By K P C Rao, LLB,
FCMA, FCS.,
CMA (USA), FIPA
(Australia)
Practicing
Company Secretary
kpcrao.india@gmail.com
Registration of Charges
Part V of the Companies Act 1956
contains provisions related to Registration of the charges (Section 142 to 145).
These contain provisions of charge including mortgage, date of notice of
charge, registration of charges, registration in case of debentures,
certificate of registration, register of charges, inspection, penalties, etc.
These provisions prescribe for the
registration of charges with the Registrar of the Companies and also provide a
list of assets and separate them from the unencumbered assets. Registration of
charge acts as protection to the lenders and creditors, banks and liquidators.
Register of charges is to be maintained by Registrar of Companies as well as the
companies concerned.
Consequences
of Non-registration
Non-registration would not prejudice
any contract or obligation for payment of money secured by the charge and where
the charge becomes void for registration, the debt secured becomes immediately
payable. Also a charge on becoming void, no right of lien can be claimed on the
documents of title as they were only ancillary to the charge and were delivered
in pursuant to the charge.
If a registerable charge is not
registered, the transaction does not become void or debt does not become
irrecoverable but the security created by the charge or mortgage becomes void
against liquidator and creditors.
It is mandatory for a company to
file the particulars of charge and failure to do so or contravene the
provisions of section 125 is punishable under Section 142 with fine extending
up to rupees Five Thousand for every day
of default.
Conflicting
Priorities
There has not been any concerted,
cohesive effort either to think or to codify the law of priorities over last
several decades. Therefore, there are fragments of laws scattered over
different enactments, each of which seems to assert its own preponderance
disregarding other claims or interests. It is rather unfortunate that such a
significant area on secured lending is left to be settled by case law rather
than by well-knit policy of the government. Law-making in this very serious
area has been sporadic and ad-hoc – just limited to achieving a limited result,
rather than comprehensive review of the matter.
There are several enactments
currently competing for super-priority – Sec. 529A of the Companies Act creates
a pari passu interest between secured lenders and workmen.
Sec 11 of Employees' Provident Funds and Miscellaneous Provisions Act, 1952,
provides that in case of insolvency of the employer or winding up of the
company, the amount so due from the employer shall be deemed to be the first
charge on the assets and shall be paid in
priority to other debts. Sales tax
laws of most states, for instance, Sec 38C of Bombay Sales Tax Act, 1959,
provides that subject to the provisions regarding first charge in any Central
Act, any sum of money due under this Act shall be the first charge on the
property. Likewise Sec 14A of Workmen’s Compensation Act, 1923 provides that
any liability accrued with respect of any compensation to be paid by the employer
shall have first charge on the assets, on the other hand, Sec 11 of the Central
Excise Act, 1944 read with Sec142 of the Customs Act 1962 says that the amount
of duty may be recovered by attachment and sale of excisable goods.
While these are the different laws
that provide for stacking order of priorities, there are several “special
recovery” laws enacted from time to time, such as Recovery of Debt due to Banks
and Financial Institutions Act, 1993, SARFAESI Act, SFC Acts, IDBI Act, IFCI Act,
etc. These special recovery laws either provide the secured lender direct right
to sell (for instance, SARFAESI Act, SFC Acts, IDBI Act, IFCI Act, SIDBI Act),
or empower a DRT to order the sale of assets to meet the claims of the secured
lender.
The question of priority order of
different claims will arise (a) in the event of distribution of liquidation
proceeds in liquidation proceedings; (b) on recovery orders of a body like
DRT;
(c) self-help repossession and sale of assets by secured lenders under SARFAESI
Act, IFCI Act, and SFC Act etc.
Ruling in Central Bank of India vs.
State of Kerala
In the case of Central Bank of India vs. State of Kerala & others,
the Supreme Court in its judgment dated February 27, 2009, in the matter of
priorities between statutory first charges and secured lenders makes the
landscape of conflicting priorities of charges over assets even more complex.
In this case, the Supreme Court was
concerned with the significant question whether the statutory first charges
created by various central and state laws will prevail over the claims of the
secured lender even while disposing of assets under the DRT law or the SARFAESI
Act. After considering a series of rulings given in the past, such as Bank of Bihar vs. State of Bihar,
Dena Bank vs. Bhikhabhai Prabhudas Parekh
& Co. and others, Central Bank of India vs. Siriguppa Sugars
& Chemicals Ltd,
State Bank of Bikaner & Jaipur vs.
National Iron & Steel Rolling Corporation and others ,
the Supreme Court came to the conclusion that the primacy of statutory first
charges prevails even in case of recovery under the DRT law and the SARFAESI
Act.
Some important principles to decide
the stacking order of priorities that emerge out of the SC ruling are as
follows:
a)
Central Law prevails over a State Law
– Hence, if a Central Law provides for a statutory first charge, it has to gain
primacy over a conflicting State Law. Sec 38C of the Bombay Sales Tax Act,
clearly states that;
“…if any Central Act provides for
first charge, the charge created under Section 38C of Bombay Sales Tax Act is
overridden”
b)
As usual, the doctrine that a later
law prevails over an earlier law applies here too. So, if there are several
central laws providing for priority, the later law will prevail over the
earlier one.
c)
Unless the law clearly provides for
a “first charge”, a mere provision for attachment or recovery as land revenue
does not by itself create a first charge. Based on analysis of the provisions
of the Central Excise Act, in the case of SICOM
vs. Union of India
the Supreme Court came to a conclusion that the Excise dues rank only above the
claims of ordinary creditors, and not secured creditors.
d) If
the law creates a first charge, the date of creation of the charge is
irrelevant - that is, the normal rule of priorities based on the date of
creation of the charge is not relevant in case of statutory first charges.
Position of unpaid Government dues
under SARFAESI Act
An important provision of the
SARFAESI Act [Sec13(9)] is that in case there are multiple security interests
on an asset, no secured lender may take an action against such asset without
the consent, in writing, of at least 75% of the secured lenders. As per the principles
of statutory first charges, obviously, the government becomes a security interest
holder over an asset to the extent of unpaid taxes. This is automatic, and
without any need for registration of charges or any similar act of creation or
perfection of security
interests. The question is, if such
a security interest exists, is a bank or financial institution, as secured
lender, entitled to take action against an asset without consulting the
government as a security interest holder? The word “secured creditor” is
defined in Sec 2(zd) of the Act to mean only such persons who have extended
financial facility against an asset. An unpaid Government is certainly a
security interest holder, but not a secured lender. Hence, Sec. 13(9) does not
seem applicable to need the consent of the government before taking of any
action under sec 13(4). However, surely enough, in light of the statutory first
charge, the distribution of assets upon sale by the secured lender will have to
be first towards the statutory first charge holders, and thereafter, to other
secured lenders.
Illustration
Assuming the value of assets of an
entity is ` 10
crores, and the entity has the following
out standings:
o
Dues to banks, holding charges over the
assets: ` 15 crores
o
Excise dues: `1 crore
o
Sales-tax dues `1 crore
o
EPF dues `1 crore
o
Workmen’s Compensation dues `1 crore
o
Workmen’s dues `3 crore
Assuming the company is not under liquidation, the
order of priorities will run as follows:
1.
Workmen’s Compensation Dues – `1 crores
2. Sales
Tax Dues – `1
crores
3.
Dues to Banks – ` 8 crores
Assuming the company is under liquidation, the order
of priorities will run as follows:
1.
EPF dues –` 1 crores
2. Workmen’s
Compensation Dues – `1
crores
3. Sales
Tax Dues – `1
crores
4. Dues
to Banks (pari passu with Workmen’s Dues) – `5.83 crores
5.
Workmen’s Dues (pari passu with Bank
Dues) –`1.17 crores
Ruling in EPF Commissioner Vs
Official Liquidator
In another significant judgment (November
8, 2011) in the case of Employees
Provident Fund Commissioner Vs. O.L. of Esskay Pharmaceuticals Limited, the Supreme Court while allowing the applications
filed by the appellant held 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. The court also directed
the Official Liquidator appointed by the High Court to deposit the dues of
provident fund payable by the employer within a period of 3 months.
An interesting question
was resolved by the Supreme Court in this case. This sprang up a rather unusual
situation where the Court was required to decide between non obstante clauses contained in two different legislations that
ran somewhat contrary to each other.
Section 529-A of the
Companies Act provides that “notwithstanding anything contained in any other
provision of this Act or any other law for the time being in force”, in case of
a winding up, the workmen’s dues and debts due to secured creditors shall be
paid in priority to all debts.
On the other hand, section 11(2) of the Employees Provident Fund and
Miscellaneous Provisions Act, 1952 (EPF Act) provides that amounts due under
that Act from an insolvent employer shall be deemed to be a first charge and be
paid in priority to all other debts “notwithstanding anything contained in any
other law for the time being in force”. The argument made by the company was
that since section 529-A was introduced by an amendment to the Companies Act
and was later in point of time, that should prevail. However, the court refused
to accept that contention.
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.
The
Supreme Court’s reasoning was based on principles of statutory interpretation,
and the court was also persuaded by the fact that the EPF Act is a welfare
legislation that must be given importance.
style='> �-- i �� X � ;font-family:
"Times New Roman","serif"'> Jagannath
Ganeshram Agarwala v. Shivnarayan Bhagirath and Ors; AIR 1940 Bombay 247
