Karkhana –
Meanwhile, one of the attached properties of Karkhana was
auctioned and sold by appellant-bank and proceeds appropriated
                                                                         G
by appellant-bank towards the amount due to it from Karkhana –
Aggrieved by non-issuance of a recovery certificate against the
appellant-bank, respondent Nos. 1 to 3 filed writ petition – During
the pendency of this petition, the competent authority under the
Societies Act directed liquidation of the Karkhana – Finally, High
                                                                         H
                                 485
486            SUPREME COURT REPORTS                      [2019] 14 S.C.R.


A     Court disposed of writ petition observing that in terms of s.50 of
      the MRTU & PULP Act, the recovery certificate should have been
      issued to the Collector for recovering the amount from the Karkhana
      and its Managing Director – Further, it held that upon the liquidation
      of the Karkhana, s.529A of the Companies Act, 1956 came into
      operation, thereby according employees’ dues priority over all other
B
      dues in respect of the sale proceeds – In light of this, it was held
      that the Collector could recover the amount from the sale proceeds
      held in trust by appellant-Bank – Instant appeal filed against this
      order – Held: s.529A of the Companies Act, which gives workers’
      dues a priority over all other debts, cannot be applied to the instant
C     case in view of s.167 of the Societies Act which bars applicability
      of Companies Act to societies registered under the Societies Act – It
      is clear from s.50 of the MRTU & PULP Act and s.169 of the Land
      Revenue Code that dues of employees in respect of which an order
      has been made by a Court under Chapter VI of the MRTU & PULP
      Act are recoverable in the same manner as arrears of land revenue
D
      – There is 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 –
      s.169(1) deals with the former category of claims and makes them a
      paramount charge on the land over all other claims – On the other
E     hand, s.169(2) deals with the latter category and gives them priority
      only over unsecured claims – In the facts of the instant case, the
      recovery certificate issued under s.50 of the MRTU & PULP Act
      only makes employees’ dues recoverable as arrears of land revenue
      – Thus, such employees’ dues would fall under the category of claims
      captured by s.169(2), and can only take priority over unsecured
F
      claims – Given that s.50 of the MRTU & PULP Act falls short of
      expressly making the employees’ dues a ‘first charge’, it cannot be
      said that such dues have priority over the claims of the Appellant-
      Bank, which is a secured creditor – Thus, under the scheme of the
      Land Revenue Code and the MRTU & PULP Act, the employees’
G     dues cannot claim priority over the claim of the Appellant-Bank –
      At the same time, the Appellant-Bank does not enjoy any paramount
      charge over the sale proceeds either – Instead, as per s.13(7) of the
      SARFAESI Act, the sale letter and the sale certificate constitute a
      contract which displaces the order of distribution stipulated under
      the said provision – The cumulative effect of these documents is
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 THE MAHARASHTRA STATE CO-OPERATIVE BANK LTD. v.                        487
                BABULAL LADE

that the Appellant-Bank must pay the employees’ dues out of the         A
sale proceeds from the auctioned property – To this extent, the
recovery certificate issued by the Industrial Court may be executed
against the Appellant – Maharashtra Co-operative Societies Act,
1960 – s.167 – Maharashtra Recognition of Trade Unions and
Prevention of Trade Unions and Prevention of Unfair Labour
                                                                        B
Practices Act, 1971 – s.50 – Companies Act – s.529A.
       Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002: s.13(4) – Manner of
distributing the money received by the secured creditor through the
sale of secured assets – s.13(4) of the SARFAESI Act allows a secured
creditor to take possession of the secured assets of a borrower-in-     C
default, including the right to transfer them by way of sale – Manner
of distributing proceeds from such sale is provided under s.13(7) –
In the absence of a contract to the contrary, such proceeds are held
by the secured creditor in trust and are to be applied first towards
payments of costs, charges, and expenses incurred with respect to       D
the sale; second, towards dues of the secured creditor; and lastly,
towards any person entitled to the residue money.
      Disposing of the appeal, the Court
      HELD: 1. Section 167 of the Maharashtra Co-operative
Societies Act, 1960 creates an express bar on the applicability of      E
the Companies Act to societies registered under the Societies
Act. Given that the Karkhana was a co-operative society
registered under the said Act, Section 167 is squarely applicable,
and the High Court committed a grave error in relying upon
Section 529A of the Companies Act. Thus, the employees cannot           F
make use of Section 529A of the Companies Act to claim priority
over all other debts of the Karkhana. [Paras 7, 8][496-D]
      2.1 Whether the employees’ dues can take priority over
other claims by virtue of being recoverable as arrears of land
revenue.                                                                G
      It is clear from Section 50 of the MRTU & PULP Act and
Section 169 of the Land Revenue Code that dues of employees
in respect of which an order has been made by a Court under
Chapter VI of the MRTU & PULP Act are recoverable in the
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488            SUPREME COURT REPORTS                    [2019] 14 S.C.R.


A     same manner as arrears of land revenue. There is 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. Section 169(1)
      deals with the former category of claims and makes them a
      paramount charge on the land over all other claims. On the other
B
      hand, Section 169(2) deals with the latter category and gives them
      priority only over unsecured claims. [Paras 9, 10, 10.1][496-E;
      497-D, F-G]
            2.2 In the facts of this case, the recovery certificate issued
      under Section 50 of the MRTU & PULP Act only makes
C     employees’ dues recoverable as arrears of land revenue. Thus,
      such employees’ dues would fall under the category of claims
      captured by Section 169(2), and can only take priority over
      unsecured claims. Further, only expressly created statutory first
      charges under Central and State laws can take precedence over
D     the claims of secured creditors under the SARFAESI Act. It is
      not enough to merely provide for recovery of dues as arrears of
      land revenue. Given that Section 50 of the MRTU & PULP Act
      falls short of expressly making the employees’ dues a ‘first
      charge’, it cannot be said that such dues have priority over the
      claims of the Appellant-Bank, which is a secured creditor. Thus,
E     under the scheme of the Land Revenue Code and the MRTU &
      PULP Act, the employees’ dues cannot claim priority over the
      claim of the Bank. However, this would not mean that the
      Appellant-Bank automatically holds a paramount charge over the
      proceeds from the sale of the secured assets. Under the scheme
F     of the SARFAESI Act, there is nothing to show that a priority is
      created in favour of banks, financial institutions, and other
      secured creditors as against a first charge specifically created
      under any other statute. [Paras 10.3, 10.4 and 11] [499-D-F]
            3.1 Manner of distributing the money received by the
G     secured creditor through the sale of secured assets. Section 13(4)
      of the SARFAESI Act allows 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. What may be done with the
      proceeds from such sale is provided under Section 13(7). In the
      absence of a contract to the contrary, such proceeds are held by
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 THE MAHARASHTRA STATE CO-OPERATIVE BANK LTD. v.                      489
                BABULAL LADE

the secured creditor in trust and are to be applied first towards     A
payments of costs, charges, and expenses incurred with respect
to the sale; second, towards dues of the secured creditor; and
lastly, towards any person entitled to the residue money. In the
facts of the present case, in exercise of its powers under Section
13(4)(a) of the SARFAESI Act, the Appellant-Bank had taken
                                                                      B
possession of the property of the Karkhana on 13.06.2005. Later,
by sale letter dated 08.03.2010, the Appellant-Bank had offered
to sell the said property to one M/s Vidarbha Realties Pvt. Ltd.
for a total consideration of Rs. 14.10 crores. Notably, this letter
stated that the Appellant-Bank would take responsibility for
employees’ dues, and all other liabilities including statutory        C
liabilities would rest solely on the purchaser. This letter was
followed by a sale certificate dated 14.09.2010 recording the sale
of the property by the Appellant-Bank in favour of M/s Wainganga
Sugar and Power Ltd. for a consideration of Rs. 14.10 crores.
The sale letter dated 08.03.2010 can be relied upon by this Court.
                                                                      D
The contention for the Appellant that the sale letter dated
08.03.2010 was addressed to a different entity than the company
mentioned in the sale certificate dated 14.09.2010 cannot be
accepted. It is found that the addressee in the sale letter dated
08.03.2010, M/s Vidarbha Realties Private Limited, had been
renamed as M/s Wainganga Sugar and Power Private Limited as           E
notified on 05.04.2010. Subsequently, M/s Wainganga Sugar and
Power Private Limited was converted to a public limited company
and its name was changed to M/s Wainganga Sugar and Power
Limited, which is also the name of the purchaser indicated on the
sale certificate. These interim developments between March
                                                                      F
2010 and September 2010 explain why the sale letter dated
08.03.2010 and the final sale certificate issued on 14.09.2010
reflect different names. However, since it is only a case of change
in name of the company, the two entities are the same and the
subsequent purchaser, Respondent No. 5 (successor of
Wainganga Sugar and Power Ltd.) would be bound by the terms           G
of the sale letter dated 08.03.2010. [Paras 11, 12, 13, 13.1][500-
D; 501-B-H; 502-A-B]
      3.2 Further, it cannot be said that the sale letter dated
08.03.2010 is an external document and cannot be relied upon to
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490            SUPREME COURT REPORTS                       [2019] 14 S.C.R.


A     interpret the sale certificate. This is because the sale certificate
      specifically references the sale letter by providing that the
      purchaser accepts “all the encumbrances presently there on the
      property and may arise in future and agreed to pay the same as
      per the sale letter accepted by the purchaser”. In view of such
      wording, the parties intended that the sale letter dated 08.03.2010
B
      be read harmoniously with the sale certificate inasmuch as it
      appears that the same is a part of the sale certificate. When a
      composite reading of the sale certificate dated 14.09.2010 and
      the sale letter dated 08.03.2010 is undertaken, it is revealed that
      though the purchaser had accepted all encumbrances on the
C     property, this did not include employees’ dues in view of the
      specific undertaking by the Appellant-Bank that it would pay them.
      Given that the certificate directly references the prior sale letter,
      it is essential to give effect to its terms. Hence, it can be concluded
      that the parties had agreed to the Bank paying the employees’
      dues and the subsequent purchaser settling other liabilities,
D
      including statutory liabilities. When read in this light, it becomes
      clear that the sale certificate and the sale letter constitute a
      contract. [Para 13.2][502-C-E]
            4.1 Scheme of distribution of sale proceeds under Section
      13(7) of the SARFAESI Act. Section 13(7) prescribes the manner
E     in which money received by the secured creditor pursuant to its
      action under Section 13(4) should be distributed. However, such
      manner of distribution is only applicable in the absence of a
      contract to the contrary. In this case, the sale certificate and sale
      letter form a contract, the cumulative effect of which is an
F     agreement that only the employees’ dues would be settled by
      the Appellant-Bank, and all other liabilities would be settled by
      the subsequent purchaser. Thus, it can be said that the contract
      between the parties diverges from the order of distribution
      stipulated under Section 13(7) and constitutes a contract to the
      contrary, which must necessarily be given effect. [Para 13.3][502-
G     F-H; 503-A]
           4.2 The clarification given by the Appellant-Bank in its
      counter-affidavit before the High Court that by the sale letter
      dated 08.03.2010 it had only accepted liability towards the

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 THE MAHARASHTRA STATE CO-OPERATIVE BANK LTD. v.                          491
                BABULAL LADE

payment of provident fund of the employees, is unsustainable.             A
This clarification is only a subsequent attempt by the Appellant
to escape its liability. If the Appellant genuinely intended to
restrict its liability to provident fund, it would have expressly
stated so in the sale letter, which clearly prescribes the terms
and conditions of the sale between the Appellant and the
                                                                          B
purchaser. At the time of entering into this sale, the Appellant-
Bank was well aware of the unpaid salaries due to the employees
of the Karkhana in view of the orders of the Industrial Court.
Hence, it cannot be said that the Appellant-Bank agreed to use
the term “employees’ dues” in the sale letter despite intending
to limit it to provident fund dues only. Thus, on facts, in terms of      C
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
                                                                          D
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. A
subsequent attempt by the Appellant-Bank to interpret the sale
contract in a manner that reduces the scope of its liability to           E
provident fund dues cannot be given effect. [Paras 13.4 and
13.5][503-B-F]
      Central Bank of India v. State of Kerala (2009) 4 SCC
      94 : [2009] 3 SCR 735 – relied on.
      SICOM Ltd. v. State of Maharashtra & Anr., (2010) 6                 F
      Bom CR 749; City Co-op Credit & Capital Ltd. & Anr.
      v. Official Liquidator of Satwik Electric Control Pvt Ltd.
      (2019) 4 Bom CR 274 – approved.
      Builders Supply Corporation v. Union of India AIR
      1965 SC 1061 : [1965] SCR 289 – referred to.                        G
                       Case Law Reference
(2010) 6 Bom CR 749             approved                 Para 10.1
[1965] SCR 289                  referred to              Para 10.2
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492              SUPREME COURT REPORTS                         [2019] 14 S.C.R.


A     (2019) 4 Bom CR 274                approved                  Para 10.2
      [2009] 3 SCR 735                   relied on                 Para 10.4
              CIVIL APPELLATE JURISDICTION: Civil Appeal No. 232 of
      2016.
B           From the Judgment and Order dated 01.12.2015 of the High
      Court of Judicature at Bombay, Nagpur Bench at Nagpur in Writ Petition
      No. 3879 of 2012.
            B. S. Patil, Sr. Adv., M. Y. Deshmukh, Ms. Manjeet Kirpal,
      Chinmay Deshpande, Geet Ahuja, Advs. for the Appellant.
C
            Dr. Manish Singhvi, Sr. Adv., Dharmendra Kumar Sinha,
      Ms. Shweta Sand, Arpit Parkash, Prakash Meghe, Satyajit A. Desai,
      Ms. Laxmi Malewar, Ms. Anagha S. Desai, Rahul Chitnis, Aaditya
      A. Pande, Chander Shekhar Ashri, Advs. for the Respondents.
D             The Judgment of the Court was delivered by
              MOHAN M. SHANTANAGOUDAR, J.
            1. This appeal arises out of judgment dated 01.12.2015 passed by
      the Nagpur Bench of the High Court of Bombay in W.P. No. 3879/2012.
E     Vide the impugned judgment, the Hon’ble High Court has directed the
      issuance of a recovery certificate against the Appellant herein, thereby
      modifying the order dated 08.08.2011 passed by the Bhandara Bench,
      Industrial Court, Maharashtra.
              2. The brief facts giving rise to this appeal are as follows:
F            2.1 Registered under the Maharashtra Co-operative Societies Act,
      1960 (hereinafter ‘Societies Act’), Respondent No. 6 herein, Vainganga
      Sahakari Sakhar Karkhana Ltd. (hereinafter ‘Karkhana’) had obtained
      credit facilities from the Appellant-Bank and mortgaged its properties in
      return. When it defaulted on the repayment of the loan, the Appellant-
G     Bank initiated recovery proceedings on 10.02.2005, by issuing a notice
      under Section 13(2) of the Securitisation and Reconstruction of Financial
      Assets and Enforcement of Security Interest Act, 2002 (hereinafter
      ‘SARFAESI Act’). Later, on 13.06.2005, the Appellant-Bank took
      physical possession of the mortgaged properties of the Karkhana as per
      Section 13(4) of the SARFAESI Act.
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 THE MAHARASHTRA STATE CO-OPERATIVE BANK LTD. v.                                 493
  BABULAL LADE [MOHAN M. SHANTANAGOUDAR, J.]

       2.2 Owing to its poor financial condition, on 24.01.2006, the             A
Karkhana issued a notice to its employees directing them to proceed on
leave without salary w.e.f. 24.02.2006. This was challenged by
representatives of the Karkhana employees (Respondent Nos. 1 to 3
herein) in ULPA No. 65/2006 filed under Section 28 read with items 9
and 10 of Schedule IV of the Maharashtra Recognition of Trade Unions
                                                                                 B
& Prevention of Unfair Labour Practices Act, 1971 (hereinafter ‘MRTU
& PULP Act’). Vide order dated 24.08.2006, the Industrial Court quashed
the notice and held that it amounted to an unfair labour practice. Further,
noting that Karkhana had not paid salaries to its employees since July
2003, the Industrial Court directed the Karkhana to pay the unpaid salaries
on top priority basis from any funds that may become available with it.          C
       2.3 On the basis of this order, Respondent Nos. 1 to 3 filed a
miscellaneous application, ULPA No. 5/2007, seeking the issuance of a
recovery certificate against the Karkhana, its Managing Director
(Respondent No. 4 herein), and the Appellant-Bank under Section 50 of
the MRTU & PULP Act. It is to be noted that the Appellant was arraigned          D
as a party in this proceeding for the first time. Vide order dated 27.04.2007,
the Industrial Court held that a recovery certificate for unpaid salaries
of the Karkhana employees could not be issued against the Appellant-
Bank. It also refused to issue such a certificate against the Karkhana
and its Managing Director in view of the precarious financial condition
of the Karkhana. However, the Karkhana was directed to pay the unpaid            E
salaries to the employees on top priority basis, as and when funds were
to become available.
       2.4 In the challenge against this order in W.P. No. 4746/2007, the
High Court of Bombay, vide order dated 12.07.2010, held that recovery
could only be made against the Karkhana and not the Appellant-Bank,              F
as there was no employer-employee relationship between the Bank and
the employees. It was further 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      G
the financial condition of the employer. In view of this, the High Court
directed the issuance of a recovery certificate against the Karkhana
and its Managing Director. Pursuant to this direction, the Industrial Court,
vide order dated 08.08.2011, disposed of ULPA No. 5/2007 by issuing a
recovery certificate of Rs.13,89,84,334 against the Karkhana and its
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494             SUPREME COURT REPORTS                         [2019] 14 S.C.R.


A     Managing Director. However, the prayer to issue a recovery certificate
      against the Appellant-Bank was rejected.
              2.5 In the interim period, on 26.08.2010, one of the attached
      properties of the Karkhana was auctioned and sold by the Appellant-
      Bank to one Purti Power and Sugar Ltd. (Respondent No. 5 herein).
B     According to the terms and conditions of this sale, the purchaser had
      accepted all encumbrances on the property as agreed upon in the sale
      letter. It is found that the proceeds from this sale were appropriated by
      the Appellant-Bank towards the amount due to it from the Karkhana.
              2.6 At the same time, aggrieved by the non-issuance of a recovery
C     certificate against the Appellant, Respondent Nos. 1 to 3 filed W.P. No.
      3879/2012. During the pendency of this petition, on 19.01.2013, an order
      was passed by the competent authority under the Societies Act directing
      the liquidation of the Karkhana. Finally, vide the impugned judgment
      dated 01.12.2015, the High Court disposed of W.P. No. 3879/2012. It
      was observed that in terms of Section 50 of the MRTU & PULP Act,
D     the recovery certificate should have been issued to the Collector for
      recovering the amount from the Karkhana and its Managing Director.
      Thus, the order of the Industrial Court dated 08.08.2011 was modified to
      this extent to clarify that the certificate is to be issued to the Collector
      first, who would then proceed to recover the sum as per the recovery
E     certificate. On the question of whether the Collector could effectuate
      such recovery from sale proceeds of the attached property of the
      Karkhana, it was held that 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
F     Companies Act, 1956 (hereinafter ‘Companies Act’) 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. It is against this order
G     that the instant appeal has been filed.
            3. Heard learned Counsel for both the parties.
             4. Learned Senior Counsel for the Appellant argued that the High
      Court erred in applying Section 529A of the Companies Act, as Section
      167 of the Societies Act specifically bars the application of the Companies
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 THE MAHARASHTRA STATE CO-OPERATIVE BANK LTD. v.                                 495
  BABULAL LADE [MOHAN M. SHANTANAGOUDAR, J.]

Act to co-operative societies, as is the case with the Karkhana here. In         A
any case, he submitted that Section 529A of the Companies Act was
misapplied, as the proviso to Section 13(9) of the SARFAESI Act requires
the company to be “in liquidation” at the time of the sale of secured
assets for Section 529A to apply. Given that the Karkhana only went
into liquidation on 19.01.2013, i.e. after the sale of its properties in 2010,
                                                                                 B
he argued that the provision was wrongly applied. In light of this, he also
submitted that there is no other provision that makes employees’ dues a
paramount charge, and the Appellant-Bank, being a secured creditor,
should be given precedence over the proceeds from the auction sale as
per Section 13(7) of the SARFAESI Act. It was also his contention that
a claim for unpaid salaries cannot lie against the Appellant, as there is no     C
employer-employee relationship between the Appellant-Bank and the
said employees.
       5. On the other hand, learned Senior Counsel for Respondent
Nos. 1 to 3 drew our attention to Section 50 of the MRTU & PULP Act,
under which the recovery certificate had been issued by the Industrial           D
Court on 08.08.2011. Noting that this provision makes employees’ dues
recoverable in the same manner as arrears of land revenue, learned
Senior Counsel referred us to Section 169(1) of the Maharashtra Land
Revenue Code, 1966 (hereinafter ‘Land Revenue Code’), which makes
arrears of land revenue a paramount charge on the land. Relying on this,
he submitted that the employees’ dues, recoverable as arrears of land            E
revenue, should be given primacy over the claim of the Appellant-Bank
while dealing with the proceeds from the auction sale.
       6. In addition to this, learned Counsel for Vainganga Sahakari
Sakhar Karkhana Mazdoor Sangh (Respondent No. 8 herein) relied on
the sale letter dated 08.03.2010, which was issued by the Appellant-             F
Bank prior to the sale of the properties of the Karkhana. In this letter,
the Appellant-Bank had stated that it would take responsibility for
employees’ dues. In light of this, it was argued that the Appellant cannot
be absolved of its liability towards the payment of employees’ dues.
Learned Counsel for the subsequent purchaser of the property                     G
(Respondent No. 5 herein) similarly relied on this letter to submit that
the liability for the payment of employees’ dues must be placed on the
Appellant.
       7. In view of the arguments raised and the material on record, the
issue that arises for our consideration in this appeal is whether, in the        H
496            SUPREME COURT REPORTS                         [2019] 14 S.C.R.


A     facts of this case, employees’ dues can take precedence over the claim
      of the secured creditor in respect of the proceeds from sale of secured
      assets of the Karkhana under the SARFAESI Act.
             8. At the outset, we find merit in the argument raised by learned
      Senior Counsel for the Appellant that the High Court erred in applying
B     Section 529A of the Companies Act to this case. It would be apposite to
      refer to Section 167 of the Societies Act in this regard:
            “167. Companies Act not to apply – For the removal of doubt,
            it is hereby declared that the provisions of the Companies Act,
            1956 shall not apply to societies registered or deemed to be
C           registered; under this Act.”
             It is clear that Section 167 creates an express bar on the
      applicability of the Companies Act to societies registered under the
      Societies Act. Given that the Karkhana was a co-operative society
      registered under the said Act, we find that Section 167 is squarely
D     applicable, and the High Court committed a grave error in relying upon
      Section 529A of the Companies Act. Thus, the employees cannot make
      use of Section 529A of the Companies Act to claim priority over all
      other debts of the Karkhana.
             9. Against this backdrop, the next question to be considered is
E     whether the employees’ dues can take priority over other claims by
      virtue of being recoverable as arrears of land revenue. Section 50 of the
      MRTU & PULP Act and Section 169 of the Land Revenue Code are
      relevant in this regard. Section 50 of the MRTU & PULP Act reads as
      follows:

F           “50. Recovery of money due from employer – Where any
            money is due to an employee from an employer under an order
            passed by the Court under Chapter VI, the employee himself or
            any other person authorized by him in writing in this behalf, or in
            the case of death of the employee, his assignee or heirs may,
            without prejudice to any other mode of recovery, make an
G           application to the Court for the recovery of money due to him,
            and if the Court is satisfied that money is so due, it shall issue a
            certificate for the amount to the Collector, who shall, proceed to
            recover the same in the same manner as an arrear of land
            revenue…”
H
 THE MAHARASHTRA STATE CO-OPERATIVE BANK LTD. v.                               497
  BABULAL LADE [MOHAN M. SHANTANAGOUDAR, J.]

      Section 169 of the Land Revenue Code is reproduced hereunder:            A
      “169. Claims of State Government to have precedence over
      all others-– (1) The arrears of land revenue due on account of
      land shall be a paramount charge on the land and on every part
      thereof and shall have precedence over any other debt, demand
      or claim whatsoever, whether in respect of mortgage, judgement-          B
      decree, execution or attachment, or otherwise howsoever, against
      any land or the holder thereof.
      (2) The claim of the State Government to any monies other than
      arrears of land revenue, but recoverable as a revenue demand
      under the provisions of this Chapter, shall have priority over all       C
      unsecured claims against any land or holder thereof.”
        10. From a reading of these provisions, it is evident that dues of
employees in respect of which an order has been made by a Court
under Chapter VI of the MRTU & PULP Act are recoverable in the
same manner as arrears of land revenue. It was argued by learned               D
Senior Counsel for Respondent Nos. 1 to 3 that such treatment of
employees’ dues as arrears of land revenue makes it a charge paramount
to all other claims in view of Section 169(1) of the Land Revenue Code.
In response, learned Senior Counsel for the Appellant contended that
the instant case falls under Section 169(2) of the Land Revenue Code,
which deals with monies other than arrears of land revenue but which is        E
recoverable as a revenue demand. Since Section 169(2) only accords
priority over unsecured claims, he submitted that the Appellant’s claim,
being that of a secured creditor, would still have priority over employees’
dues recoverable as arrears of land revenue.
      10.1 It is important to appreciate that there is a material difference   F
      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. On a close reading of sub-
      sections (1) and (2) of Section 169 of the Land Revenue Code, it
      becomes clear that Section 169(1) deals with the former category         G
      of claims and makes them a paramount charge on the land over
      all other claims. On the other hand, Section 169(2) deals with the
      latter category and gives them priority only over unsecured claims.
      10.2 This distinction has also been noted in SICOM Ltd. v. State
      of Maharashtra & Anr., (2010) 6 Bom CR 749, where a division
                                                                               H
498     SUPREME COURT REPORTS                           [2019] 14 S.C.R.


A     Bench of the High Court of Bombay was called upon to consider
      whether sales tax dues of a company in liquidation, which were
      recoverable as arrears of land revenue under Section 38-B of the
      Bombay Sales Tax Act, 1959, created a first charge. While
      discussing the scheme of Section 169 of the Land Revenue Code,
      the division Bench drew upon the reasoning of the Constitution
B
      Bench of this Court in Builders Supply Corporation v. Union of
      India, AIR 1965 SC 1061 and observed as follows:
      “10. Perusal of the above quoted provisions shows that
      the Maharashtra Land Revenue Code makes a clear distinction
      between the sum which is recoverable as a land revenue and sum
C     which is recoverable as arrears of land revenue. What creates
      paramount charge is the sum which is the amount of land revenue
      and not the sum which is recoverable as land revenue. The
      Constitution Bench of the Supreme Court in its judgment in the
      case of Builders Supply Corporation, referred to above, in our
D     opinion, has made the position absolutely clear. Following
      observations in the case of Builders Supply Corporation, in our
      opinion, are relevant. They read as under:-
         “We have referred to this decision, because it brings out
         emphatically the real character of the provisions prescribed by
E        s. 46(2). Section 46(2) does not deal with the doctrine of the
         priority of Crown debts at all; it merely provides for the recovery
         of the arrears of tax due from an assessee as if it were an
         arrear of land revenue. This provisions cannot be said to convert
         arrears of tax into arrears of land revenue either, all that it
         purports to do is to indicate that after receiving the certificate
F        from the Income-tax Officer, the Collector has to proceed to
         recover the arrears in question as if the said arrears were
         arrears of land revenue. We have already seen that other
         alternative remedies for the recovery of arrears of land revenue
         are prescribed by sub-sections (3) and (5) of s. 46. In making
G        a provision for the recovery of arrears of tax, it cannot be said
         that s. 46 deals with or provides for the principle of priority of
         tax dues at all; and so, it is impossible to accede to the argument
         that s. 46 in terms displaces the application of the said doctrine
         in the present proceedings.”

H                                                     (emphasis supplied)
 THE MAHARASHTRA STATE CO-OPERATIVE BANK LTD. v.                              499
  BABULAL LADE [MOHAN M. SHANTANAGOUDAR, J.]

      This difference in the scope of sub-sections (1) and (2) of Section     A
169 of the Land Revenue Code was again noted by the High Court of
Bombay in City Co-op Credit & Capital Ltd. & Anr. v. Official
Liquidator of Satwik Electric Controls Pvt Ltd., (2019) 4 Bom CR
274.
      10.3 When we look to the facts of the instant case, it is seen that     B
      the recovery certificate issued under Section 50 of the MRTU &
      PULP Act only makes employees’ dues recoverable as arrears
      of land revenue. Thus, in view of the foregoing discussion, it is
      clear that such employees’ dues would fall under the category of
      claims captured by Section 169(2), and can only take priority over
      unsecured claims.                                                       C

      10.4 Further, as has been held by this Court in Central Bank of
      India v. State of Kerala, (2009) 4 SCC 94, only expressly created
      statutory first charges under Central and State laws can take
      precedence over the claims of secured creditors under the
      SARFAESI Act. It is not enough to merely provide for recovery           D
      of dues as arrears of land revenue. Given that Section 50 of the
      MRTU & PULP Act falls short of expressly making the
      employees’ dues a ‘first charge’, it cannot be said that such dues
      have priority over the claims of the Appellant-Bank, which is a
      secured creditor. Thus, we find that under the scheme of the Land       E
      Revenue Code and the MRTU & PULP Act, the employees’ dues
      cannot claim priority over the claim of the Appellant-Bank.
       11. However, this does not mean that the Appellant-Bank
automatically holds a paramount charge over the proceeds from the sale
of the secured assets. Under the scheme of the SARFAESI Act, there            F
is nothing to show that a priority is created in favour of banks, financial
institutions, and other secured creditors as against a first charge
specifically created under any other statute. This has been captured
succinctly by this Court in Central Bank (supra) as follows:
      “126. While enacting the DRT Act and the Securitisation Act,            G
      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 529-A of the
                                                                              H
500            SUPREME COURT REPORTS                           [2019] 14 S.C.R.


A           Companies Act or Section 11(2) of the EPF act and ensured that
            notwithstanding series of judicial 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
B
            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.”
C            Thus, in the absence of a paramount charge created in favour of
      the employees’ dues under the MRTU & PULP Act, it cannot be said
      that the Appellant-Bank automatically gets a first charge under the
      SARFAESI Act.
             12. In this light, what becomes relevant for the instant case is the
D     scheme of the SARFAESI Act in relation to the manner of distributing
      the money received by the secured creditor through the sale of secured
      assets. The following parts of Section 13 of the SARFAESI Act are
      relevant in this regard:
                13. Enforcement of security interest – (4) In case the
E               borrower fails to discharge his liability in full within the period
                speci-fied in sub-section (2), the secured creditor may take
                recourse to one or more of the follow-ing measures to recover
                his secured debt, namely:— (a) take possession of the secured
                assets of the borrower including the right to transfer by way of
F               lease, assignment or sale for realising the secured asset…
                                          xxx
                (7) Where any action has been taken against a borrower under
                the provisions of sub-section (4), all costs, charges and expenses
                which, in the opinion of the secured creditor, have been properly
G               incurred by him or any expenses incidental thereto, shall be
                recoverable from the borrower and the money which is received
                by the secured creditor shall, in the absence of any contract to
                the contrary, be held by him in trust, to be applied, firstly, in
                payment of such costs, charges and expenses and secondly, in
                discharge of the dues of the secured creditor and the residue
H
 THE MAHARASHTRA STATE CO-OPERATIVE BANK LTD. v.                              501
  BABULAL LADE [MOHAN M. SHANTANAGOUDAR, J.]

          of the money so received shall be paid to the person entitled       A
          thereto in accordance with his rights and interests.
       Section 13(4) of the SARFAESI Act allows 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. What may be done with the
proceeds from such sale is provided under Section 13(7). In the absence       B
of a contract to the contrary, such proceeds are held by the secured
creditor in trust and are to be applied first towards payments of costs,
charges, and expenses incurred with respect to the sale; second, towards
dues of the secured creditor; and lastly, towards any person entitled to
the residue money.
                                                                              C
       13. In the facts of the present case, in exercise of its powers
under Section 13(4)(a) of the SARFAESI Act, the Appellant-Bank had
taken possession of the property of the Karkhana on 13.06.2005. Later,
vide sale letter dated 08.03.2010, the Appellant-Bank had offered to sell
the said property to one M/s Vidarbha Realties Pvt. Ltd. for a total
consideration of Rs. 14.10 crores. Notably, this letter stated that the       D
Appellant-Bank would take responsibility for employees’ dues, and all
other liabilities including statutory liabilities would rest solely on the
purchaser. This letter was followed by a sale certificate dated 14.09.2010
recording the sale of the property by the Appellant-Bank in favour of M/
s Wainganga Sugar and Power Ltd. for a consideration of Rs. 14.10             E
crores.
      13.1 Before delving into the applicability of the distribution of the
      sale proceeds as per Section 13(7) of the SARFAESI Act, we
      note that the sale letter dated 08.03.2010 can be relied upon by
      this Court. The contention of the learned Senior Counsel for the        F
      Appellant that the sale letter dated 08.03.2010 was addressed to
      a different entity than the company mentioned in the sale certificate
      dated 14.09.2010 cannot be accepted. It is found that the addressee
      in the sale letter dated 08.03.2010, M/s Vidarbha Realties Private
      Limited, had been renamed as M/s Wainganga Sugar and Power
      Private Limited as notified on 05.04.2010. Subsequently, on             G
      03.06.2010, M/s Wainganga Sugar and Power Private Limited
      was converted to a public limited company and its name was
      changed to M/s Wainganga Sugar and Power Limited, which is
      also the name of the purchaser indicated on the sale certificate.
      These interim developments between March 2010 and September
                                                                              H
502      SUPREME COURT REPORTS                           [2019] 14 S.C.R.


A     2010 explain why the sale letter dated 08.03.2010 and the final
      sale certificate issued on 14.09.2010 reflect different names.
      However, since it is only a case of change in name of the company,
      we find that the two entities are the same and the subsequent
      purchaser, Respondent No. 5 herein (successor of Wainganga
      Sugar and Power Ltd.) would be bound by the terms of the sale
B     letter dated 08.03.2010.
      13.2 Further, it cannot be said that the sale letter dated 08.03.2010
      is an external document and cannot be relied upon to interpret the
      sale certificate. This is because the sale certificate specifically
      references the sale letter by providing that the purchaser accepts
C     “all the encumbrances presently there on the property and
      may arise in future and agreed to to pay the same as per the
      sale letter accepted by the purchaser”. In view of such wording,
      we find that the parties intended that the sale letter dated
      08.03.2010 be read harmoniously with the sale certificate inasmuch
      as it appears that the same is a part of the sale certificate. When
D
      a composite reading of the sale certificate dated 14.09.2010 and
      the sale letter dated 08.03.2010 is undertaken, it is revealed that
      though the purchaser had accepted all encumbrances on the
      property, this did not include employees’ dues in view of the specific
      undertaking by the Appellant-Bank that it would pay them. Given
E     that the certificate directly references the prior sale letter, it is
      essential to give effect to its terms. Hence, it can be concluded
      that the parties had agreed to the Bank paying the employees’
      dues and the subsequent purchaser settling other liabilities, including
      statutory liabilities. When read in this light, it becomes clear that
      the sale certificate and the sale letter constitute a contract.
F
      13.3 This brings us to the scheme of distribution of sale proceeds
      under Section 13(7) of the SARFAESI Act. As mentioned supra,
      this provision prescribes the manner in which money received by
      the secured creditor pursuant to its action under Section 13(4)
      should be distributed. However, such manner of distribution is
G     only applicable in the absence of a contract to the contrary. In
      this case, the sale certificate and sale letter form a contract, the
      cumulative effect of which is 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. Thus,
      it can be said that the contract between the parties diverges from
H
 THE MAHARASHTRA STATE CO-OPERATIVE BANK LTD. v.                                     503
  BABULAL LADE [MOHAN M. SHANTANAGOUDAR, J.]

      the order of distribution stipulated under Section 13(7) and                   A
      constitutes a contract to the contrary, which must necessarily
      be given effect.
      13.4 In this regard, we find that the clarification given by the
      Appellant-Bank in its counter-affidavit before the High Court that
      by the sale letter dated 08.03.2010 it had only accepted liability             B
      towards the payment of provident fund of the employees, is
      unsustainable. Upon perusing the record, it is clear that this
      clarification is only a subsequent attempt by the Appellant to escape
      its liability. If the Appellant genuinely intended to restrict its liability
      to provident fund, it would have expressly stated so in the sale
      letter, which clearly prescribes the terms and conditions of the               C
      sale between the Appellant and the purchaser. It is important to
      bear in mind that at the time of entering into this sale, the Appellant-
      Bank was well aware of the unpaid salaries due to the employees
      of the Karkhana in view of the orders of the Industrial Court
      dated 24.08.2006 and 27.04.2007. Hence, it cannot be said that
                                                                                     D
      the Appellant-Bank agreed to use the term “employees’ dues” in
      the sale letter despite intending to limit it to provident fund dues
      only.
      13.5 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                    E
      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                  F
      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.
                                                                                     G
       14. In view of the foregoing discussion, we summarize our findings
as follows:
      (i) Section 529A of the Companies Act, which gives workers’
dues a priority over all other debts, cannot be applied to the instant case
in view of Section 167 of the Societies Act.
                                                                                     H
504              SUPREME COURT REPORTS                         [2019] 14 S.C.R.


A           (ii) Merely by virtue of being recoverable as arrears of land
      revenue, the employees’ dues, in respect of which a recovery certificate
      had been issued by the Industrial Court, cannot be treated as a paramount
      charge in terms of Section 169(1) of the Land Revenue Code. Instead,
      under 169(2) of the Land Revenue Code, they would take precedence
      only over unsecured claims.
B
             (iii) At the same time, the Appellant-Bank does not enjoy any
      paramount charge over the sale proceeds either. Instead, as per Section
      13(7) of the SARFAESI Act, the sale letter dated 08.03.2010 and the
      sale certificate dated 14.09.2010 constitute a contract which displaces
      the order of distribution stipulated under the said provision.
C
            (iv) 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 against the Appellant
      herein. Further, given the significant delay in payment of the salaries to
D     the employees, such recovery shall be made by the Collector within a
      period of six months from the date of this order.
            (v) 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
E     months from the date of this order.
             15. The instant appeal is disposed of accordingly.


      Devika Gujral                                              Appeal disposed of.
F




G




H