It is not exactly like the Greek tragedy being played out in Europe, but the scramble of creditors when a company sinks could be messier still. There are queues of secured and unsecured creditors, taxmen from different revenue departments, claims from managers of provident fund, pension fund and other welfare schemes, and employees themselves demanding wages. Setting priority has been a contentious task for courts.
Though the Companies Act and various labour welfare laws have tried to bring order in the snarl-up, litigation could not be avoided. The problem is compounded by draftsmen giving precedence to their latest work by adding the phrase, “notwithstanding other laws”. When each law is conferred primacy, the court has to interpret and find out which law prevails over the other. Last week, the Supreme Court resolved such a conflict between provisions of the Companies Act and the Employees Provident Fund Act in the leading judgment, EPF Commissioner vs Official Liquidator.
In this batch of cases, the Gujarat High Court had passed winding up orders of certain companies and official liquidators had been appointed to look after the properties and clear debts. The EPF Commissioner approached the official liquidator for payment of dues but he did not get any response. Therefore, he moved the company judge for the amounts, arguing that that liability was the first charge on the assets of the company. The claim was rejected, leading to the appeal in the Supreme Court.
According to Section 529-A of the Companies Act, payments due to workers and secured creditors get equal priority “notwithstanding anything contained in any other law.” These rights shall march over those of others. This was the view of the high court.
The catch is that the EPF Act also contains a “notwithstanding” clause. According to Section 11(2), the amount due from an employer in respect of employees’ contribution is treated as the first charge on the assets of the company and is payable in preference to all other debts. Faced with this dilemma, the court had to interpret the laws according to the intent of the law-makers. Since priority is a moot question, various laws like the Recovery of Debts Due to Banks and Financial Institutions Act and the Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest Act, apart from sales tax laws, the Workmen’s Compensation Act and State Financial Corporations Act also come into play.
Every part of a statute, said the court, should be interpreted in the context in which it is enacted. The purpose of the legislation should be kept in mind while construing the provisions. They should be looked at with the “glasses of the statute-maker”. No part of the legislation can be looked at in isolation. This is so especially, as in this case, if two special enactments contain provisions that confer overriding effect to the provisions in the other. Viewed from that angle, the dues of the workers should be the first charge.
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Moreover, the EPF Act is a welfare legislation, intended to protect the interest of the weaker sections of society, that is workers employed in factories and other establishments, “who have made significant contribution to the economic growth of the country,” the judgment emphasised. Therefore, a law made for their benefit must receive liberal and purposive interpretation in view of the Directive Principles of State Policy of the Constitution (Articles 38 and 43). A bare, mechanical interpretation will reduce most laws to futility.
Employees, facing the “superannuated winter of their lives”, thus, got protection from the court. It summarised the rule thus: All revenues, taxes, cesses and rates due from the company to the central or state governments or local authorities, all wages of any employee and all sums due to any employee from the provident fund, the pension fund, gratuity fund or any other fund for the welfare of the employees maintained by the company are payable in priority to all other debts. Further, the provident fund contribution will be the first charge on the assets of the establishment. However, other dues to the employees do not get the same priority. Those will be on par with those of the secured creditors as the company law stands.
Armed with these powers, the PF commissioner has acted dramatically sometimes. In the case, Maharashtra State Co-op Bank vs PF Commissioner, two sugar mills had pledged their stocks with the bank for getting loans. 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.