Central Bank of India vs Recovery Mamlatdar and Others

S.D. Shah, J.—The Central Bank of Indian has taken out this judge''s summons for issuance of a direction to respondents Nos. 1 to 4, so as

not to proceed further with notice dated December 22, 1988.

It appears that Shree Yamuna Mills Ltd. is ordered to be wound up by the order of this court and the assets and properties of the company in

liquidation are in the possession of the official liquidator. The applicant bank being the secured creditor has chosen to remain outside the winding

up proceedings and has instituted Special Civil Suit No. 681 of 1989 in the court of the Civil Judge, S. D., Baroda, for recovery of the sum of Rs.

4,03,41,680.80. Since various movable and plant machinery of the said mill are hypothecated and/or mortgaged to the applicant bank, it has also

prayed for a preliminary decree of redemption of the mortgage and for payment of its dues by selling all the securities.

It appears that the Recovery Mamlatdar has vide notice issued under the Bombay Land Revenue Code, called upon the mill company to pay up

the amount of Rs. 16,78,851.85. The said amount is stated to be due and payable by the company under the provisions of the Employees'' State

Insurance Act and an amount of Rs. 17,250 is due and payable under the Payment of Gratuity Act. The Regional Director of (the) Employees''

State Insurance Corporation is impleaded as respondent No. 7 in this proceeding and Mr. S. R. Shah, learned counsel, has appeared on his

behalf. The competent authority under the Payment of Gratuity Act is also impleaded as party respondent No. 6.

It is the case of the bank that since the bank is the secured creditor of the company in liquidation and since it has decided to remain outside the

winding up and since the various assets and properties of the company are mortgaged with the petitioner-bank and since it is seeking recovery of

its securities by disposing of such properties no other authority including respondent No. 1 can recover any amount from its securities. In the

alternative, it is submitted that even if any amount is found due and payable to respondent No. 7, the petitioner-bank shall do so after it is permitted

to dispose of the securities and after the amount realised is received by the bank. It is submitted before the court that the petitioner-bank is ready

and willing to abide by the appropriate direction which may be issued by the court as regards payment to be made to respondent No. 7 towards

its dues. At this stage, therefore, it is prayed that the respondent should be restrained from proceeding further with the notice of recovery of from

taking any action under the provision of the Bombay Land Revenue Code for recovery of the aforesaid amount due and payable to respondents

Nos. 6 and 7.

Mr. S. R. Shah, learned counsel appearing for respondent No. 7, has invited the attention of the court to section 40 of the Employees'' State

Insurance Act, 1948. Section 40, inter alia, provides for the liability of the principal employer, to pay contribution in the first instance. Sub-section

(4) of section 40, inter alia, provides that any sum deducted by the principal employer from wages under this Act shall be deemed to have been

entrusted to him by the employees for the purpose of paying the contribution in respect of which it was deducted. Based on the aforesaid

provision, it is submitted before this court that the amount of the employees'' contribution which was deducted from their wages by the company

was held by the company in trust. He has also invited the attention of the court to section 66 of the Indian Trusts Act, 1882, which, inter alia,

provides that where the trustee wrongfully mingles the trust property with his own, the beneficiary is entitled to a charge on the whole fund for the

amount due to him. In the instant case, since the company (employer) has mingled the contribution of the employees with its own properties and

has failed to keep it apart, the employee is entitled to a charge on the whole fund for the amount due to him and, therefore, it is submitted that the

claim of respondent No. 7 shall take precedence over any other claim or it will be a claim comparable to the claim of a secured creditor. He has in

this connection invited the attention of the court to the case of Baroda Spg. and Wvg. Mills Co Ltd. (In Liquidation) Vs. Baroda Spg. and Wvg.

Mills Co-operative Credit Society Ltd. and Another, . Before D. A. Desai J. as His Lordship then was the question was as regards deduction by

the company from the wages which became payable to the employees of the amount which the employee was required to save every month,

depending upon his wages. There was a tripartite agreement between the company, the co-operative credit society and the employees who were

the members of the society. There was a specific agreement between those who had taken loans from the society and the society. The society

every month used to send a requisition to the company showing what amount is claimed from each employee of the company and the company

would deduct the requisite amount from the wages payable to the employees and remit that amount to the society. Such a company was ordered

to be wound up and the accounts of the company showed a credit balance to the extent of Rs. 86,166.86. The society claimed payment of that

amount from the liquidator in priority to any other creditor. The liquidator moved an application before the court for a decision on the question

whether the said amount was a trust amount belonging to the society and did not form part of the assets of the company, and it was in this context

that D. A. Desai J. observed that the company would acquire the character of an agent of the society to effect recovery on behalf of the society

and pay the amount to the society. The company would have legal title to, or beneficial interest in, the money so collected by it. Only the society

would have legal title to the amount. The moment deduction was made by the company from the wages or salary of the employee for the purpose

of remittance of the amount to the society, the society would be the principal and the company the agent. It the company had neither legal nor

beneficial ownership in the property, and it was merely a custodian until it remitted the amount to the society, it could not mix the amount with its

own funds and had no liability to pay interest. Undoubtedly, the amount in the hands of the company was impressed with a trust and could not form

part of the assets of the company.

Based on the aforesaid reasoning, it is submitted by Mr. S. R. Shah, learned counsel appearing for respondent No. 7, that the amount of the

employees'' contribution which was deducted by the company from the wages payable to the employees, was an amount held by the company in

trust, and it was not liable to be intermingled with its assets or properties. The company could not have utilised the said amount as it was a trust

amount and, therefore, the seventh respondent-corporation must get priority for the aforesaid claim. In the opinion of this court, the submission is

well founded in law and shall have to be accepted. The money which the company has deducted from the wages of the employees towards the

employees'' contribution shall have to be kept apart by the company as the said amount was held by the company in trust and, therefore, the said

amount is liable to be returned to the employees and/or the seventh respondent-corporation.

However, Mr. P. V. Nanavati, learned counsel appearing for the bank, has submitted before this court that the bank is not factually disputing the

claim of the seventh respondent-corporation. However, since, at this stage, when the bank wants to realise its dues by disposing of the securities

through the permission of the court, and since it does not want to appropriate the entire amount of sale proceeds towards its dues without

permission of the court, no further direction is required to be issued. He submitted that the bank would abide by the final direction which the court

may issue in this behalf or the bank would also, if so directed by the court, keep the amount equivalent to the amount of the dues of the seventh

respondent apart and that, therefore, respondents Nos. 1 to 4 are required to be restrained from proceeding further with the recovery proceeding.

In view of the aforesaid this company application shall have to be granted by restraining respondents Nos. 1 to 4 from proceeding further with the

recovery proceeding by sale of the assets and properties of the company. However, it is clarified that as and when sale of the assets and properties

of the company is effected, the petitioner-bank as well as the official liquidator, whoever shall sell the properties and assets, shall keep apart the

sum equivalent to the amount of Rs. 16,78,851 towards the claim of the Employees'' State Insurance Corporation and shall also send intimation to

the said corporation as and when the properties are sold, about the realisation received by it.

In the result, the company application is granted to the aforesaid extent. Rule is made absolute to the aforesaid extent. No costs.