2001 (7) TMI 1312 - HC - Companies Law

Summary

Issues Involved:

1. Whether the employees' contribution under the Employees' State Insurance Act is trust money and thus does not form part of the company's assets.
2. Whether the Employees' State Insurance Corporation (ESI Corporation) has priority over secured creditors for the payment of employees' contributions.
3. The applicability of the law of limitation to the claim by the ESI Corporation.
4. The intermingling of trust money with the company's assets.
5. The rights of secured creditors versus the ESI Corporation's claim.
6. The interpretation of statutory provisions under the Employees' State Insurance Act, Trust Act, Companies Act, and Transfer of Property Act.

Detailed Analysis:

1. Trust Money Characterization:

The ESI Corporation argued that the employees' contribution deducted by the company is "trust money" and does not form part of the company's assets. This is supported by Section 40(4) of the Employees' State Insurance Act, which deems the deducted sum to be entrusted to the employer for the purpose of paying the contribution. The Corporation cited previous judgments (46 Company Cases 1 and 87 Company Cases 284) to support the claim that such contributions are held in trust and should not be intermingled with the company's assets.

2. Priority Over Secured Creditors:

The ESI Corporation contended that the employees' contribution should be given priority over all other debts, including those of secured creditors, as per Section 94 of the Employees' State Insurance Act. The Corporation argued that the employees' contribution, being trust money, should be paid in priority to any other creditor, including secured creditors.

3. Applicability of Law of Limitation:

The secured creditors argued that the claim by the ESI Corporation is barred by the law of limitation, as the deductions were made as far back as 1976, and the claim was only made in 2000. They contended that the ESI Corporation was negligent in not initiating action earlier.

4. Intermingling of Trust Money:

The ESI Corporation claimed that the company failed to keep the employees' contributions separate and intermingled them with its assets. The Official Liquidator also did not set apart the trust money. The Corporation argued that even if intermingled, the trust money retains its character, and the beneficiaries (employees) are entitled to a charge on the whole fund for the amount due.

5. Rights of Secured Creditors:

The secured creditors, represented by State Bank of India and others, argued that the company's assets were mortgaged to them before the ESI contributions were deducted. They contended that the ESI Corporation has no right to claim from the sale of secured assets, as the mortgage was created prior to the deductions. They also argued that under Section 529 and 530 of the Companies Act, only secured creditors and workers are entitled to claims from the sale of secured assets.

6. Interpretation of Statutory Provisions:

The court considered various statutory provisions, including Sections 2(4), 2(6), 2(9), 2(22), and 40 of the Employees' State Insurance Act, which define contributions and the employer's responsibilities. Section 94 of the Act was also pivotal, as it provides that contributions due to the Corporation have priority over other debts. The Trust Act's Section 66, which deals with the rights in case of blended property, was also relevant. The court examined the provisions of the Companies Act (Sections 529, 529A, and 530) and the Transfer of Property Act (Sections 58 and 100) to determine the rights of secured creditors versus the ESI Corporation's claim.

Conclusion:

The court referred the matter to a Division Bench due to the complexity of the issues and the need for an authoritative pronouncement. The questions to be decided included the binding nature of conflicting Supreme Court judgments, the trust character of the employees' contributions, and the priority of claims in the context of secured creditors and the ESI Corporation.