REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.        9630      OF 2011   (Arising out of Special Leave Petition (Civil) No. 7642 of 2011)

Employees Provident Fund Commissioner … Appellant(s)

Versus

O.L. of Esskay Pharmaceuticals Limited … Respondent(s)

With

CIVIL APPEAL NO. 9633         OF 2011   (Arising out of Special Leave Petition (Civil) No.7644 of 2011)

CIVIL APPEAL NO. 9632         OF 2011   (Arising out of Special Leave Petition (Civil) No.7645 of 2011)

CIVIL APPEAL NO.        9631      OF 2011   (Arising out of Special Leave Petition (Civil) No.7646 of 2011)

J U D G M E N T

G. S. Singhvi, J.

1. Delay condoned.

2. Leave granted.

3. The  question  which  arises  for  consideration  in  these  appeals  is  

whether priority given to the dues payable by an employer under Section 11  

of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952  

(for short, `the EPF Act’) is subject to Section 529A of the Companies Act,  

1956 (for short, `the Companies Act’) in terms of which the workmen’s dues  

and debts due to secured creditors are required to be paid in priority to all  

other debts.

4. For the sake of convenience, we have culled out the facts from the  

record of the appeal arising out of SLP(C) No. 7642/2011.

5. Messrs  Esskay  Pharmaceuticals  Limited  is  a  company  registered  

under the Companies Act.  It falls within the definition of ‘employer’ under  

Section 2(e) of the EPF Act.   On account of the company’s failure to pay  

the dues under the EPF Act for the periods from March 1998 to May 1999  

and June 1999 to August 2001,  the competent authority passed two orders  

under  Section  7A  of  the  EPF  Act  and  held  that  it  was  liable   to  pay  

Rs.14,96,751/-.  The company appears to have paid a sum of Rs.4,02,126/-  

but did not pay the remaining amount despite the issue of demand notices  

dated  12.4.2001 and 19.4.2001 by the  competent  authority.   The  orders  

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passed under Section 8F of the EPF Act, which were communicated to the  

bankers of the company also did not yield the desired result.  The competent  

authority  then issued warrant  for  attachment of  the  company’s property.  

This was followed by sale notice dated 20.9.2001.

6. Although, it is not clear from the record as to what happened to the  

sale notice, but this much is evident that after 2 years and about 4 months,  

the Enforcement Officer informed the appellant that the Gujarat High Court  

has  passed  order  dated  11.3.2004  for  winding  up  of  the  company  and  

appointed Official Liquidator to look after its properties and clear the debts.  

The appellant then approached the Official Liquidator for payment of the  

amount determined under Section 7A of the EPF Act, but the latter did not  

give any response.   

7. Company Application No. 356/2007 filed by the appellant for issue of  

a  direction  to  the  Official  Liquidator  to  pay  the  amount  payable  by  the  

employer under the EPF Act was dismissed by the learned Company Judge  

by relying upon the order passed by the Division Bench of the High Court in  

Company Application No. 216 of 1997 in Company Petition No.205 of 1996  

and order dated 31.8.2005 passed in Company Application No.195 of 2005 -  

Regional Provident Commissioner-I  v.  M.A. Kuvadia, O.L. and others.   

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8. The appellant challenged the order of the learned Company Judge by  

filing  an appeal  but  could not  convince  the  Division Bench of  the  High  

Court to entertain his plea that the amount due from the employer is first  

charge on the assets of the company and is payable in priority to all other  

dues.   The  Division  Bench  relied  upon  the  judgment  of  the  co-ordinate  

Bench and held that the learned Company Judge did not commit any error  

by dismissing the application filed by the appellant.

9. Since the  impugned judgment and the order  passed by the  learned  

Company Judge are entirely based on the order passed by another Division  

Bench  in  Company  Application  No.  216/1997  in  Company  Petition  No.  

205/1996, it will be appropriate to notice the ratio of that order.  The same is  

as under:

“Section-530,  Sub-section  (1),  clearly  observes  that  in  a  winding up matter, subject to the provisions of Section-529(A),  there shall  be paid in priority  to all  other  debts,  dues of  the  Government, which are in the form of revenues, tax, etc.  When  Section-530  is  made  subordinate  to  Section-529(A),  then,  a  Court  is  obliged  to  look  into  the  material  provisions  as  contained  under  Section-529(A).  Section-529(A)  clearly  provides that notwithstanding anything contained in any other  provision of the Companies Act or any other law for the time  being in force, in the winding up of a company, workmen's dues  and debts due to the secured creditors to the extent such debts  rank  under  clause  (c)  of  the  proviso  to  sub-section  (1)  of  

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Section-529 pari passu with such dues, shall be paid in priority  to all other debts.

Section-529(A) has been introduced in the year 1985. It starts  with  a  non-obstante  clause.  It  clearly  provides  that  "notwithstanding anything contained in any other provision of  the Act or any other law for the time being in force". A true  understanding  of  Section-529(A)  would  make  clear  that  the  provisions  of  Section-529(A)  shall  override  the  provisions  contained  in  Section-530.  Not  only  this,  the  provisions  contained  in  Section-529(A)  shall  override  the  provisions  contained in the ESI Act because the ESI Act is an Act of 1948,  while  the amendment in  the Companies Act has been made in  the  year  1985 and with  the  fullest  knowledge  that  it  was  to  override the provisions contained in Section-530. If Section-94  of the ESI Act and Section-530 of the Companies Act are made  subordinate  to  Section-529(A),  then,  Section-529(A)  shall  march over the rights of others to which the others are entitled  either  under  the  special  laws  or  under  Section-530  of  the  Companies Act. A combined/conjoint   reading   of   Section- 529(A) of the Companies Act would make clear that in a matter  of winding up, the workmen's  dues and the debts due to the  secured creditors to the extent such debts rank under clause (c)  of the proviso to Sub-section (l) of Section-529(A) pari passu  with such dues, shall be paid in priority to all other debts. If  such dues and debts are paid in full and even thereafter, some  money is left with the Official Liquidator for its   distribution,  then, such money can be distributed under Section-530 of the  Companies  Act.  When  such  a  situation  crops  up,  the  State  Government or the Central Government of the Local Authority  may file their claim before the learned Company Judge and at  that point of time, they may say that in view of their preferential  right,  either under the Local Act or under Section-530 of the  Companies Act, they be paid."

10. The factual matrix of the other appeals is more or less similar.  In all  

the cases, applications filed by the appellant for payment of the amount due  

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from the employer were dismissed by the learned Company Judge and the  

appeals were dismissed by the Division Bench of the High Court.

11. Ms. Aparna Bhat,  learned counsel for the appellant relied upon the  

judgment in Maharashtra State Cooperative Bank Ltd. v. Assistant Provident  

Fund  Commissioner  (2009)  10  SCC  123  and  argued  that  the  impugned  

judgment and the order of the learned Company Judge are liable to be set  

aside because the High Court’s interpretation of Section 11 of the EPF Act is  

contrary to the law laid down by this Court.  She submitted that even though  

Section 529A of the Companies Act also contains a non obstante clause, the  

provisions contained therein cannot override Section 11(2) of the EPF Act in  

terms  of  which  the  amount  due  from  an  employer  in  respect  of  the  

employees  contribution  is  treated  as  first  charge  on  the  assets  of  the  

company and is  payable  in  priority  to  all  other  debts.   Ms.  Bhat  further  

argued that the EPF Act is  a special  legislation for institution of various  

types  of  funds  and the schemes  and in  view of  the  non obstante clause  

contained  in  Section  11(2),  priority  given  to  the  dues  payable  by  an  

employer  will  prevail  over  the  priority  given under  Section 529A of  the  

Companies Act to the workmen’s dues and debts due to secured creditors.  

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12. Shri Gaurav Agrawal, learned counsel for respondent No.1 supported  

the impugned judgment and argued that the statutory priority given to the  

dues of the employees under Section 11(2) of the EPF Act cannot override  

the priority given to the dues of workers and secured creditors under Section  

529A(1) of the Companies Act because Parliament had inserted that section  

in  the  Companies  Act  with  effect  from  24.5.1995  knowing  fully  well  

priority given to the dues of the employees under the EPF Act.  He further  

argued that the non obstante clause contained in the subsequent legislation,  

i.e.  Section  529A (1)  of  the  Companies  Act  would  prevail  over  similar  

clause contained in the earlier legislation, i.e. Section 11(2) of the EPF Act.  

In support of this argument, Shri Agrawal relied upon the judgment of this  

Court  in  Maharashtra  Tubes  Ltd.  v.  State  Industrial  and  Investment  

Corporation of Maharashtra Ltd.  (1993) 2 SCC 144.

13. We  have  considered  the  respective  arguments.   For  deciding  the  

question  arising  in  these  appeals,  it  will  be  useful  to  notice  the  relevant  

statutory provisions.

The EPF Act

14. Section 11 (unamended) of the EPF Act was as under:

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“11.   Priority  of  payment  of  contributions  over  other  debts.– Where any employer is adjudicated insolvent or, being  a company, an order for winding up is made, the amount due –  

(a) from the employer in relation to an establishment to which  any Scheme applies in respect of any contribution payable to  the  Fund,  damages  recoverable  under  Section  14-B,  accumulations required to be transferred under sub-section (2)  of Section 15 or any charges payable by him under any other  provision of this Act or of any provision of the Scheme; or  

(b) from the employer in relation to an exempted establishment  in respect of any contribution to the provident fund (in so far as  it  relates  to  exempted  employees),  under  the  rules  of  the  provident fund (any contribution payable by him towards the  Family  Pension  Fund  under  sub-section  (6)  of  Section  17),  damages  recoverable  under  Section  13-B  or  any  charges  payable  by  him  to  the  appropriate  Government  under  any  provision of this Act or under any of the conditions specified  under section 17,

shall where the liability therefor has accrued before the order of  adjudication or winding up is made, be deemed to be included,  among the debts  which under  Section  49 of  the  Presidency- towns  Insolvency  Act,  1909,  or  under  Section  61  of  the  Provincial  Insolvency Act,  1920 or under Section 230 of the  Indian Companies Act, 1913, are to be paid in priority to all  other debts in the distribution of the property of the insolvent or  the assets of the company being wound up, as the case may be.”

15. The EPF Act was amended by Act Nos. 40 of 1973, 19 of 1976 and  

33 of 1988.  By Act No. 40 of 1973, Section 11 was renumbered as Section  

11(1) and a new sub-section was added as Section 11(2) and it was declared  

that  any  amount  due  from  an  employer  in  respect  of  the  employees’  

contribution  shall  be  deemed  to  be  the  first  charge  on  the  assets  of  the  

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establishment and shall be paid in priority to all other debts.  The scope of  

Section  11(2)  was  enlarged  by  Act  No.  33  of  1988  by  including  the  

employer’s contribution.   

16. The background in which Amendment Act No.33 of 1988 was passed  

is discernible from the Statement of Objects and Reasons appended to the  

Employees’  Provident  Funds and Miscellaneous Provisions (Amendment)  

Bill, 1988, the relevant portions of which are extracted below:

“The  Employees'  Provident  Funds  and  Miscellaneous  Provisions Act, 1952 provides for the institution of Compulsory  Provident  Fund;  Family  Pension  Fund  and  Deposit  Linked  Insurance Fund, for the benefit  of the employees in factories  and other establishments.  The Act is  at  present  applicable to  173 industries and classes of establishments employing twenty  or  more  persons.  As  on  31-3-1987,  about  1.66  1akh  establishments with about 1.38 crore subscribers were covered  under the Act.

2. The Act was last amended in 1976. The Government had set  up a high level Committee in April, 1980 to review the working  of the Employees' Provident Funds Organisation and to suggest  improvements.  The  Committee  had  made  a  number  of  recommendations involving amendment of the Act. The Central  Board of Trustees, Employees' Provident Fund had also, from  time to time, made certain recommendations for amendment of  the  Act.  The Standing Labour  Committee  had at  its  meeting  held in September, 1986 considered inter alia the question of  enhancement  of  the  rate  of  provident  fund  contribution  and  recommended suitable enhancement.

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3. Based on the above recommendations, it is proposed to carry  on certain amendments in the Act. Some of the more important  amendments are:—

(i) to (v) xxxx xxxx xxxx

(vi) a provision is being made for treating the entire amount  of arrears of provident fund dues as first charge on the assets of  an establishment in the event of its liquidation;

xxxx xxxx xxxx”

17. Section 11, as it stands after the amendment of 1988, reads as under:

“11.   Priority  of  payment  of  contributions  over  other  debts.–  (1)  Where any employer is adjudicated insolvent or,  being a company, an order for winding up is made, the amount  due –   

(a) from  the  employer  in  relation  to  an  establishment  to  which any Scheme or the Insurance Scheme applies in  respect of any contribution payable to the Fund or, as the  case  may be,  the  Insurance  Fund damages  recoverable  under  section  14B,  accumulations  required  to  be  transferred  under  sub-section  (2)  of  section  15  or  any  charges payable by him under any other provision of this  Act or of any provision of the Scheme or the Insurance  Scheme; or

(b) from  the  employer  in  relation  to  an  exempted  establishment  in  respect  of  any  contribution  to  the  provident fund or any insurance fund (in so far it relates  to exempted employees), under the rules of the provident  fund or any insurance fund, any contribution payable by  him towards the Pension Fund under sub-section (6) of  section  17,  damages  recoverable  under  section  14B or  any  charges  payable  by  him  to  the  appropriate  

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Government under any provision of  this  Act,  or  under  any of the conditions specified under section 17,

shall, where the liability therefore has accrued before the order  of  adjudication  or  winding  up  is  made,  be  deemed  to  be  included  among  the  debts  which  under  section  49  of  the  Presidency Towns Insolvency Act, 1909 (3 of 1909), or under  section 61 of the Provincial Insolvency Act, 1920 (5 of 1920),  or under section 530 of the Companies Act, 1956 (1 of 1956),  are to be paid in priority to all other debts in the distribution of  the property of the insolvent or the assets of the company being  wound up, as the case may be.

Explanation. – In this sub-section and in section 17, “insurance  fund” means any fund established by an employer under any  scheme for providing benefits in the nature of life insurance to  employees, whether linked to their deposits in provident fund or  not,  without  payment  by  the  employees  of  any  separate  contribution or premium in that behalf.

(2) Without prejudice to the provisions of sub-section (1), if  any amount is due from an employer whether in respect of the  employee’s  contribution  (deducted  from  the  wages  of  the  employee) or the employer’s contribution, the amount so due  shall  be  deemed  to  be  the  first  charge  on  the  assets  of  the  establishment, and shall, notwithstanding anything contained in  any other law for the time being in force, be paid in priority to  all other debts.”

18. An analysis of Section 11 of the EPF Act shows that it gives statutory  

priority to the amount payable to the employees over other debts.  Section  

11(1) relates to an employer who is adjudged insolvent or being a company  

against whom an order of winding up is made.  It lays down that the amount  

due from the employer in respect of any contribution payable to the Fund or,  

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as the case may be, the Insurance Fund, damages recoverable under Section  

14B,  accumulations  required  to  be  transferred  under  Section  15(2) or  any  

charges payable by him under any other provision of the Act or the Scheme  

or the Insurance Scheme shall be paid in priority to all other debts in the  

distribution of the property of the insolvent or the assets of the company  

being wound up, as the case may be.  Section 11(2) contains a non obstante  

clause and lays down that if any amount is due from an employer whether in  

respect  of  the  employee’s  contribution  deducted  from  the  wages  of  the  

employees or the employer's contribution, the same shall be deemed to be  

the first charge on the assets of the establishment and shall, notwithstanding  

anything contained in any other law for the time being in force, be paid in  

priority to all other debts.  To put it differently, sub-section (2) of Section 11  

not  only  declares  that  the  amount  due  from  an  employer  towards  

contribution payable under the EPF Act shall be treated as the first charge on  

the  assets  of  the  establishment,  but  also  lays  down that  notwithstanding  

anything contained in any other law, such dues shall be paid in priority to all  

other debts.    

The Companies Act

19. Part VII of the Companies Act, which consists of 5 Chapters contains  

provisions relating to winding up of a company.  The provisions contained  

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in Chapter V (Sections 528 to 560), which deal with proof and ranking of  

claims are applicable to every mode of winding up.  Section 528 lays down  

that in every winding up, all debts payable on a contingency, and all claims  

against the company, present or future, certain or contingent, ascertained or  

sounding only in damages, shall be admissible to proof against the company.  

This is subject to the rider that in the case of insolvent companies, law of  

insolvency  will  be  applicable  in  accordance  with  the  provisions  of  the  

Companies Act.  Section 529 deals with application of insolvency rules in  

winding up of insolvent companies.  Section 530, as it existed prior to the  

amendment of the Companies Act by Act No.35 of 1985, gave priority to  

revenue of the State and local authorities and various amounts payable to  

employees  including  the  dues  payable  from a  provident  fund,  a  pension  

fund, a gratuity fund or any other fund maintained by the company for the  

welfare of the employees.  By the Companies (Amendment) Act No.35 of  

1985,  proviso  was  added  to  Section  529(1).   By  the  same  amendment,  

Sections  529(3)  and  529A  were  inserted  in  the  Companies  Act.  

Simultaneously, the expression “subject to the provisions of Section 529A”  

was inserted in Section 530(1).  Paragraph 2 of the Statement of Objects and  

Reasons  contained  in  the  Companies  (Amendment)  Bill,  1985  reads  as  

under:

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“2. Another announcement made by the Finance Minister in  his Budget speech relates to the decision of the Government to  introduce  necessary  legislation  so  that  legitimate  dues  of  workers rank pari passu with secured creditors in the event of  closure  of  the  company  and  above  even  the  dues  to  Government.  The  resources  of  companies  constitute  a  major  segment  of  the  material  resources  of  the  community  and  common good demands that the ownership and control of the  resources  of  every  company  are  so  distributed  that  in  the  unfortunate event of its liquidation, workers, whose labour and  effort constitute an invisible but easily perceivable part of the  capital of the company are not deprived of their legitimate right  to  participate  in  the  produce  of  their  labour  and effort.  It  is  accordingly  proposed to  amend Sections 529 and 530 of  the  Companies  Act  and also to  incorporate  a new section in the  Act,  namely,  Section 529-A (vide  clauses  4,  5  and 6  of  the  Bill).”

20. Sections 529(1) and (3) and 529A and the relevant parts of Section  

530, as they stand after the 1985 amendments read as under:   

“529.  Application  of  insolvency  rules  in  winding  up  of  insolvent companies. – (1) In the winding up of an insolvent  company,  the  same rules  shall  prevail  and be  observed with  regard to—

(a)   debts provable;

(b)  the  valuation  of  annuities  and  future  and  contingent  liabilities; and

(c)   the respective rights of secured and unsecured creditors; as  are in force for the time being under the law of insolvency with  respect to the estates of persons adjudged insolvent:

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Provided that  the  security  of  every  secured creditor  shall  be  deemed to be subject to a  pari passu charge in favour of the  workmen to the extent of the workmen’s portion therein, and,  where a secured creditor, instead of relinquishing his security  and proving his debt, opts to realise his security,—

(a) the liquidator shall be entitled to represent the workmen  and enforce such charge;

(b) any  amount  realised  by  the  liquidator  by  way  of  enforcement  of  such charge shall  be applied rateably  for  the  discharge of workmen’s dues; and

(c) so much of the debt due to such secured creditor as could  not be realised by him by virtue of the foregoing provisions of  this  proviso  or  the  amount  of  the  workmen’s  portion  in  his  security,  whichever  is  less,  shall  rank  pari  passu with  the  workmen’s dues for the purposes of section 529A.

529(3).  For  the  purposes  of  this  section,  section  529A  and  section 530,–  

(a) “workmen”,  in  relation  to  a  company,  means  the  employees of  the company,  being workmen within the  meaning  of  the  Industrial  Disputes  Act,  1947  (14  of  1947);

(b) “workmen's dues”, in relation to a company, means the  aggregate of the following sums due from the company  to its workmen, namely:-

(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 (14 of 1947);

(ii) all  accrued  holiday  remuneration  becoming  payable  to  any  workman,  or  in  the  case  of  his  

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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 (8 of 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;

529A.Overridingpreferential payment.—(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 sub-section (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.

16

530. Preferential payments.– (1) In a winding up subject to  the provisions of section 529A, there shall be paid in priority to  all other debts–  

(a) all revenues taxes, cesses and rates due from the company  to the Central or a State Government or to a local authority  at  the  relevant  date  as  defined  in  clause  (c)  of  the  sub- section (8), and having become due and payable within the  twelve months next before that date;

(b) 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  employee,  in  respect  of  services  rendered to the company and due for a period not exceeding  four  months  within  the  twelve  months  next  before  the  relevant  date subject  to  the  limit  specified in  sub-section  (2);

  (f) all  sums due  to  any employee  from a  provident  fund,  a  pension  fund,  a  gratuity  fund  or  any  other  fund  for  the  welfare of the employees maintained by the company;  

(2) The sum to which priority is to be given under clause (b) of  sub-section  (1),  shall  not,  in  the  case  of  any  one  claimant,  exceed such sum as may be notified by the Central Government  in the Official Gazette.”

21. By inserting proviso in Section 529(1), Parliament ensured protection  

of the interest of the workmen in winding up proceedings. The object of this  

amendment is to place the legitimate dues of workers at par with those of  

secured creditors.  This is also a legislative recognition of the fact that the  

workmen contribute  to the growth of the capital  and industry and in the  

event of winding up of the company, they are entitled to get their legitimate  

17

share in the assets of the company by being treated at par with other secured  

creditors. With the insertion of Section 529(3)(a),  the  definition of  the  

term `workmen’ contained in  the  Industrial  Disputes Act,  1947 has been  

incorporated in the Companies Act for the purposes of Sections 529, 529A  

and 530.  The expression “workmen’s dues” has been defined in Section  

529(3)(b) to mean 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 the Industrial Disputes Act,  

1947, all accrued holiday remuneration payable to any workman, or in the  

case of his death to any other person in his right upon the termination of his  

employment before the passing of winding up order and 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, which is maintained by the company.  

The definition also takes within its fold funds capable of being transferred to  

and vested in the workman under a contract with insurers under Section 14  

of the Workmen’s Compensation Act as also the amounts due in respect of  

any  compensation  or  liability  for  compensation  under  the  Workmen’s  

Compensation Act in respect of the death or disablement of any workman of  

the company.  By virtue of the non obstante clause contained in sub-section  

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(1) of Section 529A, statutory priority has been given to the workmen’s dues  

and debts due to secured creditors over all other dues.

22. The EPF Act is  a social  welfare legislation intended to protect  the  

interest  of  a  weaker section  of  the society,  i.e.  the  workers  employed in  

factories and other establishments, who have made significant contribution  

in  economic  growth  of  the  country.   The  workers  and  other  employees  

provide  services  of  different  kinds  and  ensure  continuous  production  of  

goods,  which  are  made  available  to  the  society  at  large.   Therefore,  a  

legislation  made  for  their  benefit  must  receive  a  liberal  and  purposive  

interpretation  keeping  in  view  the  Directive  Principles  of  State  Policy  

contained in Articles 38 and 43 of the Constitution.  In Organo Chemical  

Industries  v.  Union  of  India  (1979)  4  SCC  573,  this  Court  negatived  

challenge to the constitutionality of Section 14-B of the EPF Act.  In the  

main judgment delivered by him, A.P. Sen, J. referred to the Statement of  

Objects  and  Reasons  contained  in  the  Bill  presented  before  Parliament,  

which led to the enactment of Amendment Act No. 40/1973 and observed:

“Each word, phrase or sentence is to be considered in the light  of  general  purpose  of  the  Act  itself.  A  bare  mechanical  interpretation of the words “devoid of-concept or purpose” will  reduce must of legislation to futility. It is a salutary rule, well  

19

established, that the intention of the legislature must be found  by reading the statute as a whole.”

In his concurring judgment, Krishna Iyer, J. observed:

“The measure was enacted for the support of a weaker sector  viz. the working class during the superannuated winter of their  life.  The financial  reservoir  for the distribution of benefits  is  filled  by  the  employer  collecting,  by  deducting  from  the  workers'  wages,  completing  it  with  his  own equal  share  and  duly making over the gross sums to the Fund. If the employer  neglects to remit or diverts the moneys for alien purposes the  Fund gets dry and the retirees are denied the meagre support  when  they  most  need  it.  This  prospect  of  destitution  demoralises the working class and frustrates the hopes of the  community itself. The whole project gets stultified if employers  thwart contributory responsibility and this wider fall-out must  colour the concept of ‘damages’ when the court seeks to define  its  content  in  the  special  setting  of  the  Act.  For,  judicial  interpretation  must  further  the  purpose  of  a  statute.  In  a  different  context  and  considering  a  fundamental  treaty,  the  European Court of Human Rights, in the Sunday Times Case,  observed:

The Court must interpret them in a way that reconciles  them as far as possible and is most appropriate in order to  realise the aim and achieve the object of the treaty.

A  policy-oriented  interpretation,  when  a  welfare  legislation  falls for determination, especially in the context of a developing  country, is sanctioned by principle and precedent and is implicit  in Article 37 of the Constitution since the judicial branch is, in a  sense,  part  of  the  State.  So  it  is  reasonable  to  assign  to  ‘damages’ a larger, fulfilling meaning.”

20

23. Section 11(2) of the EPF Act was interpreted by the Division Bench  

of the Kerala High Court in Recovery Officer and Asstt.  Provident Fund  

Commissioner  v.  Kerala  Financial  Corporation,  ILR  (2002)  3  Kerala  4.  

Speaking for the Bench, B.N. Srikrishna, J. (as he then was) observed:

“The F.P.F. and M.P. Act, 1952 is an Act to provide for the  institution  of  Provident  Fund,  Pension Fund,  Deposit  Linked  Insurance  Fund etc.  in  factories  and  other  establishments,  to  carry  forward  the  Constitutional  mandate  of  rendering  social  justice to the working class. It is intended to give social security  to industrial workers at the end of their careers. The E.P.F. and  M.P. Act requires every employer to deduct certain prescribed  amounts  from  the  wages  payable  to  employees  along  with  prescribed  contribution  by  the  employer  and  deposit  such  contributions  in  the  Provident  Fund.  The  Provident  |is  administered  by  the  Central  and  Regional  Provident  Fund  Commissioners,  who  are  statutory  authorities.  What  is  of  importance  to  us  is  that  section  11  of  E.P.F.  and M.P.  Act,  declares the priority of payment of contributions under the Act  over other debts. Sub-section (1) of section 11 of E.P.F.  and  M.P. Act deals with the question of priority where an employer  is  adjudicated  insolvent  or  being a  company subjected  to  an  order of winding up.  Sub-section (2) of section 11 deals with  other types of priorities and reads as under:

“11(2) Without prejudice to the provisions of sub-section  (1), if any amount is due from an employer, whether in  respect of the employee's contribution deducted from the  wages  of  the  employee or  the  employer's  contribution,  the amount so due shall be deemed to be the first charge  on  the  assets  of  the  establishment,  and  shall,  notwithstanding anything contained in any other law, for  the time being in force, be paid in priority to all other  debts."

21

Sub-section (2) of section 11 of the E.P.F. and M.P. Act has  two  facets.  First,  it  declares  that  the  amount  due  from  the  employer towards contribution under the E.P.F. and M.P. Act  shall  be  deemed  to  be  a  first  charge  on  the  assets  of  the  establishment.   Second,  it  also  declares  that  notwithstanding  anything contained in any other law for the time being in force,  such debt shall be paid in priority to all other debts.  Both these  provisions bring out the intention of Parliament to ensure the  social benefit as contained in the legislation.  There are other  provisions in the Act rendering the amounts of Provident Fund  payable  immune  from  attachment  of  Civil  Court’s  decree,  which also indicate such intention of Parliament.”

24. The ratio of the afore-mentioned judgment has been noticed in Central  

Bank of India v. State of Kerala (2009) 4 SCC 94 and  Maharashtra State  

Cooperative Bank Ltd. v. Assistant Provident Fund Commissioner (2009) 10  

SCC 123.

25. The nature of priority  given to the taxes payable  to the  State  over  

other debts was considered by the Constitution Bench in Builders Supply  

Corporation  v.  Union  of  India  (1965)  2  SCR  289.   After  noticing  the  

judgments of the Bombay and Madras High Courts, the Constitution Bench  

held:

“(i)  The common law doctrine of the priority of Crown debts  had a wide sweep but the question in the present appeal was the  narrow one whether the Union of India was entitled to claim  that the recovery of the amount of tax due to it from a citizen  must  take  precedence  and  priority  over  unsecured  debts  due  

22

from the said citizen to his other private creditors. The weight  of authority in India was strongly in support of the priority of  tax dues.

(ii)  The  common  law doctrine  on  which  the  Union of  India  based its claim in the present proceedings had been applied and  upheld in that part of India which was known as ‘British India’  prior to the Constitution. The rules of common law relating to  substantive rights which had been adopted by this country and  enforced by judicial decisions, amount to ‘law in force’ in the  territory  of  India  at  the  relevant  time within  the  meaning of  Article 372(1). In that view of the matter, the contention of the  appellant that after the Constitution was adopted the position of  the  Union  of  India  in  regard  to  its  claim for  priority  in  the  present proceedings had been alerted could not be upheld.

(iii)  The  basic  justification  for  the  claim  for  priority  of  government debts rests on the well-recognised principle that the  State is entitled to raise money by taxation, otherwise it will not  be  able  to  function  as  a  sovereign  Government  at  all.  This  consideration  emphasises  the  necessity  and  wisdom  of  conceding to the State the right to claim priority in respect of its  tax dues.”

(emphasis supplied)

26. The ratio of the judgment in Builders Supply Corporation v. Union of  

India (supra) was applied to the cases in which statutory first charge was  

created  in  favour  of  the  State  in  the  matter  of  recovery  of  tax,  penalty,  

interest etc.. – State Bank of Bikaner and Jaipur v. National Iron and Steel  

Rolling Corporation (1995) 2 SCC 19, Dena Bank v. Bhikhabhai Prabhudas  

Parekh & Co. (2000) 5 SCC 694 and State of M.P. v. State Bank of Indore  

(2002) 10 SCC 441.  In the last mentioned judgment, i.e. State of M.P. v.  

23

State Bank of Indore (supra),  this  Court considered the question whether  

statutory first charge created under Section 33-C of the M.P. General Sales  

Tax Act, 1958 would prevail over the bank’s charge and held:

“  Section 33-C creates a statutory first charge that prevails over    any  charge  that  may  be  in  existence.  Therefore,  the  charge  thereby created in favour of the State in respect of the sales tax  dues of the second respondent prevailed over the charge created  in favour of the Bank in respect of the loan taken by the second  respondent. There is no question of retrospectivity here, as, on  the  date  when  it  was  introduced,  Section  33-C  operated  in  respect of all charges that were then in force and gave sales tax  dues precedence over them.”

(emphasis supplied)

27. At  this  juncture,  it  will  be  apposite  to  mention  that  the  nature  of  

statutory  first  charge  and  the  rule  of  priority  of  the  State’s  dues  were  

considered in Builders Supply Corporation v. Union of India (supra), State  

Bank of Bikaner and Jaipur v. National Iron and Steel Rolling Corporation  

(supra), Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. (supra) and State  

of M.P. v. State Bank of Indore (supra) in the context of contra claim made  

by unsecured creditors.  The question whether first charge created by taxing  

statutes  enacted  by  State  legislatures  will  prevail  over  the  debts  due  to  

secured creditors was considered by a three Judge Bench in Central Bank of  

India v. State of Kerala (supra) and answered in affirmative.  In that case,  

this Court was called upon to consider whether the first charge created on  

24

the property of the dealer by the legislations enacted by State legislatures for  

levy and collection of sales tax would prevail over the debts due to banks,  

financial institutions and other secured creditors, which could be recovered  

under the Recovery of Debts Due to Banks and Financial Institutions Act,  

1993 and/or the Securitisation and Reconstruction of Financial Assets and  

Enforcement  of  Security  Interest  Act,  2002.   The  Court  referred  to  the  

relevant provisions contained in the DRT Act,  the Securitisation Act and  

Sales  Tax  legislations  of  different  States  as  also  Section  14A  of  the  

Workmen’s Compensation Act, 1923, Section 11 of the EPF Act, Section 74  

of  the  Estate  Duty  Act,  1953,  Section  25  of  the  Mines  and  Minerals  

(Regulation and Development) Act, 1957, Section 30 of the Gift Tax Act,  

1958, Section 529A of the Companies Act, 1956, Section 46B of the State  

Financial Corporations Act, 1951 and observed:

“Under Section 13(1) of the Securitisation Act, limited primacy  has  been  given  to  the  right  of  a  secured creditor  to  enforce  security  interest  vis-à-vis  Section  69  or  Section  69-A of  the  Transfer of Property Act. In terms of that sub-section, a secured  creditor can enforce security interest without intervention of the  court or tribunal and if the borrower has created any mortgage  of the secured asset, the mortgagee or any person acting on his  behalf cannot sell the mortgaged property or appoint a Receiver  of the income of the mortgaged property or any part thereof in a  manner which may defeat the right of the secured creditor to  enforce  security  interest.  This  provision  was  enacted  in  the  backdrop  of  Chapter  VIII  of  the  Narasimham  Committee's  Second  Report  in  which  specific  reference  was  made  to  the  

25

provisions relating to mortgages under the Transfer of Property  Act.

In an apparent bid to overcome the likely difficulty faced by the  secured  creditor  which  may  include  a  bank  or  a  financial  institution, Parliament incorporated the non obstante clause in  Section 13 and gave primacy to the right of secured creditor  vis-à-vis  other  mortgagees  who  could  exercise  rights  under  Sections 69 or 69-A of the Transfer of Property Act. However,  this  primacy  has  not  been  extended  to  other  provisions  like  Section  38-C  of  the  Bombay  Act  and  Section  26-B  of  the  Kerala Act by which first charge has been created in favour of  the State over the property of the dealer or any person liable to  pay the dues of sales tax,  etc. Sub-section (7)  of  Section 13  which  envisages  application  of  the  money  received  by  the  secured  creditor  by  adopting  any  of  the  measures  specified  under  sub-section  (4)  merely  regulates  distribution  of  money  received by the secured creditor. It does not create first charge  in favour of the secured creditor.

By enacting various provisos to sub-section (9) of Section 13,  the legislature has ensured that priority given to the claim of  workers of a company in liquidation under Section 529-A of the  Companies Act, 1956 vis-à-vis the secured creditors like banks  is  duly  respected.  This  is  the  reason  why  first  of  the  five  unnumbered provisos  to  Section 13(9)  lays  down that  in  the  case of a company in liquidation, the amount realised from the  sale of secured assets shall be distributed in accordance with the  provisions of Section 529-A of the Companies Act, 1956. This  and other provisos do not create first charge in favour of the  worker of a company in liquidation for the first time but merely  recognise  the  existing  priority  of  their  claim  under  the  Companies Act. It is interesting to note that the provisos to sub- section (9) of Section 13 do not deal with the companies which  fall in the category of borrower but which are not in liquidation  or are not being wound up.

It is thus clear that provisos referred to above are only part of  the distribution mechanism evolved by the legislature and are  intended to protect and preserve the right of the workers of a  

26

company  in  liquidation  whose  assets  are  subjected  to  the  provisions of the Securitisation Act and are disposed of by the  secured creditor in accordance with Section 13 thereof.”

(emphasis supplied)

28. The Court then referred to the earlier judgments in Builders Supply  

Corporation v. Union of India (supra),  State Bank of Bikaner and Jaipur v.  

National  Iron  and  Steel  Rolling  Corporation (supra),  Dena  Bank  v.  

Bhikhabhai Prabhudas Parekh & Co. (supra), State of M.P. v. State Bank of  

Indore  (supra),  Allahabad  Bank  v.  Canara  Bank  (2000)  4  SCC 406,  the  

judgment  of  the  Division  Bench  of  the  Kerala  High  Court  in  Recovery  

Officer  and  Asstt.  Provident  Fund  Commissioner  v.  Kerala  Financial  

Corporation (supra) and observed:

“While  enacting  the  DRT  Act  and  the  Securitisation  Act,  Parliament  was  aware  of  the  law  laid  down  by  this  Court  wherein priority of the State dues was recognised. 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 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  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  

27

omission  appears  to  be  that  the  new legal  regime  envisages  transfer of secured assets to private companies.

The  definition  of  “secured  creditor”  includes  securitisation/  reconstruction company and any other trustee holding securities  on  behalf  of  bank/financial  institution.  The  definition  of  “securitisation  company”  and  “reconstruction  company”  in  Sections 2(1)(za) and (v) shows that these companies may be  private  companies registered under the Companies Act,  1956  and  having  a  certificate  of  registration  from  Reserve  Bank  under Section 3 of the Securitisation Act. Evidently, Parliament  did not intend to give priority to the dues of private creditors  over sovereign debt of the State.

If the provisions of the DRT Act and the Securitisation Act are  interpreted  keeping  in  view  the  background  and  context  in  which these legislations were enacted and the purpose sought to  be achieved by their enactment, it becomes clear that the two  legislations,  are  intended  to  create  a  new  dispensation  for  expeditious recovery of dues of banks, financial institutions and  secured creditors  and adjudication  of  the  grievance  made  by  any aggrieved person qua the procedure adopted by the banks,  financial  institutions  and  other  secured  creditors,  but  the  provisions  contained  therein  cannot  be  read  as  creating  first  charge in favour of banks, etc.

If  Parliament  intended to  give priority  to  the  dues  of  banks,  financial institutions and other secured creditors over the first  charge created under State legislations then provisions similar  to  those  contained  in  Section  14-A  of  the  Workmen's  Compensation Act, 1923, Section 11(2) of the EPF Act, Section  74(1) of the Estate Duty Act, 1953, Section 25(2) of the Mines  and Minerals (Regulation and Development) Act, 1957, Section  30 of the Gift Tax Act, and Section 529-A of the Companies  Act, 1956 would have been incorporated in the DRT Act and  the Securitisation Act.

Undisputedly,  the  two  enactments  do  not  contain  provision  similar to the Workmen's Compensation Act, etc. In the absence  

28

of any specific provision to that effect, it is not possible to read  any  conflict  or  inconsistency  or  overlapping  between  the  provisions of the DRT Act and the Securitisation Act on the one  hand and Section 38-C of the Bombay Act and Section 26-B of  the  Kerala  Act  on  the  other  and  the  non  obstante  clauses  contained in Section 34(1) of the DRT Act and Section 35 of  the Securitisation Act cannot be invoked for declaring that the  first charge created under the State legislation will not operate  qua  or  affect  the  proceedings  initiated  by  banks,  financial  institutions  and  other  secured  creditors  for  recovery  of  their  dues or enforcement of security interest, as the case may be.

The Court could have given effect to the non obstante clauses  contained in Section 34(1) of the DRT Act and Section 35 of  the  Securitisation  Act  vis-à-vis  Section 38-C of  the  Bombay  Act and Section 26-B of the Kerala Act and similar other State  legislations  only if  there was a specific  provision in the two  enactments  creating  first  charge  in  favour  of  the  banks,  financial  institutions  and  other  secured  creditors  but  as  Parliament  has not  made any such provision in  either  of  the  enactments, the first charge created by the State legislations on  the  property  of  the dealer  or  any other  person,  liable  to pay  sales tax, etc., cannot be destroyed by implication or inference,  notwithstanding the fact that banks, etc. fall in the category of  secured creditors.”

(emphasis supplied)

29. In Maharashtra  State  Cooperative Bank Ltd.  v.  Assistant  Provident  

Fund Commissioner (supra), the Court was called upon to consider whether  

dues payable by the employer under Section 11 of the EPF Act will have  

priority over debts due to the bank.  The facts of that case were that Kannad  

Sahakari  Sakhar Karkhana Ltd.  and Gangapur Sahakari  Sakhar Karkhana  

Ltd. had pledged sugar bags in favour of the appellant bank as security for  

29

repayment of the loan and interest.  The respondent initiated proceedings for  

recovery  of  the  dues  payable  under  the  EPF  Act.  The  appellant  bank  

questioned the legality of the orders passed under the EPF Act on the ground  

that being a secured creditor, the amount due to it was payable on priority  

vis-à-vis other dues including the dues payable by the employer under the  

EPF Act.  The High Court negatived the challenge.  The Court referred to  

the relevant provisions of the EPF Act including Section 11, the judgments  

noticed  hereinabove  as  also  the  judgments  in  UCO  Bank  v.  Official  

Liquidator,  High Court of Bombay (1994) 5 SCC 1, A.P. State Financial  

Corporation  v.  Official  Liquidator  (2000)  7  SCC  291,  Textile  Labour  

Association v. Official Liquidator (2004) 9 SCC 741 and held:

“The  priority  given  to  the  dues  of  provident  fund,  etc.  in  Section  11  is  not  hedged  with  any  limitation  or  condition.  Rather,  a  bare  reading of  the  section  makes  it  clear  that  the  amount due is required to be paid in priority to all other debts.  Any doubt on the width and scope of Section 11 qua other debts  is removed by the use of expression “all other debts” in both the  sub-sections.  This  would  mean  that  the  priority  clause  enshrined in Section 11 will operate against statutory as well as  non-statutory and secured as well as unsecured debts including  a mortgage or pledge. Sub-section (2) was designedly inserted  in  the  Act  for  ensuring  that  the  provident  fund  dues  of  the  workers  are  not  defeated  by  prior  claims  of  secured  or  unsecured creditors. This is the reason why the legislature took  care to declare that irrespective of time when a debt is created  in respect of the assets of the establishment, the dues payable  under the Act would always remain first charge and shall  be  paid first out of the assets of the establishment notwithstanding  anything contained in any other law for the time being in force.  

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It  is,  therefore,  reasonable to take the view that the statutory  first charge created on the assets of the establishment by sub- section (2) of Section 11 and priority given to the payment of  any amount due from an employer will operate against all types  of debts.”

(emphasis supplied)

30.  The ratio for the last mentioned judgment is that by virtue of the non  

obstante clause contained in Section 11(2) of the EPF Act, any amount due  

from an employer shall be deemed to be first charge on the assets of the  

establishment and is payable in priority to all other debts including the debts  

due to a bank, which falls in the category of secured creditor.  

31. We  may  now  notice  some  judgments  which  have  bearing  on  the  

interpretation of Sections 529 or 529A of the Companies Act.  The scope of  

proviso to sub-section (1) of Section 529 (as inserted  by Amendment Act  

No.35 of 1985) was examined in UCO Bank v. Official Liquidator, High  

Court,  Bombay  (1994)  5  SCC  1.   The  facts  of  that  case  were  that  in  

Company  Petition  No.27  of  1971,  the  learned  Company  Judge  of  the  

Bombay High Court made an order dated 15.11.1972 for winding up of M/s.  

Glass  Carboys  and  Pressedwares  Limited.   The  Official  Liquidator  took  

possession of the assets of the company.  Appellant – UCO Bank, which was  

a  secured  creditor  of  the  company  obtained  a  decree  on  22.4.1976  for  

recovery of its debt.  Thereafter, the High Court’s Commissioner for taking  

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accounts  was  directed  to  sell  certain  movables  of  the  company.   In  the  

meantime,  the  Companies  Act  was  amended by  Act  No.35 of  1985 and  

Sections 529 and 530 were amended and Section 529A was inserted.  It was  

argued on behalf of the appellant that the amendment was not applicable to  

its case because the decree had been passed before the amendment and being  

a secured creditor, it was entitled to realize its debt in priority to other dues.  

The learned Company Judge accepted the argument but he was overruled by  

the Division Bench.  While dealing with the argument, which found favour  

with the learned Company Judge, this  Court referred to the Statement of  

Objects and Reasons contained in the Bill and observed:  

“The proviso to sub-section (1) of Section 529 inserted by the  Amending  Act  clearly  provides  that  “the  security  of  every  secured creditor shall be deemed to be subject to a pari passu  charge in favour of the workmen”. The effect of the proviso is  to  create,  by  statute,  a  charge  pari  passu  in  favour  of  the  workmen on every security available to the secured creditors of  the employer company for recovery of their debts at the time  when the amendment came into force. This expression is wide  enough to apply to the security of every secured creditor which  remained unrealised on the date of the amendment.  The clear  object of the amendment is that the legitimate dues of workers  must rank pari passu with those of secured creditors and above  even the dues of the Government. This literal construction of  the proviso is in consonance with, and promotes, the avowed  object  of  the  amendment  made.  On  the  contrary,  the  construction of the proviso suggested by the learned counsel for  the  appellant,  apart  from  being  in  conflict  with  the  plain  language  of  the  proviso  also  defeats  the  object  of  the  legislation.

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A debt due to a secured creditor, when recovered by realisation  of  the  security  after  commencement  of  the  winding  up  proceedings, results in depletion of the assets in the hands of  the Official Liquidator. This provision is intended to protect the  interests  of  the  workmen  in  proceedings  for  winding  up.  In  view of the nature of workmen's dues being similar to those of  secured creditors, the purpose of this provision is to place the  workmen  on  a  par  with  the  secured  creditors  and  create  a  statutory  charge  in  their  favour  on  all  available  securities  forming part of the assets of the company in liquidation so that  the  workmen  also  share  the  securities  pari  passu  with  the  secured creditors. The workmen contribute to the growth of the  capital and must get their legitimate share in the assets of the  company  when  the  situation  arises  for  its  closure  and  distribution of its assets first among the secured creditors due to  winding up of the company. The aforesaid amendment made in  the Act is a statutory recognition of this principle equating the  legitimate dues of the workmen with the debts of the secured  creditors  of  the  company.  To  achieve  this  purpose,  it  is  necessary  that  the  amended  provision  must  apply  to  all  available  securities  which  form  part  of  the  assets  of  the  company  in  liquidation  on  the  date  of  the  amendment.  The  conclusion reached by the Division Bench of the High Court is  supported by this reason.”

(emphasis supplied)

32.  In Allahabad Bank v. Canara Bank (supra), a two-Judge Bench was  

called upon to consider  the question whether  an application can be filed  

under the Companies Act, 1956 during the pendency of proceedings under  

the DRT Act. The facts of that case show that Allahabad Bank filed an OA  

before the Delhi Bench of the DRT under Section 19. The same was decreed  

on 13.1.1998. The debtor company filed an appeal before DRAT, Allahabad.  

33

Canara Bank also filed  application under Section 19 before DRT,  Delhi.  

During the pendency of its application, Canara Bank filed an interlocutory  

application before the Recovery Officer for impleadment in the proceedings  

arising  out  of  the  OA  filed  by  Allahabad  Bank.  That  application  was  

dismissed on 28.9.1998. In the auction conducted by the Recovery Officer,  

the  property  of  the  debtor  company  was  auctioned  and  the  sale  was  

confirmed. Thereupon, Canara Bank filed applications under Section 22 of  

the  DRT  Act.  During  the  pendency  of  applications,  Canara  Bank  filed  

company application in Company Petition No. 141 of 1995 filed by Ranbaxy  

Ltd.  against  M.S.  Shoes  Company  under  Sections  442  and  537  of  the  

Companies Act for stay of the proceedings of Recovery Case No. 9 of 1998  

instituted  by  Allahabad  Bank.  By  an  order  dated  9.3.1999,  the  learned  

Company  Judge  stayed  further  sale  of  the  assets  of  the  company.   The  

Allahabad Bank challenged the order  of the learned Company Judge and  

pleaded that in view of the amendment made in Section 19(19) of the DRT  

Act, Section 529A is attracted for a limited purpose, i.e. recovery of the dues  

of workmen.  While dealing with this plea, the Court observed as under:

“The respondent's  contention that  Section 19(19)  gives  priority  to  all  ‘secured  creditors’  to  share  in  the  sale  proceeds before the Tribuna1/ Recovery Officer cannot,  in our opinion, be accepted. The said words are qualified  by the words ‘in accordance with the provision of Section  529-A’.  Hence,  it  is  necessary  to  identify  the  above  

34

limited class of secured creditors who have priority over  all others in accordance with Section 529-A.

Secured creditors fall under two categories. Those who  desire to go before the Company Court and those who  like to stand outside the winding up.

The first category of secured creditors mentioned above  are those who go before the Company Court for dividend  by  relinquishing  their  security  in  accordance  with  the  insolvency  rules  mentioned  in  Section  529.  The  insolvency rules are those contained in Sections 45 to 50  of the Provincial  Insolvency Act.  Section 47(2) of that  Act states  that  a secured creditor  who wishes to come  before the Official Liquidator has to prove his debt and  he can prove his debt only if he relinquishes his security  for the benefit of the general body of creditors. In that  event, he will rank with the unsecured creditors and has  to take his dividend as provided in Section 529(2). Till  today,  Canara  Bank  has  not  made  it  clear  whether  it  wants to come under this category.

The second class of secured creditors referred to above  are those who come under Section 529-A(1)(b) read with  proviso (c) to Section 529(1). These are those who opt to  stand  outside  the  winding  up  to  realise  their  security.  Inasmuch  as  Section  19(19)  permits  distribution  to  secured creditors only in accordance with Section 529-A,  the said category is the one consisting of creditors who  stand outside the winding up. These secured creditors in  certain  circumstances  can  come  before  the  Company  Court  (here,  the  Tribunal)  and  claim  priority  over  all  other  creditors  for release  of  amounts  out  of  the  other  monies lying in the Company Court (here, the Tribunal).  This limited priority is declared in Section 529-A(1) but  it is restricted only to the extent specified in clause (b) of  Section 529-A(1). The said provision refers to clause (c)  of the proviso to Section 529(1)  and it  is  necessary to  understand the scope of the said provision.”

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33. The  judgment  in  Allabahad  Bank  v.  Canara  Bank  (supra)  was  

distinguished by a two-Judge Bench judgment in ICICI Bank Ltd. v. SIDCO  

Leathers Ltd. (2006) 10 SCC 452.   In that case, the appellant and Punjab  

National Bank had advanced loans to respondent No. 1 for setting up a plant  

for manufacture of leather boards and for providing working capital funds  

respectively. Respondent No.1 created first charge in favour of the appellant  

along  with  other  financial  institutions,  i.e.  IFCI  and  IDBI  by  way  of  

equitable mortgage by deposit of title deeds of its immovable property. A  

second charge was created in favour of Punjab National Bank by way of  

constructive delivery of title deeds, clearly indicating therein that the charge  

in favour of the latter was subject to and subservient to charges in favour of  

IFCI,  IDBI and ICICI.   On an application  filed by respondent  No.1,  the  

Allahabad  High  Court  passed  winding  up  order  and  appointed  Official  

Liquidator.  Thereafter, the appellant filed a suit for recovery of the amount  

credited  to  respondent.   In  due course,  the  suit  was  transferred  to  Debts  

Recovery  Tribunal,  Bombay.   During  the  pendency  of  the  proceedings  

before  the  Tribunal,  the  Official  Liquidator  was  granted  permission  to  

continue the proceedings of the suit.  Civil Judge, Fatehpur before whom the  

suit was pending, ordered sale of the assets of the company.  At that stage,  

36

the  appellants,  IFCI  and  IDBI  jointly  filed  an  application  before  the  

Company Judge for considering their claim on  pro rata basis and also for  

exclusion of the claim of the Punjab National Bank.  The learned Company  

Judge accepted the first prayer of the appellant but rejected the second one  

by relying upon the judgment in Allahabad Bank v. Canara Bank (supra).  

The intra Court appeal was dismissed by the Division Bench by relying upon  

Section  529A  of  the  Companies  Act.   On  further  appeal,  this  Court  

distinguished the judgment in Allahabad Bank v. Canara Bank by relying  

upon  an  earlier  judgment  in  Rajasthan  State  Financial  Corporation  v.  

Official Liquidator (2005) 8 SCC 190 and observed:

“In fact in Allahabad Bank it was categorically held that  the  adjudication  officer  would  have  such  powers  to  distribute  the  sale  proceeds  to  the  banks  and financial  institutions, being secured creditors, in accordance with  inter se agreement/arrangement between them and to the  other  persons  entitled  thereto  in  accordance  with  the  priority in law.

Section 529-A of the Companies Act no doubt contains a  non  obstante  clause  but  in  construing  the  provisions  thereof,  it  is  necessary  to  determine  the  purport  and  object for which the same was enacted.

In terms of Section 529 of the Companies Act, as it stood  prior to its amendment,  the dues of the workmen were  not  treated  pari  passu  with  the  secured  creditors  as  a  result whereof innumerable instances came to the notice  of the Court that the workers may not get anything after  discharging the debts of the secured creditors. It is only  

37

with a view to bring the workmen's dues pari passu with  the secured creditors, that Section 529-A was enacted.

The non obstante nature of a provision although may be  of wide amplitude, the interpretative process thereof must  be kept confined to the legislative policy. Only because  the dues of the workmen and the debts due to the secured  creditors are treated pari passu with each other, the same  by itself, in our considered view, would not lead to the  conclusion that the concept of inter se priorities amongst  the  secured  creditors  had  thereby  been  intended  to  be  given a total go-by.

A non obstante  clause  must  be  given  effect  to,  to  the  extent Parliament intended and not beyond the same.

Section 529-A of the Companies Act does not ex facie  contain a provision (on the aspect of priority) amongst  the secured creditors and, hence, it would not be proper  to  read  there  into  things,  which  Parliament  did  not  comprehend.”

34. In A.P. State Financial Corporation v. Official Liquidator (supra), the  

Court rejected the argument that the proceedings initiated by the Financial  

Corporation under Section 29 of the State Financial Corporations Act, 1951  

will not be affected by the non obstante clause contained in Section 529A of  

the Companies Act and observed:

“The  Act  of  1951  is  a  special  Act  for  grant  of  financial  assistance  to  industrial  concerns  with  a  view  to  boost  up  industrialisation and also recovery of such financial assistance  if it becomes bad and similarly the Companies Act deals with  companies  including  winding  up  of  such  companies.  The  proviso to sub-section (1)  of Section 529 and Section 529-A  

38

being  a  subsequent  enactment,  the  non  obstante  clause  in  Section 529-A prevails over Section 29 of the Act of 1951 in  view of the settled position of law. We are,  therefore,  of the  opinion that the above proviso to sub-section (1) of Section 529  and Section 529-A will control Section 29 of the Act of 1951.  In  other  words  the  statutory  right  to  sell  the  property  under  Section 29 of the Act of 1951 has to be exercised with the rights  of pari passu charge to the workmen created by the proviso to  Section 529 of the Companies Act. Under the proviso to sub- section (1)  of  Section 529,  the liquidator  shall  be entitled to  represent the workmen and force (sic enforce) the above pari  passu charge. Therefore, the Company Court was fully justified  in  imposing  the  above  conditions  to  enable  the  Official  Liquidator  to  discharge  his  function  properly  under  the  supervision of the Company Court as the new Section 529-A of  the Companies Act confers upon a Company Court the duty to  ensure that the workmen's dues are paid in priority to all other  debts in accordance with the provisions of the above section.  The legislature has amended the Companies Act in 1985 with a  social  purpose  viz.  to  protect  dues  of  the  workmen.  If  conditions are not imposed to protect the right of the workmen  there is every possibility that the secured creditor may frustrate  the above pari passu right of the workmen.”

(emphasis supplied)

35. We have referred to these judgments only for the purpose of showing  

that the object of the amendments made in the Companies Act by Act No. 35  

of 1985 was to ensure that the legitimate dues of workers should rank pari   

passu with those of secured creditors.  In other words, these amendments are  

intended to protect the interest of the workmen in winding up proceedings  

by  placing  them at  par  with  secured  creditors  and  a  statutory  charge  is  

created qua their dues on all available securities forming part of the assets of  

39

the company in liquidation.  However, the propositions laid down in these  

judgments are of little  assistance in deciding the question raised in these  

appeals  because  in  none of  the  cases  the  Court  considered  the  so called  

conflict in the  non obstante clauses contained in Section 11(2) of the EPF  

Act and Section 529A of the Companies Act.

36. The argument of Shri Gaurav Agrawal that the  non obstante clause  

contained  in  the  subsequent  legislation,  i.e.  Section  529A(1)  of  the  

Companies Act should prevail  over similar  clause contained in an earlier  

legislation, i.e. Section 11(2) of the EPF Act sounds attractive, but if the two  

provisions are read in the light of the objects sought to be achieved by the  

legislature by enacting the same, it is not possible to agree with the learned  

counsel.   As noted earlier, the object of the amendment made in the EPF  

Act by Act No.40 of 1973 was to treat the dues payable by the employer as  

first charge on the assets of the establishment and to ensure that the same are  

recovered in priority to other debts.  As against this, the amendments made  

in the Companies Act in 1985 are intended to create a charge pari passu in  

favour of the workmen on every security available to the secured creditors of  

the company for recovery of their debts.  There is nothing in the language of  

Section 529A which may give an indication that legislature wanted to create  

40

first  charge  in  respect  of  the  workmen’s  dues,  as  defined  in  Sections  

529(3)(b) and 529A and debts due to the secured creditors.   

37.  It is a well recognized rule of interpretation that every part of the  

statute must be interpreted keeping in view the context in which it appears  

and the purpose of legislation.  In RBI  v.  Peerless General Finance and  

Investment Co. Ltd. (1987) 1 SCC 424, Chinnappa Reddy, J. highlighted the  

importance of the rule of contextual interpretation in the following words :

“Interpretation must depend on the text and the context.  They are the bases of interpretation. One may well say if  the text is the texture, context is what gives the colour.  Neither  can  be  ignored.  Both  are  important.  That  interpretation  is  best  which  makes  the  textual  interpretation  match  the  contextual.  A  statute  is  best  interpreted when we know why it was enacted. With this  knowledge, the statute must be read, first as a whole and  then  section  by  section,  clause  by  clause,  phrase  by  phrase and word by word. If a statute is looked at, in the  context of its enactment, with the glasses of the statute- maker,  provided  by  such  context,  its  scheme,  the  sections, clauses, phrases and words may take colour and  appear  different  than  when  the  statute  is  looked  at  without the glasses provided by the context. With these  glasses we must look at the Act as a whole and discover  what  each  section,  each  clause,  each  phrase  and  each  word  is  meant  and  designed  to  say  as  to  fit  into  the  scheme of the  entire  Act.  No part  of  a  statute  and no  word of a statute can be construed in isolation. Statutes  have to be construed so that every word has a place and  everything is in its place.”

41

38. Another rule of interpretation of Statutes is that if two special enactments  

contain  provisions  which  give  overriding  effect  to  the  provisions  contained  

therein,  then  the  Court  is  required  to  consider  the  purpose  and  the  policy  

underlying the two Acts and the clear intendment conveyed by the language of  

the relevant provisions.   

39. In Shri Ram Narain v. Simla Banking and Industrial Co. Ltd. 1956 SCR  

603,  this  Court  was  considering  the  provisions  contained  in  the  Banking  

Companies Act, 1949 and the Displaced Persons (Debts Adjustment) Act, 1951.  

Both  the  enactments  contained  provisions  giving  overriding  effect  to  the  

provisions of the enactment over any other law.   After noticing the relevant  

provisions, the Court observed:   

“Each enactment being a special Act, the ordinary principle that  a special law overrides a general law does not afford any clear  solution in this case.”

“It is, therefore, desirable to determine the overriding effect of  one or the other of the relevant provisions in these two Acts, in  a given case,  on much broader considerations of the purpose  and policy underlying the two Acts and the clear intendment  conveyed by the language of the relevant provisions therein.”

40. In Kumaon Motor Owners' Union Ltd. v. State of Uttar Pradesh (1966) 2  

SCR 121,  there was conflict between the provisions contained in Rule 131(2)  

(g) and (i) of the Defence of India Rules, 1962 and Chapter IV-A of the Motor  

42

Vehicles Act, 1939. Section 68-B gave overriding effect to the provisions of  

Chapter IV-A of the Motor Vehicles Act whereas Section 43 of the Defence of  

India  Act,  1962,  gave  overriding  effect  to  the  provisions  contained  in  the  

Defence of India Rules. This Court held that the Defence of India Act was later  

than the Motor Vehicles Act and, therefore, if there was anything repugnant, the  

provisions of the later Act should prevail. This Court also looked into object  

behind the two statutes, namely, Defence of India Act and Motor Vehicles Act  

and on that basis also it was held that the provisions contained in the Defence of  

India Rules would have an overriding effect over the provisions of the Motor  

Vehicles Act.

41. In Ashok Marketing Limited v.  Punjab National Bank (1990) 4 SCC  

406,  the  Constitution  Bench  considered  some  of  the  precedents  on  the  

interpretation of statutes and observed :

“The principle which emerges from these decisions is that in  the  case  of  inconsistency  between  the  provisions  of  two  enactments, both of which can be regarded as special in nature,  the conflict has to be resolved by reference to the purpose and  policy underlying the two enactments and the clear intendment  conveyed by the language of the relevant provisions therein.”

(emphasis supplied)

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42. It is also important to bear in mind that even before the insertion of  

proviso to  Sections  529(1),  529(3)  and Section 529A and amendment  of  

Section  530(1),  all  sums due  to  any  employee  from a  provident  fund,  a  

pension fund, a gratuity fund or any other fund established for welfare of the  

employees  were  payable  in  priority  to  all  other  debts  in  a  winding  up  

proceedings  [Section  530(1)(f)].  Even  the  wages,  salary  and  other  dues  

payable to the workers and employees were payable in priority to all other  

debts.  What Parliament has done by these amendments is to define the term  

“workmen’s  dues”  and  to  place  them at  par  with  debts  due  to  secured  

creditors to the extent such debts rank under clause (c) of the proviso to  

Section 529(1).  However, these amendments, though subsequent in point of  

time, cannot be interpreted in a manner which would result in diluting the  

mandate of Section 11 of the EPF Act, sub-section (2) whereof declares that  

the amount due from an employer shall be the first charge on the assets of  

the establishment and shall be paid in priority to all other debts.  The words  

“all other debts” used in Section 11(2) would necessarily include the debts  

due  to  secured  creditors  like  banks,  financial  institutions  etc.  The  mere  

ranking of the dues of workers at par with debts due to secured creditors  

cannot lead to an inference that Parliament intended to create first charge in  

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favour of the secured creditors and give priority to the debts due to secured  

creditors over the amount due from the employer under the EPF Act.

43. At the cost of repetition, we would emphasize that in terms of Section  

530(1), all revenues, taxes, cesses and rates due from the company to the  

Central or State Government or to  a local authority, all wages or salary or  

any employee, in respect of the services rendered to the company and due  

for a period not exceeding 4 months all accrued holiday remuneration etc.  

and all sums due to any employee from provident fund, a pension fund, a  

gratuity fund or any other fund for the welfare of the employees maintained  

by the company are payable in priority to all other debts.  This provision  

existed when Section 11(2) was inserted in the EPF Act by Act No. 40 of  

1973 and any amount due from an employer in respect of  the employees’  

contribution was declared first charge on the assets of the establishment and  

became payable  in  priority  to  all  other  debts.   However,  while  inserting  

Section 529A in the Companies Act by Act No.35 of 1985 Parliament, in its  

wisdom,  did  not  declare  the  workmen’s  dues  (this  expression  includes  

various dues including provident fund) as first  charge.  The effect of the  

amendment made in the Companies Act in 1985 is only to expand the scope  

of the dues of workmen and place them at par with the debts due to secured  

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creditors  and  there  is  no  reason  to  interpret  this  amendment  as  giving  

priority to the debts due to secured creditor over the dues of provident fund  

payable by an employer.  Of course, after the amount due from an employer  

under the EPF Act is paid, the other dues of the workers will be treated at  

par  with  the  debts  due to  secured creditors  and payment  thereof  will  be  

regulated by the provisions contained in Section 529(1) read with Section  

529(3), 529A and 530 of the Companies Act.

44. In  view of  what  we  have  observed  above  on  the  interpretation  of  

Section  11  of  the  EPF  Act  and  Sections  529,  529A  and  530  of  the  

Companies Act,  the judgment of the Division Bench of the Gujarat High  

Court, which turned on the interpretation of Section 94 of the Employees’  

State Insurance Act and Sections 529A and 530 of the Companies Act and  

on which reliance has been placed by the learned Company Judge and the  

Division Bench of the High Court while dismissing the applications filed by  

the appellant, cannot be treated as laying down the correct law.

45. In the result, the appeals are allowed.  The impugned judgment as also  

the order of the learned Company Judge are set aside and the applications  

filed by the appellant are allowed in terms of the prayer made.  The Official  

Liquidator appointed by the High Court shall deposit the dues of provident  

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fund payable by the employer within a period of 3 months.  The parties are  

left to bear their own costs.

….………………….…J.  [G. S. Singhvi]

…..…..………………..J.  [H. L. Dattu]

New Delhi November 8, 2011.

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