M J Antony: The first-charge fluster

Provident fund defaulters & banks will lose their pledged goods as workers' dues have primacy

Managing the queue of creditors at the door of a failed industry or a recalcitrant one has become one of the onerous tasks for the courts these days. At the head of the line would be banks, state financial corporations, taxmen, workmen and statutory bodies like the employees’ provident fund commissioner and the employees’ state insurance commissioner. There might be several private lenders too. This meandering column finally shifts their venue to the courts. Though there are several judgments setting priorities for payment, the conflict among the creditors never ends.

Earlier this month, the Supreme Court dismissed the claim of ‘first charge’ of a bank over that of the commissioner of employees’ provident fund (Maharashtra State Co-operative Bank Ltd vs Provident Fund Commissioner). Two sugar mills had pledged their stocks with the bank for getting loans before the harvesting season. However, they did not contribute to the provident fund. Therefore, the commissioner took over the sugar bags in the custody of the bank and sold them to recover the dues of the mills. The bank then moved the Bombay high court arguing that the goods belonged to them. The high court rejected this contention. On appeal, the Supreme Court reiterated that the provident fund dues would take precedence over other secured debts.

 

The bank had obtained a diamond-hard deed from the mills pledging their goods to it. Therefore, it claimed that it not only had the first charge but the mortgaged goods belonged to it. Even though under Section 11(2) of the Provident Funds Act, the amount due from an employer is treated as first charge on the assets of the establishment, the same could not have priority or precedence over the dues of the bank, the payment of which was secured by the deeds of pledge executed by the mills. Therefore, the commissioner should proceed against the assets of the defaulting companies instead of the bank. But these arguments did not impress the Supreme Court.

After a long time, the court referred to the social security steps taken by the state in favour of the working class. It also invoked the Directive Principles of State Policy, which is hardly noticed in labour judgments these days. Gone are the days of 1980’s when the principle of ‘equal pay for equal work’ in the Directive Principles was interpreted in such a way that it was given the same force as a fundamental right. In later years, not only this principle, but a number of other decisions relating to workers’ rights have been diluted. In this judgment, the judges have devoted long passages to worker’s rights, refreshing our memory of the directive principles on the labour front.

The Provident Funds Act is clear on the priorities. According to Section 11(2), the dues to the fund 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.

As early as in 1979, the Supreme Court had given a benevolent interpretation of the law in Organo Chemical Industries vs Union of India. The fund was meant as a solace of the workers during the superannuated winter of their lives. The judgment said: “The pragmatics of the situation is that if the stream of contributions were frozen by employers’ defaults after due deduction from the wages and diversion for their own purposes, the scheme would be damnified by traumatic starvation of the fund, public frustration from the failure of the project and psychic demoralisation of the miserable beneficiaries when they find their wages deducted and the employer get away with it even after default in his own contribution.”

In UCO Bank vs Official Liquidator (1994), the Supreme Court considered the scope of Section 529(1) of the Companies Act as inserted by the Companies (Amendment) Act, 1985. It asserted that the object of the amendment was to protect the interest of the workers and to place them at par with secured creditors.

Even the claims of the state financial corporations will take a backseat before the welfare of the workers. The Kerala High Court, in Provident Fund Commissioner vs Kerala Financial Corporation (2002), asserted the primacy of provident fund dues over other debts, though the State Financial Corporations Act contains a declaration that its provisions will prevail over other laws. Thus the courts have left no more doubt about the place of banks and financial institutions in the line-up to the creditor’s door.